Taxation Ruling TR 2018/5
Date of effect: 15 March 2017

What this ruling is about: This publication (excluding appendixes) is a public ruling for the purposes of the Taxation Administration Act 1953. A public ruling is an expression of the Commissioner's opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes. If you rely on this ruling, the Commissioner must apply the law to you in the way set out in the ruling (unless the Commissioner is satisfied that the ruling is incorrect and disadvantages you, in which case the law may be applied to you in a way that is more favourable for you - provided the Commissioner is not prevented from doing so by a time limit imposed by the law). You will be protected from having to pay any underpaid tax, penalty or interest in respect of the matters covered by this ruling if it turns out that it does not correctly state how the relevant provision applies to you.


Ruling: Background: 3. A company is a resident or a resident of Australia under the central management and control test of residency [3] if it: 4. Four matters are relevant in determining whether a company meets these criteria: 5. Whether a company is a resident under the central management and control test of residency must be determined by reference to all the facts and relevant case law. | Does a company carry on business in Australia?: 6. To be resident under the central management and control test of residency, a company must carry on business in Australia. [4] 7. If a company carries on business and has its central management and control in Australia, it will carry on business in Australia within the meaning of the central management and control test of residency. [5] 8. It is not necessary for any part of the actual trading or investment operations of the business of the company to take place in Australia. This is because the central management and control of a business is factually part of carrying on that business. [6] A company carrying on business does so both where its trading and investment activities take place, and where the central management and control of those activities occurs. [7] 9. Central management and control of a company is not necessarily exercised where the trading or investment activities of the company are carried on. [8] | What does central management and control mean?: 10. Central management and control refers to the control and direction of a company's operations. [9] It does not refer to a physical location in which the control and direction of a company is located, and may ultimately be exercised in more than one location. [10] 11. The key element in the control and direction of a company's operations is the making of high-level decisions that set the company's general policies, and determine the direction of its operations and the type of transactions it will enter. [11] 12. The control and direction of a company is different from the day-to-day conduct and management of its activities and operations. [12] The day-to-day conduct and management of a company's activities and operations is not ordinarily an act of central management and control. [13] Nor is the management of day-to-day activities under the authority and supervision of higher-level managers or controllers. [14] 13. The day-to-day conduct and management of a company's operations might be an exercise of central management and control in circumstances where they are effectively the same. For example, for a small passive investment company with a very small number of investments, the decisions to make, hold and dispose of those investments, would be both the day-to-day management and the central management and control of the company. [15] 14. Merely because a person is a majority shareholder, or has the power to appoint those who control and direct a company's operations does not, by itself, mean the person controls and directs a company's operations and activities. [16] | What is 'decision making'?: 15. A person, or group of people, make a decision if they actively consider and decide to do, or not do something based on it being in the best interests of the company. [17] It does not include the mere implementation, or rubberstamping, of decisions made by others (see paragraphs 26 to 29 of this Ruling). | Acts of central management and control: 16. Exercising central management and control of a company can involve: | Matters of company administration: 17. Matters of company administration are not acts of central management and control. These include: | The relevance of a company's activities: 18. The nature of a company's activities and business define which acts and decisions are an exercise of the central management and control of that company. [29] For example, where a company is a special purpose vehicle set up to conduct only two transactions - to buy and sell an asset - the decisions to buy and sell will be the only activities relevant to central management and control. [30] For a company carrying on an ongoing business of mining and selling diamonds, the relevant decisions include determining policies on the operation and development of mines, and the sale of the mined diamonds. [31] | Who exercises central management and control of a company?: 19. Identifying who exercises central management and control is a question of fact. It cannot be determined solely by identifying who has the legal power or authority to control and direct a company. [32] The crucial question is who controls and directs a company's operations in reality. | A starting point: 20. Normally, where a company is run by its directors in accordance with its constitution and the company law rules applicable to that company [33] , which give its directors the power to manage the company, the company's directors will control and direct its operations. [34] It follows that ordinarily it is a company's directors who exercise its central management and control. 21. However, the actions of a company's directors, or others with the legal power and authority to control and manage the company, are not the end of the enquiry as to who exercises central management and control. There is no presumption that the directors of a company will always exercise its central management and control. [35] 22. When determining who exercises a company's central management and control, all the relevant facts and circumstances must be considered. Facts and circumstances to be considered in determining who exercises a company's central management and control include the role of anyone who assumes the role of the directors' role in managing and controlling the company's affairs or has a role [36] in the decision-making processes or governance of the company. [37] | Mere legal power or authority to manage a company is not sufficient to establish exercise of central management and control: 23. A person who has legal power or authority to control and direct a company, but does not use it, does not exercise central management and control. [38] For example, in Bywater , the court disregarded the role of those directors who were formally appointed but did not play any real role in the affairs of the company. | Tacit control and delegated authority: 24. A person may control and direct a company without actively intervening in the company's affairs on an ongoing basis provided they [39] : | Legal authority or power is not necessary for a person to exercise central management and control: 25. A person without any legal power or authority to control or direct a company may exercise central management and control of that company. [40] | Company outsiders - is a person merely influential over decision makers or do they exercise central management and control of that company?: 26. An outsider who merely influences those with legal power to control and direct a company, even if they can and do exert strong influence, is not the relevant decision maker and does not exercise central management and control of the company. [41] However, if an outsider is more than merely influential, and actually dictates or controls the decisions made by the directors, the outsider will exercise central management and control of the company. [42] 27. The distinction turns on what amounts to decision making for the central management and control test of residency. In Bywater , the High Court observed that this turns on whether the people said to make the decisions of the company, actually consider whether to do what they are told, or are advised to do, and make a decision to do it because it is in the best interests of the company. If they do, they are the relevant decision maker and exercise central management and control of the company. [43] If they do not, and merely mechanically implement or rubberstamp company decisions already made by others based on what they are told or advised to do, the person who gave the instruction is the real decision-maker and exercises central management and control of the company. [44] 28. It is relevant to consider whether the directors would refuse to follow advice or directions of outsiders that are improper or inadvisable. [45] If they would, it is more likely the directors are the real decision makers. If not, it is more likely the outsider who exercises central management and control. 29. The directors' knowledge of the business is also relevant. A lack of knowledge of the business sufficient to enable them to determine if following advice or instructions would be improper or inadvisable, suggests they are not the real decision makers and are more likely rubberstamping or implementing decisions already made by others. [46] | Where is central management and control of a company exercised?: 30. A company will be controlled and directed where those making its high-level decisions do so as a matter of fact and substance. It is not where they are merely recorded and formalised [47] , or where the company's constitution, bylaws or articles of association require it be controlled and directed, if in reality it occurs elsewhere. [48] This will not necessarily be the place where those who control and direct a company live. [49] | Multiple places of central management and control: 31. Control and direction of a company may be undertaken by those controlling a company in multiple places. This means a company's central management and control may be divided between more than one place. [50] However, a company's central management and control will only be exercised in a place for the purpose of the central management and control test if it is exercised in that place to a substantial degree, sufficient to conclude the company is really carrying on business there. [51] | Relevance of a company's activities: 32. Central management and control of a company is not necessarily exercised where the trading or investment activities of the company are carried on. [52] However, the nature of a company's business activities may dictate where its key decisions must be made as a matter of practice. [53] 33. In North Australian Pastoral and Waterloo Pastoral , the practical need to make the key high-level decisions where its day-to-day operational activities occurred, heavily influenced the court's conclusion that the central management and control of the company was exercised where its operational activities took place. | Residence of directors vs residence of a company: 34. Where a company's central management and control is exercised is not determined by where the directors, or other persons, who control and manage it, are resident or live. [54] What matters is where they actually perform the activities to control and direct the company. | Relevant considerations: 35. No single factor alone will necessarily determine where central management and control of a company is exercised. [55] The relevance and weight to be given to each will depend on the facts and circumstances of the case and surrounding circumstances. [56] 36. The matters most likely to influence a court's decision, as to where those who control and direct the operations of a company do so from, are: 37. Other matters, of lesser weight, the courts have considered in analysing where a company's central management and control is exercised include: 38. These factors are used to help identify where a company's directors, or others, actually make its high-level decisions and in doing so where they actually manage and control the company.


Appendix: 41. The following is a detailed contents list for this Ruling: © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). Previously released in draft format as TR 2017/D2


Summary - what this ruling is about | NOT LEGALLY BINDING SECTION: | Summary - what this ruling is about: 1. This Ruling sets out the Commissioner's view on how to apply the central management and control test of company residency [1] following Bywater Investments Limited & Ors v. Commissioner of Taxation; Hua Wang Bank Berhad v. Commissioner of Taxation [2016] HCA 45; 2016 ATC 20-589 ( Bywater ). | 2. This Ruling does not deal with: | Date of effect: 39. This Ruling applies from 15 March 2017. | 40. However, this Ruling will not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of this Ruling (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10). | Commissioner of Taxation 21 June 2018 | Appendix 1 - Detailed contents list


Related rulings: TR 2006/10
Legislative references: ITAA 1936 ITAA 1936 6(1) TAA 1953 Corporations Act 2001
Case references: American Leaf Blending Co Sdn. Bhd v. Director-General of Inland Revenue [1979] AC 676 [1978] 3 WLR 985 [1978] 3 All ER 1185 [1979] 1 AC 676 - Privy Council
Other references: PCG 2018/D3