In a unanimous decision on 16 November 2016, the High Court of Australia found that four offshore companies were in fact resident in Australia for tax purposes. In a big win for the ATO, these companies will now have to pay over $16 million in tax and penalties.
Location of ‘Central management and control’ key in the ruling
While the companies had a complex structure that gave the impression of offshore control with Directors resident overseas and meetings held overseas, the High Court found that their real business was conducted by an Australian resident from Sydney who was deemed to hold ‘central management and control’.
In the past, such a structure has often meant that a foreign incorporated company would not be taxable in Australia. However, the High Court found that the residence of a company for tax purposes is determined by where “central management and control” actually occurs, rather than focusing on the location of business structures. The place where the board of directors meet, or where effective management occurs, is not determined by the place where a company is controlled. The location of ‘control’ is based on the principals of functionality and fact, rather than formality. In this case, the board of directors were completely relying on an Australian advisor to manage the companies, to the extent that despite formal overseas management, the controlling decisions were held to be actually made by the Australian advisor.
What is ‘central management and control?’
The High Court did not actually rule on what ‘central management control’ means. The question left unanswered is just how much influence can be exerted from Australia by an Australian parent company before the offshore subsidiary becomes a resident?
It is certainly the case that the directors of foreign subsidiaries of Australian companies often act as they are instructed to by their Australian parent companies, without fear that the central management and control of the subsidiaries would thereby be sited in Australia.
A big change for multinationals or a one-off?
Whether these cases turn out to be a momentous change for Australian multinationals, depends on how expansively the ATO wants to interpret this decision and how willing future Courts are to accept the argument that the test is not principally about control from Australia, but rather about proper governance offshore.
As an indication of the ATO’s position, the Tax Commissioner Chris Jordan by was quoted The Sydney Morning Herald as saying “the decision means that any parties who set up complex structures offshore with the clear intent to avoid paying tax in Australia, should take a hard look at what they are doing and whether they want to run the risk of being caught and seriously penalised.”
It should be noted that in this case the advisor was also the beneficial owner of the companies, contrary to evidence given under oath. In addition to this deliberate misrepresentation of the companies’ arrangements, there was strong evidence for the directors’ complete lack of knowledge of the companies and total reliance on the Australian advisor. If your business situation is less absolute as to the Australian source of actual decision-making, you should seek Accru’s advice.
What are the implications for foreign-incorporated businesses?
Foreign incorporated entities should be aware of the case and the tax risks posed. If a company is genuinely fully controlled from Australia, it appears that no matter how many directors or directors’ meetings are overseas, the company will be taxable in Australia.
New developments such as these are occurring regularly in International taxation in Australia. Please contact your local Accru international tax specialist if you need advice on how the latest developments affect your business.