On 28 June 2023, the Commissioner of Taxation (Commissioner) issued an amended draft version of PCG 2018/9 Central management and control test of residency: identifying where a company’s central management and control is located (PCG), entitled PCG 2018/9DC1 (Amended PCG).

The Commissioner has sought comments on the Amended PCG, which appends a detailed risk assessment framework to the substantially unchanged body of the PCG, by no later than 28 July 2023.

It is notable that issuance of the Amended PCG coincides with the cessation of the Commissioner’s transitional compliance approach with respect to the Australian tax residency status of certain foreign-incorporated companies, which had previously been extended twice in anticipation of announced legislative changes that to date have not been enacted. 

Issuance of the Amended PCG effectively puts in-scope taxpayers on notice as to the Commissioner’s intended compliance approach.

1. Context

To appreciate the significance of the Amended PCG, it is necessary to place it in its context, both in terms of the relevant legislative provision and how the Commissioner’s interpretation thereof has evolved in recent years.  central management and control test of residency

a. legislation

The definition of ‘resident’ for Australian tax purposes has subsisted for more than 90 years in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). Relevantly, that definition encompasses:

‘a company which is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia [emphasis added], or its voting power controlled by shareholders who are residents of Australia.’

B. ATO View

The traditional construction of that definition, which was until March 2017 reflected in guidance issued by the Commissioner (viz. TR 2004/15), was that it comprised two discrete requirements for companies incorporated outside of Australia – i.e., to be an Australian tax resident, a foreign-incorporated company must both carry on business in Australia and have either its central management and control in Australia, or its voting power controlled by Australian resident shareholders.   

Following the High Court case of Bywater Investments Ltd & Ors v FC of T; Hua Wang Bank Berhad v FC of T [2016] HCA 45 (Bywater), notwithstanding the anti-avoidance nature of the case, the Commissioner applied the case to back-flip on his long-held view. It is also notable that the relevant ground of appeal concerned only the situs of the taxpayers’ central management and control [2], the Commissioner construed an obiter reference to the judgment in Malayan Shipping Co Ltd v Federal Commissioner of Taxation [1946] HCA 7 (Malayan Shipping) as authority for the proposition that a company will invariably carry on business where its central management and control is located, meaning that any company with central management and control in Australia will be an Australian tax resident [3]. 

c. Post-BywaterThe Commissioner’s Position On Corporate Tax Residency

In response to Bywater, the Commissioner withdrew TR 2004/15 and subsequently issued Taxation Ruling TR 2018/5 Income tax: central management and control test of residency (TR 2018/5) and the PCG, both of which reflect the Commissioner’s view that 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.  

The PCG sets out factors to which the ATO will have regard in determining where a company’s central management and control is located as well as a number of illustrative examples.   

Separately, the Board of Taxation issued its Report to the Treasurer in July 2020 recommending, inter alia, that the ‘central management and control test’ be modified to ensure that foreign-incorporated companies can only be an Australian tax resident where there is a ‘sufficient economic connection’ to Australia. This recommendation was reflected in a measure announced by the former Federal Government as part of the 2020-21 Federal Budget. However, to date that announced measure remains unenacted.   

In response to the Federal Government flagging changes to the law, the PCG outlined the Commissioner’s “transitional compliance approach” that ultimately applied until 30 June 2023, whereunder the Commissioner would not apply resources to review or seek to disturb a foreign-incorporated company’s status as a non-resident where prescribed criteria were met. 

2. Amended PCG

The Amended PCG, which should be read together with TR 2018/5, effectively affirms the Commissioner’s view with respect to Bywater and provides a framework by reference to which foreign-incorporated companies can self-assess the likelihood of compliance resources being reviewed to review their residency status.  

Similar to other Practical Compliance Guidelines, the risk assessment framework outlines circumstances and features that inform which of three risk zones foreign-incorporated companies sit (i.e., ‘low’, ‘medium’ or ‘high’ risk). To fall within the low-risk zone, companies must not have any moderate or high-risk circumstances or features.   
The three risk zones, and the corresponding treatment by the Commissioner are described in the following table: 

Guidance is also provided at paragraphs 114 to 118 on how companies can evidence their self-assessment risk zone. 

Paraphrased examples of moderate and high-risk features that may be relevant to Australian multinationals with foreign-incorporated subsidiaries include:

  • Majority of directors spending most of their time in Australia but being stated to make all high-level decision in a foreign jurisdiction (moderate risk) 
  • A company not being a resident of any foreign jurisdiction, or facts suggesting that central management and control is not exercised in any foreign jurisdiction (high risk) 
  • Artificial or contrived arrangements affecting the location of central management and control, implicitly including flying Australian directors overseas to attend board meetings in a country where a company does not have a substantive commercial presence (high risk) 

3. Implications

The Amended PCG’s issuance is awkward, given the announced changes were supported by the Board of Taxation report, and were highly anticipated to be enacted. Whether or not the changes will now be enacted is currently unknown.

That the Amended PCG in effect affirms the Commissioner’s interpretation of Bywater (and in turn, Malayan Shipping) may be of concern to taxpayers and tax practitioners alike who harbour doubt as to the correctness of that interpretation and the tenability of administrative guidance on which it is predicated.

The potential impact of a foreign-incorporated company being treated as an Australian tax resident is significant. 

Examples of that potential impact include:

  • Foreign-sourced income derived by the company that is otherwise not assessable, or assessable at a lower rate, being subject to Australian income tax;
  • Where a Double Tax Agreement and Multilateral Agreement are in force between Australia and a particular country, situations can arise where the foreign incorporated company is deemed a dual resident without the ability to apply a tie-breaker test. This can result in the company not being able to rely on certain protections afforded under the relevant treaty.
  • If a prescribed dual resident, the company will be unable to join any income tax consolidated group that its parent company is a member of, meaning any unfranked dividends will be taxable in the hands in the ‘head company’ of the income tax consolidated group;Compliance approach
  • Inability to access the participation exemptions contained in Subdivision 768-A and 768-G of the ITAA 1997 in relation to distributions or share disposals; and
  • Potentially having to register for a Tax File Number in Australia and lodged an Australian income tax return annually, despite there being no assessable income owing to the existence of a foreign branch, the income of which is not assessable pursuant to section 23AH of the ITAA 1936.

Additionally, as referenced above, the moderate and high-risk circumstances and features outlined in the Amended PCG, which to an extent arguably reflect common industry practices (e.g., Board meetings being held in a holding company’s country of incorporation) may cause compliance headaches for a large number of Australian residents with foreign-incorporated subsidiaries, particularly with the Commissioner’s transitional compliance approach having now ceased.

Finally, it is notable that issuance of the Amended PCG coincides with Parliament’s consideration of the ‘disclosure of corporate subsidiary information’ rules contained in Schedule 1 to the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share – Integrity and Transparency) Bill 2023[5], which requires public companies to disclose, inter alia, the tax residency of all constituent entities within their accounting consolidated group.

For more information

RSM Australia has significant experience in assisting corporate clients to mitigate tax residency risks and will continue to monitor and provide updates on relevant developments. Please do not hesitate to contact your local RSM representative should you wish to discuss such matters. 

[1] Foreign-incorporated companies that treated themselves as non-residents of Australia for tax purposes on the basis of withdrawn Taxation Ruling TR 2004/15 Income tax: residence of companies not incorporated in Australia – carrying on business in Australia and central management and control (TR 2004/15).

[2] The taxpayers had conceded that they were carrying on business in Australia.

[3] Decision Impact Statement: Bywater Investments Ltd & Ors v Commissioner of Taxation.

[4] Budget Paper No. 2: Budget Measures

[5] Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity and Transparency) Bill 2023 – Parliament of Australia (aph.gov.au)