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COVID-19 and central control and management residency test for companies
Determining a company’s residency
depends on a combination of where it was incorporated or where it is centrally
managed or controlled and where the voting power of its shares is controlled.
For non-residents of Australia with a company incorporated overseas, COVID-19
could potentially change the residency of that company where central management
and control comes to be conducted from Australia. COVID-19 has seen bans to
overseas travel and restrictions of movement. As a result, there are many
previously non-resident Australian citizens who returned to Australia in early
2020, and have since been unable to return to their overseas homes, and others
who have decided to stay in Australia during this period of global economic
uncertainty. Many people in this situation have continued to undertake their
employment and company director responsibilities from Australia.
What is central management and control?
A company is a resident of Australia under the central control and management test (‘CMC’) if it:
Taxation Ruling TR 2018/5 Income
tax: central management and control test of residency outlines four
relevant facts to consider whether the company meets the CMC test criteria:
i. Does
the company carry on a business in Australia?
ii. What
does central management and control mean?
iii. Who
exercises central management and control?
iv. Where
is central management and control exercised?
i. Does the company carry on a business in Australia?
The ATO guidance states that is it not necessary for actual trading or operations of the business to take place in Australia to meeting this factor. Instead, this factor can be met by looking at where the CMC of those activities occur. Further, CMC can be exercised in a different location to the trading or operation activities of the company.
ii. What does central management and control mean?
CMC refers to the control and direction of a company’s operations. CMC can be exercised from multiple locations. In determining where CMC is located, a key element is to look at where high-level decisions are made. High-level decisions involve a company’s strategic direction, general policy, setting values, operational decisions, finance decisions, etc.
CMC is distinctly different to the
day-to-day operations and management of company activities. The ATO has stated that undertaking day-to-day operations
is not an act of CMC. However, in some situations, day-to-day conduct may be an
exercise of CMC, where both activities are essentially the same. This is more
commonly seen in small companies. An example provided by the ATO is a small
passive investment company where decisions to hold, dispose and make
investments is both a day-to-day activity and an exercise of CMC.
Maintaining company records (as
required by law in various jurisdictions) is not an act of CMC. Maintaining
company records is required to maintain company registration, but keeping a
company share register, company accounts, documents relating to dividends, etc
are not generally seen as an act of CMC.
iii. Who exercises central management
and control?
Generally, directors of a company run
the company in accordance with the constitution and relevant company laws.
Therefore, generally directors exercise a company’s CMC. However, there is no
presumption that other individuals cannot exercise CMC.
It is important to look at individuals
who assume the role of director, or individuals who are not directors and yet
play a critical role in the decision-making process/governance of the company.
Passive directors who do not play any real role in the affairs of the company
(such as those described in Bywater) are not assumed to carry out CMC.
iv. Where is central management and
control exercised?
The location of CMC is determined by
where the decisions are made – not where they are recorded or formalised. Where
there are multiple locations of CMC, it is important to determine where CMC was
exercise to a substantial degree in one location over others, sufficient to
conclude the company is really carrying on business in that location.
In some situations, high-level
decisions are required to be made in the same location as day-to-day
operations. As a result, in North Australian Pastoral and Waterloo
Pastoral, the court concluded that CMC was exercised where the operational
activities of the company took place.
Most relevant to COVID-19 impacted
directors is determination of CMC with reference to the residence of the
director. For a company where CMC decisions can be made remotely from the
operational activities, the location of the director can be very important.
But which factor is most
determinative?
The ATO guidance indicated that no
single factor will determine CMC of a company. Relevant weight needs to be
given to each factor, and each case will be different based on the company
facts and circumstances.
Based on court decisions on CMC, the
ATO has indicated that the following factors are likely to influence location
of CMC:
Secondary to the factors listed above,
other factors considered included:
How can Tax Controversy Partners help
you?
The current ATO guidance indicates that compliance resources will not be utilised where board meetings are held in Australia because of the effects of COVID-19. However, where directors of foreign companies have stayed in Australia despite being able to return to their home countries, their residency position may have changed. As a result, high-level decisions made on behalf of the company could affect the company’s residency.
At Tax Controversy Partners, our
experienced lawyers can assist you in determining whether your company’s
residency has changed and explain the taxation implications of being an under
the Australian tax regime. Please contact us using our online contact form, via
email at admin@taxcontroverypartners.com.au or by phone at 02 8513 3813.