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Australian Courts often deal with cases involving commercial arrangements where foreign companies operating in Australia have arranged their corporate affairs, at least in part, to minimise paying tax in Australia. A question that often arises is whether the company or its business operation is an Australian resident for tax purposes. If your company does business in Australia either directly or via subsidiaries, it is important to stay abreast of the law and to ask whether your business has become an Australian resident for taxation purposes.

Following the unanimous High Court decision in Bywater Investments Limited & Ors V Commissioner Of Taxation; Hua Wang Bank Berhad V Commissioner Of Taxation [2016] HCA 45 (Bywater), answering this question may not be so simple.

In Bywater the High Court dismissed the appeals of the four foreign companies (the appellants) who were seeking to overturn the primary decision from the Federal Court that they were in fact Australian residents for taxation purposes under s6(1) of the Income Tax Assessment Act 1936 (Cth) (the Act), despite their foreign status and the foreign status of their companies.

While the incorporated location of the entities varied, the appellants each argued that the “central management and control” or “real business” took place overseas and is therefore outside the remit of the Australian taxation regime.

The primary judge did not agree with this assessment and held that, irrespective:

  • of the board’s location;
  • of the board meeting being conducted overseas: or
  • that the directors where foreign residents,

the businesses’ “real business” was in fact being conducted by an Australian resident in Australia and therefore, was an Australian resident for taxation purposes under the Act.

The High Court upheld the primary judge’s findings and highlighted that the test for assessing a companies taxation obligations under the Act must give greater weight to the substance of the company structure, rather than the form.

It is not enough to incorporate the business overseas and operate the business as if the company has abrogated its business decision-making duties to a local representative. The foreign entity must be more than a rubber stamp or a ‘puppet’ of the local management team.

Three of the appellants further argued that even if they were deemed to be Australian residents for taxation purposes, they should be exempt from any additional taxation due to the treaties Australia has entered into to prevent double taxation.

These treaties anticipate that a foreign entity could be a resident of two countries for taxation purposes at the same time and includes tie-breaker provisions, which require the Court to review the “place of effective management”.

To establish where the “place of effective management” is, the Court must again look at:

  • the formal corporate structure of the entity;
  • how the corporate structure operates in practice;
  • who is making the day-to-day decisions; and
  • ultimately, who is the driving mind behind the corporate decisions.

If it is established that the “place of effective management” is Australia, then Australia will be the sole recipient of the taxation monies. However, if it is established that the “place of effective management” of the foreign entity is the foreign entity’s incorporated country, that entity may be able to rely on the protections of the relevant treaty and be exempt from paying tax to the Australian government.

These protections would only be available to a foreign entity if Australia has entered into a relevant treaty with the country in which the foreign entity is incorporated or in which it claims is its “place of effective management”.

If your company group sits under a foreign entity it is paramount for business planning and risk management, that you seek legal advice and review any additional taxation obligations to which your current business practices may be exposing your company.

If you would like further information in relation to this matter or other legal matters please contact our office on Freecall 1800 609 945 or email us now.

(This information serves as a general guide and does not constitute legal advice. It is based on our research and experience at the time of publication. Please consult our knowledgeable Legal Team for any specific inquiries or advice relevant to your circumstances, as the content may not have been updated subsequently.