Assessability of income derived on or after 1 July 2004 by a company resident of Australia and of the United Kingdom

Is the business income derived by a company taxpayer that is incorporated in the United Kingdom (UK) and has its central management and control in Australia assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The business income derived by the company taxpayer is assessable under subsection 6-5(2) of the ITAA 1997. Article 7(1) of Schedule 1 to the International Tax Agreements Act 1953 (the Agreements Act) provides Australia the sole taxing right over the income as Article 4 of Schedule 1 deems the company to be a resident of Australia.

The taxpayer is a company that is incorporated in UK but not in Australia.

The company is a resident of the UK for the purposes of the domestic tax laws of the UK.

The company carries on business in Australia and its central management and control is located in Australia. The company does not derive any business income through a permanent establishment in the UK.

All board of directors meetings are held in Australia. All strategic, investment and operational business decisions are made and implemented in Australia.

The company is not a dual listed company within the meaning of Article 4(6) of the UK Double Tax Convention.

Subsection 6-5(2) of the ITAA 1997 provides that assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Business income is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

According to subsection 995-1(1) of the ITAA 1997, the term 'resident' has the same meaning as the definition of 'resident' in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). A company is therefore a resident if it is incorporated in Australia or, if it is not so incorporated, it carries on business in Australia and has either its central management and control in Australia or its voting power is controlled by resident Australian shareholders.

In the present case, the company taxpayer is not incorporated in Australia but it does carry on business in Australia and its central management and control is located in Australia. Accordingly, it is a resident of Australia for the purposes of Australia's domestic tax law.

However, the company is also a resident of the United Kingdom (UK) for the purposes of the domestic tax laws of the UK because it is incorporated in the UK. Therefore, it is necessary to consider not only the income tax law but also the applicable double tax agreement contained in the Agreements Act.

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Schedule 1 to the Agreements Act contains the double tax convention between Australia and the United Kingdom of Great Britain and Northern Ireland (the 2003 UK Convention). The 2003 UK Convention operates to avoid the double taxation of income received by Australian and UK residents.

The 2003 UK Convention entered into force on 17 December 2003, and in the case of Australia, applies to income or gains for the income year beginning on 1 July 2004 and thereafter.

Article 7(1) of the 2003 UK Convention provides that profits of an enterprise shall only be taxable in the country of residence unless the enterprise carries on business through a permanent establishment in the other country.

Article 4(1) provides that a company is a resident of the UK if it is a resident of the UK for the purposes of UK tax. The company is a resident of Australia if it is a resident of Australia for the purposes of Australian tax. Where a company is treated as a resident of both the UK and Australia by reason of the domestic tax laws of both countries, Article 4(4) deems the company to be a resident only of the country in which its place of effective management is situated.

According to the Organisation of Economic Cooperation and Development (OECD) Commentary, the place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the entity's business are in substance made. Based on the explanation used in paragraph 24 of the OECD Commentary, the test of 'place of effective management' is very similar to the test of 'central management and control' and is a question of fact. Therefore, if the company's central management and control is in Australia, then its place of effective management is also likely to be in Australia.

In the present case, all the board of directors meetings are held in Australia. Furthermore, all strategic, investment and operational business decisions are made and implemented in Australia. For these reasons, the place of effective management of the company is situated in Australia and therefore the company is a resident of Australia for the purposes of the 2003 UK Convention.

Article 7(1) of the 2003 UK Convention provides Australia sole taxing rights over the company's business income because the company does not derive any business income through a permanent establishment in the UK.

Accordingly, the business income of the company is included in its assessable income under subsection 6-5(2) of the ITAA 1997.