1 Is Company A resident of Australia under subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?
Yes. Question 2 If the answer to Question 1 is 'yes' will Company A be treated as foreign hybrid company under section 830-15 of the Income Tax Assessment Act 1997 (ITAA 1997)? Answer No. This ruling applies for the following period : 1 January XXX to 31 December XXXX The scheme commences on: 1 January XXXX
1. Company A is a limited liability company ("LLC") incorporated in the Country A. 2. Company A is taxed as a partnership in Country A. 3. Person C and Person D have an equal member interest in Company A. 4. Company A operates business in Australia. 5. Company A's Articles of Organisation designate Person C and Person D as authorised Managers. 6. Company A's Operating Agreement with Person C and Person D, provides that overall management and control of all aspects of the business operations of Company A are vested in the authorised Manager. 7. The Manager has the right and powers to manage and control the business, investment affairs of the Company, including to delegate to agents, employees and affiliates of the Manager or Company." 8. Management meetings involving business policy, management, business development and operational strategies are always held in Australia. 9. Person C and/or Person D work is always present in Australia to oversee Company A's business operation. 10. All meeting and accounting records for the business are digitally stored, but the accountant is based in Australia. Any paper records are kept in Australia.
Income Tax Assessment Act 1936 subsection 6(1) Income Tax Assessment Act 1997 section 830-1 Income Tax Assessment Act 1997 section 830-15 Income Tax Assessment Act 1997 subsection 830-15(1) Income Tax Assessment Act 1997 subsection 830-15(2) Income Tax Assessment Act 1997 subsection 830-15(3) Income Tax Assessment Act 1997 subsection 995-1
Question 1 Is Company A resident of Australia under subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)? The term 'resident' in relation to a company is defined within subsection 6(1) of the ITAA 1936, and is defined at paragraph (b) of that term as: b) 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, or its voting power controlled by shareholders who are residents of Australia. The definition sets the criteria necessary to establish residency of a company. The first element of the definition states that a company which is incorporated in Australia, is a resident of Australia ( the incorporation test ). For a company incorporated in Australia, this is where the examination ends to determine if the company is a resident under the definition. If a company is not incorporated in Australia, a company will be a resident under ' the central management and control test ' of company residency in paragraph (b) if it carries on business in Australia and has its the central management and control in Australia.
Alternatively, a company which is not incorporated in Australia will be a resident under 'the voting power test' if it carries on business in Australia and has its voting power controlled by shareholders who are residents of Australia. Incorporation Test Company A is incorporated in Country A. Therefore, it is not incorporated in Australia and is not a resident company under the incorporation test within subsection 6(1) of the ITAA 1936. Central Management & Control Test (CM&C) Taxation Ruling TR 2018/5 Income tax: central management and control test of residency (TR 2018/5) sets out the Commissioner's view on how to apply the CM&C test of company residency following Bywater Investments Limited & Ors v. Commissioner of Taxation; Hua Wang Bank Berhad v. Commissioner of Taxation [2016] HCA 45; 2016 ATC 20-589 (Bywater). Paragraphs 3 of TR 2018/5 states: A company is a resident or a resident of Australia under the central management and control test of residency if it: • carries on business in Australia, and • has its central management and control in Australia. Paragraph 8 of TR2018/5 states:
'It is not necessary for any part of the actual trading or investment operations of the business of the company to take place in Australia. This is because the central management and control of a business is factually part of carrying on that business. A company carrying on business does so both where its trading and investment activities take place, and where the central management and control of those activities occurs.' Therefore, if a company carrying on business has its central management and control in Australia it will necessarily carry on business in Australia. That is so even when the only business carried on in Australia consists of that central management and control, and trading operations are conducted outside of Australia. As outlined at paragraph 10 of TR 2018/5, CM&C refers to the control and direction of a company's operations. Paragraph 11 of TR 2018/5 states that the key element in the control and direction of a company's operations is the making of high-level decisions that set the company's general policies and determine the direction of its operations and the type of transactions it will enter. What activities constitute high-level decision-making?
Paragraph 16 of TR 2018/5 provides examples of what acts involve exercising CM&C: 16. Exercising central management and control of a company can involve: • setting investment and operational policy including: - setting the policy on disposal of trading stock, and/or the use and development of capital assets - deciding to buy and sell significant assets of the company • appointing company officers and agents and granting them power to carry on the company's business (and the revocation of such appointments and powers) • overseeing and controlling those appointed to carry out the day-to-day business of the company, and • matters of finance, including determining how profits are used and the declaration of dividends. Company A's Article of Organisation and accompanying Operating Agreements states that the formal powers and control of all aspects of the business and operations of the company is vested exclusively in the Managers, including: a) Power to invest in, purchase, and acquire the business, consummate all financing related transactions necessary.
b) Power to appoint one or more local directors, and successors thereof, as may be required from time to time. c) Power to make from company assets any and all expenditures that it may deem necessary or desirable for the conduct of the company's business. d) Maintain adequate records and accounts of all operations and expenditures and furnish the Members with annual statements of accounts as of the end of each company fiscal year. e) Establish and maintain reserves, in such amount as the Manager determines appropriate. f) Execute, on behalf of the company, any agreements, contracts, documents, certificates and instruments. g) Take any and all other action permitted under the Law and that is reasonably related to company purposes. h) Power to make and revoke any and all tax elections. i) Power to employ and terminate agents, employees, managers, accountants, attorneys, consultants or other professionals. j) Powers to delegate to agents, employees and Affiliates of the Manager or company. k) Power to redeem member interests.
l) Power to admit and assign additional member interests. m) Power to transfer member interest and rights. n) Power to conduct wind-up affairs of the company. o) Power to call for a meeting, to determine the location of the meeting and to determine the shareholders entitled to vote. Who exercises CM&C? Paragraph 19 of TR 2018/5 states that identifying who exercise CM&C is a question of fact. Paragraphs 20-22 of TR 2018/5 provide that: 20. Normally, where a company is run by its directors in accordance with its constitution and the company law rules applicable to that company, which give its directors the power to manage the company, the company's directors will control and direct its operations. It follows that ordinarily it is a company's directors who exercise its central management and control. 21. However, the actions of a company's directors, or others with the legal power and authority to control and manage the company, are not the end of the enquiry as to who exercises central management and control. There is no presumption that the directors of a company will always exercise its central management and control.
22. When determining who exercises a company's central management and control, all the relevant facts and circumstances must be considered. Facts and circumstances to be considered in determining who exercises a company's central management and control include the role of anyone who assumes the role of the directors' role in managing and controlling the company's affairs or has a role in the decision-making processes or governance of the company. Company A is run by the appointed Manager in accordance with the Operating Agreement & Articles of Organisation, the Manager(s) control and direct the operations of the Company A. As outlined in paragraph 19 of TR 2018/5, this amounts to the Manager(s) exercising CM&C. Person C and Person D (controlling members of Company A) are the appointed Managers of Company A. Where is the CM&C carried out? In determining where CM&C of a company is exercised, paragraph 30 of TR 2018/5 provides:
30. A company will be controlled and directed where those making its high-level decisions do so as a matter of fact and substance. It is not where they are merely recorded and formalised, or where the company's constitution, bylaws or articles of association require it be controlled and directed, if in reality it occurs elsewhere. This will not necessarily be the place where those who control and direct a company live. Paragraph 34 of TR 2018/5 states that where a company's CM&C is exercised is not determined by where the directors, or other persons, who control and manage it, are resident or live. It states that what matters is where they actually perform the activities to control and direct the company. Relevant considerations in determining where CM&C is exercised are provided in paragraphs 35-38 of TR 2018/5: 35. No single factor alone will necessarily determine where central management and control of a company is exercised. The relevance and weight to be given to each will depend on the facts and circumstances of the case and surrounding circumstances.
36. The matters most likely to influence a court's decision, as to where those who control and direct the operations of a company do so from, are: • where those who exercise central management control do so, rather than where they live • where the governing body of the company meets • where the company declares and pays dividends • the nature of the business and whether it dictates where control and management decisions are made in practice • minutes or other documents recording where high-level decisions are made. 37. Other matters, of lesser weight, the courts have considered in analysing where a company's central management and control is exercised include: • where those who control and direct the company's operations live • where the company's books are kept • where its registered office is located • where the company's register of shareholders is kept • where the shareholder's meetings are held • where its shareholders reside.
38. These factors are used to help identify where a company's directors, or others, actually make its high-level decisions and in doing so where they actually manage and control the company. In applying the circumstances stated in TR 2018/5 to Company A, the following is relevant • The two listed mangers of Company A are Person C and Person D, both are also controlling shareholders. • Person C and/or Person D work is always present in Australia to oversee the business operations, with support of the Australiana based manager, final management oversight (relating to operational and strategic decision) rests with the individual currently in Australia. • Manager and Shareholder meetings are to be held in Australia, all meeting and accounting records for the business are digitally stored, any paper records are kept in Australia and the accountant is based in Australia.
Based on the facts outlined above, operational and strategic decisions relating to the operation of Company A will be made in Australia and therefore CM&C of Company A will be in Australia. Central management and control of Company A is factually part of carrying on the business of Company A. Company A will be a resident of Australia under the CM&C test. Voting Power Test As stated above, CM&C of Company A is in Australia, Company A therefore will be residents of Australia under the CM&C test. Accordingly, it is not necessary to consider the voting power test for Company A. Question 2 If the answer to Question 1 is 'yes' will Company A be treated as foreign hybrid company under section 830-15 of the Income Tax Assessment Act 1997 (ITAA 1997)? Detailed reasoning Foreign hybrid companies Division 830 of the ITAA 1997 provides for foreign hybrids, that are treated as flow-through entities for the purposes of foreign tax, but treated as companies for Australian income tax purposes, to be treated as partnerships for the purposes of the Acts (section 830-1 of the ITAA 1997).
Relevantly, section 830-15 of the ITAA 1997 provides when a company is a foreign hybrid company in relation to an income year. It states: (1) Subject to subsection (5), a company is a foreign hybrid company in relation to an income year if: (a) at all times during the income year when the company is in existence, the partnership treatment requirements for the income year in subsection (2) or (3) are satisfied; and (b) at no time during the income year is the company, for the purposes of a law of any foreign country that imposes *foreign income tax (except *credit absorption tax or *unitary tax) on entities because they are residents of the foreign country, a resident of that country; and (c) at no time during the income year is the company an Australian resident; and (d) disregarding this Division, in relation to the same income year of another taxpayer: (i) the company is a *CFC at the end of a *statutory accounting period that ends in the income year; and
(ii) at the end of the statutory accounting period, the taxpayer is an *attributable taxpayer in relation to the CFC with an *attribution percentage greater than nil. (2) For the purposes of paragraph (1)(a), the partnership treatment requirements are satisfied if: (a) the company was formed in the Country A; and (b) for the purposes of the law of that country relating to *foreign income tax (except *credit absorption tax or *unitary tax) imposed by that country, the company is a limited liability company that: (i) is treated as a partnership; or (ii) is an eligible entity that is disregarded as an entity separate from its owner. (3) For the purposes of paragraph (1)(a), the partnership treatment requirements are also satisfied if: (a) the company was formed in a foreign country (which may be the Country A); and (b) for the purposes of the law of that country relating to *foreign income tax (except *credit absorption tax or *unitary tax) imposed by that country, the company is treated as a partnership; and
(c) regulations are in force setting out requirements to be satisfied by a company in relation to the income year for the purposes of this paragraph, and the company satisfies those requirements. In accordance with subsection 830-15(1) of the I TAA 1997, a company is a foreign hybrid company for an income year if it satisfies all of the criteria contained within that provision. Each criterion is now considered to determine whether the Company A is foreign hybrid company for the purposes of Australian taxation law. (a) at all times during the income year when the company is in existence. the partnership treatment requirements for the income year are satisfied. The partnership treatment requirements are satisfied if the company meets all of the requirements listed in either subsections 830-15(2) or 830-15(3) of the ITAA 1997. The partnership treatment requirements in subsection 830-15(2) of the I TAA 1997 are satisfied if: • the company was formed in the Country A; and
• for the purposes of the law of that country relating to *foreign income tax (except *credit absorption tax or *unitary tax) imposed by that country, the company is a limited liability company that: - is treated as a partnership, or - is an eligible entity that is disregarded as an entity separate from its owner Company A satisfies the partnership treatment requirement in subsection 830-15(2) of the ITAA 1997 as: • It is formed in the Country A, and • it is treated as either a partnership, or an eligible entity that is disregarded as an entity separate from its owner for the purposes of Country A income tax law. As the Company A satisfies the partnership treatment requirements under subsection 830-15(2) of the ITAA 1997 it is not necessary to consider the additional criterion in 830-15(3). (b) at no time during the income year is the company, for the purposes of a law of any foreign country that imposes *foreign income tax (except *credit absorption tax or *unitary tax) on entities because they are residents of the foreign country, a resident of that country;
As noted above, Company A will be treated as a partnership for the purposes of Country A income tax law such that the owner (member) is taxed rather than Company A. Company A itself is not taxed under Country A federal income tax law. Accordingly, the requirements in paragraph 830-15(1)(b) of the ITAA 1997 are satisfied. (c) at no time during the income year is the company an Australian resident: Subsection 995-1 (1) of the ITAA 1997 defines an Australian resident as being, in this case, a person who is a resident of Australia for the purposes of the I TAA 1936. As established under Question 1, that Company A will be resident of Australia for the purposes of Australian taxation law. Therefore, Company A would not satisfy the residency requirements under subsection 830-15(1)(c) of the ITAA 1997, it is not necessary to consider the additional criterion in 830-15(1). Conclusion Company A will be treated as a company for the purposes of Australian income tax law as it is not a foreign hybrid company under Division 830 of the ITAA 1997.