Income tax: central management and control test of residency

This Ruling sets out the Commissioner's view on how to apply the central management and control test of company residency [1] 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 ).

This Ruling does not deal with: • the voting power test of company residency for foreign incorporated companies [2] , or • when a company carries on a business.

A company is a resident or a resident of Australia under the central management and control test of residency [3] if it: • carries on business in Australia, and • has its central management and control in Australia.

Four matters are relevant in determining whether a company meets these criteria: (1) Does the company carry on business in Australia? (see paragraph 6 of this Ruling). (2) What does central management and control mean? (see paragraph 10 of this Ruling). (3) Who exercises central management and control? (see paragraph 19 of this Ruling). (4) Where is central management and control exercised? (see paragraph 30 of this Ruling).

Whether a company is a resident under the central management and control test of residency must be determined by reference to all the facts and relevant case law.

To be resident under the central management and control test of residency, a company must carry on business in Australia. [4]

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. [5]

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. [6] 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. [7]

Central management and control of a company is not necessarily exercised where the trading or investment activities of the company are carried on. [8]

Central management and control refers to the control and direction of a company's operations. [9] It does not refer to a physical location in which the control and direction of a company is located, and may ultimately be exercised in more than one location. [10]

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. [11]

The control and direction of a company is different from the day-to-day conduct and management of its activities and operations. [12] The day-to-day conduct and management of a company's activities and operations is not ordinarily an act of central management and control. [13] Nor is the management of day-to-day activities under the authority and supervision of higher-level managers or controllers. [14]

The day-to-day conduct and management of a company's operations might be an exercise of central management and control in circumstances where they are effectively the same. For example, for a small passive investment company with a very small number of investments, the decisions to make, hold and dispose of those investments, would be both the day-to-day management and the central management and control of the company. [15]

Merely because a person is a majority shareholder, or has the power to appoint those who control and direct a company's operations does not, by itself, mean the person controls and directs a company's operations and activities. [16]

A person, or group of people, make a decision if they actively consider and decide to do, or not do something based on it being in the best interests of the company. [17] It does not include the mere implementation, or rubberstamping, of decisions made by others (see paragraphs 26 to 29 of this Ruling).

Exercising central management and control of a company can involve: • setting investment and operational policy [18] including: - setting the policy on disposal of trading stock, and/or the use and development of capital assets [19] - deciding to buy and sell significant assets of the company [20] • appointing company officers and agents and granting them power to carry on the company's business (and the revocation of such appointments and powers) [21] • overseeing and controlling those appointed to carry out the day-to-day business of the company [22] , and • matters of finance [23] , including determining how profits are used and the declaration of dividends. [24]

Matters of company administration are not acts of central management and control. These include: • keeping a company's share register, including registering transfers of shares [25] • keeping and adopting a company's accounts [26] • where a company pays dividends [27] , and • the minimum acts necessary to maintain a company's registration. [28]

The nature of a company's activities and business define which acts and decisions are an exercise of the central management and control of that company. [29] For example, where a company is a special purpose vehicle set up to conduct only two transactions - to buy and sell an asset - the decisions to buy and sell will be the only activities relevant to central management and control. [30] For a company carrying on an ongoing business of mining and selling diamonds, the relevant decisions include determining policies on the operation and development of mines, and the sale of the mined diamonds. [31]

Identifying who exercises central management and control is a question of fact. It cannot be determined solely by identifying who has the legal power or authority to control and direct a company. [32] The crucial question is who controls and directs a company's operations in reality.

Normally, where a company is run by its directors in accordance with its constitution and the company law rules applicable to that company [33] , which give its directors the power to manage the company, the company's directors will control and direct its operations. [34] It follows that ordinarily it is a company's directors who exercise its central management and control.

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. [35]

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 [36] in the decision-making processes or governance of the company. [37]

A person who has legal power or authority to control and direct a company, but does not use it, does not exercise central management and control. [38] For example, in Bywater , the court disregarded the role of those directors who were formally appointed but did not play any real role in the affairs of the company.

A person may control and direct a company without actively intervening in the company's affairs on an ongoing basis provided they [39] : • have appointed agents or managers whom they tacitly control to conduct the company's day-to-day business • tacitly control and regularly exercise oversight of the affairs of the company, including monitoring the company's performance, and • do not need to actively intervene because the company's affairs are running smoothly and in the manner they desire.

A person without any legal power or authority to control or direct a company may exercise central management and control of that company. [40]

An outsider who merely influences those with legal power to control and direct a company, even if they can and do exert strong influence, is not the relevant decision maker and does not exercise central management and control of the company. [41] However, if an outsider is more than merely influential, and actually dictates or controls the decisions made by the directors, the outsider will exercise central management and control of the company. [42]

The distinction turns on what amounts to decision making for the central management and control test of residency. In Bywater , the High Court observed that this turns on whether the people said to make the decisions of the company, actually consider whether to do what they are told, or are advised to do, and make a decision to do it because it is in the best interests of the company. If they do, they are the relevant decision maker and exercise central management and control of the company. [43] If they do not, and merely mechanically implement or rubberstamp company decisions already made by others based on what they are told or advised to do, the person who gave the instruction is the real decision-maker and exercises central management and control of the company. [44]

It is relevant to consider whether the directors would refuse to follow advice or directions of outsiders that are improper or inadvisable. [45] If they would, it is more likely the directors are the real decision makers. If not, it is more likely the outsider who exercises central management and control.

The directors' knowledge of the business is also relevant. A lack of knowledge of the business sufficient to enable them to determine if following advice or instructions would be improper or inadvisable, suggests they are not the real decision makers and are more likely rubberstamping or implementing decisions already made by others. [46]

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 [47] , or where the company's constitution, bylaws or articles of association require it be controlled and directed, if in reality it occurs elsewhere. [48] This will not necessarily be the place where those who control and direct a company live. [49]

Control and direction of a company may be undertaken by those controlling a company in multiple places. This means a company's central management and control may be divided between more than one place. [50] However, a company's central management and control will only be exercised in a place for the purpose of the central management and control test if it is exercised in that place to a substantial degree, sufficient to conclude the company is really carrying on business there. [51]

Central management and control of a company is not necessarily exercised where the trading or investment activities of the company are carried on. [52] However, the nature of a company's business activities may dictate where its key decisions must be made as a matter of practice. [53]

In North Australian Pastoral and Waterloo Pastoral , the practical need to make the key high-level decisions where its day-to-day operational activities occurred, heavily influenced the court's conclusion that the central management and control of the company was exercised where its operational activities took place.

Where a company's central management and control is exercised is not determined by where the directors, or other persons, who control and manage it, are resident or live. [54] What matters is where they actually perform the activities to control and direct the company.

No single factor alone will necessarily determine where central management and control of a company is exercised. [55] The relevance and weight to be given to each will depend on the facts and circumstances of the case and surrounding circumstances. [56]

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 [57] • where the governing body of the company meets [58] • where the company declares and pays dividends [59] • the nature of the business and whether it dictates where control and management decisions are made in practice [60] • minutes or other documents recording where high-level decisions are made. [61]

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 [62] • where the company's books are kept [63] • where its registered office is located [64] • where the company's register of shareholders is kept [65] • where the shareholder's meetings are held [66] • where its shareholders reside. [67]

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.

This Ruling applies from 15 March 2017.

However, this Ruling will not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of this Ruling (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10).

The following is a detailed contents list for this Ruling: Paragraph Summary - what this ruling is about 1 Ruling 3 Background 3 Does a company carry on business in Australia? 6 What does central management and control mean? 10 What is 'decision making'? 15 Acts of central management and control 16 Matters of company administration 17 The relevance of a company's activities 18 Who exercises central management and control of a company? 19 A starting point 20 Mere legal power or authority to manage a company is not sufficient to establish exercise of central management and control 23 Tacit control and delegated authority 24 Legal authority or power is not necessary for a person to exercise central management and control 25 Company outsiders - is a person merely influential over decision makers or do they exercise central management and control of that company? 26 Where is central management and control of a company exercised? 30 Multiple places of central management and control 31 Relevance of a company's activities 32 Residence of directors vs residence of a company 34 Relevant considerations 35 Date of effect 39 Appendix 1 - Detailed contents list 41