• Federal Budget 2020-2021

Clarifying the Corporate Residency Test

The Government will make technical amendments to clarify the corporate residency test in relation to companies incorporated offshore. This measure is consistent with the Board of Taxation’s key recommendation in its 2020 report: Review of Corporate Tax Residency.

Current Law

Under the current corporate residency test, a company incorporated offshore is an Australian resident if it carries on business in Australia and either has its central management and control in Australia, or its voting power is controlled by shareholders who are residents of Australia.

Prior to 2017 the Australian Taxation Office (ATO) generally took the view that the ‘carrying on of a business’ was separate to the ‘central management and control’ test. However the ATO recently changed its view such that merely exercising central management and control may in itself constitute the carrying on of a business.

Proposed Law

The Government is proposing to amend the law to provide that a company which is incorporated offshore is an Australian resident if it has a ‘significant economic connection to Australia’. The test will be satisfied where both the company’s core commercial activities are undertaken in Australian and its central management and control is in Australia.

This proposed measure will have effect from the first income year following the date of Royal Assent, however taxpayers will have the option of applying the new law from 15 March 2017 (the date on which the ATO withdrew its ruling TR 2004/15 Income tax: residence of companies not incorporated in Australia – carrying on a business in Australian and central management and control).

BDO Comment

BDO considers this change to the corporate residency tests to be long overdue, and welcomes this measure subject to seeing details of the draft legislation. The ambiguity surrounding the application of the existing corporate residency tests produces commercial uncertainty and places unnecessary compliance burdens on taxpayers. The clarification is welcome, but will be of little solace to companies that have been engaged in disputes with the ATO for the last three or more years.