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  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
The primary judge did not agree with this assessment and held
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
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
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
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
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Exemptions or concessions on stamp duty could apply when contemplating the purchase or transfer of NSW real estate.
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