In a previous article we discussed the High Court of Australia decision in Bywater & Ors v FC of T: see

Subsequent to the High Court decision, the ATO withdrew its previous ruling TR 2004/15, and issued a new draft ruling TR 2018/D3, and an exposure draft Practical Compliance Guideline (PCG).

After rejecting most criticisms of TR 2018/D3, the ATO has issued it in final form as TR 2018/5, and issued a draft PCG 2018/D3.

The time for submissions on PCG 2018/D3 have now closed, so it remains to be seen whether any of the criticism of it, results in any material change.

The problem with TR 2018/5 is it reverses 14 years of accepting that the central management & control (CM&C) test will only make a foreign company a tax resident of Australia if the company actually physically carries on business in Australia, in favour of the approach that the earlier High Court decision in Malayan Shipping must be interpreted as meaning that if CM&C is in Australia, that is an act of carrying on business in Australia. Before the decision in Bywater, we had written about CM&C, see

This change causes far more problems for Australian owned multinationals, rather than foreign owned. This is because an Australian owned multinational is far more likely to have some Australian directors or group policies that make it more likely that the Australian parent's views for its foreign subsidiary will be followed.

Whereas the earlier TR 2004/15 had examples to highlight the ATO approach to the CM&C issue, TR 2018/5 does not, but relies on PCG 2018/D3 to set out examples of the application of TR 2018/5.

The problem caused by the ATO change of heart are manifest in PCG 2018/D3, especially in relation to the presence of Australian directors on the board, and the use of electronic communication to hold board meetings.

As the Joint Professional Bodies submission dated 25 July 2018 said:

"Example 13 in the Draft PCG provides perhaps one of the most critical safe harbours in terms of practical guidance. However, the conclusion in paragraph 87 that the central management and control of the company is exercised to a "substantial degree in Australia" relies on, in part, that two of the four directors are located in Australia. The Joint Bodies suggest that a more useful example (or additional example) may be where only one of the four directors, all participating equally, are located in Australia. Having a minority of Australian directors on the board of a foreign company is common and so it would be useful to have clear guidance that such an arrangement will not result in central management and control being exercised to a substantial degree in Australia. Such an example would also provide clear guidance that it is not necessary that the single Australian director is required to physically attend board meetings overseas...

"Our concern is that the Commissioner's approach to the different forms of communication as articulated in the Draft PCG will engender more awkward Australian participation in relation to foreign subsidiaries of Australian companies. Distinguishing between video conference, circular resolutions, teleconference and physical presence will tend to create inefficiency and artificiality. It may promote situations where an Australian resident director is required to physically travel to the foreign board meeting to avoid central management and control being at least partly in Australia. This raises questions as to whether the Australian resident director might travel to the nearest country outside Australia (for example, Singapore or New Zealand) and participate in the directors' meeting by video conference or teleconference from that jurisdiction. It might also lead to boards being constituted only with foreign resident directors, therefore making the corporate governance of offshore subsidiaries of Australian companies far more cumbersome. Requiring a minority Australian resident director, or indeed, a number of Australian resident directors to travel overseas to attend board meetings to avoid having a substantial degree of central management and control in Australia is not consistent with a desire to limit 'red tape' and to promote business efficiency."

If PCG 2018/D3 is not amended, there is likely to be a push to have the law changed, perhaps along the lines of the 2003 Board of Taxation suggestion, that only Australian incorporated companies be treated as Australian tax residents. This would be consistent with the US approach, although this is uncommon internationally. Coincidentally, we have recently written about the push to change the tests for tax residence of individuals:

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