Companies with significant economic connection to Australia will now be treated as an Australian tax resident under a change revealed in the federal budget.
‘Fantastic outcome’: Government clarifies corporate residency rules
The federal government has now announced plans to make amendments to clarify the corporate residency test.
Under the proposed amendment, companies incorporated offshore will be treated as an Australian tax resident if it has a significant economic connection to Australia.
This test will have two components: one, where the company’s core commercial activities are undertaken in Australia; and two, where its central management and control is in Australia.
The Tax Institute’s senior advocate, Robyn Jacobson, said the announcement would be welcomed by the profession after the ATO withdrew Tax Ruling 2004/15 in the wake of the 2016 High Court decision in Bywater Investments Ltd v Federal Commissioner of Taxation.
“This is a fantastic outcome after the last few years of uncertainty following the Bywater case and it substantially reinstates the position in withdrawn Tax Ruling 2004/15,” Ms Jacobson said.
The measure will come into effect from the first income year after the bill receives royal assent, but taxpayers will have the option of applying the new law from 15 March 2017 — the date on which the ATO withdrew TR 2004/15.
The government’s announcement comes after the Board of Taxation was tasked to review Australia’s corporate tax residency rules.
“This measure is consistent with the Board’s key recommendation in its 2020 report, Review of Corporate Tax Residency, and will mean the treatment of foreign incorporated companies will reflect the position prior to the 2016 court decision,” the budget papers said.