Substance trump(s) form: Determining Central Management & Control (CMC) of a company
A recent Australian High Court decision1 confirmed that a company not incorporated in Australia can still be a resident of Australia for tax purposes even if the company has foreign directors and the board meetings are held outside of Australia.
It should therefore not just automatically be assumed that because a company is not incorporated in Australia (with foreign directors and board meetings held outside Australia) the company will be a non-resident for Australian tax purposes.
An analysis of all relevant factors is required to determine whether the real central management and control (CMC) of the company is situated in Australia.
Background to Australian tax residency
Pursuant to Australia’s residency based system of taxation, tax residents2 of Australia will be taxable on their worldwide income (i.e. income from Australian and non-Australian sources), whereas non-residents will only be taxable on Australian sourced income.
However, determining the tax residency of a company is not a simple exercise – mainly because a variety of factors (e.g. place of incorporation, place of carrying on business, place of CMC or tax residency of the shareholders) as well as the taxpayer’s particular circumstances – affects such a determination.
As a rule of thumb, a company that is incorporated in Australia will be a tax resident of Australia (regardless of where the company conducts business or holds board meetings). However, a company that is not incorporated in Australia will only be an Australian tax resident if the company is at least carrying on business in Australia and either:
- the central management and control (CMC) of the company is also situated in Australia; or
- the majority of voting-class shares (by value) are controlled by Australian resident shareholders.
Consequently a company not incorporated in Australia that carries on a business in Australia, will be an Australian tax resident if the CMC of the company is also situated in Australia (regardless of the tax residency of the shareholders).
But what is central management and control (CMC)?
The recent Australian High Court case of Bywater Investments provides further guidance on how to determine where a company’s CMC is exercised.
The specific case involved four companies incorporated in different overseas countries – involving foreign directors and board meetings that were not conducted in Australia. However, the companies did carry on business in Australia through buying and selling shares on the Australian Securities Exchange (ASX).
A question arose where the decision to buy and sell such shares were made (i.e. where the CMC of the companies was exercised).
As illustrated in the table below, the CMC of a company will generally be where the directors hold their board meetings to make high-level decisions about the company’s general policies, the direction of its operations and the type of transactions the company will enter into:
Examples of actions that are CMC
- Setting investment and operational policy such as:
- Setting the policy on disposal of trading stock & capital assets
- Deciding to buy & sell significant assets of the company
- Appointing company officers to carry on the company’s business
Overseeing and controlling these company officers to carry out the day-to-day business of the company
However, merely conducting a company’s day-to-day activities and operations (e.g. company administration activities) will not be an act of CMC
Examples of actions that are not CMC
Company administration activities such as:
- Keeping a company’s share register
- Keeping a company’s accounts
- Where a company pays dividends;
- The minimum acts necessary to maintain a company’s registration
Furthermore, it is a question of fact who really makes the substantive decisions of the company (e.g. a majority shareholder does not necessarily control and directs a company’s operations and activities).
The board of directors were not the real decision-makers
In Bywater Investments, the High Court held that although the board meetings were held outside of Australia, the CMC was in Australia because the real substantive control of the companies was actually exercised by an Australian accountant in Sydney.
This Australian accountant made the real business decisions in Australia (e.g. setting the investment and operational policy) and the foreign board of directors merely implemented these decisions (i.e. the board meetings were mere window dressing and effectively only rubber-stamped decisions that were already made3.
These artificial arrangements (i.e. overseas board meetings) were designed to give the impression that the company’s CMC was not in Australia – however the Court looked beyond the form of the arrangement and looked at the substance / reality of what was actually going on.
The Court found that, in substance, these board meetings were not the real “engine room” of important decision making of the company since these non-resident directors merely recorded and implemented decisions (already made by the Sydney accountant) in a mechanical fashion.
Therefore the companies were held to be Australian tax residents and subject to tax in Australia on their worldwide income.
The recent Australian High Court decision of Bywater Investments is a sober reminder of the importance of substance over form. The determination of where CMC is exercised is a question of fact and depends on the specific circumstances of the particular taxpayer.
The decision highlights the complications of determining the tax residency of companies incorporated in foreign jurisdictions that conduct business in Australia.
Beware! Such companies may be Australian tax residents and subject to Australian tax on their worldwide income.
References
(1) Bywater Investments Limited v Commissioner of Taxation; Hua Wang Bank Berhad v Commissioner of Taxation [2016]HCA 45 (16 November 2016). (2) Tax residency is a concept determined specifically by the Australian tax rules. It is different from the concept of residency for immigration purposes. (3) Paragraph 80 of Bywater Investments
