Australia's Corporate Tax Residency laws to change: Budget Announcement

6 October 2020

The Government has announced that the Income Tax Assessment Act 1936 will be amended to change Australia's Corporate Tax Residency laws. The change which has been announced today, as part of the Federal Budget 2020-2021 aims to ensure that a foreign company is not considered tax resident of Australia merely because its central management and control is exercised from Australia.

Today the Government announced that intends to change tax legislation in relation to corporate tax residency. In particular the change will apply to the residency of companies incorporated overseas.

The current test of corporate residency set out in Section 6(1) ITAA 1936 is that a company not incorporated in Australia is considered resident here if it carries on a business in Australia and if either its central management and control or if its voting power controlled by shareholders who are resident in Australia. However, the decision in the Bywater in 2016, foreign companies could be considered tax resident in Australia if their central management and control was in Australia, because the very exercise of such management and control was seen by High Court as being an integral part of the carrying on a business.

The government announced today in the Budget that the High Court's decision in Bywater 'departed from a long held position on the definition of a corporate resident' (not true in our review).

Consequently, the government has said that it "will amend the law to provide that a company that is incorporated offshore will be treated as an Australian tax resident if it has a ‘significant economic connection to Australia’. This test will be satisfied where both the company’s core commercial activities are undertaken in Australia and its central management and control is in Australia.

This change follows a report by the Board of Taxation handed down earlier this year on the issue of corporate residency. It is not clear at this stage what would be considered 'core commercial activities' and again this area is likely to become the subject of some debate.