Australia: Changes to corporate residency guidelines and other international tax developments
Australian residency for companies – updated ATO guidelines
On June 21 2018, the Australian Taxation Office (ATO) released updated guidelines on the corporate residency test in Taxation Ruling TR 2018/5 and Draft Practical Compliance Guidelines PCG 2018/D3.
Under Australian income tax law, a company incorporated outside of Australia will be an Australian tax resident where it carries on business in Australia and either:
Has its central and management control (CMaC) in Australia; or
Has its voting power controlled by shareholders who are Australian residents.
Importantly, in the updated guidelines, the ATO states that a company that has its CMaC in Australia will also be considered to carry on business in Australia. It is not necessary for the actual trading or investment activities of the company to take place in Australia. Thus, the act of management or control in Australia will, of itself, be sufficient for the company to be considered an Australian resident.
The ATO states that CMaC will ordinarily reside with the directors of the company, but this will not always be the case (e.g. where the directors simply 'rubber stamp' the decisions of the real decision maker). Ultimately, the location of the CMaC will be a question of fact, requiring an analysis of the nature of the company's business, its activities and decision-making structure.
Taxation reform of stapled structures – integrity measures for transitional rules
Under the transitional rules in the proposed tax changes to 'stapled structures' (released in May 2018), certain stapled structures are able to continue to access the concessional 15% managed investment trust withholding tax rate in respect of cross-staple rental payments for either 15 years (for approved economic infrastructure projects) or seven years (for other existing projects).
On June 28 2018, the Australian government released a consultation paper on proposed integrity measures for these transitional rules, under which the transitional rules would only be available where:
For projects eligible for the seven-year period, the cross-staple rental payments are consistent with the non-arm's length income rule (i.e. market pricing); and
For projects eligible for the 15-year period, the cross-staple rent payments either:
Are in accordance with existing rent calculation methodology for the project (for existing projects); or
Do not result in more than 80% of the taxable income of the project being allocated to the asset entity (for new projects).
Multinational integrity measures – expansion of significant global entity definition
Since 2015, in response to the OECD's BEPS Action Plan, Australia has introduced various integrity measures and reporting obligations for multinationals, such as the Multinational Anti-Avoidance Law, diverted profits tax and country-by-country reporting requirements.
These measures generally only apply to entities that meet the 'significant global entity' (SGE) definition, being:
A global parent entity with annual global income of A$1 billion ($738 million) or more; or
A member of a group of entities that are consolidated for accounting purposes and the global parent entity of that group has annual global income of A$1 billion or more.
On July 20 2018, the Australian government released draft legislation to extend the definition of the SGE to cover members of groups headed by proprietary companies, trusts, partnerships and investment entities. The existing SGE definition only includes groups headed by listed companies or private companies required to prepare general purpose financial statements.
Accordingly, a wider range of entities could now fall within the definition of a SGE and be subject to the various integrity measures and reporting obligations for multinationals; for example, companies that are majority-owned by large private equity or other investment funds.
These changes are proposed to apply from July 1 2018.