New corporate residency rules for foreign companies

The 2020 Australian government budget was tabled on 06 October 2020. The government announced changes to the corporate residency test that seek to clarify it, so that a company incorporated outside Australia will only be treated as an Australian tax resident if it has a “significant economic connection to Australia”.

This means that a company will only satisfy the “significant economic connection” test where both:

• Its core commercial activities are undertaken in Australia, and
• Its central management and control is located in Australia.

The domestic corporate residency rules were relatively settled and set out in a 2004 Commissioner’s ruling (TR 2004/15). In this ruling, the Commissioner outlined his views on the situations where a company that is not incorporated in Australia would be treated as a resident of Australia for tax purposes. Following the High Court of Australia’s 2016 decision in Bywater Investments Ltd v Federal Commissioner of Taxation, the Commissioner’s position changed. These changes to the position in TR 2004/15 have created significant uncertainty in the international market as to whether a foreignincorporated company, with some Australian presence, will be a resident of Australia for income tax purposes. The new legislation, which is yet to be released, is an attempt to restore the corporate residency tests that existed prior to the High Court decision in Bywater.

The proposals will apply from the first income year after the enabling legislation receives Royal Assent, but taxpayers will also have the option of applying the measures retroactively to 15 March 2017.

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