Liam Delahunty looks at the implications of the High Court’s decision in Bywater for Australian groups with foreign-incorporated subsidiaries.
The High Court’s decision in Bywater Investments Limited / Hua Wang Bank Berhad v. Commissioner of Taxation  HCA 45 (Bywater) found that various foreign-incorporated entities had, in reality, been centrally managed and controlled in Australia and also carried on business in Australia, and had thereby become Australian residents.
The Australian Taxation Office (ATO) has reiterated the outcome of the case in Draft Ruling TR 2017/D2. Simultaneously it has withdrawn Taxation Ruling 2004/15 as of 15 March 2017 (which arguably provided a concessional treatment). The Draft Ruling is anticipated to be finalised shortly.
The key aspect of this change in the ATO’s approach appears to be that if central management and control is situated in Australia, then that automatically constitutes the carrying-on of a business in Australia.
Some groups may be adversely affected by this decision and the apparent change in the ATO’s position. The consequences could be severe – including:
It is timely for Australian groups with foreign-incorporated subsidiaries to consider whether they are appropriately managing tax residency risk from a go-forward perspective. This can include re-visiting and /or implementing tax residency protocols and ensuring that they can be applied practically.
Given that since 15 March 2017, reliance on the prior Taxation Ruling 2004/15 is no longer possible, groups should be doing this as soon as possible.