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Australia and New Zealand subsidiaries – where are you resident?

Australia and New Zealand subsidiaries

Our latest taxmail on the Inland Revenue and Australian Taxation Office agreement for determining the tax residency of dual resident companies.

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Key contact

John Cantin - KPMG NZ - Partner

Partner - Tax

KPMG in New Zealand

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Floating somewhat under the BEPS radar was a change to determine where a dual resident company is tax resident. This is relevant under our DTA with Australia, as well as a handful of other DTAs.

Dual resident companies must now seek formal confirmation from the tax authorities to agree their tax residency under the applicable DTA. This change applies from 1 January 2019 for our DTA with Australia.

The ATO and Inland Revenue have agreed that companies can self-assess their residency as solely New Zealand or Australian, if certain criteria are met. They have recently published that administrative agreement (here). Companies that do not qualify must apply to have their DTA position confirmed through a (six month) process. This taxmail has a checklist summary you can use to see if the agreement applies.

Importantly, the domestic dual resident rules may still apply (Dual resident companies are unable to offset losses, maintain imputation accounts and will be denied deductions under the hybrid rule).

The key takeaway is that New Zealand companies should be confirming their tax residency (and those of their Australian subsidiaries) under both countries’ rules and taking steps to manage the position.

What have the ATO and Inland Revenue agreed?

At its simplest, the administrative agreement allows Australian and New Zealand companies to self-assess their residency for DTA purposes, if they meet certain criteria.

These are summarised in the checklist below. All of the criteria must be met for self-assessment to apply.

Criteria Satisfied?              

Structure

  • Place of effective management is in one country only. 

Yes / No

 

Financials

  • Group turnover less than AUD250m/NZD260m.
  • Passive income less than 20% of total income.
  • Intangible assets (excluding goodwill) less than 20% of total assets. 
Yes / No

Compliance activities

  • There is no compliance activity with the ATO or IR relating to residency in the last five years.  
  • There is no formal dispute with the ATO or IR on any tax matter.
Yes / No

Continuing obligations

  • Notify ATO/IR that the administrative agreement has been applied on any new compliance activity (e.g. risk review or audit).
  • There have been no tax avoidance schemes depending on residency or affecting central management and control, including migration.
  • There have been no arrangements to conceal ultimate beneficial ownership or to abuse board processes or the board not operating.
  • There have been no arrangements which would mean DTA benefits would be denied.
  • There has been no material change to the company’s circumstances that would impact tax residency.   
Yes / No

ATO or IR review

  • There has been no ATO/IR review of the taxpayer’s residency (especially if the anti-avoidance rules may apply).
Yes / No           

 

If an ATO or IR review subsequently changes the self–assessment, the change will apply retrospectively to the later of 1 January 2019 or the change in the taxpayer’s circumstances.  If there has been no change in circumstances, the change applies from 1 January 2019.

Who does this impact?

New Zealand and Australia have comparatively broad tests for tax residency under domestic law that include place of incorporation as well as where a company is managed or controlled. This means New Zealand subsidiaries are at risk of being tax resident in Australia and vice versa.

The first step for many comnpanies' will be examining how their boards operate, to see if they are dual resident. This is particularly so because of recent changes to Australia’s view on tax residency under its domestic law, which means many companies may now (unexpectedly) find themselves tax resident in both Australia and New Zealand.

If a company finds that it is dual resident, its ability to use the administrative agreement (to self-assess), or request a determination from Inland Revenue or the ATO, needs to be considered.

Our view

The agreement

KPMG, among others, submitted that the DTA amendment would impose significant compliance costs on taxpayers and administrative costs on Inland Revenue. Those submissions were dismissed by Officials and therefore Government. The combined change in the ATO’s position and the DTA amendment has meant, in our view, that many more companies will have to deal with the New Zealand dual resident rules and the ATO and Inland Revenue. This should not change the DTA residency position for many companies, but is another compliance hoop they will now need to jump through.

The administrative agreement goes some way to reducing the costs but is very restrictive in its application. Further, the detailed criteria may, to reduce uncertainty, mean that an Inland Revenue and ATO agreement may be preferred by some taxpayers.

Dual resident company rules

New Zealand has a number of tax rules for dual residents. These are more restrictive than the rules that apply to companies that are not dual resident. For example, the hybrid rules can deny deductions, tax losses cannot be offset and an imputation credit account cannot be maintained. These can all be detrimental to the company’s New Zealand tax position.

The new DTA residency test has two possible effects. It may mean that New Zealand dual resident rules apply and/or that the benefits of the DTA do not apply.

The agreement between the ATO and Inland Revenue is intended to confirm DTA benefits for dual resident companies. However, it may not remove the effect of New Zealand’s dual resident rules. Even if the DTA position is sorted, many may find that dual resident rules will cause problems. You should review the application of the dual resident company rules in Australia and New Zealand for their effect.

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