Australia: Extension of transition period for residency management and control test

The Australian Taxation Office (ATO) on 29 June 2022 extended the transition period for the central management and control test for residency—to 31 December 2022.

The transition period applies to a foreign-incorporated company that, immediately prior to the withdrawal of Taxation Ruling (TR) 2004/15 Income tax relating to the residence of companies not incorporated in Australia:

• Had relied on TR 2004/15 and on that basis was not a resident of Australia
• Had not undertaken or entered
  • Any artificial or contrived arrangements that affected the location of its central management and control
  • Any tax avoidance scheme whose outcome depends, in whole or part, on it being a non-resident
• Is an ordinary company incorporated under a foreign equivalent to the Corporations Act 2001 and is not a foreign hybrid within the meaning of section 830-5 of the Income Tax Assessment Act 1997
• Would become a resident under the central management and control test of residency under the Commissioner's revised view in TR 2018/5, solely because its central management and control is located in Australia

The ATO will respect a foreign-incorporated company's status as a non-resident during the transition period (i.e., the period between 15 March 2017 and, with this extension, now to 31 December 2022) if it meets the above criteria and during the transition period it:

• Changes its governance arrangements, so that its central management and control is exercised outside Australia by the end of the transition period
• Does not commence carrying on business in Australia (other than because its central management and control is exercised in Australia)
• Does not undertake or enter
  • Any artificial or contrived arrangements that affect the location of its central management and control, for these purposes, if board meetings are undertaken in another country where that company has a substantive commercial presence, the mere fact that a company may fly Australian directors overseas to attend those board meetings would not by itself be regarded as artificial or contrived
  • Any tax avoidance scheme whose outcome depends, in whole or part, on whether it is a resident or non-resident

The extension of the transition period is positive news for companies that have been experiencing difficulty in making the practical changes to their governance arrangements necessary to comply with the changes envisaged in TR 2018/5.