Company tax residency in Australia: central management and control explained

Australian tax law has three ways a company can be resident. An Australian-incorporated subsidiary is resident under the first one, full stop. The other two tests matter for companies incorporated overseas, and the one that catches foreign groups is central management and control (CMC): if the people who make a foreign company's high-level decisions make them from Australia, and the company carries on business, the foreign company can be an Australian tax resident too. This guide explains the tests, the ATO's view in TR 2018/5 and PCG 2018/9, and the board habits that keep each company resident where it is meant to be.

It is general information. Residency can change a group's tax position significantly, so a tax adviser should look at your actual governance before you rely on any of it.

The three residency tests

The definition of 'resident' for companies is in section 6(1) of the Income Tax Assessment Act 1936. The ATO's residency page summarises it. A company is a resident of Australia if it is either:

1. incorporated in Australia, or
2. not incorporated in Australia but carries on business in Australia, and has either:
3. its central management and control in Australia, or
4. its voting power controlled by shareholders who are residents of Australia.

Your Australian subsidiary

The subsidiary is incorporated in Australia, so it is resident regardless of where its directors live, where its board meets, or who owns it. Moving its board meetings offshore does not change that. What residency means for the subsidiary in practice (tax rates, worldwide income, withholding on payments to the parent, lodgements) is covered in company tax obligations for foreign-owned companies, so it isn't repeated here.

The foreign parent and other offshore entities

This is where CMC matters. A parent incorporated in Singapore, the UK or the US is not resident under the first test. It can still be resident under the second if it carries on business and its CMC is in Australia. The voting power limb mainly affects foreign companies controlled by Australian residents, for example an offshore holding company owned by Australian founders.

What 'central management and control' means

The ATO's view is set out in TR 2018/5, which applies the High Court's decision in Bywater Investments and applies from 15 March 2017. The key points:

• It is about high-level decisions. CMC refers to the control and direction of a company's operations. The key element is making the high-level decisions that set the company's general policies, decide the direction of its operations and the type of transactions it will enter.
• Administration is not CMC. Matters of company administration, and the mere implementation or rubber-stamping of decisions made by others, are not acts of CMC.
• It is a question of fact. The ruling says decisions are made where those making them do so as a matter of fact and substance, not where they are merely recorded and formalised, or where the constitution says they must be made.
• Formal directors can be disregarded. In Bywater the court disregarded directors who were formally appointed but played no real role.
• Outsiders can hold CMC. A person who merely influences the directors does not exercise CMC. But if an outsider dictates the decisions and the directors mechanically implement them, the outsider is the real decision maker.
• Owning shares is not enough on its own. Being a majority shareholder, or having the power to appoint the directors, does not by itself mean a person controls and directs the company.
• CMC can be split. A company's CMC may be divided between more than one place.
• Residence of the decision makers is not the test. Where CMC is exercised is not decided by where the directors live. What matters is where they actually make the decisions.

Carrying on business

The CMC test only applies if the company carries on business in Australia. TR 2018/5 says that if a company carries on business and its CMC is in Australia, it carries on business in Australia for this purpose, because the business of a company includes its central management and control. In other words, you can't assume a parent is safe just because its trading happens overseas. The ruling also says a company established to make a profit for shareholders, and investing its assets in gainful activities, is likely to be carrying on business.

The factors the ATO looks at

TR 2018/5 lists the matters most likely to influence a court:

• where those who exercise CMC actually do so, rather than where they live
• where the governing body meets
• where the company declares and pays dividends
• whether the nature of the business dictates where decisions are made in practice
• minutes or other documents recording where high-level decisions are made.

Factors of lesser weight include where the directors live, where the books and the share register are kept, where the registered office is, and where shareholders meet and live.

PCG 2018/9: evidence and the ATO's compliance approach

PCG 2018/9 is the practical companion to the ruling.

Board minutes come first

Board minutes are the starting point for identifying who exercises CMC and where. If minutes show a complete record of where all high-level decisions were made and who made them, the ATO will accept them as prima facie evidence, and true minutes will generally be treated as conclusive for practical purposes. They don't need to record deliberations, though doing so is valuable supporting evidence.

Minutes stop helping when decisions are made outside meetings, when minutes don't show where directors were, or when they are false, including where they record rubber-stamping of decisions made elsewhere. The ATO then looks at board papers, emails, correspondence and statements from the people involved.

Video meetings: where the people are

The PCG deals with boards that meet in several places or by video, phone, circular resolution or email. For electronic meetings, the focus is on where the participants contributing to the decisions are located, not where the technology is based. One of its examples is a foreign-incorporated company with four directors, two in Australia, all participating equally by video: the ATO treats it as an Australian resident under the CMC test, even if it is also resident in its home country.

Temporary changes

The PCG's ongoing compliance approach (paragraphs 105 to 107) is for public groups. Where a foreign-incorporated company meets the paragraph 107 conditions, for example a substantial majority of CMC exercised in a foreign, non-tax-haven jurisdiction where the company is resident, the ATO will not apply resources to review its residency. For those companies only, it also will not apply resources to one-off or temporary changes, such as a board meeting held in Australia or a director dialling in from Australia. Other companies don't get that assurance: a one-off or temporary change of that kind is a factor that can place a company in the low-risk zone of Table 2, provided it has no moderate or high-risk factors. These approaches have conditions and exclusions (for example, artificial or contrived arrangements), so read them with your adviser rather than assuming you qualify.

Parent influence over a subsidiary

The PCG accepts that the directors of a subsidiary don't stop exercising its CMC merely because they decide it is in the company's interest to facilitate the parent's plans, follow proper proposals from the parent, or make decisions only after the parent approves. The board still has to actually consider the decisions. That links to the corporate law side covered in shadow directors and parent control.

The ATO also notes the consolidated entity disclosure statement (CEDS) that public companies include in annual financial reports. PCG 2018/9 says a company will not be 'low risk' if it self-assesses as a non-resident for tax but reports itself as an Australian tax resident in the CEDS.

The reverse risk: an Australian-run foreign parent

The scenario that worries advisers is not the subsidiary. It is the foreign parent, or an offshore holding company, whose real decisions drift to Australia. Common ways it happens:

• the founder or CEO relocates to Australia and keeps running the whole group from here
• a majority of the parent's directors live in Australia and join board calls from here
• the parent's board formally meets offshore but only approves what an Australian-based executive has already decided
• group strategy is set in Australian management meetings, then minuted at the parent level later.

If the parent became an Australian resident, it could be taxed in Australia on its worldwide income, and the group could face double residence issues. Some of Australia's tax treaties deal with companies resident in both countries, and the s6(1) definition of 'prescribed dual resident' deals with some of these cases. How that plays out depends on the treaty, which is a specialist question.

The ATO's COVID-19 guidance shows the ATO looks at this area closely: it set out a temporary approach for foreign companies whose directors were stuck in Australia because of travel restrictions. That relief was tied to the pandemic and is not a general permission.

Practical board governance

Neither TR 2018/5 nor PCG 2018/9 tells you where to hold meetings. They tell you the ATO will look at where decisions are really made. Some practical habits that keep the record accurate:

For the Australian subsidiary

• Let the subsidiary's board decide subsidiary matters. Its residency is fixed by incorporation, but its directors still owe duties to the company. A board that genuinely considers decisions is better for both tax and corporate law. See director duties.
• Minute the subsidiary's decisions as the subsidiary's. Keep subsidiary minutes and resolutions separate from parent papers, and record who attended and from where. Our record keeping guide and shareholder resolutions guide cover the mechanics.

For the foreign parent

• Decide parent matters at the parent's board, where its directors are. If most parent directors are overseas and meet there, the record should show that.
• Record locations. Minutes that note where each director was when they participated are useful evidence under the PCG.
• Watch circular resolutions signed in Australia. If Australian-based people are signing most parent resolutions, ask where the decision was really made. Our guide to signing documents from overseas covers execution logistics.
• Review when people move. A founder or director relocating to Australia is a trigger to revisit the parent's governance with a tax adviser.

Where the resident director fits

Section 201A of the Corporations Act 2001 requires a proprietary company to have at least one director who ordinarily resides in Australia (see resident director requirements). That director sits on the subsidiary's board. Their presence has no bearing on the subsidiary's residency, which is already settled by incorporation.

The point to keep clear is that the resident director should not be the person making the parent's strategic decisions from Australia. A resident director who acts as a subsidiary director, attends subsidiary board meetings and signs subsidiary documents is doing what the role requires. If your group wants an Australian-based person on the parent's board as well, take tax advice first.

When to get advice

Talk to a tax adviser before:

• appointing Australian-resident people to a foreign parent's board, or moving a group executive to Australia
• holding the parent's board meetings in Australia on a regular basis
• setting up an offshore holding company owned or run by Australian residents
• reporting residency in financial statements in a way that may not match the tax position.

We provide resident directors and company secretarial support for the Australian subsidiary, including minutes and registers that record decisions properly. We don't give tax advice. See our pricing or start here.

General information about Australian law and practice, not legal or tax advice for your circumstances. Check the official sources, or ask your adviser, before you act.