Bywater Investments Ltd V Federal Commissioner Of Taxation: Analysis And Related Case Law

Analysis

Case: Bywater Investments Ltd and Others v. Federal Commissioner of Taxation (11 December 2015)

The above mentioned case was between the Bywater Investments Limited and the commissioner of taxation. The case was related to the residential status of the company. The company was incorporated in Australia and the ultimate owners of the company were companies of Cayman Islands. The company was alleging that it was not the resident of Australia and thus accordingly taxation should be carried as if it is the foreign residents. The appellants wanted to claim that they are not the residents of Australia and they are merely the residents of other countries and thus should be liable to taxation accordingly. The company had thus not followed the rules and regulations which are specified in the provision of section 6 of the income tax assessment act 1936. The section provides that the company will be considered as the resident of Australia only if it is incorporated in Australia or the main control and management of the company lies in Australia. The courts had undertaken deep research in regard in regard to the actual operations of the company and its decision making process in order to come to the conclusion that the company is a resident of Australia or not. The detailed analysis in regard to the case came to an important point that the major decisions in the company are undertaken by a person who is based in Australia which gives a straight point in order to contend the point submitted by the appellants. (Martin Clark, 2016)

The high court had received a case against the decision given by the federal court in regard to the residential status of the company for the purpose of taxation.

The section that was breached under this case was section 6(1) of the income tax assessment act 1936. As per the provisions of the section 6(1) of the income tax assessment act 1936, a company is considered as the resident of Australia when the incorporation of the company was in Australia or the operations and the business is carried in the territory of Australia and the management of the company lies in the territory of Australia or the major shareholders who are having the highest voting power are the residents of Australia. (ATO, 2017)

In the above case, the directors of the companies had provided the views that the incorporation of the companies had not taken place in Australia, the companies are owned by the two companies located in the Cayman Island. The shareholder of the Cayman Island was a business man named Borgas who was located in Switzerland.

Related case law: Esquire Nominees Ltd v Federal Commissioner of Taxation [1973]

The commissioner had challenged the contention of the companies in which they claimed that the company is not the resident of Australia. The judge in the previous case at the primary level had provided that there was an accountant named Gould, who was based in Sydney was the actual owner of one company located in Cayman Island and the appointer of the company who was having the actual right to appoint new and other shareholders and directors and replace the existing shareholders were having the residential status of Australia and thus the company will be consequently considered as the resident of Australia. (Cindy Chan, 2014)

This result given by the primary judge was argued by the appellants, the companies that the directors of the companies are residing outside Australia, they also held their important meetings outside Australia and they also provided that the main control and management of the companies also lies outside Australia thus the companies should not be considered as the resident of Australia for the purpose of taxation.

Thus the appeal was made by Bywater Investments limited in regard to non residential status on the basis of two points one of which provides that the company was not able to discharge itself from the point that it was not a resident of Australia for the purpose of taxation. The other point is that the company wanted that court should give the decision that the central control and management of the company is relying in Switzerland or the territory of United Kingdom. Hence it had just gone to high court with a hope that it would reverse the decision given by the primary judge. (Deloitte, 2016)

But the appeal made by the appellants had been dismissed by the high court. The appellants had provided that the company is considered as the resident of the country in which board meetings of the company are held but the high court provided that this rule does not apply in the case in which the board members are taking decision in relation and regard to a outside person and the board is acting on behalf of the outside person and it will mean as if the outside person is taking the board decision. The high court had based their decision on the basis of the finding that was conducted by primary judge in regard to the role of Gourd who was an accountant based in Sydney, and he was also acting as the appointer of the company and the actual person making the decisions and hence the location of the board members outside Australia and holding of board meeting outside Australia does not matter in this case. The appeal was rejected on the base that the superior authority handling the major business decisions is a fact that matter in the case when the board meetings are even held at a different place if the decisions are being taken at a different place just to evade from the point of residential status. The same decision was also given in case which had taken place in UK. The last rejection of the contention of appellant was done on the basis of the point that the decision making should be taken as the base for the purpose of checking the central management and the primary judge had clearly proved that the accountant Gould was having full and complete control over the operations of the business of the companies and the directors were merely acting on behalf of the main decision making authority and thus they were not having any control over the operations of the business. (Les Nethercott, 2010)

Conclusion

Gordon J had also rejected the appeal on the basis of the effective management and they have provided that the location of effective management is the most important thing for the purpose of checking the tax payer’s status. Thus he had also confirmed that the residential status of the company will be Australia for the purpose of double taxation agreements. He had undertaken various observations which have provided that effective management place in relation to the double taxation agreements should be undertaken in regard to treaty of international laws. Thus the principle provides that the place of effective management and the place of control of central management can be different. (Stephen Barkoczy, 2010)

Conclusion

The appeal of the companies was dismissed by the high court and they have given the decision that the residential status of the company was Australia. The company is considered as the resident of Australia under the provision of paragraph b of sub section 1 of section 6 of the income tax assessment act 1936 which provides the situations in which the foreign incorporated company will be considered as the resident of Australia under the test of control  and central management. Thus it had provided that the place of central management and control should be decided on the basis of the actual decision making which had taken place in this case in Australia. The high court had also provided that the location of the directors outside Australia was not sufficient to prove that the appellants are residing outside Australia. Hence the court had given the final ruling that the appellants cannot escape their tax liability in regard to Income tax in Australia. The central board of management was residing in Australia and it was taking the major decision in regard to operations and business of the company and the appellants had just pretended that the central management of the company is lying outside Australia merely by saying that the directors are residing abroad in order to evade from the tax liability that may arise on the company being the resident of Australia. Thus the high court had given dismissal in regard to appeal submitted by the company. Thus the company will be liable to tax liabilities in Australia but it will be liable to take advantage of tax paid in other countries by way of the double taxation agreements between the countries. The court came to the conclusion that the board of directors of the company may be residing in Australia but the business in real sense was undertaken from the person residing in Australia leading to the proof that company is a resident of Australia.

The reason for decision in this case is the expanded view of residency test of Australia given by the provisions of section 6(1) of the income tax assessment act 1936.

Thus the courts should take detailed analysis in regard to each and every proceeding and activities of the operations of the company in order to ensure the correct taxation of the company and thus escape the evasion of taxation which will lead to adequate taxation and tax liabilities leading to overall benefit to the country.

References:

1. Bywater Investments Ltd v Commissioner of Taxation; Hua Wang Bank Berhad v Commissioner of Taxation[2016] HCA 45 (15 November 2016) and related summaries provided by the High Court
2. TimeBase, 2016, “Bywater Investments Ltd v. Commissioner of Taxation; Hua Wang Bank Berhad v Commissioner of Taxation [2016] HCA 45: Whether Company a Resident”; Available at: https://www.timebase.com.au/news/2016/AT3981-article.html
3. Martin Clark, 2016, “Bywater Investments Ltd v. Commissioner of Taxation; Hua Wang Bank Berhad v Commissioner of Taxation” ; Available at: https://blogs.unimelb.edu.au/opinionsonhigh/2016/11/16/bywater-investments-hua-wang-case-page/
4. Australian Taxation Office, 2017, “Taxation Ruling 2004/15W : Residence of Companies not incorporated in Australia – Carrying on business in Australia
5. Australian Taxation Office, 2016, “Decision Impact Statement: Bywater Investments Ltd. & Ors v. Commissioner of Taxation”; Available at: https://law.ato.gov.au/atolaw/view.htm?docid=%22LIT%2FICD%2FS134andS135of2016%2F00001%22
6. Cindy Chan, 2014, “Corporate Residence: Has Esquire Nominees Stood the test of time?”; Available at: https://www.wolterskluwercentral.com.au/tax/international-tax/corporate-residence-has-esquire-nominees-stood-the-test-of-time/
7. Guglielmo Maisto, “Residence of Companies Under Tax Treaties and EC Law”, EC and International Tax Law Series, Volume 5, 2009
8. Australian Taxation Office, 2002, “ATO ID 2002/46: Residency Status of a foreign company”; Available at: https://law.ato.gov.au/atolaw/view.htm?docid=AID/AID200246/00001
9. Australian Taxation Office, 2016, “Residency Requirements for companies, corporate limited partnerships and trusts”; Available at: https://www.ato.gov.au/Business/International-tax-for-business/In-detail/residency/residency-requirements-for-companies,-corporate-limited-partnerships-and-trusts/
10. Deloitte, 2016, “Taxation and Investment in Australia 2017: Reach relevance and reliability”; Available at: https://www2.deloitte.com/content/dam/Deloitte/cn/Documents/international-business-support/deloitte-cn-ibs-australia-tax-invest-en-2017.pdf
11. Parsons, R.W., 2001, “Income Taxation in Australia: Principles of Income, Deductibility  and Tax Accounting”; Available at: https://setis.library.usyd.edu.au/ozlit/pdf/p00086.pdf
12. Les Nethercott, “Australian Taxation Study Manual: Questions and Suggested Solutions”;Published by CCH Australia Limited, Edition 20^th, 2010
13. Stephen Barkoczy, “Australian Tax Casebook” Published by CCH Australia Limited, 2010
14. French CJ, Kiefel, Bell, Nettle, Gordon JJ, 2016, “Bywater Investments Ltd v Commissioner of Taxation”; Available at:https://eresources.hcourt.gov.au/showCase/2016/HCA/45
15. High Court of Australia, 2016, “Bywater Investments Ltd & Ors v. Commissioner of Taxation”; Available at:https://www.hcourt.gov.au/cases/case_s134-2016
16. International Bureau of Fiscal Documentation, 2015, “Bywater Investments Ltd and others v Commissioner of Taxation; Hua Wang Bank Berhad v Commissioner of Taxation : [2015] FCAFC 176”; Available at: https://link.library.ibfd.org/portal/Bywater-Investments-Ltd-and-others-v-Commissioner/uOZE4CJCvjQ/

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