Determining Tax Residency Of A Company

Is The Company a Resident Of Australia For Tax Purposes?

Elwood has started a new business venture. He has started an international shipping company based in Singapore. There are 4 directors:

• Two are located in Singapore
• One is located in Monaco, an

All the director’s meetings are held in Singapore and the annual general meeting is held in Monaco. The company’s main business is shipping containers between Sydney and Africa, via Singapore. The contracts are signed in Sydney on behalf of the company by Elwood.

The company has a rotating Managing Director with the role changing every three months between the directors. The shares are held only by the directors and are held in equal proportion.

Under the said case Mr. Elwood has started a business outside Australia. The business of Mr. Elwood is international shipping and the company floated has four directors to aid in decision making. The composition of the board includes four directors out of which three directors are resident outside Australia and one director i.e. Mr. Elwood himself reside in Australia. Also, the following information has been provided that the board meeting of the new company took place outside Australia and the annual general meeting took place in Monaco. In this regard, Mr. Elwood on behalf of the company wants to determine residency of company for tax purpose.

Let us analyse the rules to determine the tax residency of the company. For this, reference may be had to section 6-5(2) of Australian Income Tax Assessment Act, 1997 where in it has been inked that for a company resident in Australia in terms of Section 6(1) para b all income earned worldwide by an Australian resident shall be taxable in Australia.

Further, reference may be had to Section 6(1) para (b) of Income Tax Assessment Act wherein three tests have been defined to determining tax residency of companies.(Lawyers, 2018) These three tests have been detailed here-in-below:

• Incorporation Test;
• Controlling Shareholder Test;
• Central Management and Control Test;

In terms of Australian law, if any of the above test is satisfies then the company shall be considered tax resident of Australia and  the provisions of the act shall apply accordingly.

Under the said test, if a company is incorporated in Australia, the company shall be considered tax resident of Australia.

Under the said test, if a company carries on its business operations in Australia and the majority shareholders of the company who carry major voting rights in the company reside in Australia, then such company shall be considered tax resident of Australia. Further, it shall be noted that both conditions must be satisfied together for a company to be declared as tax resident of Australia.(Common wealth of Australia, 2018)

Sale of Assets and determination of tax liability

Under the said test, if the company carry on its business operations in Australia and the management and control of such business is situated in Australia i.e. majority of decision of the company are undertaken by its directors in Australia (i.e. board meetings are held in Australia) or the major decision makers i.e majority of board of directors are resident of Australia.

Also, the place of registered offices and area where real business activities of the company are undertaken shall also play an important role in determining tax residency of company.(Common wealth of Australia, 2018) It is also important to note that both the conditions shall be satisfied together to be classified as tax resident of Australia.

Under the present circumstance, the company floated by Mr. Elwood is incorporated in Singapore; hence the incorporation test is failed.

Also, the company consists of four directors among which three are non–resident directors and one is tax resident of Australia. Further, majority of board meeting of the company takes place in Monaco a place outside Australia. Further, the operations of the new company are carried out between Sydney and Africa via Singapore. As the majority of the meetings of the company are held outside Australia and major decision maker of the company are outside Australia, the company fails to satisfy this Test.(Common wealth of Australia, 2018)

Under the third test, Mr. Elwood is the founder of business and he is assumed to be the major shareholder of the company. Further,Mr. Elwood is tax resident of Australia. Further, business of the company is in Australia as majority of the contracts of the company are signed in Australia and thus it can be concluded in substance the business of the companyis in Australia.

On the basis of above, it may be concluded that the company floated by Mr. Elwood tax resident of Australia in terms of third test i.e. Shareholding Test and accordingly worldwide income of the new company shall be taxable in Australia under Section 6 of Income Tax Assessment Act.

A car he bought 3 years ago for $65 000 and was used solely for his personal use was sold for $25 000. The book value of the car is $27500

Under the said case, it can be seen that Elwood has sold his car which was used for personal use. Further under Australian Income Tax Assessment Act, the gain of disposal of car used for personal use is not chargeable to tax. Hence the said income or loss shall not be used for purpose of computation of statutory income. The law dealing with the aforesaid inference is Section 118-5 of Income Tax Assessment Act 1997

Vacant land sold in June 2018 for $200,000 that had been bought by him on 21/3/1984 for $20,000. This is being paid in 10 instalments of $20 000, however the purchaser has declared bankruptcy and the last two instalments due next financial year will not be paid.

Under the said case, the vacant land was acquired by the taxpayer before 20^th September, 1985 and no improvement was taken post acquisition. Hence, the disposition of the same shall not trigger a CGT event and shall not be eligible for taxation under Capital Gain Taxation regime. Accordingly, the same shall be exempt under Australian Tax Act.

10,000 shares in ABC Ltd sold in February 2017 for a total sale price of $175,000. Elwood bought all the shares for long term investment purposes during November and December 1994 at a total cost of $80,000.

Underthe said case, Mr. Elwood purchased shares during November and December, 1994 and hassold the same in February 2017 leading to rise of a Capital Gain Tax event in terms of Section 102-20  and Section 104-10(1) of ITAA, 1997. Also the period of holding of the shares exceed one year. Accordingly, the benefit of subdivision 115-A of ITAA, 1997 shall be available on disposition. The computation of taxable income has been provided here-in-below:

It shall be important to note that sale has been made in year 2016-17.

An antique sold on 1 May 2018 for $15,000. Elwood bought the antique on 31 December 1989 at a cost of $5,000 for personal reasons.

In accordance with the terms of Section 118.10 of ITAA, 1997  where in it has been stated that disposition of collectibles may not be liable to capital gain or loss only if the cost element of such asset does not exceed AUD 500 during the time of purchase. (Commonwealth Consolidated Acts, n.d.)

Under the current circumstance, the antique sold by Mr. Elwood on 01-05-2018 may be categorised as collectible. However, exemption shall not be provided as the cost of acquisition of such asset exceeds AUD 500 Further, the disposition of the same shall not be provided exemption as the market value of acquisition of such asset exceeded AUD 500. Thus, disposition of Jewellery by Mr. Elwood shall trigger CGT liability under Section 102-20 and Section 104-10(1) of ITAA, 1997.

Also the period of holding of the shares exceed one year. Accordingly, the benefit of subdivision 115-A of ITAA, 1997 shall be available on disposition, The computation of taxable income has been provided here-in-below:

Jewellery sold in July 2017 for $5,000. The jewellery was purchased for 29/09/09 for $20,000

In this regard, reference may be had to Section 118.10 of ITAA, 1997 wherein it has been stated that disposition of collectibles may not be liable to capital gain tax or loss if the market value of such collectible does not exceed AUD 500 at the time of purchase. Also, if such asset was acquired before 16 December, 1995 then reference may be had to the provision of Section 118-10 of Income Tax (Transitional Provisions) Act, 1997(Commonwealth consolidation, n.d.)which shall be similar as above.

Under the current circumstance, jewellery sold by Mr. Elwood during July shall be treated as special collectible. Further, the disposition of the same shall not be provided exemption as the market value of acquisition of such asset exceeded AUD 500. Thus, disposition of Jewellery by Mr. Elwood shall trigger CGT liability under Section 102-20  and Section 104-10(1) of ITAA, 1997.

Also the period of holding of the shares exceed one year. Accordingly, the benefit of subdivision 115-A of ITAA, 1997 shall be available on disposition.The computation of taxable income has been provided here-in-below:

Shares in XYZ Ltd were sold on 1/10/2017 for $45000. These shares were purchased for long term investment purposes on 31/10/1998 for $41500.

Underthe said case, Mr. Elwood purchased certain shares on 31^st October,1998 and sold the same on 1^st October, 2017 giving rise to Capital Gain Tax event under Section 102-20  and Section 104-10(1) of ITAA, 1997.

Also the period of holding of the shares exceed one year. Accordingly, the benefit of subdivision 115-A of ITAA, 1997 shall be available on dispositionThe computation of taxable income has been provided here-in-below:

Elwood has interests in many businesses. One particular business is a clothing store. This store imports a lot of clothing from overseas and is entitled to a concessional rate on the customs duty for a quota (a particular quantity) of protective clothing. However, this protective clothing was not selling well so Elwood sold the quota to another business for $50 000. The value of the quota at purchase 5 years ago was $25 000. Elwood also has to pay an annual fee of $5000 to renew the quota.

Under the said case, Mr. Elwood has purchased business quota five years ago and sold the same in the current year 2017-18giving rise to Capital Gain Tax event in terms of Section 102-20  and Section 104-10(1) of ITAA, 1997. Also the period of holding of the shares exceed one year. Accordingly, the benefit of subdivision 115-A of ITAA, 1997 shall be available on disposition. Further, the expenses that have been incurred towards maintaining the quota shall be considered as part of cost base while computation of capital gains tax or loss. The computation of taxable income has been provided here-in-below

Elwood is keenly promoting a car made in Fiji which runs on overproof alcohol. However, the Federal Government has decided this is undesirable and has imposed a new, strict limit on the number of cars which can be imported. Elwood is Fijian and is hopping mad about this. He has launched a media campaign, costing $175 000, attacking this restriction and demanding its removal claiming it is an unfair restriction on his business structure and is undermining freedom of product choice.

Elwood has borrowed a significant amount of money to set up the structure to import the cars, buy and fit out showrooms and provide the after sales support for the cars.

• interest on the loan, amounting to $250 000, will be deductible. He took the loan out after confirmation from both governments the importation could go ahead, however he did not have a showroom at this time. He acquired the showroom before the first cars arrived.
• costs of the media campaign are deductible.

In accordance with terms of Division 8 of Income Tax Assessment Act, 1997 wherein it has been stated that there are two categories of deduction shall be allowed:

 (a) Deduction under section 8-1 of Income Tax Assessment Act, 1997 of general nature and;

 (b)Specific deduction under Section 8-5 of Income Tax Assessment Act, 1997

In addition, under section 8-1 there are two limbs positive and negative

Further, ITAA 1997(Anon., n.d.) permits deductions only for those expenses which have been incurred for the purpose of generating assessable income Also, there shall be a nexus between expenditureincurred and generation of assessable income as laid down under the judgement of Charles Moore & Co (WA) Pty Ltd v FCT (1956) 95 CLR 344.

It has been further stated that if the link is distant, then the expenditure shall not be allowed as deduction under the act. Further, reliance may be placed on the judgement ofSteele v DCT (1999) 197 CLR 459 (Course Hero, 2018)wherein the authority held that interest on loan which has been taken for purchasing the property may be allowed as deduction to the taxpayer if he/she could demonstrate that the said expense has been incurred by the tax payer for the purpose of generating assessable income even though the project for which such expenditure was incurred has been abandoned.

Under present case, the expenditure that has been incurred by Mr. Elwoodhad intent of generatingassessable, thus the said expenditure shall be allowed as deductible expense under ITAA, 1997.

Also for expenses incurred w.r.t campaign to protest against the restriction and demanding uplifting of such covenants there does not seem to have a direct nexus with the  generation of income assessable to tax and thus the same may be disallowed in terms of above case laws and relevant provisions of ITAA, 1997.

References:

Anon., n.d, Charles Moore and Co (WA) Pty Ltd v Federal Commissioner of Taxation, [Online]
Available at: https://jade.io/j/?a=outline&id=65191
[Accessed 9 September 2018].

Common wealth of Australia, 2018, Central management and control advice and guidance released. [Online]
Available at: https://www.ato.gov.au/Business/Large-business/In-detail/Business-bulletins/Articles/Central-management-and-control-advice-and-guidance-released/
[Accessed 10 September 2018].

Commonwealth Consolidated Acts, n.d, INCOME TAX ASSESSMENT ACT 1997 – SECT 118.10, [Online]
Available at: https://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s118.10.html
[Accessed 10 September 2018].

Commonwealth consolidation, n.d, INCOME TAX ASSESSMENT ACT 1997, [Online]
Available at: https://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s118.10.htmlQuestion
[Accessed 9 September 2018].

Commonwealth of Australia, 2015. Rental Property – timing of deductions, [Online]
Available at: https://law.ato.gov.au/atolaw/view.htm?docid=AID/AID2002364/00001

Course Hero, 2018, Steele v DCT. [Online]
Available at: https://www.coursehero.com/file/p4nvgok/Steele-Steele-v-DCT-1999-197-CLR-459-41-ATR-139-Facts-taxpayer-acquired-land-in/
[Accessed 10 September 2018].

Lawyers, D., 2018, When is a company an Australian resident for tax purposes?. [Online]
Available at: https://www.dundaslawyers.com.au/when-is-a-company-an-australian-resident-for-tax-purposes/
[Accessed 10 September 2018].

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