If decisions about a business are being made in Australia, despite being incorporated overseas, then it is likely to be considered an Australian resident for tax.

The Australian High Court has ruled that four companies incorporated overseas should be classified as residents of Australia for tax purposes, exposing them to Australian income tax from all sources.

The case centred on companies that were incorporated in the UK, Bahamas, and Samoa, with non-resident directors and board meetings occurring largely outside of Australia. The companies argued that their central management and control were outside of Australia, which meant that they should not be classified as residents of Australia.  

The High Court confirmed that a company has its central management and control where management and control where management and control actually abides, and that each case depends on its own facts and circumstances.

In this particular case, the taxpayer has documentation indicating the foreign location of the directors’ meetings, the shareholding of each company and the transaction records etc. However, the lower court found the star witness lacks credibility and the evidence presented by other witnesses could not be accepted. On this basis, the High Court concluded that the boards were merely rubber-stamping the decisions and that as these decisions were made in Australia, the High Court held that central management and control of each company was in fact in Australia and that the companies were therefore resident in Australia. 

The decision indicated that this would ordinarily be where the board of directors actually meets and makes independent judgements. However did not necessarily mean that the result would be the same where the meetings are mere window dressing and the board basically handed over its decision-making power to an outsider.

Although the decision is not surprising or adds too much to the existing law, it is still an important reminder for Australian taxpayers with ‘connections” to foreign companies to review the current arrangements.