International Tax: Central Management and Control Test (CMAC) and Australian Tax Residency of a Company

Central Management and Control CMAC and Australian Company Tax Residency

This blog article talks about the Central Management and Control CMAC and Australian Company Tax Residency.

When is a company a resident of Australia for tax purposes?

There are three tests to determine if a company is a resident of Australia for income tax purposes. If any of the following tests are satisfied then the company will be a resident of Australia for tax purposes:

• Incorporation in Australia; or
• Carrying on business in Australia and central management and control (CMAC) in Australia; or
• Carrying on business in Australia and voting power controlled by shareholders who are residents of Australia.

Importantly, historically tests (2) and (3) have traditionally been viewed with the requirement that a company actual carry on business in Australia and conduct business trading operations in Australia.

Recent changes

A recent case on residency between the Commissioner of Taxation and Bywater Investments Ltd (Bywater case) has given rise to significant changes. Following the case, the Commissioner issued a tax ruling (TR 2018/5) which supported the decision in the Bywater case.

The Commissioner also withdrew his previous tax ruling (TR 2004/15) which provided guidance on the CMAC corporate residence test. The key changes have resulted in the following interpretations:

• the exercise of management and controlling decisions are itself paramount to the carrying on of a business; and
• A company is taken to carry on business in Australia if CMAC is exercised in Australia.

Therefore, if a foreign company’s CMAC is located in Australia (despite not trading in Australia), it will be deemed to be an Australian tax resident company.

Location of Central Management and Control

The location of a company’s CMAC is a question of fact. There are four considerations relevant to locating CMAC:

Does the company carry on business in Australia?

• If a company carries on business and has its CMAC in Australia, it will carry on business in Australia within the meaning of the CMAC test of residency.
• It is not necessary for any part of the actual trading or investment operations of the business of the company to take place in Australia. This is because the CMAC of a business is factually part of carrying on that business.

What does CMAC mean?

• CMAC refers to the control and direction of a company’s operations.
• The key element in the control and direction of a company’s operations is the making of high-level that set the company’s general policies, and determine the direction of its operations and the type of transactions it will enter.
• This can be contrasted with the day-to-day conduct and management of the company’s activities and operations, which does not amount to CMAC.

Who exercises central management and control?

• Identifying who exercises CMAC is a question of fact. Whilst Directors will ordinarily control and direct operations of a company, a consideration of all facts and circumstances may indicate that someone other than the Directors actually perform this function.

Where is central management and control exercised?

• Those who make high-level decisions for a company will effectively control and dictate its direction.

So, if your foreign incorporated company has Australian resident shareholders or directors, it’s crucial to thoroughly examine the CMAC position. Make sure the company isn’t classified as a tax resident of Australia. Implementing suitable tax governance policies and arrangements can help minimize any potential risks.

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