A long-established feature of the taxation landscape for Australian business entities is that the residency status of a business determines a large part of its income tax obligations.
Foreign resident entities are generally taxed in Australia on any income that has an Australian source. Australian resident entities are generally taxed on their worldwide income. Also there are differing residency criteria for sole traders and ordinary partnerships, incorporated companies, corporate limited partnerships and for trusts.
For foreign incorporated companies however, the COVID-19 pandemic has caused some particular barriers to otherwise established factors generally used to determine the entity’s residency status. A company is a resident of Australia if it is incorporated in Australia, or, although not incorporated in Australia, it carries on business in Australia and has either its “central management and control” in Australia or its voting power controlled by shareholders who are residents of Australia (“permanent establishment”).
As a result of travel restrictions during the pandemic, the ATO has established some temporary protocols to cover the necessary changes in procedures foreign incorporated companies have had to make.
Central management and control
The ATO states that if the only reason for holding board meetings in Australia or directors attending board meetings from Australia is because of the effects of COVID-19, then it will not apply compliance resources to determine if central management and control is in Australia.
It says that some boards of foreign-incorporated companies that are not Australian tax residents may temporarily suspend their normal pattern of board meetings because either:
- there are overseas travel bans or restrictions
- the board has made the decision to halt international travel because of COVID-19.
If these companies instead hold board meetings in Australia or directors attend board meetings from Australia, this alone will not (in the absence of other changes in the company’s circumstances) alter the company’s residency status for Australian tax purposes.
For the same reason, foreign companies may be concerned about potential effects on their business and tax affairs because of the presence of employees in Australia.
The ATO states that the effects of COVID-19 will not alone result in the company having an Australian permanent establishment if it meets all the following:
- The foreign incorporated company did not have a permanent establishment in Australia before the effects of COVID-19
- There are no other changes in the company’s circumstances
- The unplanned presence of employees in Australia is the short-term result of them being temporarily relocated or restricted in their travel because of COVID-19.
The ATO says it will not apply compliance resources to determine if a business has a permanent establishment in Australia if:
- It did not otherwise have a permanent establishment in Australia before the effects of COVID-19
- The temporary presence of employees in Australia continues to solely be as a result of COVID-19 related travel restrictions
- Those employees temporarily in Australia will relocate overseas as soon as practicable following the relaxation of international travel restrictions
- The business has not recognised those employees as creating a permanent establishment or generating Australian sourced income in Australia for the purpose of the tax laws of another jurisdiction.
Click here for the ATO’s statements on the above circumstances (scroll down to “Central management and control” and “Permanent establishment”). The ATO states that this approach is applicable until 31 January 2021.