Residence Issues for Trust Estates With Foreign Corporate Trustees

The notional taxpayer described in Australian law as a ‘trust estate’ is required to calculate its net income as if it was a resident. ‘Resident trust estate’ is defined in s 95(2) of the Income Tax Assessment Act 1936 (ITAA 36). It is relevant to determining whether liability exists under s 99 or 99A of the ITAA 36 and whether accruals taxation applies under Division 6AAA of the ITAA 36.

A trust estate is a ‘resident trust estate’ for the purposes of Division 6 if either:

1. a trustee of a trust estate was a resident at any time during the year of income; or
2. the central management and control of the trust estate was in Australia at any time during the year of income.

Note that this differs from a ‘resident trust for CGT purposes’ which is defined in s 995-1 of the Income Tax Assessment Act 1995 (ITAA 97) as a trust that at any time during the income year has:

1. for a trust that is not a unit trust, a trustee that is an Australian resident or the central management and control of the trust is in Australia; or
2. for a unit trust, either;
   • any of the property of the trust is situated in Australia, or the trust must carry on a business in Australia; and
   • the central management and control of the trust is in Australia, or Australian residents hold 50% of the beneficial interest in the income or property of the trust.

Therefore, the central consideration is to whether the trustee of a trust estate is a resident of Australia for tax purposes. This note dominantly focuses on trust estates which operate with a corporate trustee rather than an individual trustee.

Individual residence

Briefly, to determine the residence of an individual, s 6 of the ITAA 36 provides a definition of ‘resident’ for Australian tax purposes:

1. a person, other than a company, who resides in Australia and includes a person:
   1. whose domicile is in Australia, unless the Commissioner is satisfied that the person’s permanent place of abode is outside of Australia;
   2. who has actually been in Australia, continuously or intermittently, during more than one-half of the year of income, unless the Commissioner is satisfied that the person’s usual place of abode is outside Australia and that the person does not intend to take up residence in Australia;
   3. who is:
      • a member of the superannuation scheme established by deed under the Superannuation Act 1990;
      • an eligible employee for the purposes of the Superannuation Act 1976; or
      • the spouse, or a child under 16, of a person covered by subparagraph (1) or (2); and
2. a company which is incorporated in Australia, or which, not being incorporated in Australia, 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.

Therefore, an individual will be treated as a resident of Australia for taxation purposes if they:

1. are a resident under the ordinary meaning of the term;
2. spend 183 or more days in Australia;
3. are domiciled in Australia (unless their ‘usual place of abode’ is outside of Australia); or
4. are an eligible employee as defined in certain Government superannuation schemes.

As mentioned above, this note does not consider the amassed case law and Tribunal decisions or Australian Taxation Office (ATO) guidance regarding the above factors in their determination of whether an individual is an Australia resident. The above factors are provided to indicate a general starting point and demonstrate what tests are considered when determining the residence of an individual. Ultimately decisions about individual residence are made from an exhaustive examination of all relevant facts, and acute distinctions can arise as between one set of facts and another.

Corporate residence

Corporate residence of a trust estate will be established by a foreign corporate or resident corporate trustee being found resident in Australia at any time during a year of income through the exercise of central management and control in Australia at any time during that year. Specifically, the term ‘at any time’ indicates that a foreign corporate entity is not required to reside in Australia for a specified period of time, it merely has to be resident at any given time during the year of income for the trust estate to be considered an Australian resident. There are a number of considerations when determining where the central management and control of the trust estate or a corporate entity is operated.

The several Landmark cases provide guidance for determining the location where a corporate trustee has exercised its central management and control and whether the company is consequently considered to be an Australian resident for taxation purposes. In Koitaki Para Rubber Estates Ltd v Federal Commissioner of Taxation (1941) 64 CLR 241 the High Court considered the location to be where the exercise of management and control decisions of the company made at the highest level in the company. Alternatively in Malayan Shipping Co v Federal Commissioner of Taxation (1946) 3 AITR 258, where the company’s board was not in fact the highest level decision-maker of the company, the impact of that factor had a major effect in determining on the residence of the company.

More recently, in the case of Bywater Investments Limited & Ors v Commissioner of Taxation; Hua Wang Bank Berhad v Commissioner of Taxation [2016] HCA 45; 2016 ATC 20-589, the taxpayers had argued that because all of its directors were non-residents, and all of the directors meetings here held abroad, the central management and control of the company could only be determined to be outside of Australia. The High Court unanimously disagreed, stating that the question is one of degree and requires a determination of where the management and control is actually exercised, rather than merely looking to what the constituent documents say.

TR 2018/5 was released by the ATO following the decision in Bywater Investments. It sets out the ATO view on how to apply the ‘central management and control test of residency’ following that decision. The Ruling appears to have reversed the previous ATO view of Malayan Shipping by now taking the position that if a company’s central management and control is exercised in Australia, then it necessarily carries on business in Australia. In this regard, the ATO contends that the central management and control of a business is factually part of carrying on that business.

Additionally, the ATO issued Practical Compliance Guideline 2018/9 (PCG 2018/9) which considers the ‘Central management and control test of residency: identifying where a company’s central management and control is located’. PCG 2018/9 provides ATO guidance to assist foreign incorporated companies and their advisors to apply the principles set out in TR 2018/5, to help them determine whether they are resident under central management and control test of company residency in s 6(1) of the ITAA36. PCG 2018/9 states that generally the board minutes are the starting point for determining this.

At paragraph 16 Taxation Ruling of TR2018/5, acts of central management and control of a company are considered to include:

1.  setting investment and operational policy including;
   • setting the policy on disposal of trading stock, and/or the use and development of capital assets;
   • deciding to buy and sell significant assets;
2. appointment of officers and agents and granting them power to carry on the company’s business (and the revocation of such appointments and powers);
3. overseeing and controlling those appointed to carry out the day-to-day business of the company; and
4. matters of finance, including determining how profits are used and the declaration of dividends.

The Ruling has generated concerns for multi-national corporates, including that decisions made through communications with one or more board members in Australia may be deemed an exercise of management and control and the conduct of business in Australia. The Board of Taxation is reviewing such concerns with a view to possibly making recommendations for law reform.

For a trust estate with a corporate trustee, the time perspective concerning residence may be momentary rather than judged across a more extensive period. For example, if the sole director of a foreign corporation takes a holiday for a few weeks in Australia and during that time makes management decisions concerning the trust investments, will that period of management and control constitute the trustee a resident at the time of the decisions or will the trustee, looked at from a broader perspective,    remain a non-resident. In TR 2018/5, the ATO contends that activities consisting of passive receipts from investments and their distribution are likely to amount to carrying on a business for the purpose of the central management and control criteria.  

Also, if resident beneficiaries delegate to a foreign corporate trustee, the investment decisions to be made by that trustee TR 2018/45 suggests that the central management and control criterion would be satisfied.

There are a number of consequences which may arise where a corporate trustee is determined to be an Australian resident for taxation purposes for any part of a taxation year. Notably, a trust estate cannot be a resident trust estate for part of the year and a non-resident trust estate for the remainder of the year, the status of the trust estate is definite.

If a trust estate is determined to be a resident trust estate, consideration may need to be given to a variety of other provisions of taxation laws along with any relevant Double Taxation Agreement to determine the net income of the trust estate and liability of beneficiaries presently entitled or in receipt of amounts derived from the trust estate. Additionally, CGT events I1 and I2 (i.e. when the trust estate becomes and ceases to be a resident trust for CGT purposes) will also need to be considered along with any withholding obligations arising upon the trustee.

Foreign resident beneficiaries may have Australian taxation obligations and liabilities even though the trustee is a foreign incorporated corporate considered outside of Australian taxation law to be a foreign resident and in receipt of foreign-sourced income.

In summary, determining the residency of a trust estate with a foreign corporate trustee has received a different emphasis as a result of the Bywater Investments discussion and TR2018/5. It is important for foreign corporate trustees and foreign beneficiaries of trust estates where decisions about their activities are made in Australia to understand what can result in a period of residence in Australia for the trustee and consequently the trust estate and what is now required for such entities to appropriately manage this tax residency risk.