Author: Matthew Marcarian
Is Australia’s most important corporate residency case in 40 years heading to the High Court? We are watching with interest. The taxpayer has appealed to the High Court from the decision made by the Full Federal Court in Bywater Investments Limited v Commissioner of Taxation  FCAFC 176 on appeal from the decision in Hua Wang Bank Berhad v Commissioner of Taxation  FCA 1392.
What makes the Bywater/Hua Wang case so compelling is that the Federal Court came down so strongly on the side of the Commissioner in agreeing with his argument for a ‘substance over form’ approach.
The question was whether five overseas-incorporated companies had their central management and control in Australia and therefore were Australian residents for tax purposes. The amount of tax in dispute, before interest and penalties, was over AUD 14M.
Justice Perram was damning in his conclusions. He referred to the activities of the foreign companies as a ‘crooked pantomime’ designed as window dressing to conceal the control of the Australian resident. Overseas directors were ‘puppets who did not exercise any independent judgment in the discharge of their offices’ but instead merely carried into effect the wishes of the Australian resident in a mechanical fashion.
Apart from the overwhelming findings of fact and there was also resounding condemnation by the judge of the taxpayer’s ‘disgraceful’ behaviour in trying to conceal his ownership of the foreign companies. The ATO was able to obtain documents from the Cayman Islands that proved otherwise.
At a technical level the case highlighted ‘two principles’ relating to the issues that have never once waivered over the past 40 years in Australian tax law; being that
The case is an object lesson to Australian companies or entrepreneurs seeking to expand overseas and who intend to use ‘nominee directors’.
This case dramatically illustrates how important it is for clients to ensure that any overseas companies are run by overseas directors with sufficient operational experience and independence to be able to carry on and supervise the business of the company. If strings are pulled from Australia there is a risk that those overseas companies will be considered resident in Australia, with the result that Australian tax may apply. A second set of rules, the Controlled Foreign Corporation rules may also apply to foreign company that aer controlled by Australian residents even if they are controlled and managed outside Australia, if the income derived is passive in nature or considered to be tainted income.
CST Tax Advisors is able to assist clients with advice in these complex areas.