When is a foreign company an Australian resident for tax purposes?
The recent judgment of the Federal Court in Hua Wang Bank Berhad v Commissioner of Taxation again highlights the dangers of attempting to claim that a foreign company operating in Australia is not liable to pay Australian income tax.
A foreign company is liable to pay tax in Australia if it is considered resident in Australia. This will be the case where a company operates in Australia and has its central management and control in Australia.
In Hua Wang Bank Berhad, a number of foreign companies had directors who were located variously in the United Kingdom, Switzerland and Samoa. These directors effectively functioned as the puppets of a Sydney accountant, mechanically carrying out his instructions without exercising any independent judgment. The arrangement is colourfully described throughout the course of the decision as variously an “elaborate façade”, a “crooked pantomime”, “fake” and “a sham”.
The Federal Court had no trouble finding that, as the strings were actually being pulled by an accountant in Australia, the companies in fact had their central management and control in Australia, were Australian residents for tax purposes and were therefore liable to pay Australian income tax.
For foreign companies seeking to limit their exposure to Australian income tax liability, this case underscores the importance of ensuring that their central management and control is not in Australia. Foreign companies need to be aware that it will be determined by where decisions are really made, not simply where administrative actions are carried out on paper.