ATO Risk Assessment Framework for Central Management & Control
The ATO has released an update to its Draft Practical Compliance Guideline (PCG 2018/9DC1) on identifying where a foreign incorporated company’s central management and control is located under the central management and control test of corporate tax residency. The update adds a risk assessment framework to assist foreign incorporated companies in managing their compliance risks and provide certainty regarding the ATO’s compliance approach. Companies may self-assess against the new risk assessment framework to understand the likelihood of the ATO applying compliance resources to review their tax residency.
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Low risk zone - green
The risk assessment framework contains three colour coded risk zones, consisting of low (green), moderate (yellow) and high (red). To fall into the low risk zone, one or more of the following must apply to a company:
- ordinarily has their central management and control in a foreign jurisdiction but has one-off temporary changes to their established governance practices that result in either meetings being held in Australia or directors attending meetings from Australia via “modern communication technology”;
- is a subsidiary incorporated in a foreign jurisdiction and is subject to an Australian parent company’s policies, proposals, or approval processes and there is evidence demonstrating independent consideration and judgement by directors in making high-level decisions in a foreign jurisdiction;
- has a wholly offshore operating business in a foreign jurisdiction, the company’s tax position in Australia is substantially similar to what it would be if the company was an Australian resident, and a substantial majority of the company’s central management and control is exercised in that jurisdiction through:
- board meetings that are held outside Australia, or
- board meetings (including meetings via the use of modern communications technologies including teleconferencing) where the majority of directors are not present in Australia when such meetings take place; or
- decisions by the board undertaken by circular resolution where the majority of directors are not present in Australia when such decisions are made.
- governance arrangements were intended to be changed so that central management and control was exercised outside Australia under the transitional compliance approach, however, the company was unable to change its governance arrangements by the end of the transitional period (i.e. 30 June 2023). This criterion only applies for the transitional period (i.e. 15 March 2017 to 30 June 2023). From 1 July 2023, these companies will need to reconsider their governance arrangements in line with TR 2018/5 (Central management and control test of residency) and draft practical compliance guideline (PCG 2018/9DC1).
Generally, to fall within the low risk zone, companies must not have moderate or high risk circumstances or features, and the Commissioner will not normally allocate resources to review a company’s position on central management and control test.
Those companies must also keep contemporaneous board minutes and governance documents that accurately reflect high level decision making and support the company’s self-assessment of low risk
Higher risk
For companies where evidence of high level decision making is not available, inconclusive or incomplete, the company’s tax residency position is likely to be considered to be moderate or high risk.
Further, the Commissioner is unlikely to accept board minutes as prima facie evidence establishing where the company’s central management and control are located.
Other supporting documentation to demonstrate high level decision making, governance controls and processes may be sought by the ATO to understand the company’s residency position.
Need assistance determing your risk profile?
If you’re not sure about your company’s tax residency under the central management and control test or where it fits under the ATO’s risk assessment framework contact us now for advice and assistance.
Disclaimer: The information on this page is for general information purposes only and is not specific to any particular person or situation. There are many factors that may affect your particular circumstances. We advise that you contact Mathews Tax Lawyers before making any decisions.