Recent changes in Australia could mean a New Zealand business may be deemed to be tax resident in both Australia and New Zealand, even if the business does not trade in Australia.
Being dual resident can impact on the New Zealand business in a number of ways, including needing to determine the primary place of tax residence under the Double Tax Agreement, inability to group tax losses, restrictions on imputation credit accounts, application of the hybrid tax rules, and increased compliance costs in both jurisdictions.
Previously, the Australian Tax Office (ATO) has taken the position that a company is tax resident in Australia if the company carries on a business in Australia and it has its central management and control in Australia.
The ATO has recently widened their view such that a business can be tax resident in Australia if it just has its central management and control in Australia, even where there is no trading in Australia. Central management and control will, in itself, now be considered to be ‘carrying on business’.
The key element of central management and control is that it is “the making of high-level decisions that set the company’s general policies and determine the direction of its operations and the type of transactions it will enter”.
Essentially it is where the high-level management decisions are made, which is different to the day-to-day conduct and management of those decisions.
The question of where central management and control is exercised is determined by reference to how it is exercised over time. The ATO does not intend to catch one-off, high-level decisions being made outside of normal business processes.
New Zealand businesses that are managed from Australia or who have Directors living in Australia, should conduct a review of their governance policies and consider whether they could be captured by the new rule. It is important to consider where the directors physically are when they are making business decisions, including when decisions are being made via electronic meetings.
New Zealand businesses have until 31 December 2020 (or 30 June 2021 depending on balance date) to review their governance arrangements before the new rule on tax residency will apply.
If you would like assistance with determining if your business may have an Australian tax residency exposure, please contact the Hayes Knight tax team.