News & Thinking
Corporate tax residence – setting up business in the New Zealand market and the impact of recent Australian Tax Office rulings
Setting up business in New Zealand may be easy, however not having in place appropriate corporate governance practices can lead to costly tax residence consequences.
Doing business in New Zealand
We are frequently approached by global organisations wishing to set up operations in NZ for advice on their global structure. There are a few factors to take into consideration – tax efficiency, asset protection, corporate presence and governance to name a few.
NZ is renowned for being country in which it is easy to do business – it is a relatively cheap and simple process to set up a company here and our corporate governance requirements are not overly onerous.
The Companies Act requirements include a requirement that a NZ incorporated company have one or more directors and at least one of them must live in NZ or in an enforcement country and be a director of a body corporate incorporated in that country. Australia is the only country that is an enforcement country for these purposes.
This fact, together with the fact it is usual for global organisations to set up business in Australia before entering the NZ market, results in a common practice of having an Australian resident director fulfil this NZ Companies Act requirement.
Modern international board practices mean directors meetings will often be held by way of videoconferencing or remote dialling in and minutes may be stored in electronic format, meaning little or no actual director presence in NZ.
What is happening in Australia?
A recent spate of rulings issued by the Australian Tax Office has thrown the proverbial spanner in the works by stating its view that a company that
- carries on business (anywhere); and
- has its centre of management and control (CMAC) in Australia
is deemed to be carrying on business in Australia and will therefore be tax resident in Australia.
This new approach has negative connotations for the following companies in New Zealand to name a few:
- New Zealand subsidiaries of Australian groups;
- New Zealand intermediate holding companies controlled by Australian groups; and
- New Zealand subsidiaries of foreign controlled Australian groups (investing into doing business in New Zealand);
New Zealand companies with directors resident in Australia.
There is no longer a requirement to carry on business in Australia as a separate test to be tax resident in Australia.
Where is a company’s CMAC?
In short CMAC is located where the company is controlled and directed, and how its control is directed over time. Broadly, a company’s directors exercise CMAC where they execute their duties and comply with the standards expected of directors under the applicable jurisdiction’s company law. This will normally be where the directors of the company are located when they make their decisions, however due to modern practices CMAC may be exercised in more than one jurisdiction.
In most cases, where directors reside and carry out their directorial duties in NZ, CMAC will be clearly carried out in NZ and no issue arises. However, where the only director living in NZ or an enforcement country is in Australia and there are no other directors in NZ, or where the control is predominantly undertaken in Australia or remotely this could pose a problem.
So what is the problem?
For new Zealand tax residence purposes a company is tax resident in the country in which it is incorporated (as well as in other circumstances).
A company may therefore be NZ tax resident by virtue of its incorporation here and conduct its business in NZ, but also be deemed, under the Australian Tax Office rulings, to be tax resident in Australia. This will mean dual tax residence.
The potential ramifications for New Zealand companies that are found to be Australian residents under this approach are onerous and include:
- Having to file an Australian tax return and being taxed on the worldwide income or the Australian-sourced income in Australia;
- An inability to group tax losses with other group companies in New Zealand;
- An inability to be a member of a tax consolidated group resulting in more onerous tax compliance;
- Not being able to maintain an imputation credit account without approval, resulting in tax inefficiencies to any New Zealand shareholders;
- Potential denial of tax deductions and new compliance obligations under the hybrid tax rules, resulting in additional tax cost;
- Potential application of a raft of Australian tax rules to their operations, meaning further compliance costs and complexity;
- Corporate residence may fluctuate from year to year depending on where directors reside and carry out their duties, meaning ongoing uncertainty.
What can be done?
Be aware of this risk, take care with corporate governance practices and determine where the ultimate residence of your organisation lies.
To add to the confusion Australia and New Zealand both adopted the OECD Multilateral instrument, which effectively updated the double tax agreement and removed the corporate residence tie breaker test, previously used to determine the country of primary tax residence.
As a measure to soften the blow the ATO and IRD recently reached an agreement which allows most companies (there are eligibility criteria to be met) to self-assess their tax residence status. However where directors reside and exercise control in Australia, such a determination is likely to conclude Australian tax residence.
This process leaves companies with a level of uncertainty around their tax status and in some cases needing to approach the IRD or ATO for a definitive ruling on where they are tax resident.
A key to managing this minefield is to have clear corporate governance processes in place as well as managing the practical requirement of having directors on the ground in New Zealand when controlling the company concerned.
The Australian Board of Taxation is currently reviewing the Australian tax residency rules with a view to modernising the application of the CMAC test, however any resulting change will be some time away and in the meantime we need to adapt to the current landscape.