Tax insights | High Court rules on tax residency appeal

This article considers the implications from the High Court’s decision (unanimous in orders, with Justice Gordon delivering a separate judgment from the majority of French CJ, Kiefel Bell and Nettle JJ) in Bywater Investments Ltd & Ors v Commissioner of Taxation; Hua Wang Bank Berhad v Commissioner of Taxation [2016] HCA 45.  It also touches upon some of the issues explored at first instance in the Federal Court of Australia.

The facts

The Commissioner of Taxation tendered had discovered and tendered documents and correspondence which the trial judge accepted were evidence that the taxpayers were indirectly controlled by an Australian individual.

Notwithstanding the formal constitutions of holding companies, board composition, nominee arrangements and documentation (including deeds with powers of appointment/removal of members/directors, secured debentures suspending voting and polling rights), it was found at first instance (and unchallenged on appeal) that complex multi-jurisdictional nominee arrangements and instruments were used to disguise the factual control over the taxpayers being exercised by an Australian individual.

In various instances described in the primary trial, the Swiss witness who was responsible for documenting the transactions was apparently perplexed by the complexity of the artificial arrangements, who in one instance wrote to a fellow advisor:

I have to admit that I have rather “lost the plot” in relation to this matter and, at the moment, I am following instructions received from our mutual client.

Evidently, the arrangements were so complex that its actors could not keep up with the Australian conductor.

Interestingly, the legal documentation was prepared to ensure that the Australian individual could assert control over each taxpayers’ activities, and it was the effectiveness of such “de facto” control as evidenced in the Australian individual’s emails/faxes/letters which caused the taxpayers’ arguments to fail.  Moreover, the taxpayers were not assisted by the fact that substantial cash flows were transferred through other controlled entities and then applied for the benefit of the Australian individual, his associates and controlled entities; such payments being inexplicable if the funds were beneficially owned and controlled by the Swiss witness.

Confirmation of tax residency principle

Per the High Court at [77]:

“As a matter of long-established principle, the residence of a company is first and last a question of fact and degree to be answered according to where the central management and control of the company actually abides.  As a matter of long-established authority, that is to be determined, not by reference to the constituent documents of the company, but upon a scrutiny of the course of business and trading.…Each case depends on its own facts and circumstances, albeit that those cases that have been decided may provide a degree of guidance in relation to those still to come.”

Treaty tax residency tie-breaker principles

The majority justices in the High Court held it unnecessary to enter a detailed analysis of the UK and Swiss double taxation agreements, preferring to accept the taxpayers’ concession that “central management and control” (an expression in Australian domestic tax law) and “place of effective management” (an expression in Australia’s double taxation agreements) were the same due to the facts before them, namely, that it was an Australian individual who was orchestrating the activities of the taxpayers such that the directors were merely “rubber-stamping” the taxpayers’ decisions.

Justice Gordon, in a separate decision, was not content to accept the concessions and proceeded to consider the application of the UK and Swiss treaties.  In particular, her Honour made it clear that the “central management and control” and “place of effective management” expressions are “different concepts” and the interpretive approach will differ.

From a treaty perspective, it was held impermissible to constrain the deadlock provision by if it were construed so as to be limited to an enquiry about the location of the formal organs of the company.

Her Honour’s approach, consistent with the High Court’s earlier decision in Thiel, was to apply the interpretive rules in the Vienna Convention on the Law of Treaties expressly if the applicable tax treaty were enacted after the adoption of that convention, and otherwise as customary international law where enacted prior.

Her Honour drew attention to the OECD’s Commentary on the Model Convention’s position that the place of effective management is ordinarily the place where the most senior person or group of persons (e.g. the Board) makes its decisions but this is subject to all relevant facts and circumstances.

Controlled foreign company rules

In the primary decision, there was a brief mention of Australia’s controlled foreign company (CFC) rules and the use of registered debentures in a particular scheme to circumvent those rules.

Insight: an Australian taxpayer may be taxed upon a foreign company’s profits under the CFC rules.  The CFC rules are highly complex and specialist advice should be sought whenever making substantial offshore investments.

The method by which this particular scheme sought to avoid those rules was by delivering control and the beneficial ownership in the relevant company through means which escaped the defined expressions through which the CFC rules are applied.

In our view, if it was necessary to consider the CFC issue, the Australian individual’s attempt to circumvent the CFC rules would not have succeeded.  This is because the CFC rules include a “control” expression which has its ordinary meaning (and the facts made it abundantly clear the taxpayers were under his control).  In this particular case, the attempted circumvention of the CFC rules was not detrimental to the revenue as the relevant foreign company was determined to be Australian resident and thus taxable on its worldwide income.

That said, one cannot exclude the possibility of a CFC attack on Australian controllers in similar circumstances, particularly where the foreign company may be impecunious/difficult to enforce judgment and an Australian controller holds substantial wealth directly in Australia.


The taxpayers in this case came unstuck for a host of reasons, including the complexity of the schemes at play, legal practice of documenting transactions and protections to the fullest extent possible, commercial practice, and more than anything else – the commercial reality of the facts.

Insight: Australian taxpayers with foreign interests (and foreign taxpayers with Australian interests) would be well advised to seek a professional review of their organisational structure and decision making processes.

The case is a stern reminder to all that it is very easy to fall within the Australian tax net despite great lengths to create formal arrangements to achieve the opposite.


This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article.


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