Urgent clarity needed on corporate taxation, The Tax Institute says

As the federal budget and election loom, the Tax Institute is outlining the need for unclear corporate tax residency rules to be addressed “sooner rather than later”.

Julie Abdalla, head of tax and legal at The Tax Institute, said corporate taxpayers needed certainty for their professional dealings.

“Unclear corporate tax residency rules are giving rise to high compliance costs and complex corporate governance parties, and need to be addressed sooner rather than later if the government and regulators expect both compliance with tax obligations and future investment in Australia from foreign corporations,” she said.

“Corporate taxpayers need certainty in their taxation dealing, and this is well overdue when it comes to the corporate tax residency rules.”

According to The Tax Institute, previous promised action in the corporate taxation space from the government had not been delivered which is what had contributed to the body’s urge for more clarification.

As part of the federal budget 2020–21, the government sought to amend the law so that a company incorporated offshore would be treated as an Australian tax resident if it had a significant economic connection to Australia.

Originally, this was proposed in response to the ATO’s interpretation following the High Court’s decision in Bywater Investments Ltd v Federal Commissioner of Taxation in 2016.

Abdalla said this departed from the long-held position on the definition of a corporate tax resident and although this proposed clarification was welcomed, the lack of action to come from it was “frustrating”.

The promise followed by the lack of action left corporates having to put in place expensive compliance and governance practices, without sufficient certainty, Abdalla said.

“We need clarification in the law to dispel any confusion that taxpayers are facing when determining the central management and control aspects of a corporation,” she said.

“The absence of clarification is costly for taxpayers and can hinder good corporate governance. A simple clarification by way of a technical amendment to the law will provide corporate taxpayers a clear indication of their residency and corresponding tax liabilities.”

Abdalla noted that consultation on the proposed changes should be immediately progressed as implementation of the amendments would provide certainty for taxpayers and “bigger picture” implications for foreign investment into Australia.

“The former government also floated the idea of expanding the definition to apply to trusts and corporate limited partnerships, but this too remains unlegislated.”

“Any legislative changes should be aligned with broader tax reform objectives to avoid making piecemeal changes directed to an isolated purpose.”