Taxation Law and Practice

The issue of residency, for Australian tax payers, has been considered by the High Court for the first time in this case in over 40 years. Bywater investments limited & ors v. commissioner of taxation[1] is a case that primarily focuses on Section 6 of the Income Tax Assessment Act 1936 (Cth) concerning the residency of a company that is not incorporated in Australia. The decision in this case determines the long standing principle that the reference to legal formalities, or restriction on who may exercise those legal formalities and where does not decide where the company’s central management and control is located rather, is decided by the reality of what happens within the company. In this case there are 2 issues decided by the High Court-


  1. Whether the company’s central management and control had its place in Australia if each taxpayer company was not incorporated in Australia.
  2. Whether the appellants companies would be considered as “residents” of Australia according to the meaning of resident in the Income Tax Assessment Act 1936 because their central management and control is in Australia.
  3. Whether for the purpose of relevant double tax agreements, their place of effective management would be Australia. 


  1. Income Tax Assessment Act, 1936
  2. Swiss Citizens Rights Agreement


The appellant contended that Mr. Borgas, an office holder of Anglore along with 2 others and was the sole beneficial owner of the companies. Anglore is a company that performs corporates services business from Switzerland. Being the sole shareholder of JA investments and MH Investments which were incooperated in the Cayman Islands he was called as a primary witness on behalf of the appelant companies. was the ultimate beneficial owner of the companies and was the primary witness called on behalf of the taxpayers. The position of Appointer under JA Investment and MH Investment was held by on Mr. Gould who is an Australian resident residing in Sydney. Anglore held two of its shares for the company MH investments in Bywater Investments Limited which was incooperated in the Bahamas The facts stated that Bywater had three directors; including Mr. Borgas, his wife and a third company named NTW Directors Inc, also incooperated in the Bahamas. As a matter of fact the law of Bahamas restricts Bywater to have director’s meeting and the only corporate record that Bywater held was its cashbook maintained at the London offices of Lubbock Fine, a firm of Accountants. As Mr Gould, a resident off Australia was the appointer of the companies and he alone had the power of appointing additional members, the Court held that he was the true owner and controlled affairs of JA Investments and MH Investments through his position as Appointer. His honour found that Mr Borgas a puppet of the company working as a façade to give effect to Mr Gould’s will. The affairs were not managed by Mr. Bogus even in a slightest way and he did not in any way aplly his intelligence to the working and discharge of his duties as a position holder of the company. As a result, the primary Judge concluded that Bywater along with other appellants company’s key management and commercial decision were made by Mr. Gould in Sydney and hence the place where all the important decision-making steps regarding the company were made was Australia. The authorities confirm that the question of where the ‘real business’ of the company is carried[2] on and therefore the ‘actual’ central management and control of the company is a question that needs to be answered differently after determining the varying facts and issues of each case.[3] the Full Court agreed with Perram J that the facts provided by Mr Borgas clearly showed that no key decisions were made by Mr. Borgas in regards to the discharge of his duties towards the company and same was reflect by the evidence provided the question of residency of a company not incooperated in Australia has to has to go through the investigation to find out the place where all the effective and central management took place and the court in this case was not satisfied that the management of the company was actually done by Mr Borgas and not by Mr. Gould.[4] The fact that the constitution of a company requires that board meetings be held in a place is not enough of itself to locate central management and control of the company in that place[5]. The Court stated that Mr Borgas provided the evidence of meetings of Board of Directors and in addition no minutes were presented by Mr. Borgas as evidence, therefore, his highness rejected the evidences stating that the evidences are untruthful and are provided just to create an illusion that Mr. Gould was running the company.

Under the statutory definition in subsection 6(1) of the Income Tax Assessment Act 1936, a company, incooperated in Australia is a resident of Australia along with the companies which carries on business in Australia and has its central management and control in Australia or its voting power controlled by shareholders who are residents of Australia.[6] The words “ central management and control” used for companies not incorporated in Australia for the purpose of definition of “resident” under Section 6(1) of the Act was adopted by the Parliament when the provision was enacted to involve inquiry into various aspects of a company in a commercial reality. The Board of Directors ordinarily makes the policies of a company which determines the direction of operations and transactions, therefore by applying Section 6(1) of the Act the company resides where the meetings of its board of directors is conducted but since in this case the Board of Directors do nothing but follow the instructions of the Appointer the rule cannot be applied and the actual decision-making place will be taken into consideration.[7] For the purposes of income tax, a company resides where its real business is carried on and the definition of “resident” does not have any direct application on Section 7(1), but the place of incorporation or the place where the company’s operations are controlled and directedis a factor to be considered.[8]

Under Art 4(1)(a) of the Swiss Agreement, a person will be considered, reletively, a resident of Australia if the person is a resident of Australia according to section 6 of the Income Tax Assessment Act[9] And, according to the Swiss Agreement when a person is subject to is liable to pay under law of Switzerland then that person will be the resident of Switzerland.[10] A company, at many instances be considered as residents of both Australia and Switzerland and this fact is well recognized by the Swiss Agreement.[11] Where a company comes under the provisions of both Article 4(1)(a) and Arlicle4(1)(b), the the company shall be deemed to be a resident solely of the Contracting State (being Australia and Switzerland) in which the place of effective management is situated. The companies are proved to be the resident of Australia as the central management and control of each of the Company along with its place of effective management is in Australia not Switzerland. A conclusion was formed by the primary judge in the case that the evidence provided by Mr. Borgas residing in Switzerland were bogus and were just presented to trick the court. For the reasons mentioned herewith, Article 4(3) of the Swiss Agreement deems each of Bywater, Chemical Trustee and Derrin to be a resident only of Australia and therefore, these companies would be taxable only in Australia in accordance with Article 7(1) of the Swiss Agreement. Thus, relief from Section 5 and Section 6 of the 1997 Act, mentioned under the Swiss Agreement, will not be provided to these companies whose place of central and effective management is found to be Australia after inquiry.

As per s 6(1) of the Income tax Assessment Act 1936, any company is resident in Australia for tax purposes, if it is formed in Australia as a Legal Corporation or if it conduct its work in Australia and either has its central management and control in Australia. For the purpose of taxes it is important to identify company’s central management and control. Under Income Tax Assessment Act 1936, place where management really lies is an important concept in Australia where top most policy decisions are made. 

Due to High Court ruling, taxation ruling 2004/2015 was withdrawn and TR2017/D2 had been issue by the tax official in Australia. After two year of the verdict, Austrian Tax Office (ATO) has finalised TR2018/5 to assist the application of the Central Management & Control test. This is new taxation ruling for company incorporated outside Australia but working in Australia. This ruling has caused transparency in the field of taxation and tax diversion to outside Australia was stopped. Transitional period was given to multinational company to change company governance arrangement but company should not take any action to change Central Management and Control for any tax avoidance.

The first step to determine a company’s central management and control is the company board minutes. Thus, it is important to understand what board minutes is. Board minutes is nothing but recording of decisions of the board of the company. It is used to pass on the information from the board to the executives. Only in the following cases other evidences are required as to where company’s important decisions were made.[12]

  • When board minutes are not kept by the companies
  • When important judgements are made by outside the board meeting.
  • When board minutes are not true.
  • When board minutes do not reveal the place of making important decisions.

Other than board meetings following things are considered in determining central management and control. Paper that are circulated before meetings, emails showing the role played by the director in the decision making phase of the business. Oral testimonials of people involved in making decisions in company will also be taken into account.

The broader the commercial practises of an organisation are, it is more probable that important decisions that are an exercise of its Central management and control and different from decisions taken by management on everyday basis. Boards may give broad powers of management to employees, still have central management and control.

Merely influential person even if its influence is powerful, it will not amount to exercise of central management and control. It is important to understand who the real decision maker is.

The Central management and control was first used in Calcutta Jute Mills Co Ltd v Nicholson[13] and Cesena Sulphur Co Ltd v Nicholson[14]. The registered office of the company was in London but it conducted its business in India. This company had no assets in London, but the company was operated from London by the directors. The Cesena Sulphur Company was formed in London. It conducted business in Italy. The company had directors in London who met at London. They were in touch with directors in Italy. Both Company were held to be resident in London as both the companies were controlled from London.

It is also important to understand the relationship of a parent and its subsidiary with respect to determining central management and control. In Unigate Overseas Ltd v McGregor. The commissioner claimed that the company made investment based on wishes of Parent company. But it was found that the subsidiary company did not rubberstamp decisions of the parent company. It did not take decision that it considered wrong or not good for subsidiary company.

Along with central management and control test we also have voting power test which requires that company is doing its work in Australia and company’s majority voting power is in control of shareholders residing in Australia. 

The First issue that had come up in this case was that, the company resident in Australia as their central management was in Australia. The second issue is regarding Double tax agreement. It was held in this case that central management and control was in Australia.

It cleared three matters to determine whether company incorporated in foreign country is resident under control test

  • This decision made it clear that where company’s central management and control is located is a question of fact which is based on what really happens.
  • The fact that if a company is incorporated in foreign country will make its central management and control outside Australia was rejected in this case. If the local board which is situated in foreign country merely approves the decision made in Australia.
  • The contention was rejected that company must be a resident of Australia where company has central management and control in Australia. Thus in this case the decision taken in Malayan Shipping case was reversed.

This decision by Australian High Court has effected multinational company which were incorporated outside Australia but were control in Australia. This was mainly in the case of company incorporated in New Zealand by Australia. Since these company were control by Australia hence they are liable to pay tax in Australia. In this case Company has to pay tax in Australia, unless relief is available to multinational company under double tax agreement for certain country. 

In Bywater[15] decision a distinction was made between director who makes independent decision and director who approves decision made elsewhere. The effect of this case law has effected on multinational companies working in Australia. The important question that need to be determined is whether the control is in Australia. It is determined based on facts of each case and we don’t have a fixed rule for that. If a company need to escape from paying tax in Australia then it has to ensure that its high level decisions are not made in Australia, but they are made in some other country, may be in a country where the company is incorporated.

 If a parent company which is incorporated in Australia has its subsidiary abroad. If the parent company is highly influential. In order to escape tax liability in Australia the subsidiary company need to show that it makes all its high level decision on its own. It acts with a level of independence and it is not completely dependent on the parent company.

 The board minutes plays most important role in court’s decision. Thus it completely depends on facts of each case. As in each case the board minutes will be different. Through board minutes commissioner will get complete information as to who made the decisions and where those decisions were made.

A multinational company which is formed in foreign country and carries business only in Australia. The company’s high level decision are made in foreign country where the company is formed. The company appoints manager in Australia. The company gives the manager wide authority, but the authority granted is under company’s supervision. The board also reserved authority to overrule the judgement made by the manager. In this case the company is not resident under central management and control, as the real control is in foreign country and not with Australian manager.

A circumstance might arise where high level decisions are made in multiple countries. In this circumstance it may be found that the central management and control is located in multiple places. This question will be answered by the fact that where the company’s central management and control lies in substance.

Ernst & Young submitted certain recommendations, they stated that the tax board’s residence law is challenging. They agreed with board recommendation of 2003 replacing central management and control test with incorporation test. Central management and control test provided in TR2018/5 would not be consistent with other rules which try to improve the role of Australian companies in global scenario. 2018 guidance is challenging for Australian companies trying to grow globally. As Central management and control test is question of fact issues might arise because of different application by tax officials. According to E&Y.

response, company might become a dual resident. E&Y paper requested change in law like transitional compliance approach to help the companies. [16]

In board of taxation reform paper, the first question asked is whether a reform in central management and control test as provided by Baywater case is required. The feedback received by the board suggests that a change is required on this topic. Reform option 1 stated that the test would be modified and applied based on tax ruling TR 2004/15. Certain stakeholder requested further clarification on this topic. Reform option 2 provides a simpler approach of incorporation only test. According to which for the place of incorporation would be taken into account for the purpose of taxation. [17]


In Conclusion, even though the Board of Directors of the company did not reside in Australia the court took into consideration various authorities which state that there should be an inquiry to help find out the actual place of management of the company. His highness, considering all the evidences provided, upheld that even though the company was not in cooperated in Australia the effective decisions regarding the management and transactions of the company were directed by the Appointer of the company, Mr. Gould residing in Sydney, Australia and hence, the company will be said to be resident of Australia within the meaning of Section 6(1) of the Act. The fact that the company was a resident of Australia and not of Switzerland for the purpose of tax residency, the company will not be relieved from Section6-5 of the Act as mentioned under the Swiss Agreement. Central management and control is question of fact thus issue might arise because of different application by tax official. Central management and control test should be replaced with incorporation test or test should be modified and applied based on tax ruling TR 2004/15.

References for Bywater Investments Limited v. Commissioner of Taxation

  • Practical Compliance Guideline,
  • Income Tax Assessment Act 1936 No. 27, 1936 ,,

  • Decision impact statement,
  • Australia’s corporate tax residency rules – EY response ,
  • Corporate tax residency: Reform options,
  • Bywater investments limited & ors v. commissioner of taxation [2016] hca 45.5
  • De Beers Consolidated Mines Ltdv Howe [1906] AC 455.
  • Esquire Nominees Ltd v Federal Commissioner of Taxation[1973] HCA 67
  • Cesena Sulphur(1876) 1 Ex D 428 at 445–446
  • Bullock[1960] AC 351
  • Cesena Sulphur Company v Nicholson (1876) 1 Ex D 428 at 446–447 
  • Koitaki Para Rubber Estates Ltd. v. Federal Commissioner of Taxation
  • [1876] 1 TC 83
  • (1875-1883) 1 TC 88
  • [2016] HCA 45

[1] Bywater investments limited & ors v. commissioner of taxation [2016] hca 45.5

[2] De Beers Consolidated Mines Ltd v Howe [1906] AC 455.

[3] Esquire Nominees Ltd v Federal Commissioner of Taxation[1973] HCA 67

[4] Cesena Sulphur (1876) 1 Ex D 428 at 445–446

[5] Bullock [1960] AC 351

[6] subsection 6(1) of the Income Tax Assessment Act 1936

[7]Cesena Sulphur Company v Nicholson (1876) 1 Ex D 428 at 446–447 

[8] Koitaki Para Rubber Estates Ltd. v. Federal Commissioner of Taxation

[9] Art 4(1)(a) of the Swiss Agreement.

[10] Art 4(1)(b) of the Swiss Agreement

[11]Article 4(3) of the Swiss Agreement

[12] Practical Compliance Guideline, available at:, Last accessed on September 21st 2020

[13] [1876] 1 TC 83

[14] (1875-1883) 1 TC 88

[15] [2016] HCA 45

[16] Australia’s corporate tax residency rules – EY response, available at: , Acessed on September 21st 2020

[17]Corporate tax residency: Reform options, available at, Acessed on September 21st 2020

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