Corporate tax residency reform — where the 2020 Budget package sits
Why the 2020 Budget proposal to clarify Australia's corporate tax residency rules using a 'significant economic connection' test still hasn't become law in 2026.
The 2020 Budget announcement
The 2020-21 Budget included measures to amend the corporate tax residency rules. The Government adopted a key recommendation from the Board of Taxation.
The proposed changes would treat a company incorporated offshore as an Australian tax resident if it has a ‘significant economic connection’ to Australia.
This connection test would be satisfied when core commercial activities are undertaken in Australia, and central management and control is also in Australia. The Board of Taxation delivered its final report on this matter to the Treasurer in July 2020.
Why it stalled
The proposed corporate tax residency reforms, initially outlined in the 2020 Budget package, have not been enacted as of June 2026. This means the changes to how corporate tax residency is determined have not been implemented into law.
A significant factor contributing to this delay was the change of Government in May 2022. The shift in political leadership resulted in a reassessment of the proposed reforms.
The Albanese Government’s current position on enacting the reforms remains uncertain. To date, no exposure draft of the legislation has been released, indicating a lack of immediate progress towards implementation.
PCG 2018/9 and the ATO transitional approach
The Australian Taxation Office administers corporate residency by reference to its Practical Compliance Guideline PCG 2018/9 on central management and control. This guideline provides guidance on how the ATO assesses whether a foreign-incorporated company is resident in Australia.
A draft update to PCG 2018/9 was released by the ATO on 28 June 2023. This update is yet to be finalised.
The ATO’s transitional compliance approach for foreign-incorporated companies concluded on 30 June 2023. Following this date, from 1 July 2023, foreign-incorporated companies with central management and control in Australia are treated as Australian residents under the existing residency test.
What boards should be doing now
Boards of companies incorporated offshore but with Australian directors should undertake a review of current governance practices. This should include examining board meeting cadence, the documentation of decision-making processes, and the residency of directors. Demonstrating where strategic decisions are actually made is a critical element in establishing corporate tax residency.
The Australian Taxation Office’s Practical Compliance Guideline 2018/9 remains enforceable, even in the absence of legislative reform. Boards should be aware of this existing guidance and its implications for the company’s tax position.
As part of this review, boards should consider the ATO’s PCG 2018/9 risk ratings – green, amber, and red – when assessing existing commercial and management control (CM&C) arrangements.
Frequently asked
If the 2020 reform is not law, what test currently applies?
The existing test in section 6(1) of the ITAA 1936 — incorporated in Australia, OR carries on business in Australia and either has central management and control in Australia or its voting power is controlled by Australian-resident shareholders.
Does PCG 2018/9 affect Australian-incorporated companies?
No. Australian-incorporated companies are automatically residents under the first limb of the section 6(1) test. PCG 2018/9 applies to foreign-incorporated companies.