Corporate Tax Residency Reform: 2020 Budget Proposals Status as at 2026

Current law (TR 2018/5)

Under section 6(1) of the Income Tax Assessment Act 1936 (Cth), a company is an Australian resident for tax purposes if it is incorporated in Australia, or if it carries on business in Australia and has either its central management and control (CMC) in Australia or its voting power controlled by Australian residents. Taxation Ruling TR 2018/5 'Income tax: central management and control test of residency' superseded the previous interpretation following a High Court decision.

TR 2018/5 outlines the ATO’s view that a company carrying on its CMC in Australia will also be carrying on business in Australia for the purposes of section 6(1). This interpretation is narrower than the previous approach.

The potential for inadvertent Australian tax residency for foreign-incorporated companies with Australian board oversight is a consequence of this interpretation. Practical Compliance Guideline PCG 2018/9 provides administrative relief during a transitional period.

2020 Budget reform proposal

The 2020-21 Federal Budget (October 2020) included a proposal to reform corporate tax residency. This reform aimed to replace the current ‘connected matters’ (CMC) test with a new ‘sufficient economic connection’ test for foreign-incorporated companies.

The proposed test would determine Australian residency for foreign-incorporated companies based on whether they have a ‘significant economic connection’ to Australia. This connection would require the company’s core commercial activities to be carried on in Australia.

The reform was intended to provide greater certainty for foreign-incorporated multinational groups that have board oversight functions located in Australia.

Implementation status

The 2020 Budget proposal concerning corporate tax residency has not been enacted as of 2026. Treasury undertook a consultation process regarding the proposal in 2020; however, no enabling legislation has been introduced into Parliament.

The government reaffirmed its consideration of the reform in the 2022-23 Budget, but this did not result in legislative action. Subsequent Budgets, namely the 2023-24 and 2024-25 Budgets, did not include any updates or progress on the proposed reform.

Until legislation is passed, foreign-incorporated companies must continue to apply Taxation Ruling TR 2018/5 and the existing Commonwealth model convention test.

Practical compliance and PCG 2018/9

Practical Compliance Guideline PCG 2018/9 offers guidance to foreign-incorporated companies during the transitional period relating to corporate tax residency. The guideline provides a ‘low risk’ rating for companies that demonstrate offshore residency through specific actions.

To achieve this ‘low risk’ rating, foreign-incorporated companies should review aspects of their operations, including board meeting practices, decision-making frameworks, and the level of involvement of Australian-resident directors.

The PCG has been extended on several occasions, awaiting legislative change; therefore, current ATO guidance should be consulted to ensure ongoing compliance. Failure to disclose inadvertent Australian tax residency can lead to significant tax liability and SGE penalties.