Dual Resident Companies: A Simple Guide to Explain the Tax Rules of Dual Resident Companies of Australia and New Zealand

Introduction to Dual Resident Companies

TIB Vol 35 No 6 July 2023 explains the Dual Resident companies. In today's interconnected world, it's not uncommon for companies to operate in multiple countries. Sometimes, a company might be considered a resident for tax purposes in more than one country. These are known as "dual resident companies." Understanding the rules and benefits for these companies, especially in New Zealand, can be quite beneficial. This guide provides an overview of the new legislation and its impact on dual resident companies.

New Legislation for Dual Resident companies

The Taxation (Annual Rates for 2022-23, Platform Economy, and Remedial Matters) Act 2023 introduces significant changes for dual resident companies in New Zealand. The key changes allow these companies to:

1. Offset their income tax losses against the profits of other group companies.

2. Be a member of a consolidated group.

3. Retain their imputation credit account (ICA) balance in certain situations.

Background of Dual Resident Companies

In 2019, the Australian Tax Office (ATO) revised its interpretation of corporate tax residence rules. This meant companies with Australian directors could be considered Australian tax residents, even if their activities were exclusively outside Australia. This change impacted New Zealand companies with Australian-based directors, potentially making them tax residents in both countries.

Key Features of the Amendments for Dual Resident Companies

1. Loss Grouping: Dual resident companies can now offset their tax losses against profits of another company within the same group. This is applicable from 15 March 2017.

2. Consolidation: These companies can be members of a consolidated group for income tax purposes, even if they are considered residents in another country under a double tax agreement (DTA).

3. Imputation Credits: Companies changing their tax residence between New Zealand and Australia can retain their ICA balance. This helps maintain the value of accumulated imputation credits for shareholders.

Detailed Analysis of Dual Resident Companies

1. Loss Grouping: Previously, dual resident companies couldn't offset losses within a group due to the risk of claiming deductions in multiple jurisdictions. However, new hybrid and mismatch rules now mitigate this risk, allowing for the change.

2. Consolidation Rules: Similar to loss grouping, the new rules allow dual resident companies to be part of a consolidated group, addressing the same risk with hybrid and mismatch rules.

3. Imputation Credit Accounts: When a company’s residence changes from New Zealand to Australia, it will now maintain its ICA, ensuring accumulated credits are preserved.

Examples of Dual Resident Companies

1. Loss Grouping Examples: If ABC Limited, a dual resident company, incurs a loss in New Zealand, it can now transfer this loss to another group company, DEF Limited, even if ABC is also an Australian tax resident.

2. Consolidation Examples: GB Limited, a member of a consolidated group in New Zealand, can continue to be part of this group even after becoming an Australian resident.

3. Imputation Credit  Examples: Southern Crux Limited, upon becoming an Australian resident, retains its ICA balance from New Zealand, ensuring no loss of imputation credits.

Conclusion of Dual Resident Companies

The changes introduced by The Taxation (Annual Rates for 2022-23, Platform Economy, and Remedial Matters) Act 2023 are beneficial for dual resident companies, providing more flexibility and maintaining tax benefits. These amendments ensure that companies operating in both New Zealand and Australia can efficiently manage their tax obligations and retain valuable tax credits. Understanding these changes can help businesses make better financial and operational decisions in a complex international tax environment.

This simplified guide aims to help you grasp the essential aspects of the new legislation affecting dual resident companies. For detailed scenarios and specific cases, consulting with a tax professional or referring to the actual legislative text is recommended.