Australian mid-size business groups with operations overseas should take heed of the outcome of Bywater Investments & Ors v FCT [2016] HCA 45, as should any high net worth individuals & families investing across borders.

In its unanimous judgement, the High Court found that four foreign companies were in fact Australian resident companies for tax purposes.  This was on the basis that the "central management and control" of the companies was in Australia rather than overseas.

While this outcome could be said to be unsurprising and based on its facts, don't let that hide the strong underlying message: it is uncommon for the High Court to grant special leave for appeals on tax matters.  The fact that they chose to hear it in the first place is a signal that this issue should be ignored at your peril - and the unanimous judgement reinforces that.

Critical to the decision was the finding that the boards of directors had abrogated their decision-making in favour of the controlling mind (who was Australian) such that the boards only met to mechanically implement or rubber stamp decisions made by him in Australia.

The process to reach the findings of fact was painstaking - there were 19 challenges to the evidence and procedure throughout the litigation process!  This highlights how complex (& costly) these situations can be and maybe that nothing is ever as it seems.

But whatever the background facts, it is clear that legal formality & structure is not enough - if foreign companies are not intended to be regarded as Australian tax residents, then the foreign activity needs to be much more than merely having boards of directors located overseas ratify decisions made from Australia, especially through third party corporate service providers.

For some situations, Australia's double tax treaties may provide some protection, but even this may be limited.

Groups with entities offshore should review how their foreign structures are governed, to identify what unforeseen tax risks are lurking and determine what actions to take.