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Modifications for a broad-exemption listed country

Last updated 4 December 2006

Working out attributable income for a CFC in a broad-exemption listed country is similar to working out attributable income for a CFC in a non-broad-exemption listed country. However, more exemptions are provided for CFCs in broad-exemption listed countries.

What if a CFC fails the active income test?

If a CFC fails the active income test, amounts that would be assessable if the CFC were a resident are included in attributable income to the extent they represent the following:

  • eligible designated concession income that is adjusted tainted income
  • low-taxed third country income
  • trust amounts arising to the CFC directly that are not subject to tax in a broad-exemption listed country
  • trust amounts arising to the CFC indirectly because the CFC is a partner in a partnership, provided that the amounts are not subject to tax in a broad-exemption listed country
  • FIF income derived by the CFC directly or indirectly as a partner in a partnership.

Any other amounts of income are notional exempt income.

What if a CFC passes the active income test?

If a CFC passes the active income test, amounts that would be assessable if the CFC were a resident are included in attributable income to the extent they represent the following:

  • low-taxed third country income
  • trust amounts arising to the CFC directly that are not subject to tax in a broad-exemption listed country
  • trust amounts arising to the CFC indirectly because the CFC is a partner in a partnership, provided that the amounts are not subject to tax in a broad-exemption listed country
  • FIF income derived by the CFC directly or indirectly as a partner in a partnership.

Any other income is notional exempt income.

Diagram of amounts taken into account

Other income is not included; tainted EDCI derived directly or indirectly via a partnership is only included if CFC fails the active income and de minimis tests; low-taxed third country income is always included unless the de minimis test is satisfied; trust and FIF income derived directly or indirectly via a partnership is always included - FIF income may be exempt if the de minimis test is satisfied.

Adjusted tainted income

Adjusted tainted income is based on the definition of tainted income used for the active income test. Broadly, it comprises amounts that are either passive income, tainted sales income or tainted services income.

The difference in the definition of tainted income for the active income test and the definition for working out attributable income is that net gains are included in determining the active income test whereas the entire consideration on disposal of an asset is included when working out attributable income.

Low-taxed third country income

The notional assessable income of a CFC in a broad-exemption listed country includes amounts derived from sources outside the CFC's country of residence if the amounts are not taxed in a listed country. This rule does not apply to amounts of eligible designated concession income-these amounts may be included if the CFC fails the active income test.

Amounts of adjusted tainted income derived from sources outside a CFC's country of residence will also be included if they have not been taxed in a broad-exemption listed country. The source of an amount is to be determined according to the laws of the CFC's country of residence.

FIF income

The FIF rules apply when working out the attributable income of a CFC because of the assumption that the company is a resident of Australia. However, rules apply to prevent double taxation in instances where a company FIF is also a CFC. These rules provide an exemption from the FIF measures for an interest held by a CFC in a company FIF if a share of the attributable income of the company FIF is included in your assessable income under the CFC measures for:

  • a statutory accounting period coinciding with the notional accounting period of the company FIF for FIF taxation purposes, or
  • statutory accounting periods ending and commencing during the notional accounting period of the company FIF.

For the purposes of the above tests, the Tax Office will accept that a share of the attributable income of a company FIF has been included in the assessable income of an attributable taxpayer if no amount was included solely because the company FIF had no attributable income. Refer to Taxation Determination TD 93/167 for further assistance.

Amounts taxed in Australia

Amounts that have been taxed in full in Australia are not included in notional assessable income. Amounts will be treated as taxed in full if they have been included in a CFC's assessable income. Amounts that will not be considered fully taxed, although subject to Australian taxation, are:

  • amounts subject to Australian interest or dividend withholding tax
  • certain shipping income, film and video tape royalties and insurance premiums.

Dividends that have been franked under the imputation provisions are treated as notional exempt income.

Dividends not included

Most dividends paid to a CFC by a foreign company are not included. The only dividends you must include are:

  • dividends - other than non-portfolio dividends - paid to the CFC by a company that was a resident of an unlisted country when the dividends were paid and
  • non-portfolio dividends paid to the CFC by a non-CFC that was a resident of an unlisted country when the dividends were paid unless the dividends were paid from profits taxed in a listed country.

These amounts will not be included in notional assessable income if the profits from which the dividends were paid have previously been attributed to you. They will also not be included in notional assessable income where they are subject to tax in the listed country.

Exemption for small amounts

An exemption applies for CFCs in broad-exemption listed countries if the total of:

  • eligible designated concession income low-taxed foreign source income and
  • FIF income

is not greater than a threshold amount. There is no similar exemption for a CFC that is a resident of a non-broad-exemption listed country.

Threshold amount

If the CFC has a gross turnover of $1 million or more, the threshold amount is $50,000 - that is, the exemption will only apply if the total of the amounts is $50,000 or less.

If a CFC has a gross turnover of less than $1 million, the threshold amount is 5% of the CFC's gross turnover - that is, the exemption will only apply if the sum of the amounts is less than or equal to 5%.

How does the exemption operate?

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