Treatment of foreign and Australian taxes
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Deduction for taxes
A notional allowable deduction is available for foreign or Australian tax paid on amounts included in the attributable income of a CFC. An Australian tax is defined to be a withholding or income tax. It does not include additional taxes such as late payment penalties. If the tax is paid in a subsequent year, the earlier year's assessment can be amended subject to the time limits for amendments to allow a deduction for the tax.
Example 17: Taxes paid directly by a CFC
Assume a CFC (CFC Co) owns 20% of the voting shares in a company (Unlist Co). Unlist Co is a company resident in an unlisted country and is not a CFC. Unlist Co pays CFC Co a dividend of $180,000. CFC Co receives $162,000 because tax of $18,000 is withheld. Unlist Co has no profits that have been taxed in a listed country or in Australia.
Because of the dividend, the notional assessable income of CFC Co will include $180,000 - the dividend before withholding tax - and a notional allowable deduction may be claimed for the $18,000 tax paid by CFC Co.
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What about underlying tax?
Where a non-portfolio dividend is included in the notional assessable income of the CFC, a corporate taxpayer may claim a notional allowable deduction for taxes paid on the profits from which the dividend was paid. This tax is called underlying tax. Where the profits from which the dividend was paid include a dividend from a related company or that has passed through a number of related companies, the underlying tax may also include tax paid by the related companies. See chapter 3, part 3, for an explanation of related companies and for further information on working out underlying tax.
The notional allowable deduction for underlying tax is used to work out the foreign tax credit you can claim. The notional allowable deduction is effectively reversed because the dividend to which the underlying tax relates is increased by the amount of the underlying tax. If, for instance, a CFC receives a $100 dividend and is taken to have paid $20 underlying tax on the dividend, the amount of the dividend is increased to $120 to work out attributable income. A notional allowable deduction of $20 is then available for the underlying tax.
Last modified: 05 Dec 2006QC 17522
Example 18: Underlying taxes
Assume a corporate taxpayer wholly owns a CFC - CFC Co. CFC Co in turn owns 20% of the voting shares in a company - Unlist Co. Unlist Co is a company resident in an unlisted country and is not a CFC. Unlist Co has accumulated profits of $900,000 and has paid tax of $100,000. It distributes all of the profits. CFC Co receives $162,000 because tax of $18,000 is withheld. None of Unlist Co's profits have been taxed in a listed country or in Australia.
The underlying tax would be 20% of $100,000 = $20,000
A notional allowable deduction may be claimed for the $20,000 tax deemed paid by CFC Co as well as for the $18,000 withholding tax. The dividend is increased by the amount of the underlying tax deemed paid - that is, $20,000. The amount included in notional assessable income as a result of the dividend payment would therefore be $200,000.
A corporate taxpayer can claim a foreign tax credit for both the direct tax paid by the CFC and the underlying tax. However, when working out the attributable income, only a deduction is allowed. The subsequent claim for a credit reverses this deduction because the attributable income is grossed up - that is, increased - by the amount of the foreign tax credit. This is explained in part 3 of chapter 3.
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