• Non-portfolio dividends received from an unlisted country company

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    The taxation of a non-portfolio dividend paid by an unlisted country company to a resident company depends on the profits from which the dividend was paid. There are three types of profits:

    • comparably taxed profits - called exempting profits - from accounting periods ending after 30 June 1990
    • income attributed to the shareholder under the accruals tax measures
    • other profits.

    In the three simplest cases, a non-portfolio dividend paid to a resident company from a company resident in an unlisted country will be treated as follows:

    • if all the profits of the unlisted country company are exempting profits, the dividend will be non-assessable non-exempt income.
    • if all the profits of an unlisted country company have been attributed to the resident company, the dividend paid out of those profits will also be non-assessable non-exempt income
    • if the unlisted country company has no exempting profits or profits which have been accruals taxed, the dividend will be subject to Australian tax.

    If an unlisted country company has exempting profits and other profits, a non-portfolio dividend paid by the company is treated as paid proportionately from its exempting profits and other profits. The part of the dividend that is treated as paid from other profits is in turn treated as paid first from attributed income, and then from other profits.

    To work out the amount that is not assessable you will need to determine how much of the dividend is treated as paid respectively from exempting profits, attributed income and other profits.

    .

    Resident company

     

    100%

    Unlisted country company
    distributable profits

    Exempting profits

    All other profits including attributed income

    The dividend paid by the unlisted country company is treated as paid proportionately from exempting profits and other profits

    Resident company

     

    100%

    Unlisted country company
    distributable profits

    From exempting profits - exempt from tax - s.23AJ

    from other profits

    First from attributed income - exempt from tax - s.23AI

    Balance from other income

    Taxable

    Working out the exempting profits percentage of a non-portfolio dividend paid by an unlisted country company

    The exempting profits percentage of a dividend paid by an unlisted country company is calculated using the formula:

    Exempting profits percentage of dividend

    =

    Exempting profits
    Distributable profit

    x

    100

    This percentage represents the part of a non-portfolio dividend paid by an unlisted country company that is not assessable because it is paid from exempting profits.

    Distributable profits

    A distributable profit is the amount a company can distribute as dividends. Any decision or requirement restricting the availability of profits for distribution as dividends, other than any requirement providing for the following provisions or reserves, is disregarded:

    • a provision or reserve which is required to be maintained by law
    • a provision for any liability in respect of foreign tax or Australian tax
    • a reserve maintained for the purpose of qualifying for relief from foreign tax
    • a provision or reserve for depreciation, bad or doubtful debts or leave payments or
    • any other provision or reserve of a kind prescribed by regulations - to date, no regulations have been made for this purpose.

    Exempting profits

    Exempting profits are the distributable profits of a company that result from exempting receipts. Exempting profits are worked out using the formula:

    Exempting profits

    =

    Exempting receipts

    -

    Expenses and taxes attributable to those receipts

    There are special rules for working out exempting profits of an unlisted country CFC which has changed residence from a listed country. The exempting profits are determined in the normal manner except that distributable profits the CFC had at the time it changed residence are also treated as exempting profits. However, profits taxed previously under the CFC measures are not treated as exempting profits.

    Exempting receipts

    In broad terms, exempting receipts are amounts received by a company that have been either:

    • included in assessable income for Australian tax purposes, or
    • taxed at comparable tax rates in a listed country.

    Only amounts received by a company in accounting periods that end after 30 June 1990 can constitute exempting receipts.

    The following seven types of amounts received by an unlisted country company qualify as exempting receipts:

    • amounts derived by the company in carrying on a business in a broad-exemption listed country through a permanent establishment in that country providing:
      • the amounts are not eligible designated concession income
      • the amounts are subject to tax in a listed country in an accounting period ending or commencing during the statutory accounting period of the CFC
       
    • amounts derived by the company in carrying on a business in a limited-exemption listed country through a permanent establishment in that country providing:
      • the amounts are not adjusted tainted income
      • the amounts are subject to tax in a listed country in an accounting period ending or commencing during the statutory accounting period of the CFC
       
    • income derived by the company that is included in the assessable income of the company for Australian tax purposes and is taxed by assessment
    • net capital gains included in assessable income on the disposal of a taxable Australian asset
    • non-portfolio dividends paid to the company by a listed country company - except where the dividend is treated as paid out of previously attributed income
    • fully franked dividends paid by resident companies
    • the exempting profits percentage of a non-portfolio dividend paid to the company by another unlisted country company.

    The first four types of exempting receipts mentioned above could flow to the company through either a partnership or a trust. If the receipts flow to the company through a partnership of which it is a partner, the exempting receipt will be the company's share of the after-tax profits of the partnership that can be attributed to those receipts. The company's share of those exempting receipts could also be distributed to the partnership through other partnerships and trusts.

    If the receipts flow to the company through a trust, the exempting receipt will be the trust distribution. Again, the receipts could be derived by the trust directly or through other trusts and partnerships.

    Accounting records for exempting receipts and exempting profits

    The law does not set out the records that have to be kept to identify exempting receipts and exempting profits. However, if you claim that a part of a dividend paid by an unlisted country company was paid from exempting profits, you will have to maintain adequate records to substantiate this claim.

    Adequate records include:

    • a statement of the exempting receipts of the foreign company
    • an analysis of the outgoings and expenses incurred by the foreign company that are attributable to the exempting receipts
    • an analysis of the taxes paid or provided for by the foreign company that are attributable to the exempting receipts.

    Distributions of attributed income - maintaining records to support a claim that an amount is not assessable

    Attribution accounts

    To be able to work out what distributions out of attributed income of a CFC are non-assessable non-exempt income, you will need to keep certain records called attribution accounts

    You must maintain an attribution account for:

    • each CFC from which income is attributed to you. This account will contain a record of:
      • income attributed to you from the CFC
      • income distributed to you by the CFC which is treated as distributed from attributed income
       
    • each entity through which the income of that CFC is distributed to you. These entities may be:
      • partnerships
      • trusts
      • companies that are not Part X Australian residents
       
    • each FIF where an amount of FIF income is included in the notional assessable income of the CFC
    • each CFC that has changed residence from an unlisted country to Australia. Dividends paid by a company out of profits which were attributed to you prior to the company becoming a resident of Australia are non-assessable non-exempt income.

    These accounts are used to keep track of profits that have been taxed on an accruals basis so that you determine what amounts are non-assessable non-exempt income when you receive a distribution from those profits.

    Example 3
    Attribution accounts

    A resident company - Resco - owns all the share capital of a CFC that is a resident of an unlisted country. The CFC commenced business on 1 July 2002. For the 2002-03 income year, its only income was attributable income of $2,500. It paid no tax. On 1 August 2003, it paid a dividend of $2,500 to Resco.

    Attribution credit:

    Resco will open an attribution account for the CFC and credit it with $2,500 on 30 June 2003 because this amount was included at that time in Resco's assessable income under the CFC measures. The CFC is called an attribution account entity.

    Attribution debit:

    Resco will debit $2,500 to the attribution account for the CFC on 1 August 2003 because of the dividend paid by the CFC. The debit is referred to as an 'attribution debit'. The amount of the debit cannot be more than the credit balance in the account - called the 'attribution surplus' - at the time the debit is made. In this case, the debit could not be more than $2,500.

    The dividend received by Resco is non-assessable non-exempt income to the extent the dividend gave rise to an attribution debit. In this case, Resco can claim the whole amount of the dividend as non-assessable non-exempt income in the 2003-04 income year. The effect is that Resco only pays tax on the CFC's income when it is attributed, and not again when it is distributed.

    An attribution account maintained by you for a CFC is specific to you. This means that when you sell shares in a CFC, you cannot transfer the attribution account to the purchaser of the shares.

    Tracing the path of distributions of attributed income

    There are a number of ways you can receive amounts that were paid from profits that have previously been attributed to you. In general, these amounts will be distributed to you as a dividend. The dividend may be distributed to you directly, or indirectly through a chain of companies, partnerships, or trusts.

    When are attribution account payments made?

    To work out your exemption, you will need to know the date on which attribution account payments are taken to have been made.

    The following table sets out:

    • the types of attribution account payments that can occur
    • the entities that are treated as making and receiving an attribution account payment
    • the date on which the payment is taken to be made.

    Type of attribution payment

    Entity making payment

    Entity receiving payment

    Date payment made

    Dividend

    paying company

    shareholder

    on date dividend is paid

    Partner's share in the net income of a partnership

    partnership

    partner

    at the end of the income year of the partnership

    Share of the net income of a trust estate equal to the beneficiary's present entitlement

    trust

    beneficiary

    at the end of the income year of the trust

    Whole or part of the net income of a trust estate is assessable to the trustees. 99 or s. 99A

    trust

    trustee

    at the end of the income year of the trust

    Other distribution of accumulated trust income

    trust

    beneficiary

    income year in which the distribution was made

    What accounting entries should you make?

    As mentioned earlier, attribution accounts link distributions a CFC has made to you - either directly or through other entities - to the income of the CFC that has already been attributed to you. The link is made when you:

    • debit the attribution account of the entity that makes the payment and
    • credit the account of the entity that receives the payment.

    Continue this process down a chain of entities until you receive a distribution made by the CFC.

    Example 4
    Distribution of attributed income

    A resident company - Resco - owns all of the shares of CFC1, which owns all of the shares of CFC2. The CFCs are residents of unlisted countries.

    CFC2 commenced business on 1 July 1997 and for the 2003 income year CFC2 derived $100 which was attributed under the CFC measures. The company paid no tax on the attributed amount. On 1 August 2003 the company paid its first dividend of $100 to CFC1, which paid the dividend to Resco on the same day.

    All the entities close accounts to 30 June 2004.

    CFC 2 pays a dividend of $100 to CFC 1, which pays a dividend of $100 to the resident company.

    Attribution accounts

    CFC2

    Debit

    Credit

    1 August 2003 dividend to CFC1

    $100

    30 June 2003 amount attributed to Resco

    $100

    CFC1

    Debit

    Credit

    1 August 2003 dividend to Resco

    $100

    30 June 2003 amount attributed to CFC2

    $100

    As the $100 attributed from CFC2 to Resco on 30 June 2003 was included in Resco's 2003 assessable income, and as the distribution Resco received on 1 August 2003 is no more than the income already attributed, Resco will be exempt from tax on the dividend.

    Proportionate interests in the CFC and in interposed entities

    A resident taxpayer might hold only a proportion - that is, less than 100% - of the interests in a CFC. That interest may be held directly or indirectly through interests in other foreign entities.

    If you hold an interest of less than 100% in a CFC, only a proportion of the attributable income of the CFC is included in your assessable income. The proportion to use depends on the interest - called the attribution percentage - you have in the CFC - see chapter 1.

    When tracing a distribution made by a CFC through a chain of interposed entities to yourself, note any proportionate interests you have in any of these entities.

    Your interest in the CFC - and in each interposed entity - is called your attribution account percentage. This interest may differ from your attribution percentage in an entity. The foreign entities in the chain along which the attributed income of the CFC is later distributed to you need not necessarily be controlled foreign entities.

    If you have both direct and indirect attribution account interests in an entity, then your attribution account percentage in that entity is the sum of the interests as follows

    Attribution account percentage

    =

    direct attribution account interest

    +

    indirect account attribution interest

    How do you work out your direct attribution account interest in an entity?

    Your direct attribution account interest in an entity will depend on the type of entity it is.

    If the entity is a foreign company, your direct attribution account interest in the company is the same as your direct attribution interest in that company.

    If the entity is a partnership of which you are a partner, your direct attribution account interest is the percentage that you hold - and any percentage you are entitled to acquire - of either the partnership's profits or the partnership's property. If the two percentages differ, use the higher percentage as your direct attribution account interest.

    Your interest in a partnership is measured at the end of the accounting period in which the dividend is distributed through the partnership to you. The date of the dividend payment is called the test time. You should assume that you held the same interest in the profits and property of the partnership throughout the accounting period that you held at the test time. When working out your interest in the profits, use the amount of profit for the whole of the period.

    Example 5
    Attribution account interest in a partnership

    A resident company owns 100% of CFC 1 which owns a 50% interest in a partnership which owns 50% of CFC 2. CFC 2 pays a dividend to the partnership on 1 August 2004. Income is attributed to the resident company for 2003-04.

    It is necessary to measure the direct attribution account interest of CFC1 in the partnership in order to measure the attribution account percentage of the resident individual in the partnership when the dividend is paid.

    If the entity is a trust of which you are a beneficiary, your interest in the trust is the percentage of either the income or property of the trust to which you are presently entitled - and any percentage you are entitled to acquire. If the two percentages differ, use the higher percentage as your attribution account interest.

    As in the case of an interest in a partnership, your interest in a trust is measured at the end of the accounting period of the trust in which the dividend is distributed through the trust to you. The date of this payment is called the test time. You should assume that you held the same interest in the income or property of the trust throughout the accounting period as you held at the test time. When working out your interest in the income, use the amount of income earned for the whole period.

    How do you work out your indirect attribution account interest in an entity?

    Your attribution account percentage in an entity is the sum of your direct and indirect interests in that entity. To work out your indirect interest in an entity - entity B - which is held through another entity - entity A - multiply your direct interest in entity A by entity A's direct interest in entity B.

    If there are more than two entities in a chain, continue the process of multiplication along the chain until you reach the entity in which you are measuring your indirect interest.

    Example 6
    Attribution account interest

    The resident company has a 60% direct interest in CFC 1, which has a 60% direct interest in CFC 2. In addition, the resident company has a direct attribution account interest in CFC 2 of 25%.

    36% indirect attribution account interest (60% x 60% )

    In this case, the resident taxpayer's attribution account percentage in CFC2 is 61% - that is, the taxpayer has a direct attribution account interest of 25% plus an indirect attribution account interest of 36%.

    Example 7
    Direct and indirect attribution account percentage

    The following example shows how to work out direct and indirect interests and the attribution account percentage in an entity.

    A resident company owns 50% of the share capital of CFC1 and CFC1 owns 50% of the share capital of CFC2. The CFCs are residents of unlisted countries. CFC2 commenced business on 1 July 2003. For the 2003-04 financial year the only income of CFC2 was attributable income of $100. On 1 August 2004, CFC2 paid a dividend of $50 to CFC1.

    The resident company owns 50% of CFC 1 which owns 50% of CFC 2. CFC 2 pays a $50 dividend to CFC 1. The resident company's attributable income is $25 (50% of $50).

    The resident company's attribution percentage in CFC2 is 25% - that is, 50% of 50%. The resident company's share of the attributable income of the CFC is therefore $25 - that is, 25% of $100.

    The dividend of $50 paid to CFC1 is an attribution account payment. When the dividend is paid to CFC1 it is necessary to measure how much of the dividend can be treated as a distribution of CFC2's previously attributed income. The amount is worked out by applying the attribution account percentage of the resident company in CFC1 to the dividend paid to CFC1.

    The direct attribution account interests will be as follows:

    Direct attribution account interest of the resident company in CFC1

    = 50%

    Direct attribution account interest of CFC1 in CFC2

    = 50%

    The indirect attribution account interest is obtained by multiplying the direct attribution interests along the chain. The indirect attribution account interest of the resident in CFC2 will be 25% (50% x 50%). Up to $25 of the dividend can therefore be treated as paid from previously attributed income.

    Example 8
    Attribution debit

    A resident individual has a direct attribution account interest of 80% in CFC1. CFC1 has a direct attribution interest of 90% in CFC2. The CFCs are resident in unlisted countries.

    CFC2 commenced business on 1 July 2003. For the 2004 income year, its only income was attributable income of $100. It paid no tax. On 1 August 2004 it distributed its 2004 income. On the same day, CFC1 distributed the full amount of the dividend it received from CFC2.

    Attribution accounts

    CFC2

    Debit

    Credit

    1 August 2004 dividend to CFC1 (note 2)

    $72

    30 June 2004 attributed income (note 1)

    $72

    CFC2

    Debit

    Credit

    1 August 2004 dividend to Resco (note 4)

    $72

    30 June 2004 dividend from CFC2 (note 3)

    $72

    Note 1
    This represents CFC2's attributable income of $100 multiplied by the resident's attribution percentage in CFC2 - that is, 80% (interest of the resident in CFC1) x 90% (interest of CFC1 in CFC2) x $100 = $72.

    Note 2
    This represents the resident's attribution account percentage in the dividend received by CFC1 - that is, 80% of the $90 dividend.

    Note 3
    The resident's attribution account percentage in the dividend received by CFC1 - worked out as in note 2.

    Note 4
    The dividend paid by CFC1 to the resident.

    The dividend of $72 received by the resident is non-assessable non-exempt income to the extent of the attribution debit that arose when the dividend was paid. As this debit was also $72, the entire dividend is non-assessable non-exempt income.

    When should you make a credit in an attribution account?

    You must make a credit in an attribution account if you include an amount in your assessable income because:

    • An amount of the CFC's income has been attributed to you - section 456. The credit amount will be the amount of the attributed income included in your assessable income under section 456 without any addition for foreign or Australian tax paid by the CFC on that income. You must enter the credit at the end of the CFC's statutory accounting period. Where a company is a CFC at the beginning of its statutory accounting period but ceases to exist during that period, the statutory accounting period is deemed to end immediately before the company ceases to exist. However, in this circumstance the credit arises at the beginning of the statutory account period
    • An amount of FIF income is included in the attributable income of a CFC. In this case a credit arises in relation to the FIF equal to the amount included in your assessable income under section 456 that is referable to the FIF income. The credit that would otherwise arise for the CFC is reduced by the amount that arises for the FIF. If a FIF has an interest in another FIF and the calculation method applies to determine the FIF income of the first FIF, a credit will arise for the second FIF. The FIF income is based on the FIF income of the first FIF referable to the FIF income of the second FIF. In this case, the attribution credit for the first FIF is reduced by the credit that arises for the second FIF
    • The CFC has both:
      • ceased to be a resident of an unlisted country
      • become a resident of a listed country or of Australia.
       

    The amount of the credit will be the amount you included in your assessable income under section 457 without any addition for foreign or Australian tax the CFC paid on that amount. You must normally enter the credit at the time the CFC changed residence. You have the option to defer the credit, however, to the extent it relates to an amount included in attributable income under section 457 for an unrealised gain on an asset.

    The credit may be deferred until the CFC pays a dividend out of profits arising from the subsequent disposal of the asset or

    • an unlisted country CFC paid a non-portfolio dividend to either:
      • a CFC resident in another country, or
      • in certain circumstances, to a CFT or partnership or Australian trust.
       

    The credit is for the amount you included in your assessable income under section 458 without the addition of any foreign tax treated as paid by the CFC on that dividend. You must enter the credit at the time the dividend was paid.

    You must also make a credit in an entity's attribution account if:

    • that entity receives an attribution account payment from another entity and
    • the payment gives rise to an attribution debit for the paying entity.

    The credit amount will be the same as the attribution debit. You must enter the credit on the date of the attribution account payment.

    An attribution credit will not arise when an amount is included in your assessable income under section 459.

    How are credits made when the taxpayer is an Australian partnership or Australian trust?

    Only the taxpayer who is actually liable to tax on the attributed income of the CFC can obtain an exemption from tax for distributions of that income.

    This means that if the income of a CFC is attributed to an Australian partnership or Australian trust, the credit you make in the CFC's account is for the partner of the partnership or for the trust beneficiary who is presently entitled to the trust income. If there is no such beneficiary, the credit arises for the trustee.

    The credit does not normally arise for the partnership or trust itself. There is an exception where the trust is a corporate unit trust, a public trading trust, an approved deposit fund, an eligible superannuation fund or a pooled superannuation trust.

    When is the credit reduced for foreign taxes paid?

    If a non-resident company pays a non-portfolio dividend to another non-resident company of which you are an attributable taxpayer, you may make an attribution credit in the second company's account. The general rule is that the credit will be equal to the amount included in your assessable income under section 458, without the addition of any foreign tax paid by the company that received the dividend. Reduce this credit by the amount of any foreign tax payable by the company that received the dividend to the extent the tax is related to either the dividend or to income that includes the dividend.

    If, for example, an unlisted country CFC pays a non-portfolio dividend to a listed country CFC of which you are an attributable taxpayer, you may be attributed certain amounts of the dividend - see section 458. If this is so, you will make an attribution credit for yourself in the listed country CFC's attribution account. The credit amount will be equal to the dividend minus any foreign tax payable in a foreign country on the dividend.

    If the listed country taxes the non-portfolio dividend at its normal company tax rate, there will be no attribution of the income to you and no attribution credit will arise for the dividend - refer to section 2 of this part.

    Example 9
    Reduction of an attribution credit for foreign tax

    Resco, a resident company, owns CFC1 - a subsidiary in a listed country - which owns CFC2 - a subsidiary in an unlisted country. CFC2 pays a dividend of $100 to CFC1. The listed country's normal company tax rate is 35%, however the dividend is taxed at only 10% in that country.

    The attribution credit in CFC1's account will be for $90 - that is, $100 minus the foreign tax of $10.

    When should you make debits in attribution accounts?

    You must make an attribution debit in an entity's attribution account if that entity makes an attribution account payment to either:

    • an attributable taxpayer, or
    • another attribution account entity.

    There are, however, two rules you must observe. These are:

    • you can only make a debit if there is an attribution surplus in the attribution account at the time the attribution account payment is made - that is, the account balance must be more than nil
    • the debit cannot be more than the amount of the surplus in the account at the time.

    What is the amount of the attribution debit?

    There are again two rules to observe:

    • if an entity makes an attribution account payment to a resident taxpayer, the debit is the same as the amount of the payment
    • if the entity makes an attribution account payment to another entity, the debit will equal the resident taxpayer's attribution account percentage of the payment received by the second entity.

    Working out the amount of the attribution debit where a non-portfolio dividend is paid by an unlisted country company

    If a company that is a member of a non-portfolio company group pays a non-portfolio dividend to another member of the same group, you must reduce the amount of the attribution account debit by the exempting profits percentage of the dividend.

    A non-portfolio company group will arise if an Australian company has a 10% or greater voting interest in a foreign company. If this occurs, the two companies are members of a non-portfolio company group.

    If the foreign company has a 10% or greater voting interest in another foreign company, the Australian company and the two foreign companies constitute the non-portfolio company group. Other companies are added to the group if each company has a 10% or greater voting interest in the company immediately below it.

    The attribution debit that you make in the attribution account for the company that paid the dividend is equal to your attribution account percentage of the balance of the dividend - that is, the dividend less the exempting profits percentage.

    Working out the exempting receipt resulting from a dividend paid by a listed country company to an unlisted country company

    The method for working out the exempting profits percentage of a non-portfolio dividend paid by an unlisted country company was discussed earlier in this section. One type of exempting receipt that could give rise to exempting profits is where a listed country company pays a non-portfolio dividend to an unlisted country company.

    The dividend may be paid:

    • out of income of the listed country company that was attributed to you under the accruals tax measures or
    • out of other income.

    Before you can work out the exempting profits percentage of the dividend you will need to determine:

    • the amount of the dividend paid by the listed country company that is to be treated as an exempting receipt of the unlisted country company
    • the amount to be treated as paid out of income previously attributed to you.

    To work out the amount of the exempting receipt, use the formula:

    Exempting receipt = dividend - grossed up attribution debit

    The grossed up attribution debit is the attribution debit arising from the attribution account payment divided by your attribution account percentage for the payment.

    The attribution debit is the debit that arose for the listed country company when it paid the dividend. The debit is for the amount of your interest in the dividend - that is, your attribution account percentage in the unlisted country company that received the dividend multiplied by the dividend. Note, however, that the debit cannot be more than the attribution surplus in the attribution account of the listed country company.

    Example 10
    Exempting receipts arising on the payment of a non-portfolio dividend

    Resco, a resident company, owns 100% of an unlisted country company. The unlisted country company owns 60% of a listed country company. The listed country company commenced business on 12 July 2003. It had distributable profits of $20,000 which represent attributable income of $2,000 and other profits of $18,000. On 1 August 2004, the listed country company paid a dividend of $10,000 to the unlisted country company.

    On attribution

    Resco will open an attribution account for the listed country company and credit it $1,200.

    On the dividend being paid

    Resco will debit the attribution account for the listed country company with $1,200. Resco will open an attribution account for the unlisted country company and credit the account with $1,200 (60% of $2,000).

    The exempting receipt of the unlisted country company will be the dividend less the grossed up attribution debit:

    $10,000 - (attribution debit $1,200[divided by]100% ) = $8,800

    Further examples showing how to work out exempting profits

    Example 11

    Resco, a resident company, has a wholly owned subsidiary, Subco, in an unlisted country. The distributable profits of Subco on 1 July 2003 were $15,000.

    In the year ended 30 June 2004, the subsidiary derived the following profits:

     

    $

    Passive income from its business in the unlisted country - see chapter 1

    6,000

    Profits from its branch in a broad-exemption listed country

    16,000

    Subco paid tax of $1,000 on its unlisted country income and $6,000 in the broad-exemption listed country on its branch profits.

    On 1 August 2004 it paid a dividend of $15,000 to Resco.

    The attributable income of Subco for the 2004 income year was worked out as follows:

     

    $

    Passive income from business in the unlisted country

    16,000

    deduct: foreign tax

    1,000

    Subco's attributable income for 2004

    5,000

    Subco's distributable profits on 30 June 2004 were:

     

    $

    distributable profits on 1 July 2003

    15,000

    distributable profits derived in the year ended 30 June 2003:

     

    from unlisted country operations
    ($6,000 - tax $1,000)

    5,000

    from the broad-exemption listed country branch ($16,000 - tax $6,000)

    10,000

    Distributable profits 30 June 2004

    30,000

    The dividend of $15,000 paid to Resco on 1 August 2004 was treated as paid from exempting profits and other profits as follows:

    Resco's exempting profits that were included in distributable profits - that is, profits from the broad-exemption listed country branch for the accounting years ending on or after 1 July 2003

    10,000

    Resco's other profits* that were included in distributable profits

    20,000

    * consisting of $15,000 distributable profits for the period prior to 1 July 2003 plus $5,000 distributable profits from unlisted country operations in the year ended 30 June  004.

    Exempting profits percentage of the dividend

    =

    exempting profits
    distributable profits

    X 100

    =

    10,000
    30,000

    X 100

    =

    33 1/3%

    A third of the dividend of $15,000 - that is, $5,000 - was treated as paid from exempting profits and is non-assessable non-exempt income. Thebalance of the dividend - $10,000 - was treated as paid from other profits.

    The balance of the dividend - $10,,000 - was treated as paid first from previously attributed income. It was non-assessable non-exempt income up to the amount of the attribution debit that arose when the dividend was paid.

    The attributable income of Subco for the 2003-04 income year was $5,000. When the income was included in Resco's assessable income, Resco opened an attribution account for Subco and credited it with $5,000. On 1 August 2004, when the dividend was paid, there was an attribution surplus of $5,000 in the attribution account.

    When the $15,000 dividend was received by Resco, $10,000 was treated as paid out of profits other than exempting profits. An attribution debit was made and this amount was non-assessable non-exempt income.

    The $5,000 balance of the dividend was taxable. The amount of this dividend is increased by the amount of foreign tax for which a foreign tax credit was claimed - see chapter 3 part 3.

    Summary

    The dividend of $15,000 is divided into:

     

    $

    non-assessable non-exempt dividend paid out of exempting profits

    5,000

    non-assessable non-exempt dividend paid out of attributed income

    5,000

    assessable dividend

    5,000

     

    15,000

    Example 12

    It is assumed, in this example, that Subco is owned by another unlisted country company, Parentco, which is owned by Resco. The data used is the same as in the previous example, except that the dividend is paid to Parentco.

    On 1 July 2003, Parentco had distributable profits of $60,000 made up of $20,000 exempting profits and $40,000 other profits. On 1 August 2003, Parentco received the dividend of $15,000 from Subco. Parentco did not pay any foreign tax on the dividend.

    For the year ended 30 June 2004, Parentco derived distributable profits - excluding the dividend from Subco - of $30,000 made up of $10,000 exempting profits and $20,000 active income, none of which was attributable income.

    On 1 August 2004, Parentco paid a dividend of $75,000 to Resco.

    In this case, the exempting profits of Parentco are worked out as follows:

     

    Exempting profits
    $

    Other profits
    $

    Distributable profits
    $

    On 1 July 2003

    20,000

    40,000

    60,000

    In relation to the dividend from Subco

    5,000

    10,000

    15,000

    On other profits for the year ended 30 June 2004

    10,000

    20,000

    30,000

    Total

    35,000

    70,000

    105,000

    The dividend that Parentco paid to Resco was divided into an exempting profits part and the balance as follows:

    The exempting profits percentage of the dividend

    =

     exempting profits 
    distributable profits

    X 100

     

    =

     35,000 
    105,000

    X 100

     

    =

    33 1/3%

    The exempting profits part of the dividend

    =

    33 1/ 3% x $75,000

     

    =

    $25,000

    This amount is non-assessable non-exempt income.

    Attribution accounts

    When the attributable income of Subco was attributable to Resco, Resco opened an attribution account for Subco and credited it $5,000.

    When Subco paid the dividend of $15,000 to Parentco, Resco debited the attribution account of Subco with $5,000, opened an attribution account for Parentco and credited it with $5,000. The debit was for the amount of the dividend not treated as paid from exempting profits. Note, however, that the debit was limited to the attribution surplus.

    When Parentco paid the dividend of $75,000 to Resco, Resco debited $5,000 to the attribution account of Parentco and this amount of $5,000 was non-assessable non-exempt income of Resco.

    The balance of the dividend was liable to Australian tax - that is:

    Dividend

     

    $75,000

    Less:
    part paid from exempting profits

    $25,000

     

    part paid from attributed income

    $5,000

     
     

    $30,000

     

    Taxable part of dividend

    $45,000

    This $45,000 was increased by the amount of foreign tax for which a foreign tax credit was claimed - see chapter 3 part 3.

    Last modified: 05 Dec 2006QC 17522