• Working out the foreign tax credit when income is attributed

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

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    Where a company is related to a CFC at the end of the CFC's statutory accounting period and the assessable income of the company includes a share of the attributable income of the CFC - refer to chapter 1 - the company is allowed a credit for an amount of tax equal to its attribution percentage of the CFC's notional allowable deductions for taxes paid.

    A CFC can claim a notional deduction for foreign or Australian tax paid by the CFC on amounts included in the CFC's notional assessable income.

    If the notional assessable income of the CFC includes a non-portfolio dividend from a related company, a notional deduction is also allowable for underlying tax the CFC is taken to have paid on the dividend.

    Example 9
    Foreign tax credit for attributed income

    An Australian resident company - Ausco - has a 60% interest in a CFC resident in an unlisted country - Forco.

    Forco details:

    $

    Profits from a foreign branch in a listed country - not attributable income

    2,000

    Tax paid in the listed country on foreign branch income

    600

    Income derived in an unlisted country - it is all attributable income

    10,000

    Tax paid in the unlisted country on all income - this includes the foreign branch income

    1,200

    Ausco is deemed to have paid the following amount of tax on the attributed income:

    Attribution percentage: 60%

    Tax paid on attributed income

    1,000

    (10,000/1200) 12,000

     

    Tax deemed paid by Ausco

    600

    (1,000/60) 100

     

    Ausco must gross up its assessable foreign income by this amount. It can claim a foreign tax credit for $600.

    Credits where benefits deemed to be dividends are attributed

    If a benefit provided by a CFC is deemed to be a dividend under section 47A and is attributed to a taxpayer, a credit for foreign tax paid will be allowed only if:

    • the amount of the deemed dividend is included in the taxpayer's assessable income in their return lodged in the year of the distribution or
    • the taxpayer notifies the Tax Office, in writing, within 12 months after the end of the income year in which the benefit was provided.

    Credits where income is attributed due to a change in residence of a CFC

    A resident company is allowed a credit for foreign tax paid by a CFC where an amount of income is attributed to it because the CFC changed its residence from an unlisted country to a listed country or to Australia. The credit is available, however, only if the resident company is related to the CFC at the time of the change of residence - see section 160 AFCB. The company is allowed a credit for the foreign tax and the Australian tax paid by the CFC on the attributed amount.

    An underlying tax credit may also be available for an attributed amount referable to a non-portfolio dividend paid to the CFC from a foreign company. A credit will be allowed only if the foreign company was related to the resident company at the time the dividend was paid. In this case, the tax deemed paid by the resident company will include an amount equal to its attribution percentage - at the residence-change time - of the underlying tax that the CFC would have been taken to have paid if the CFC were an Australian resident company.

    Credits when income is attributed due to a CFC paying dividends to another CFC

    Income may be attributed to a taxpayer if:

    • a CFC resident in an unlisted country pays a dividend to another CFC
    • both the CFCs are related to the taxpayer at the time the dividend was paid - see section 160AFCC.

    The income attributed is referred to as the section 458 amount.

    Where a section 458 amount is included in the assessable income of a company, the company is allowed a credit for foreign tax paid on the amount.

    The credit can be claimed for:

    • the part of the foreign tax paid on the dividend that relates to the amount included in the assessable income of the resident company - this is referred to as the 'adjusted foreign tax paid'
    • the part of the foreign underlying tax paid on the dividend that relates to the amount included in the assessable income of the resident company - this is referred to as the 'adjusted foreign underlying tax'.

    The amount of adjusted foreign tax paid by the CFC receiving the dividend does not include tax paid under the taxation law of the country in which it is resident. The amount is worked out using the formula:

    AFT = section 458 amount AFT x

    FT
    D

     
     

    adjusted foreign tax paid by the CFC receiving the dividend on that part of the dividend which is not deemed to be paid out of exempting profits

    FT

    foreign tax paid by the CFC receiving the dividend

    D

    amount of the dividend

    The adjusted foreign underlying tax deemed paid by the CFC receiving the dividend is worked out as follows:

    AFUT = FUT x

    section 458 amount
    D - EPP

     

    FUT

    foreign underlying tax deemed paid by the CFC receiving the dividend

    D

    amount of the dividend

    EPP

    that part of the dividend which relates to exempting profits

    Example 10
    Adjusted foreign tax

    Ausco has a wholly owned subsidiary - Forco1 - which is a resident of a listed country. Forco1 has a wholly owned subsidiary - Forco2 - which is a resident of an unlisted country. Forco2 pays a dividend of $50,000 to Forco1. There has been no previous attribution of Forco2 income - that is, there are no attribution credits - and no withholding tax has been paid on the dividend.

    Forco2

    $

    Exempting receipts less expenses

    10,000

    Other net income

    42,000

    Tax paid

    2,000

    Distributable profits
    (10,000 + 42,000 - 2,000)

    50,000

    The income attributed to Forco1 under section 458 would be worked out as follows:

    Section 458 amount = AP x (D - GD - EPP - T)

    AP

    attribution percentage:

    100%

    D

    amount of the dividend

    50,000

    GD

    grossed up amount of any attribution debit

    nil

    EPP

    that part of the dividend which relates to exempting profits - that is, exempting profits divided by distributable profits multiplied by the amount of the dividend

     

    The exempting profits are the part of the distributable profits that relates to exempting receipts.

    Tax relating to the exempting receipts

    384.62

    10,000
    52,000

    X 2,000

     
     

    Exempting profits (10,000 - 384.62)

    9,615

    EPP

    exempting profits
    distributable profits

    X dividend amount

     
     

    9,615
    50,000

    X 50,000

    9,615

    T

    any foreign tax deducted from the dividend by or on behalf of the CFC receiving the dividend, multiplied by the percentage of the dividend represented by (D - GD - EPP)

     
     

    nil x (50,000 - nil - 9,615)
    50,000

     

    nil

    section 458 amount

    40,385

     

    100% x (50,000 - nil - 9,615 - nil)

     

    The adjusted foreign tax paid by the CFC receiving the dividend is worked out as follows:

    AFT =

    section 458 amount x

    FT
    D

     

    AFT

    adjusted foreign tax paid by the CFC receiving the dividend

     

    FT

    foreign tax paid by the CFC receiving the dividend

    nil

    Section 458 amount

    40,385

    D

    amount of the dividend

    50,000

    AFT =

    nil x (40,385[divided by]52,000)

    nil

    The adjusted foreign underlying tax deemed paid by the CFC receiving the dividend is worked out as follows:

    AFUT =

    FUT x (section 458 amount/D)

     

    AFUT

    adjusted foreign underlying tax

     

    FUT

    foreign underlying tax deemed paid by the CFC receiving the dividend

    1,615.39

     

    2,000 x (42,000/50,000)

     

    Section 458 amount

    40,385

    D

    amount of the dividend less withholding tax

    50,000

    EPP

    that part of the dividend which relates to exempting profits

    9,615

    AFUT =

    1,615.39 x (40,385/(50,000 - 9,615))

    1,615.39

    Last modified: 05 Dec 2006QC 17522