• Working out a foreign tax credit when a dividend is paid from income which was previously attributed to an Australian resident company

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    A dividend paid out of income previously attributed to an Australian resident is non-assessable non-exempt income - refer to part 1 of this chapter. In addition, an Australian resident company is allowed a credit for foreign tax - including foreign underlying tax - paid on a dividend from attributed income. The credit is reduced to the extent a credit was claimed for taxes paid when the income was attributable.

    The formula to work out the foreign tax for which a credit is due when a dividend is received from previously attributed income is:

     

    FTP = (EP x DT) + (AEP x UT) - AT

    FTP

    foreign tax paid on previously attributed income for which a credit is now allowable

    EP

    percentage of the payment which is non-assessable non-exempt because the income has been previously attributed

    DT

    amount of foreign tax which the taxpayer is taken to have paid, and to have been personally liable for, in relation to the attribution account payment

    AEP

    percentage that would be EP if the attribution account payment were reduced by the amount of any exempting receipts of the Australian resident company

    UT

    foreign underlying tax credit allowable for the attribution account payment, except CFC-type foreign tax - that is, foreign tax which generally corresponds to tax payable under Australia's accruals tax measures

    AT

    amount of the attributed tax account debit arising from the payment of the dividend that is equal to or less than AEP x UT

    Example 11
    Credit for foreign taxes on a dividend paid from profits attributed to an Australian company

    Ausco has a wholly owned subsidiary, Subco, in an unlisted country. Subco had distributable profits of $10,000 on which it paid foreign tax of $1,000. These profits have previously been attributed to Ausco.

    On 1 August 2003, Subco paid a dividend of $10,000 to Ausco. The unlisted country levied dividend withholding tax at a rate of 10%.

    The dividend received by Ausco is non-assessable non-exempt income because it was paid from previously attributed income. At the attribution stage, Ausco would have received a credit of $1,000 for foreign tax paid.

    Even though the dividend was not included in Ausco's assessable income, a foreign tax credit is available for withholding tax and underlying tax relating to the dividend. This is because the profits out of which the dividend was paid were attributed to Ausco and taxed in Australia.

    The method by which this credit is granted is as follows:

    Step 1

    Work out the foreign tax credit for dividend withholding tax and for underlying tax on the dividend as though the dividend was paid from income that had not been attributed to Ausco.

    Step 2

    Reduce the credit by the amount of a credit given at the attribution stage.

     

    $

    Dividend

    10,000

    Dividend withholding tax

    1,000

    Underlying tax (UT) is worked out as though the dividend was paid from income that was not attributed:

    dividend
    distributable profits

    x

    tax paid on profits out of which the dividend was paid

    $10,000/$1,000 x $10,000

    = $1,000

    Under the first step, Ausco's credit is the total of the amounts of dividend withholding tax and underlying tax ($1,000 + $1,000)

    2,000

    This credit is reduced, under the second step, by the $1,000 credit given at the attribution stage.

    The formula for working out the foreign tax credit Ausco can claim is as follows:

    FTP = (EP x DT) + (AEP + UT) - AT

    This formula can be broken down as follows

    EP x DT

    tax paid on the dividend paid out of previously attributed income

    EP

    percentage of the dividend paid from previously attributed income - 100% in the example

    DT

    tax paid on the dividend - dividend withholding tax of $1,000 in the example

    AEP x UT

    underlying tax in relation to the dividend - $1,000 tax was paid in the unlisted country on the profits out of which the dividend was paid

    AEP

    referred to as the adjusted exempt percentage of the dividend. This is the dividend reduced by the exempting profits part of the dividend. In the example, there is no exempting profits part of the dividend, therefore, AEP = 100%

    UT

    underlying tax paid on the dividend - do not include tax paid under an accruals tax law of another country

    AT

    tax for which a credit was allowed when the income of the unlisted country company was attributed to Resco - $1,000 in the example. The amount of the tax is worked out using accounts referred to as attributable tax accounts. These accounts trace the tax for which credit was allowed at the attribution stage

    In this example, when the income of $10,000 was attributed to Resco and a credit was given for $1,000, Resco would have opened accounts as follows:

    Attribution Account for Subco

    Attributed Tax Account for Subco

    Attributed income

    $10,000

    Tax credited

    $1,000

    When the dividend is received, Resco will debit the attribution account $10,000 and treat the dividend as non-assessable non-exempt income. It will also debit $1,000 to the attributed tax account.

    This debit is the amount referred to as AT. Attributed tax accounts are dealt with below.

    Last modified: 05 Dec 2006QC 17522