Section 2 - Credits available only to resident companies
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End of attentionAustralian resident companies are entitled to a foreign tax credit as worked out in section 1. In addition, in some circumstances a company - other than a company in the capacity of trustee - may be:
- entitled to a credit for foreign underlying tax - see section 160 AFC
- entitled to a credit for tax paid by a CFC on amounts attributed to the Australian company
- able to transfer a foreign tax credit to another group company
- not assessable on foreign non-portfolio dividends where those dividends are an exempting receipt of that company - see part 1 of this chapter
- not assessable on foreign income derived through a branch in a listed country - see part 2 of this chapter.
Credits available to resident companies for underlying tax
An Australian resident company which receives a dividend from a related company is entitled to a credit for both:
- the direct foreign tax - for example, withholding tax - on the dividend received, and
- the underlying tax paid by a foreign company on the portion of the distributable profits out of which the dividend was paid.
These credits will generally be available only where the dividend is included in assessable income. The only exception is where a dividend is received from a related foreign company and is treated as paid out of income previously attributed to the resident company under the accruals tax system. A tax credit can be claimed for both the direct foreign tax and underlying tax on these exempt dividends.
Related foreign companies
Under section 160AFB, an Australian company is treated as related to any number of linked foreign companies provided that:
- each company in the chain - starting with the Australian company - has at least a 10% voting interest in the company in the tier below it and
- the Australian company has a direct or indirect interest of at least 5% in the voting shares of each foreign company that is a member of the chain.
A chain of related companies cannot include a trust or partnership - that is, the chain will be broken by the interposition of a trust or partnership.
Example 5: Related foreign companies
Australian company A has a 50% voting interest in foreign company B, which in turn has a 10% voting interest in foreign company C. Both B and C will be treated as related to A.
Step 1
Are the companies members of the same group?
Yes - each company in the chain, starting with the Australian company, has at least a 10% voting interest in the company in the tier below it.
Step 2
Does company A have a 5% or more direct or indirect voting interest?
Yes - company A has a voting interest of 50% (50% × 100%) in company B and a voting interest of 5% (50% × 10%) in company C.
Step 3
Are the companies related?
Yes - both tests are satisfied for both companies B and C. Therefore, they are both related to company A.
End of exampleWorking out underlying tax
Underlying tax is traced through a chain of related companies. In each successive distribution in the chain, the portion of underlying tax deemed paid by the recipient company is worked out by multiplying the underlying tax paid by the company making the dividend by the amount of the dividend divided by the paying company's distributable profits.
Working out underlying tax where there are only two companies in a dividend series
The following formula is used to work out underlying tax deemed paid when there are only two companies in a dividend series.
FUT = (D × EUT) ÷ DPE
FUT
|
foreign underlying tax deemed paid
|
D
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the amount of the dividend
|
UT
|
the amount of the underlying tax
|
DP
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the number of whole dollars in the distributable profits out of which the dividend was paid
|
Example 6: Underlying tax where there are two companies
On 1 August 2003 an Australian resident company - Ausco - received a dividend from a wholly owned subsidiary - Forco1 - in an unlisted country.
Forco1
Distributable profit - that is, profits which accumulated during accounting periods commencing after 30 June 1997
|
$50,000
|
The distributable profits did not include exempting profits or attributed income.
|
-
|
Foreign tax paid on those profits
|
$5,000
|
Dividend paid to Ausco
|
$10,000
|
Ausco is deemed to have paid foreign tax on the dividend of
|
-
|
($10,000 × $5,000) ÷ $50,000
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$1,000
|
Working out underlying tax where there are more than two companies in a dividend series
The following formula is used to work out underlying tax deemed paid where there are more than two companies in a dividend series:
FUT2 = D (UT + FUT1) ÷ DP
FUT2
|
underlying tax deemed paid
|
D
|
amount of the dividend
|
UT
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amount of underlying tax paid that relates to the distributable profits out of which the dividend was paid
|
FUT1
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amount of foreign tax deemed to have been paid by the previous calculation in relation to the dividend series
|
DP
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number of whole dollars in the distributable profits out of which the dividend was paid
|
End of example
Example 7: Underlying tax where there are more than two companies
On 1 August 2003, an Australian resident company - Ausco - received a dividend from a wholly owned unlisted country subsidiary - Forco1. Forco1 paid the dividend out of distributable profits that included a dividend it received from Forco2. Forco2 is a wholly owned unlisted country subsidiary of Forco1. The distributable profits did not include exempting profits or attributed income.
Forco1
Distributable profit
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$50,000
|
Dividend paid to Ausco
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$10,000
|
Foreign tax paid
|
$5,000
|
Forco2
Distributable profit
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$20,000
|
Foreign tax paid on those profits
|
$2,000
|
Dividend paid to Forco1
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$5,000
|
Forco1 is deemed to have paid foreign tax on the dividend of $500
$5,000 × ($2,000 + 0) ÷ $20,000
Ausco is deemed to have paid foreign tax on the dividend of $1,100
$1,000 × ($5,000 + $500) ÷ $50,000
Working out underlying tax when a dividend is wholly or partly an exempting receipt
An Australian resident company is not entitled to a foreign tax credit for the exempting receipts component of a non-portfolio dividend because the component is not included in the assessable income of the resident company.
Exempting receipts of an Australian resident company
The following are exempting receipts of an Australian resident company:
- a non-portfolio dividend received from a company resident in a listed country. The extent to which the dividend is treated as an exempting receipt depends on whether an attribution debit arises for the company paying the dividend. If no attribution debit arises in relation to the payment, all of the dividend is an exempting receipt. If an attribution debit arises - refer to part 1 of this chapter - the amount of the dividend that is more than the attribution debit is an exempting receipt
- the exempting profits percentage - refer to part 1 - of a non-portfolio dividend received from a company resident in an unlisted country.
The exempting profits percentage for a dividend from the unlisted country company is worked out using the following formula.
EPP = (EP ÷ DP) × 100
EPP
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exempting profits percentage
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EP
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exempting profits
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DP
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distributable profit
|
The distributable profit is the amount of profits of the company that would be available for distribution as dividends if any decision or requirement restricting their distribution as dividends was disregarded - other than any requirement providing for an eligible provision or reserve. An eligible provision or reserve is:
- 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.
The exempting profits of an unlisted country company is the amount of the distributable profit that is attributable to exempting receipts of the unlisted country company.
Working out foreign underlying tax credits if a dividend is paid by a listed country company from previously attributed income
A resident company will be entitled to a foreign tax credit for a non-portfolio dividend received from a listed country company if part of the dividend is paid from previously attributed income. The credit for that part of the dividend is worked out as follows. The credit is reduced by the amount of a foreign tax credit allowed previously when the income was attributed.
FUT = D × (UT ÷ DP)
D
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amount of the dividend that is not an exempting receipt
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UT
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amount of underlying tax relating to the amount of the distributable profits attributable to the attribution surplus - that is, UT = AST + (GT x ASP)
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AST
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amount of underlying tax relating exclusively to that part of the distributable profits attributable to any attribution surplus immediately before the payment of the dividend
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GT
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amount of underlying tax relating to both attributed profits - in respect of the attribution surplus - and the remainder of the distributable profits
|
ASP
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percentage of the general tax that may reasonably be related to the part of distributable profits relating to that attribution surplus
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DP
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amount of distributable profits relating to an attribution surplus existing immediately before the dividend was paid
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Working out foreign underlying tax credits if a dividend is paid by an unlisted country company from exempting profits
The foreign underlying tax credit for a dividend received from an unlisted country company which is partly an exempting receipt of an Australian resident company is worked out as follows.
FUT = D × (UT ÷ DP)
D
|
amount of the dividend that is not an exempting receipt
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UT
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amount of underlying tax relating to the distributable profits, worked out as follows:
|
UT = N-ET + (GT × N-EP)
N-ET
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amount of the underlying tax relating exclusively to non-exempting profits - that is, profits other than exempting profits
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GT
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amount of underlying tax that relates to both exempting and non-exempting profits
|
N-EP
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percentage of GT that may reasonably be related to non-exempting profits of the Australian company and that form part of the distributable profits
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DP
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number of whole dollars in the non-exempting portion of the distributable profit out of which the dividend was paid
|
End of example
Example 8: Dividend paid by an unlisted country company
Ausco is an Australian resident company which has a wholly owned subsidiary - Forco - that is a resident of an unlisted country.
Forco has distributable profits of $30,000. Of this amount, $20,000 represents profits from operations in the unlisted country and $10,000 represents profits from a branch located in a listed country. None of these profits have been attributed to Ausco.
Dividend paid to Ausco
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$27,000
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Tax paid in the unlisted country
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$2,500
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Tax paid by the branch in the listed country - no tax credit was allowed for this tax in the unlisted country
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$4,000
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Distributable profits that are exempting profits
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$10,000
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Distributable profits that are other profits
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$20,000
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The dividend is treated as paid proportionately from exempting profits and other profits.
Dividend paid out of exempting profits
(10,000 ÷ 30,000) × 27,000
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$9,000
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D dividend that is not an
exempting receipt (27,000 - 9,000)
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$18,000
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UT uses the following components:
N-ET
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underlying tax that relates exclusively to the non-exempt portion of distributable profits
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nil
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GT
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amount of underlying tax which relates to both exempting and non-exempting profits
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$2,500
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N-EP
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percentage of GT that may reasonably be related to non-exempting profits, in relation to the Australian company, forming part of the distributable profits - $20,000 divided by $30,000 = 2/ 3. This example assumes that the accounting profits were also the taxable income of the company.
|
-
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UT =
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N − ET + (GT × N − EP)
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$1,666.67
|
-
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(nil + (2,500 x 2/ 3))
|
-
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DP
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number of whole dollars in the non-exempting portion of the distributable profit out of which the dividend was paid
|
$20,000
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Underlying tax is therefore $1,500
($18,000 ÷ $20,000) × $1,666.67
End of exampleCredits available to resident companies for attributed income
Working out the foreign tax credit when income is attributed
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.
Profits from a foreign branch in a listed country - not attributable income
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$2,000
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Tax paid in the listed country on foreign branch income
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$600
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Income derived in an unlisted country - it is all attributable income
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$10,000
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Tax paid in the unlisted country on all income - this includes the foreign branch income
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$1,200
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Ausco is deemed to have paid the following amount of tax on the attributed income:
Attribution percentage: 60%
Tax paid on attributed income
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$1,000
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(10,000 ÷ 1200) × 12,000
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-
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Tax deemed paid by Ausco
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$600
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(1,000 ÷ 60) × 100
|
-
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Ausco must gross up its assessable foreign income by this amount. It can claim a foreign tax credit for $600.
End of exampleCredits 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 × (FT ÷ D)
AFT
|
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 × 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)
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$50,000
|
The income attributed to Forco1 under section 458 would be worked out as follows:
Section 458 amount = AP × (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
($10,000 ÷ $52,000) × $2,000
|
$384.62
|
Exempting profits ($10,000 − $384.62)
|
$9,615
|
EPP = (exempting profits ÷ distributable profits) × dividend amount
|
-
|
($9,615 ÷ $50,000) × $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)
|
-
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(nil × ($50,000 − nil − $9,615)) ÷ $50,000
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nil
|
section 458 amount
100% × ($50,000 − nil − $9,615 − nil)
|
$40,385
|
The adjusted foreign tax paid by the CFC receiving the dividend is worked out as follows:
AFT = section 458 amount × (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 × ($40,385 ÷ $52,000)
|
nil
|
The adjusted foreign underlying tax deemed paid by the CFC receiving the dividend is worked out as follows:
AFUT = FUT × (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 × ($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 × (40,385 ÷ (50,000 − 9,615))
|
$1,615.39
|
End of example