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

    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 × DT) + (AEP × 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)

    ×

    tax paid on profits out of which the dividend was paid

    ($10,000 ÷ $1,000) × $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 income

    $10,000

    Attributed tax account for Subco

    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.

    End of example
    Evidence of underlying tax paid

    Your company should retain full particulars of the material on which its underlying tax credit has been worked out. Obtain a statement from the company which paid the dividend, certifying the amount of tax paid on the distributable profits out of which the dividend was paid. When underlying tax paid is traced down a chain of related foreign companies, such details will be required for each company in the chain.

    Attribution accounts relevant to foreign tax credits for companies
    Attributed tax accounts
    What is the purpose of attributed tax accounts?

    A resident company can claim a foreign tax credit for dividend withholding tax and certain underlying taxes on a non-assessable non-exempt dividend paid from previously attributed profits.

    The credit is initially worked out on the basis that no foreign tax credit was allowed at the time the profits were attributable. The foreign tax credit worked out in this way is then reduced by the credit allowed at the time the attributable income of the CFC was included in the assessable income of the resident company. The attributed tax accounts trace the foreign tax credit allowed at the attribution stage so that this reduction can be made.

    Who should maintain attributed tax accounts?

    Attributed tax accounts are to be maintained by a resident company to which the attributable income of a related foreign company has been attributed under the CFC measures. Other taxpayers need not maintain these accounts.

    Attributed tax account credits

    An attributed tax account credit can arise in relation to a CFC where an amount is attributed under any of the following sections:

    • section 160AFCA where the attribution of income of the CFC arises under section 456
    • section 160AFCB where the attribution of income of the CFC on a change of residence arises under section 457
    • section 160AFCC where the attribution of certain dividends paid by the CFC arises under section 458.

    Each time a credit is made to an attribution account - as explained in part 1 of this chapter - a corresponding credit must be made to an attributed tax account for the entity for which the attribution account is operated.

    Attributed tax account debits

    An attributed tax account debit must be made each time the attribution account entity pays a dividend. The attributed tax account debit is worked out using the following formula.

    Attributed tax account debit

    =

    (attribution debit ÷ attribution surplus)

    ×

    attributed tax account surplus

    In order to claim a credit for foreign tax paid on income that was previously attributed, the amount of attributed tax account debit must be verifiable. The attributed tax accounts for each of the relevant entities in respect of the taxpayer claiming the credit must be available or a credit will not be allowed.

    Example 12: Credit for foreign tax reduced by credits previously allowed

    Forco1 is a resident of an unlisted country and is a wholly owned subsidiary of Ausco. Forco1 derived income of $16,500 from sources in its country of residence, all of which is attributed to Ausco, and pays foreign tax of $1,500.

    Forco1 has distributable profits of $15,000
    ($16,500 − $1,500).

    It pays a dividend of $10,000 to Ausco in the following year, from which withholding tax of $1,500 was deducted - the net dividend is therefore $8,500.

    The dividend Ausco received is non-assessable non-exempt income Ausco is also entitled to a credit for foreign tax paid on the income which was previously attributed. The credit is reduced, however, to the extent a credit for foreign tax was allowed when the income was attributed to Ausco. The non-assessable non-exempt income is not included in working out the Australian tax payable on the foreign income and thus does not increase Ausco's foreign tax credit limit.

    The credit is worked out as follows:

    FTP = EP × DT) + (AEP × 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 income because the income has been previously attributed - that is, profits which have been previously attributed or distributable profits. In this example EP is 100% as the dividend is paid from previously attributed income

    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 - that is, $1,500 withholding tax

    AEP

    percentage that would be EP if the attribution account payment were reduced by any amount of that payment which is an exempting receipt of the Australian resident company. In this case, AEP is 100% because there is no exempting receipt

    UT

    foreign underlying tax credit allowable for the attribution account payment, other than CFC-type foreign tax - that is, foreign tax arising from laws that generally correspond with Australia's accruals measures

    -

    (D ÷ DP) × tax on distributable profits

    -

    (10,000 ÷ 15,000) × 1,500 = 1,000

    AT

    amount of the attributed tax account debit for the tax credit previously allowed on the attributed income that is equal to or less than AEP × UT. The attributed tax account debit is equal to

    -

    (attribution debit ÷ attribution surplus) × attributed tax account surplus

    -

    (10,000 ÷ 15,000) × 1,500 = 1,000

    Note: When $15,000 income was attributed to Ausco, Ausco would have credited an attribution account for Forco1 with $15,000. It would also have credited $1,500 tax to the attributed tax account for Forco1 - that is, tax for which a credit was allowed at the attributed stage. When the dividend was paid by Forco, this would have remained as an attribution surplus. The dividend of $10,000 is an attribution account payment.

    FTP = $1,500 + $1,000 − $1,000 = $1,500

    End of example
    Transfer of excess foreign tax credits

    A resident company that is a member of a company group may transfer an excess credit to another member of the group if:

    • there is 100% common ownership within the group
    • there is a shortfall of foreign tax credits in a class of income for the company receiving the transfer
    • the shortfall is for income of the same class as that for which there is an excess foreign tax credit in the company transferring the credit
    • both companies retain a record of the transfer showing the credit transferred.

    The transfer of an excess credit may include credit carried forward from five prior years as well as the current year. The transfer operates only for the following two classes of income:

    • passive income
    • other income - excluding offshore banking income.

    A company can transfer only an amount equal to the credit shortfall for that class of income - that is, the transferee cannot carry forward the transferred amount.

    Carry forward of foreign losses by companies

    An overall foreign loss for a class of assessable foreign income may be carried forward indefinitely and used to reduce a future year's assessable foreign income for that class.

    Losses incurred by a company before the 1990-91 income year can be carried forward only for seven years and are therefore no longer available.

    Claiming foreign tax credits on your foreign income

    To work out if you can claim a foreign tax credit on your foreign income, refer to How to claim a foreign tax credit.

    Last modified: 05 Dec 2006QC 17522