• CGT concession for active foreign companies

    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

    For certain CGT events happening on or after 1 April 2004, a CFC may be able to reduce its capital gains or losses arising in relation to its interest in a foreign company, including a CFC.

    Requirements

    • The CFC holds shares in a company that is a foreign resident (excluding eligible finance shares and widely distributed finance shares)
    • a CGT event occurs in respect of the CGT asset being the share in the foreign company, and
    • the CFC has held a direct voting percentage of at least 10% in that foreign company for a continuous period of 12 months in the 24 months before the time of the CGT event.

    The gain or loss resulting from the CGT event is reduced by a percentage, calculated at the time of the CGT event, called the active foreign business asset percentage. The method for calculating the active foreign business asset percentage is explained below.

    Active foreign business asset

    An asset will be an active foreign business asset if, at the time of the CGT event, it is:

    • an asset included in the total assets of the foreign company
    • used or held ready for use by the foreign company in the course of carrying on a business, and
    • not a CGT asset that has the necessary connection with Australia.

    Goodwill of the foreign company is included as an active business asset but financial instruments (other than shares and trade debts) are not included.

    To be included in the total assets of the foreign company, the asset must be a CGT asset that is owned by the foreign company at the time of the CGT event.

    Active foreign business asset percentage

    You can work out the active foreign business asset percentage of a foreign resident company in relation to the CFC by choosing to do the calculation using either the market value method or the book value method. If you do not choose either method, you will not be eligible for the concession.

    Market value method

    The active foreign business asset percentage is worked out under the market value method using the following formula:

    market value of all active foreign business assets
    market value of the total assets

    Book value method

    The active foreign business asset percentage is worked out under the book value method using the following formula:

    average value of active foreign business assets
    average value of total assets

    The average value of the active foreign business assets is worked out using the following formula:

    value of the active foreign business asset at the end
    of the most recent period + the value of the asset of the previous period

    2

    The average value of the total assets of the foreign company are worked out in the same way.

    After applying the formula under either method, the active foreign business asset percentage is determined as follows:

    Result of calculation

    Active foreign business asset percentage

    < 10%

    0%

    10 - 89%

    The result of the calculation

    > 90%

    100%

    Foreign wholly-owned groups

    In certain circumstances where the determination of the active foreign business asset percentage involves a tier of foreign companies the calculation may be done on a consolidated basis for wholly-owned companies comprising or within that tier of companies. This removes the need to determine the active foreign business asset percentage for each individual company in the tier where those companies are considered part of the wholly-owned group. Rather, one calculation is performed for the top foreign company in the wholly-owned group that also covers all its 100% owned foreign subsidiary companies.

    Last modified: 05 Dec 2006QC 18000