• Non-portfolio dividends

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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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    Definition of non-portfolio dividends

    The concept of a non-portfolio dividend is central to the scheme of taxation of foreign dividends. A dividend is a non-portfolio dividend if five conditions are met. These are:

    • the dividend is paid to a company
    • the company receiving the dividend has a 10% or greater voting interest in the voting power of the company that paid the dividend
    • the voting power in a company is the maximum number of votes that can be cast on a poll at a general meeting of the company at which all matters that can be referred to such a meeting are decided
    • the shareholder is the beneficial owner of the shares that carry the required voting interest
    • the voting interest is held at the time the dividend is paid, and
    • there is no arrangement in force at that time by which any person is in a position - or may become in a position - to affect the voting right.

    Non-portfolio dividends received from a foreign company

    Non-portfolio dividends received by a resident company from a company that is a resident of a listed or unlisted country are non-assessable non-exempt income, because:

    • they are paid out of profits of a CFC that have been previously attributed to the resident company under the accruals tax measures (section 23AI), and/or
    • they are received from a foreign company (section 23AJ).

    Example 1

    Non-portfolio dividend paid partly from profits taxed on an accruals basis

    Resco, a resident company, wholly owns a CFC in a listed country. Attributable income of $10,000 from the CFC was included in Resco's assessable income for the 2003-04 income year.

    The CFC then paid a dividend of $25,000 to Resco on 1 August 2004.

    Resco can treat part of the non-portfolio dividend - $10,000 - as non-assessable non-exempt income under section 23AI, as it is a distribution out of previously attributed income.

    The $15,000 balance of the non-portfolio dividend can be treated as non-assessable non-exempt income under section 23AJ.

    Non-portfolio dividends received by a resident individual from a company that is a resident of a listed or unlisted country may also be treated as non-assessable non-exempt income if they are paid out of profits of a CFC that have been previously attributed to the resident individual under the accruals tax measures (section 23AI).

    Distributions of attributed income - maintaining records to support a claim that an amount is not assessable

    Attribution accounts

    To be able to work out what distributions out of attributed income of a CFC are non-assessable non-exempt income, you will need to keep certain records called attribution accounts.

    You must maintain an attribution account for:

    • each CFC from which income is attributed to you. This account will contain a record of
      • income attributed to you from the CFC
      • income distributed to you by the CFC which is treated as distributed from attributed income
       
    • each entity through which the income of that CFC is distributed to you. These entities may be
      • partnerships
      • trusts
      • companies that are not Part X Australian residents
       
    • each foreign investment fund (FIF) where an amount of FIF income is included in the notional assessable income of the CFC
    • each CFC that has changed residence from an unlisted country to Australia. Dividends paid by a company out of profits which were attributed to you prior to the company becoming a resident of Australia are non-assessable non-exempt income.

    These accounts are used to keep track of profits that have been taxed on an accruals basis so that you determine what amounts are non-assessable non-exempt income when you receive a distribution from those profits.

    Example 2

    Attribution accounts

    A resident company - Resco - owns all the share capital of a CFC that is a resident of an unlisted country. The CFC commenced business on 1 July 2002. For the 2002-03 income year, its only income was attributable income of $2,500. It paid no tax. On 1 August 2003, it paid a dividend of $2,500 to Resco.

    Attribution credit:

    Resco will open an attribution account for the CFC and credit it with $2,500 on 30 June 2003 because this amount was included at that time in Resco's assessable income under the CFC measures. The CFC is called an attribution account entity.

    Attribution debit:

    Resco will debit $2,500 to the attribution account for the CFC on 1 August 2003 because of the dividend paid by the CFC. The debit is referred to as an 'attribution debit'. The amount of the debit cannot be more than the credit balance in the account - called the 'attribution surplus' - at the time the debit is made. In this case, the debit could not be more than $2,500.

    The dividend received by Resco is non-assessable non-exempt income to the extent the dividend gave rise to an attribution debit. In this case, Resco can claim the whole amount of the dividend as non-assessable non-exempt income in the 2003-04 income year. The effect is that Resco only pays tax on the CFC's income when it is attributed, and not again when it is distributed.

    An attribution account maintained by you for a CFC is specific to you. This means that when you sell shares in a CFC, you cannot transfer the attribution account to the purchaser of the shares.

    Tracing the path of distributions of attributed income

    There are a number of ways you can receive amounts that were paid from profits that have previously been attributed to you. In general, these amounts will be distributed to you as a dividend. The dividend may be distributed to you directly, or indirectly through a chain of companies, partnerships, or trusts.

    When are attribution account payments made?

    To work out your exemption, you will need to know the date on which attribution account payments are taken to have been made.

    The following table sets out:

    • the types of attribution account payments that can occur
    • the entities that are treated as making and receiving an attribution account payment
    • the date on which the payment is taken to be made.

    Type of attribution payment

    Entity making payment

    Entity receiving payment

    Date payment made

    Dividend

    paying company

    shareholder

    on date dividend is paid

    Partner's share in the net income of a partnership

    partnership

    partner

    at the end of the income year of the partnership

    Share of the net income of a trust estate equal to the beneficiary's present entitlement

    trust

    beneficiary

    at the end of the income year of the trust

    Whole or part of the net income of a trust estate is assessable to the trustees. 99 or s. 99A

    trust

    trustee

    at the end of the income year of the trust

    Other distribution of accumulated trust income

    trust

    beneficiary

    income year in which the distribution was made

    What accounting entries should you make?

    As mentioned earlier, attribution accounts link distributions a CFC has made to you - either directly or through other entities - to the income of the CFC that has already been attributed to you. The link is made when you:

    • debit the attribution account of the entity that makes the payment, and
    • credit the account of the entity that receives the payment.

    Continue this process down a chain of entities until you receive a distribution made by the CFC.

    Example 3

    Distribution of attributed income

    A resident company - Resco - owns all of the shares of CFC1, which owns all of the shares of CFC2. The CFCs are residents of unlisted countries.

    CFC2 commenced business on 1 July 1997 and for the 2003 income year CFC2 derived $100 which was attributed under the CFC measures. The company paid no tax on the attributed amount. On 1 August 2003 the company paid its first dividend of $100 to CFC1, which paid the dividend to Resco on the same day.

    All the entities close accounts to 30 June 2004.

    CFC 2 pays a dividend of $100 to CFC 1, which pays a dividend of $100 to the resident company.

    Attribution accounts

    CFC2

    Debit

    Credit

    1 August 2003 dividend to CFC1

    $100

    30 June 2003 amount attributed to Resco

    $100


    CFC1

    Debit

    Credit

    1 August 2003 dividend to Resco

    $100

    30 June 2003 amount attributed to CFC2

    $100

    As the $100 attributed from CFC2 to Resco on 30 June 2003 was included in Resco's 2003 assessable income, and as the distribution Resco received on 1 August 2003 is no more than the income already attributed, Resco will treat the dividend as non-assessable non-exempt income.

    Proportionate interests in the CFC and in interposed entities

    A resident taxpayer might hold only a proportion - that is, less than 100% - of the interests in a CFC. That interest may be held directly or indirectly through interests in other foreign entities.

    If you hold an interest of less than 100% in a CFC, only a proportion of the attributable income of the CFC is included in your assessable income. The proportion to use depends on the interest - called the attribution percentage - you have in the CFC - see chapter 1.

    When tracing a distribution made by a CFC through a chain of interposed entities to yourself, note any proportionate interests you have in any of these entities.

    Your interest in the CFC - and in each interposed entity - is called your attribution account percentage. This interest may differ from your attribution percentage in an entity. The foreign entities in the chain along which the attributed income of the CFC is later distributed to you need not necessarily be controlled foreign entities.

    If you have both direct and indirect attribution account interests in an entity, then your attribution account percentage in that entity is the sum of the interests as follows:

    Attribution account percentage

    =

    direct attribution account interest

    +

    indirect account attribution interest

    How do you work out your direct attribution account interest in an entity?

    Your direct attribution account interest in an entity will depend on the type of entity it is.

    If the entity is a foreign company, your direct attribution account interest in the company is the same as your direct attribution interest in that company.

    If the entity is a partnership of which you are a partner, your direct attribution account interest is the percentage that you hold - and any percentage you are entitled to acquire - of either the partnership's profits or the partnership's property. If the two percentages differ, use the higher percentage as your direct attribution account interest.

    Your interest in a partnership is measured at the end of the accounting period in which the dividend is distributed through the partnership to you. The date of the dividend payment is called the test time. You should assume that you held the same interest in the profits and property of the partnership throughout the accounting period that you held at the test time. When working out your interest in the profits, use the amount of profit for the whole of the period.

    Example 4

    Attribution account interest in a partnership

    A resident company owns 100% of CFC 1 which owns a 50% interest in a partnership which owns 50% of CFC 2. CFC 2 pays a dividend to the partnership on 1 August 2004. Income is attributed to the resident company for 2003-04.

    It is necessary to measure the direct attribution account interest of CFC 1 in the partnership in order to measure the attribution account percentage of the resident individual in the partnership when the dividend is paid.

    If the entity is a trust of which you are a beneficiary, your interest in the trust is the percentage of either the income or property of the trust to which you are presently entitled - and any percentage you are entitled to acquire. If the two percentages differ, use the higher percentage as your attribution account interest.

    As in the case of an interest in a partnership, your interest in a trust is measured at the end of the accounting period of the trust in which the dividend is distributed through the trust to you. The date of this payment is called the test time. You should assume that you held the same interest in the income or property of the trust throughout the accounting period as you held at the test time. When working out your interest in the income, use the amount of income earned for the whole period.

    How do you work out your indirect attribution account interest in an entity?

    Your attribution account percentage in an entity is the sum of your direct and indirect interests in that entity. To work out your indirect interest in an entity - entity B - which is held through another entity - entity A - multiply your direct interest in entity A by entity A's direct interest in entity B.

    If there are more than two entities in a chain, continue the process of multiplication along the chain until you reach the entity in which you are measuring your indirect interest.

    Example 5

    Attribution account interest

    The resident company has a 60% direct interest in CFC 1, which has a 60% direct interest in CFC 2. In addition, the resident company has a direct attribution account interest in CFC 2 of 25%.

    36% indirect attribution account interest (60% x 60%)

    In this case, the resident taxpayer's attribution account percentage in CFC2 is 61% - that is, the taxpayer has a direct attribution account interest of 25% plus an indirect attribution account interest of 36%.

    Example 6

    Direct and indirect attribution account percentage

    The following example shows how to work out direct and indirect interests and the attribution account percentage in an entity.

    A resident company owns 50% of the share capital of CFC1 and CFC1 owns 50% of the share capital of CFC2. The CFCs are residents of unlisted countries. CFC2 commenced business on 1 July 2003. For the 2003-04 financial year the only income of CFC2 was attributable income of $100. On 1 August 2004, CFC2 paid a dividend of $50 to CFC1.

    The resident company owns 50% of CFC 1 which owns 50% of CFC 2. CFC 2 pays a $50 dividend to CFC 1. The resident company's attributable income is $25 (50% of $50).

    The resident company's attribution percentage in CFC2 is 25% - that is, 50% of 50%. The resident company's share of the attributable income of the CFC is therefore $25 - that is, 25% of $100.

    The dividend of $50 paid to CFC1 is an attribution account payment. When the dividend is paid to CFC1 it is necessary to measure how much of the dividend can be treated as a distribution of CFC2's previously attributed income. The amount is worked out by applying the attribution account percentage of the resident company in CFC1 to the dividend paid to CFC1.

    The direct attribution account interests will be as follows:

    Direct attribution account interest of the resident company in CFC1

    = 50%

    Direct attribution account interest of CFC1 in CFC2

    = 50%

    The indirect attribution account interest is obtained by multiplying the direct attribution interests along the chain. The indirect attribution account interest of the resident in CFC2 will be 25% (50% x 50%). Up to $25 of the dividend can therefore be treated as paid from previously attributed income.

    Example 7

    Attribution debit

    A resident individual has a direct attribution account interest of 80% in CFC1. CFC1 has a direct attribution interest of 90% in CFC2. The CFCs are resident in unlisted countries.

    CFC2 commenced business on 1 July 2003. For the 2004 income year, its only income was attributable income of $100. It paid no tax. On 1 August 2004 it distributed its 2004 income. On the same day, CFC1 distributed the full amount of the dividend it received from CFC2.

    Attribution accounts

    CFC2

    Debit

    Credit

    1 August 2004 dividend to CFC1 (note 2)

    $72

    30 June 2004 attributed income (note 1)

    $72

    CFC2

    Debit

    Credit

    1 August 2004 dividend to Resco (note 4)

    $72

    30 June 2004 dividend from CFC2 (note 3)

    $72

    Note 1

    This represents CFC2's attributable income of $100 multiplied by the resident's attribution percentage in CFC2 - that is, 80% (interest of the resident in CFC1) x 90% (interest of CFC1 in CFC2) x $100 = $72.

    Note 2

    This represents the resident's attribution account percentage in the dividend received by CFC1 - that is, 80% of the $90 dividend.

    Note 3

    The resident's attribution account percentage in the dividend received by CFC1 - worked out as in note 2.

    Note 4

    The dividend paid by CFC1 to the resident.

    The dividend of $72 received by the resident is non-assessable non-exempt income to the extent of the attribution debit that arose when the dividend was paid. As this debit was also $72, the entire dividend is non-assessable non-exempt income.

    When should you make a credit in an attribution account?

    You must make a credit in an attribution account if you include an amount in your assessable income because:

    • An amount of the CFC's income has been attributed to you - section 456. The credit amount will be the amount of the attributed income included in your assessable income under section 456 without any addition for foreign or Australian tax paid by the CFC on that income. You must enter the credit at the end of the CFC's statutory accounting period. Where a company is a CFC at the beginning of its statutory accounting period but ceases to exist during that period, the statutory accounting period is deemed to end immediately before the company ceases to exist. However, in this circumstance the credit arises at the beginning of the statutory account period.
    • An amount of FIF income is included in the attributable income of a CFC. In this case a credit arises in relation to the FIF equal to the amount included in your assessable income under section 456 that is referable to the FIF income. The credit that would otherwise arise for the CFC is reduced by the amount that arises for the FIF. If a FIF has an interest in another FIF and the calculation method applies to determine the FIF income of the first FIF, a credit will arise for the second FIF. The FIF income is based on the FIF income of the first FIF referable to the FIF income of the second FIF. In this case, the attribution credit for the first FIF is reduced by the credit that arises for the second FIF.
    • The CFC has both
      • ceased to be a resident of an unlisted country
      • become a resident of a listed country or of Australia.
       

    The amount of the credit will be the amount you included in your assessable income under section 457 without any addition for foreign or Australian tax the CFC paid on that amount. You must normally enter the credit at the time the CFC changed residence. You have the option to defer the credit, however, to the extent it relates to an amount included in attributable income under section 457 for an unrealised gain on a tainted asset.

    The credit may be deferred until the CFC pays a dividend out of profits arising from the subsequent disposal of the asset.

    You must also make a credit in an entity's attribution account if:

    • that entity receives an attribution account payment from another entity, and
    • the payment gives rise to an attribution debit for the paying entity.

    The credit amount will be the same as the attribution debit. You must enter the credit on the date of the attribution account payment.

    How are credits made when the taxpayer is an Australian partnership or Australian trust?

    Only the taxpayer who is actually liable to tax on the attributed income of the CFC can obtain an exemption from tax for distributions of that income.

    This means that if the income of a CFC is attributed to an Australian partnership or Australian trust, the credit you make in the CFC's account is for the partner of the partnership or for the trust beneficiary who is presently entitled to the trust income. If there is no such beneficiary, the credit arises for the trustee.

    The credit does not normally arise for the partnership or trust itself. There is an exception where the trust is a corporate unit trust, a public trading trust, an approved deposit fund, an eligible superannuation fund or a pooled superannuation trust.

    When should you make debits in attribution accounts?

    You must make an attribution debit in an entity's attribution account if that entity makes an attribution account payment to either:

    • an attributable taxpayer, or
    • another attribution account entity.

    There are, however, two rules you must observe. These are:

    • you can only make a debit if there is an attribution surplus in the attribution account at the time the attribution account payment is made - that is, the account balance must be more than nil
    • the debit cannot be more than the amount of the surplus in the account at the time.

    What is the amount of the attribution debit?

    There are again two rules to observe:

    • if an entity makes an attribution account payment to a resident taxpayer, the debit is the same as the amount of the payment
    • if the entity makes an attribution account payment to another entity, the debit will equal the resident taxpayer's attribution account percentage of the payment received by the second entity.
    Last modified: 05 Dec 2006QC 18000