Working out the foreign tax credit when income is attributed
If 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 - see 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.
Example 17: Foreign tax credit for attributed income
An Australian resident company AustCo has a 60% interest in a CFC, ForCo, a resident of an unlisted country
Profits from a foreign branch (not attributable income) |
$2,000 |
Tax paid in the foreign country on the foreign branch income |
$600 |
Income derived in an unlisted country (attributable income) |
$10,000 |
Tax paid in the unlisted country on all income (including foreign branch income) |
$1,200 |
AustCo is deemed to have paid the following amount of tax on the attributed income:
Tax paid on attributed income |
$1,000 |
Tax deemed paid by AustCo |
$600 |
AustCo must gross up its assessable foreign income by this amount. AustCo can claim a foreign tax credit for $600.
End of exampleCredits where dividends are deemed to have been paid to an Australian resident taxpayer
If a benefit provided by a CFC to a resident taxpayer is deemed to be a dividend paid to that taxpayer under section 47A, 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 would be so included apart from section 23AI, 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 if 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 160AFCB. The company is allowed a credit for the foreign tax and the Australian tax paid by the CFC on the attributed amount.
Working out a foreign tax credit when a dividend is paid from income that was previously attributed to an Australian resident company
A dividend paid out of income previously attributed to an Australian resident is non-assessable non-exempt income - see 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 non-portfolio dividend from attributed income. The credit for the underlying tax is limited to the amount by which the section 23AI part of the dividend would have been greater if no foreign tax had been paid.
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 any part of the payment that is non-assessable non-exempt income under section 23AJ |
UT |
Where the taxpayer is a company and the attribution account payment is a non-portfolio dividend, UT equals the amount by which the section 23AI non-assessable non-exempt part would have been greater if an attribution account entity had not paid foreign tax on its profits |
AT |
Amount of the attributed tax account debit arising from the payment of the dividend that is equal to or less than AEP × UT |
Example 18: Credit for foreign taxes on a dividend paid from profits attributed to an Australian company
Austco 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 Austco.
On 1 August 2004, Subco paid a dividend of $10,000 to Austco. The unlisted country levied dividend withholding tax at a rate of 10%.
The dividend received by Austco is non-assessable non-exempt income because it was paid from previously attributed income. At the attribution stage, Austco would have received a credit of $1,000 for foreign tax paid.
Even though the dividend is not included in Austco'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 Austco and taxed in Australia.
The method by which this credit is granted is as follows:
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 Austco.
The formula for working out the foreign tax credit Austco can claim is as follows:
FTP = (EP × DT) + (AEP × UT) − AT
This formula can be broken down as follows:
EP × DT |
= percentage of the dividend paid from previously attributed income × tax paid on the dividend = 100% × $1,000 (dividend withholding tax) = $1,000 |
AEP × UT |
= adjusted exempt percentage of the dividend × underlying tax paid on the dividend (excluding tax paid under a foreign accruals regime) = 100% × $1,000 = $1,000 |
AT |
= tax for which a credit was allowed when the income of the unlisted country CFC was attributed to Austco = $1,000 |
FTP |
= $1,000 + $1,000 − $1,000 = $1,000 |
In this example, when the income of $10,000 was attributed to Austco and a credit was given for $1,000, Austco would have opened accounts as follows:
Attributed income |
$10,000 |
Tax credited |
$1,000 |
When the dividend is received, Austco 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