• Working out underlying tax

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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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    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 X EUT
       DPE
     

     

    FUT

    foreign underlying tax deemed paid

    D

    the amount of the dividend

    UT

    the amount of the underlying tax

    DP

    the number of whole dollars in the distributable profits out of which the dividend was paid

    Example 14

    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 x 5,000)
    50,000

     

    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

    amount of underlying tax paid that relates to the distributable profits out of which the dividend was paid

    FUT1

    amount of foreign tax deemed to have been paid by the previous calculation in relation to the dividend series

    DP

    number of whole dollars in the distributable profits out of which the dividend was paid

    Example 15

    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

    50,000

    Dividend paid to Ausco

    10,000

    Foreign tax paid

    5,000

    Forco2

     

    Distributable profit

    20,000

    Foreign tax paid on those profits

    2,000

    Dividend paid to Forco1

    5,000

    Forco1 is deemed to have paid foreign tax on the dividend of

    500

    5,000 x

    (2,000 + 0)
    20,000

     

    Ausco is deemed to have paid foreign tax on the dividend of

    1,100

    1,000 x

    (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 - see 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 - see 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
     

    X   100

     

    EPP

    exempting profits percentage

    EP

    exempting profits

    DP

    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 X UT
      DP  
     

     

    D

    Amount of the dividend that is not an exempting receipt

    UT

    amount of underlying tax relating to the amount of the distributable profits attributable to the attribution surplus - that is, UT = AST + (GT x ASP)

    AST

    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

    GT

    amount of underlying tax relating to both attributed profits - in respect of the attribution surplus - and the remainder of the distributable profits

    ASP

    percentage of the general tax that may reasonably be related to the part of distributable profits relating to that attribution surplus

    DP

    amount of distributable profits relating to an attribution surplus existing immediately before the dividend was paid

    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 X UT
      DP  

     

    D

    Amount of the dividend that is not an exempting receipt

    UT

    Amount of underlying tax relating to the distributable profits, worked out as follows:

    UT = N - ET + (GT x N-EP)

    N-ET

    amount of the underlying tax relating exclusively to non-exempting profits - that is, profits other than exempting profits

    GT

    Amount of underlying tax that relates to both exempting and non-exempting profits

    N-EP

    percentage of GT that may reasonably be related to non-exempting profits of the Australian company and that form part of the distributable profits

    DP

    number of whole dollars in the non-exempting portion of the distributable profit out of which the dividend was paid

    Example 16

    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

    27,000

    Tax paid in the unlisted country

    2,500

    Tax paid by the branch in the listed country - no tax credit was allowed for this tax in the unlisted country

    4,000

    Distributable profits that are exempting profits

    10,000

    Distributable profits that are other profits

    20,000

    The dividend is treated as paid proportionately from exempting profits and other profits.

     

    $

    Dividend paid out of exempting profits

    9,000

    10,000 x 27,000
    30,000

       

    D

    dividend that is not an exempting receipt
    (27,000 - 9,000)

    18,000

    UT uses the following components:

     

    N-ET

    underlying tax that relates exclusively to the non-exempt portion of distributable profits

    nil

    GT

    amount of underlying tax which relates to both exempting and non-exempting profits

    2,500

    N-EP

    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.

     

    UT =

    N - ET + (GT x N - EP)

    1,666.67

     

    (nil + (2,500 x 2/ 3))

     

    DP

    number of whole dollars in the non-exempting portion of the distributable profit out of which the dividend was paid

    20,000

    Underlying tax is therefore

    1,500

     

    18,000
    20,000

    x    1,666.67

     
    Last modified: 05 Dec 2006QC 18000