• Attribution accounts relevant to foreign tax credits for companies

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    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, or 
    • section 160AFCB where the attribution of income of the CFC on a change of residence arises under section 457.

    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

    x

    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 19

    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 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 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 non-assessable non-exempt income under section 23AJ.

    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) x tax on distributable profits

     

    (10,000/15,000) x 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 x UT. The attributed tax account debit is equal to

     

     Attribution debit 
    attribution surplus

    x

    attributed tax account surplus

     

    (10,000/15,000) x 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

    Last modified: 05 Dec 2006QC 18000