ato logo
Search Suggestion:

Part 3: Working out attributable income and the amount to include in your assessable income

Last updated 17 May 2020

This part explains how to work out the attributable income of a CFC. Your share of the attributable income is included in your assessable income.

Even if the CFC passes the active income test, you will still need to read on. Passing the test will eliminate many, but not all, types of attributed income and gains.

Summary of part 3

Section 1

General assumptions for working out the attributable income of a CFC

Section 2

General modifications to the law

Section 3

Modifications to the treatment of capital gains and capital losses

Section 4

Quarantining of losses

Section 5

Working out the net income of a partnership

Section 6

Trust amounts

Section 7

Reduction of attributable income because of interim dividends

Section 8

Relief from double accruals taxation

Section 9

How much is included in assessable income

Section 1: General assumptions for working out the attributable income of a CFC

Attributable income is included directly in your assessable income. It is not necessary to aggregate amounts of attributable income as you trace through a chain of CFCs.

Example 16: Attribution directly to taxpayer

Assume you wholly own a foreign company which, in turn, wholly owns another foreign company. Also assume that the first company has $300,000 attributable income and the second company has $200,000 attributable income.

You include an amount in your assessable income as follows:

Like this

Not like this

Do include $300,000 from the first company and $200,000 from the second in your income.

Do not include $200,000 from the second company in the income of the first company, and $500,000 income from the first company in your own income

Do include $300,000 from the first company and $200,000 from the second in your income

Do not include $200,000 from the second company in the income of the first company, and $500,000 income from the first company in your own income

 

End of example

Attributable income is taxable income

Attributable income is a hypothetical amount. It is the amount that would be the taxable income of a CFC, based on certain assumptions. These are explained below.

Assume the CFC is a resident taxpayer

To work out attributable income it must first be assumed that the CFC is both a resident of Australia and a taxpayer for the whole of a statutory accounting period. You can then work out the attributable income in the same way you work out the taxable income of a resident company. Amounts derived by a CFC from all sources will be taken into account because residents are taxable on their worldwide income and gains.

To distinguish the calculation of attributable income from a 'real' calculation of taxable income, the amounts used to work out attributable income are called notional amounts. Thus, attributable income is the amount by which the notional assessable income is greater than notional allowable deductions. Income that is not notional assessable income is notional exempt income.

The assumption that a CFC is a resident of Australia does not change the nature of the activities of the CFC - that is, events that occur in a foreign country will not be taken to have occurred in Australia.

Modifications in working out the attributable income of a CFC

In applying the Act to work out a CFC's hypothetical taxable income, you will need to read the Act as if certain modifications (dealt with later in this chapter) have been made to it.

In some cases, provisions are ignored because the application is not appropriate. In other cases, provisions have been replaced with similar provisions that are tailored to the way the attributable income is worked out.

In addition, provisions have been included that are not comparable to other provisions of the Act. These modifications are explained later in this part.

Some provisions of the Act clearly cannot apply when working out attributable income - for example, Part IV, which deals with the making of returns or assessments. Although these provisions of the Act are not specifically excluded from the calculation, for practical purposes they have no effect and can be ignored.

Accounting period is the year of income

Taxable income is worked out for a period called an income year. To apply the Act, the statutory accounting period of a CFC is assumed to be an income year. The particular income year referred to in working out attributable income will be the income year of the attributable taxpayer in which the statutory accounting period ends.

Example 17

Assume you are working out the amount to be included in assessable income for the year ending 30 June 2003 and the statutory accounting period of the CFC ended on 30 September 2002. The attributable income of the CFC for that statutory accounting period is to be worked out in accordance with the provisions of the Act that applied for the year ended 30 June 2003.

End of example

Work out attributable income separately

You must work out your attributable income for a CFC separately to other attributable taxpayers. Different taxpayers may work out different amounts of attributable income for a CFC - that is, the amount included in assessable income may be different for each attributable taxpayer even if they have the same attribution percentage in the CFC.

There are differences in working out attributable income depending on whether a CFC is a resident of a listed country or unlisted country.

Modifications for an unlisted country

The notional assessable income of a CFC includes only amounts that fall into specified categories. All other amounts are treated as notional exempt income.

The excluded amounts depend on whether the CFC passed or failed the active income test.

What if a CFC fails the active income test?

If a CFC fails the active income test, amounts that would be assessable if the CFC were a resident are included in attributable income to the extent they represent the following:

  • adjusted tainted income derived by the CFC directly
  • adjusted tainted income derived by the CFC indirectly as a partner in a partnership
  • trust amounts arising directly
  • trust amounts arising indirectly because the CFC is a partner in a partnership, or
  • FIF income derived by the CFC directly or indirectly as a partner in a partnership.

What if a CFC passes the active income test?

If a CFC passes the active income test, amounts that would be assessable if the CFC were a resident are included in attributable income to the extent they represent the following:

  • FIF income derived by the CFC directly or indirectly as a partner in a partnership
  • trust amounts arising to the CFC directly, or
  • trust amounts arising to the CFC indirectly because the CFC is a partner in a partnership.

These amounts are explained in section 5 and section 6. Any other income is notional exempt income.

Diagram 1: Amounts taken into account

Trust and FIF income derived directly or indirectly via a partnership are always included; tainted income derived directly or indirectly via a partnership is only included if the CFC fails the active income test; other income is not included.

What is adjusted tainted income?

Adjusted tainted income is based on the definition of tainted income used for the active income test. Broadly, it comprises amounts that are either passive income, tainted sales income or tainted services income.

The main difference in the definition of tainted income for the active income test and the definition for working out attributable income is that net gains are included in determining the active income test whereas the entire consideration on disposal of an asset is included when working out attributable income.

FIF income

The FIF rules apply in working out the attributable income of a CFC because of the assumption that the company is a resident of Australia. However, rules apply to prevent double taxation where a company FIF is also a CFC. These rules provide an exemption from the FIF measures for an interest held by a CFC in a company FIF if a share of the attributable income of the company FIF is included in your assessable income under the CFC measures for:

  • a statutory accounting period coinciding with the notional accounting period of the company FIF for FIF taxation purposes, or
  • statutory accounting periods ending and commencing during the notional accounting period of the company FIF.

For the purposes of the above tests, the Tax Office will accept that a share of the attributable income of a company FIF has been included in your assessable income if no amount was included solely because the company FIF had no attributable income. See Taxation Determination TD 93/167 - Income tax: foreign income - when is Foreign Investment Fund (FIF) income not included in: (a) assessable income of an attributable taxpayer of a Controlled Foreign Company (CFC); or (b) the notional assessable income of a CFC? for further assistance.

Amounts not included

Some amounts that would normally be assessable if derived by a resident company are treated as notional exempt income in working out the attributable income of a CFC. Certain exemptions are also disregarded when working out attributable income. These exemptions have been replaced with similar provisions that are tailored for working out attributable income.

Amounts taxed in Australia

Amounts that have been taxed in full in Australia are not included in notional assessable income. Amounts will be treated as taxed in full if they have been included in a CFC's assessable income - for example, income sourced in Australia from a CFC's branch in Australia would normally be included in the CFC's assessable income in Australia. Amounts that will not be considered fully taxed, although subject to Australian taxation, are:

  • amounts subject to interest or dividend withholding tax
  • certain shipping income, film and video tape royalties and insurance premiums.

Dividends that are franked under the imputation provisions are treated as notional exempt income.

Branch in a listed country

An amount of income or profits derived by a CFC in an unlisted country from carrying on a business through a permanent establishment (for example, a branch) in a listed country is excluded provided the amount is not eligible designated concession income (EDCI) in relation to any listed country.

Exclusion of dividends

Most dividends paid to a CFC by a foreign company are not included in the notional assessable income of the CFC. The only dividends you may need to include for a CFC that is resident in an unlisted country are dividends that are portfolio dividends paid to the CFC (see chapter 3).

Modifications for a listed country

Working out attributable income for a CFC resident in a listed country is similar to working out attributable income for a CFC resident in an unlisted country. However, more exemptions are provided for CFCs in listed countries.

What if a CFC fails the active income test?

If a CFC fails the active income test, amounts that would be assessable if the CFC were a resident are included in attributable income to the extent they represent the following:

  • EDCI that is adjusted tainted income
  • low-taxed third country income (only where it is of a kind specified in the Regulations)
  • trust amounts arising to the CFC directly that are not subject to tax in a listed country
  • trust amounts arising to the CFC indirectly because the CFC is a partner in a partnership, if the amounts are not subject to tax in a listed country, or
  • FIF income derived directly by the CFC or indirectly as a partner in a partnership.

Any other amounts are notional exempt income.

What if a CFC passes the active income test?

If a CFC passes the active income test, amounts that would be assessable if the CFC were a resident are included in attributable income to the extent they represent the following:

  • low-taxed third country income (only where it is of a kind specified in the Regulations)
  • trust amounts arising to the CFC directly that are not subject to tax in a listed country
  • trust amounts arising to the CFC indirectly because the CFC is a partner in a partnership, provided that the amounts are not subject to tax in a listed country, or
  • FIF income derived by the CFC directly or indirectly as a partner in a partnership.

Any other income is notional exempt income.

Diagram 2: Amounts taken into account

Other income is not included; tainted EDCI derived directly or indirectly via a partnership is only included if CFC fails the active income and de minimis tests; low-taxed third country income (of a kind specified in the Regulations) is always included unless the de minimis test is satisfied; trust and FIF income derived directly or indirectly via a partnership is always included - FIF income may be exempt if the de minimis test is satisfied.

See Exemption for small amounts for more information concerning the de minimis tests.

Adjusted tainted income

Adjusted tainted income is based on the definition of tainted income used for the active income test. Broadly, it comprises amounts that are either passive income, tainted sales income or tainted services income.

The difference in the definition of tainted income for the active income test and the definition for working out attributable income is that net gains are included in determining the active income test whereas the entire consideration on disposal of an asset is included when working out attributable income.

Low-taxed third country income

The notional assessable income of a CFC in a listed country includes amounts derived from sources outside the CFC's country of residence if the amounts are of a kind specified in the Regulations. This rule does not apply to amounts of eligible designated concession income - these amounts may be included if the CFC fails the active income test.

FIF income

The foreign investment fund (FIF) rules apply when working out the attributable income of a CFC because of the assumption that the company is a resident of Australia. However, rules apply to prevent double taxation in instances where a company FIF is also a CFC. These rules provide an exemption from the FIF measures for an interest held by a CFC in a company FIF if a share of the attributable income of the company FIF is included in your assessable income under the CFC measures for:

  • a statutory accounting period coinciding with the notional accounting period of the company FIF for FIF taxation purposes, or
  • statutory accounting periods ending and commencing during the notional accounting period of the company FIF.

For the purposes of the above tests, the Tax Office will accept that a share of the attributable income of a company FIF has been included in the assessable income of an attributable taxpayer if no amount was included solely because the company FIF had no attributable income. See Taxation Determination TD 93/167 for further assistance.

Amounts taxed in Australia

Amounts that have been taxed in full in Australia are not included in notional assessable income. Amounts will be treated as taxed in full if they have been included in a CFC's assessable income. Amounts that will not be considered fully taxed, although subject to Australian taxation, are:

  • amounts subject to Australian interest or dividend withholding tax, and
  • certain shipping income, film and videotape royalties and insurance premiums.

Dividends that have been franked under the imputation provisions are treated as notional exempt income.

Dividends not included

Most dividends paid to a CFC by a foreign company are not included. The only dividends you must include are dividends - other than non-portfolio dividends - paid to the CFC by a company that was a resident of an unlisted country (other than a section 404 country) when the dividends were paid.

These amounts will not be included in notional assessable income if the profits from which the dividends were paid have previously been attributed to you.

Exemption for small amounts

An exemption applies for CFCs in listed countries if the total of:

  • eligible designated concession income
  • low-taxed third country income (of a kind specified in the Regulations), and
  • FIF income is not greater than a threshold amount.

There is no similar exemption for a CFC that is a resident of an unlisted country.

Threshold amount

If the CFC has a gross turnover of $1 million or more, the threshold amount is $50,000 - that is, the exemption will only apply if the total of the amounts is $50,000 or less.

If a CFC has a gross turnover of less than $1 million, the threshold amount is 5% of the CFC's gross turnover - that is, the exemption will only apply if the sum of the amounts is less than or equal to 5%.

How does the exemption operate?

If the threshold is not exceeded, a CFC's eligible designated concession income, low-taxed foreign source income and FIF income are not included in the notional assessable income of the CFC. The general anti-avoidance provisions of the Act may apply where attempts are made to split income among a number of CFCs to take advantage of the exemption.






QC19443