Foreign income return form guide 2009-10
The Foreign income return form guide contains an explanation of measures relating to the taxation of foreign income derived by, or attributed to, Australian residents. For an explanation of the foreign income tax offset (FITO) measures see the Guide to foreign income tax offset rules (NAT 72923). The chapters in this guide are:
Attribution of the current year profits of a controlled foreign company (CFC)
Transferor trust and related measures
Taxation of foreign dividends and branch profits
Proving your assessment
Consolidation (consolidated income tax treatment for groups of entities)
Summary sheets at the end of this guide provide a quick reference to assist you in determining if and to what extent the measures apply to you. Where necessary, worksheets have also been provided to help you work out your tax liability.
Although the guide is quite detailed, it may not cover all the qualifications and conditions contained in the law that relate to your circumstances. For instance, it does not discuss the special rules that apply in working out attributable income for companies conducting banking or insurance activities. If you are not sure about the application of the law, phone 13 28 66.
The Australian Taxation Office (ATO) regularly receives information from foreign tax authorities under our tax treaties regarding foreign source income paid to (and the tax withheld from) Australian resident taxpayers. We are making increasing use of information-matching technology to verify the correctness of tax returns. Ensure that all information is fully and correctly declared in the relevant tax return.
Unless otherwise stated, references in this guide to provisions of the law are to provisions of the Income Tax Assessment Act 1936 (ITAA 1936).
Retrospective amendments to allow the reduction of consideration from the disposal of an asset
Tax Laws Amendment (Foreign Source Income Deferral) Bill (No. 1) 2010 was introduced to Parliament on 13 May 2010. When enacted, the changes will amend the income tax law to allow the consideration for the disposal of assets held on revenue account (as opposed to just interests held on capital account) to be reduced by associated foreign investment fund (FIF) and CFC income which has previously been attributed. These changes will have effect to tax assessments for the 2006-07 income year and any subsequent income years.
This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.
End of attention
Some abbreviations used in this publication without accompanying explanation are:
capital gains tax
controlled foreign company
Commissioner of Taxation
eligible designated concession income
foreign investment fund
Income Tax Assessment Act 1936
Income Tax Assessment Act 1997
Multiple entry consolidated group
Accruals taxation is the taxation of Australian residents on profits derived through a foreign company or trust as they are earned by the company or trust. Normally, the profits would not be taxed in Australia until they are distributed to the taxpayer as a dividend or trust distribution.
In this guide, the term 'the Act' means the Income Tax Assessment Act 1936, as amended. Unless specified otherwise, all references to legislation are to the ITAA 1936.
Active income test
The active income test ensures that small amounts of tainted income derived by a CFC are exempt from accruals taxation. An exemption is provided from accruals taxation for most amounts derived by a CFC if the test is satisfied.
Adjusted tainted income
Adjusted tainted income comprises passive, tainted sales and tainted services income.
Arm's length amount
This expression means, in relation to an actual transfer of property or services to a non-resident trust estate, the amount that the trustee of the non-resident trust might reasonably be expected to pay to the transferor for the property or services if the property or services had been transferred under an arrangement between independent parties dealing at arm's length with each other.
There are four parts to determining who are the associates of an entity. They deal with:
- associates of an individual
- associates of a company
- associates of a trustee
- associates of a partnership.
Part 1 - Associates of an individual
The associates of an individual - other than an individual acting in the capacity of a trustee - are:
- relatives of the individual - that is, the parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of the individual or of his or her spouse; and the spouse of the individual or of any other person mentioned above
- a partner of the individual or a partnership of which the individual is a partner
- the spouse, including de facto spouse, or child of a partner, where the partner is also an individual - other than an individual acting in the capacity of a trustee
- the trustee of a trust, where the individual or another entity that is an associate by virtue of this part benefits under the trust
- a company where that company is sufficiently influenced by
- the individual
- another entity that is an associate of the individual because of the rules in this part, or
- another company which is sufficiently influenced by the individual, or
- two or more of the above entities, or
- a company where the capacity to cast or control greater than 50% of the maximum votes at a general meeting of the company is held by
- the individual
- associates of the individual under the rules in this part, or
- the individual and the associates.
Part 2 - Associates of a company
Part 2 deals with the associates of a company - called company A. The associates of company A include:
- a partner of company A
- a partnership of which company A is a partner
- where a partner of company A is an individual otherwise than in the capacity of a trustee, the spouse or child of the partner
- the trustee of a trust where company A, or an entity that is an associate of company A, benefits under the trust
- an entity (entity B) that exerts sufficient influence over company A or holds a majority voting interest in company A. The influence may be exerted by entity B alone or together with other entities. The majority interest may be held by entity B alone or together with entities that would be associates of entity B if it were treated as company A
- a company (company C) that is sufficiently influenced by company A or in which company A holds a majority voting interest. The influence may be exerted by company A alone or together with other entities that are sufficiently influenced by company A or in which company A holds majority voting interests. The majority voting interests may be held by company A alone or together with entities that are associates of company A, and
- any other entity (entity D) that would be an associate of a third entity (entity E) which would be an associate of company A if the associates of entity E were determined by treating it as company A.
Majority voting interest
An entity holds a majority voting interest in a company if the following shareholdings amount to 50% or more of the maximum number of votes that can be cast at a general meeting of the company:
- the entity's direct shareholding in the company, and
- the entity's indirect shareholding in the company - for example, through a subsidiary.
An example is where a company has a wholly owned subsidiary that has a 75% voting interest in another company. Both the parent and subsidiary would be associates of the third company because the subsidiary has a majority voting interest in the third company and the parent has a majority voting interest in the subsidiary.
An entity is sufficiently influenced by a second entity or other entities if the entity is accustomed, under an obligation, or might reasonably be expected to act in accordance with directions, instructions or wishes of the second entity or other entities.
Part 3 -Associates of a trustee
The associates of a trustee are:
- any entity that benefits under the trust
- any entity that is an associate of an individual who benefits under the trust, or
- an entity that is an associate of a company, where the company is an associate of the trustee under either of the two above dot points.
Rules relating to public unit trusts
In applying the tests for associates, the trustee of a public unit trust is treated as if it were a company. Special rules apply to determine whether a public unit trust is sufficiently influenced by another entity or whether an entity has a majority voting interest in the public unit trust.
Generally, a public unit trust will be sufficiently influenced by another entity or entities where the trust is accustomed to act or is under an obligation to act or might reasonably be expected to act in accordance with the directions, instructions or wishes of the entity or entities.
The concept of a majority voting interest in relation to a public unit trust is determined by reference to the capital or income of the trust. If an entity is entitled to, or is entitled to acquire, 50% or more of the income or capital of the trust, the entity is considered to hold a majority voting interest in the public unit trust. Corresponding rules apply to test whether a group of entities have a majority voting interest in the trust.
Part 4 - Associates of a partnership
The associates of a partnership are:
- a partner in the partnership
- any entity that would be an associate of an individual, where the partner is an individual, or
- any entity that would be an associate of a company, where the partner is a company.
Amounts taxed on an accruals basis under the CFC, transferor trust or foreign investment fund (FIF) measures.
An attributable taxpayer is an Australian entity that has an associate inclusive control interest in a CFC of not less than the specified level.
The process by which income is taxed on an accruals basis under the CFC, transferor trust or FIF measures.
The attribution percentage is the pro rata share of a CFC's attributable income that will be attributed to a particular taxpayer's assessable income.
Australian 1% entity
An Australian 1% entity, in relation to a company or trust, is an Australian entity whose associate inclusive control interest in the company or trust is at least 1%.
An Australian entity is an Australian partnership, an Australian trust, or an entity - other than a partnership or trust - that is a Part X Australian resident.
An Australian partnership is a partnership of which at least one of the partners is an Australian entity. A foreign hybrid limited partnership with at least one Australian resident partner, and a foreign hybrid company with at least one Australian resident shareholder, may also qualify as an Australian partnership. For more information, see Foreign hybrids - information guide.
An Australian trust is a trust which at a particular time - or at a time in the 12 months before that time - has a trustee who is a Part X Australian resident or has its central control and management in Australia. It includes a corporate unit trust and a public trading trust as defined in the Act.
See Permanent establishment.
The CFC measures deal with the accruals taxation of Australian residents that have a controlling interest in a foreign company.
Controlled foreign company (CFC)
Broadly, a controlled foreign company is a company that is not a resident of Australia and is controlled by five or fewer Australian entities.
Designated concession income
Designated concession income is income or profits of a kind specified in the Income Tax Regulations 1936. Broadly, it refers to income or profits that are subject to a tax concession in a listed country. Details of the specified types of income and profits are set out in appendix 1 of this guide.
Discretionary trust estate
A discretionary trust estate is a trust estate for which:
- both of the following conditions are satisfied:
- a person - including the trustee - has a power of appointment or other discretion, and
- the exercise of, or the failure to exercise, the power or discretion has the effect of determining, to any extent, either or both of the following:
- the persons who may benefit under the trust
- how the beneficiaries are to benefit under the trust
- one or more of the beneficiaries under the trust have a contingent or defeasible interest in some or all of the capital or income of the trust estate
- the trustee of another trust estate that satisfies both conditions in the first dot point above benefits or is capable of benefiting under the first-mentioned trust estate.
Double taxation agreement
A double taxation agreement is an agreement made between the Australian Government and another government under the International Tax Agreements Act 1953.
Eligible designated concession income (EDCI)
Eligible designated concession income is designated concession income, in relation to a particular listed country, derived by an entity in an income year:
- that is not subject to tax in another listed country in a tax accounting period that ends before the end of, or commences during, that income year, or
- is subject to tax in another listed country in a tax accounting period that ends before the end of, or commences during, that income year but is also designated concession income in relation to that other listed country.
For the purposes of accruals taxation under the CFC measures, an eligible transferor is an Australian entity or a controlled foreign entity that has transferred property or services in certain specified circumstances to a non-resident trust.
If the transfer was to a trust which is a discretionary trust before the IP time, the transferor will be an eligible transferor if the transferor was able to control the trust at any time after the IP time and before the test time. An exception is made where the transfer was an ordinary business transaction for full value. The IP time is 7.30pm, by standard time in the Australian Capital Territory, on 12 April 1989.
If the transfer was made at or after the IP time, the transferor will be an eligible transferor unless the transfer was for full value.
If the transfer was made after the IP time to a trust that is a non-discretionary trust or a public unit trust at the test time, the transferor will be an eligible transferor if the transfer was made for no consideration or for inadequate consideration.
Financial intermediary business
A financial intermediary business is a banking business or a business whose income is principally derived from the lending of money.
Foreign investment fund (FIF)
A foreign investment fund is any foreign company or foreign trust - other than a deceased estate.
The FIF measures deal with the accruals taxation of Australian residents that have a non-controlling interest in a foreign company or foreign trust.
An income year - or year of income - is a 12-month period ending on 30 June, or a 12-month period ending on another date where the Commissioner of Taxation (Commissioner) has approved that other date under section 18 of the Act.
A foreign country that is declared by the Income Tax Regulations 1936 to be a listed country for the purposes of the CFC rules (see attachment A of appendix 1).
In relation to a non-resident trust estate, net income essentially means the total assessable income of the trust estate, worked out as though the trustee were an Australian resident and a taxpayer in respect of that income, less all allowable deductions, as provided by section 95 of the Act.
Non-discretionary trust estate
A non-resident trust estate is a non-discretionary trust estate if it is not a discretionary trust estate.
Broadly, non-portfolio dividends are dividends paid to a company where that company has a 10% or greater voting interest in the company paying the dividend.
Non-resident trust estate
A non-resident trust estate is a trust other than a resident trust.
Notional accounting period
A notional accounting period is the period used to determine the attributable income of a FIF or a foreign life assurance policy.
Notional assessable income
Notional assessable income is the assessable income of a CFC for the purposes of determining the CFC's attributable income.
Part X Australian resident
A Part X Australian resident is a resident of Australia who is not treated solely as a resident of a treaty partner country under a double taxation agreement between Australia and that country.
Passive income includes certain types of dividend, interest, royalty, annuity and rental income (section 446). It also includes gains on the disposal of assets that produce passive income or that are not used solely in carrying on a business.
A permanent establishment is widely defined in subsection 6(1). Generally, it can be described as a place through or at which an entity in Australia conducts its business in another country. A permanent establishment is also referred to as a 'branch' in this publication.
This term includes money, a chose in action, any trust estate and interest, right or power, whether at law or in equity, in or over property.
Section 404 country
A foreign country that is declared by the Income Tax Regulations 1936 to be a section 404 country for the purposes of the CFC rules (see attachment A of appendix 1).
This term includes any benefit, right, privilege or facility. Services include a right in relation to real or personal property as well as an interest in real or personal property. Services also include a right, benefit, privilege, service or facility that is provided or is to be provided:
- under an arrangement for, or in relation to:
- the performance of work, whether or not property was also provided as part of the work performed
- the provision of entertainment, recreation or instruction or the use of facilities for entertainment, recreation or instruction, or
- the conferring of benefits, rights or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar payment
- under a contract of insurance, including life assurance, or
- under an arrangement for, or in relation to, the lending of money.
Your 'spouse' includes another person (whether of the same sex or opposite sex) who:
- you were in a relationship with that was registered under a prescribed state or territory law,
- although not legally married to you, lived with you on a genuine domestic basis in a relationship as a couple.
Statutory accounting period
A statutory accounting period is the period used to determine the attributable income of a CFC.
Tainted income includes passive income, tainted sales income and tainted services income.
Tainted rental income
Tainted rental income includes rental income of a CFC where:
- land is leased to an associate or the rent is paid by an associate, or
- land is leased by a lessor company not resident in the same country as the land, or
- the land is leased by a lessor company which is resident in the same country as the land, and the lessor does not carry out substantial management activities in relation to the leased land.
It can also include rental income from particular leases on ships, aircraft or cargo containers.
Tainted sales income
Tainted sales income is income of a CFC from the sale of goods purchased from or sold to:
- an associate who is an Australian resident, or
- an associate who is not an Australian resident but carries on business in Australia through a permanent establishment.
Tainted services income
Tainted services income is, in very broad terms, income derived from the provision of services by a CFC:
- to an Australian resident, or
- in connection with a permanent establishment in Australia.
Transfer is defined in broad terms. In relation to the transfer of property, it includes a disposal of property by assignment, creation of a trust or any other manner or the provision of property. For the transfer of services, it includes such concepts as allow, confer, give, grant, perform or provide.
Transfer pricing rules
Transfer pricing rules are contained in Division 13 of Part III of the Act. This Division seeks to impose 'arms-length' consideration in relation to the acquisition or supply of property (including services and rights to use intangible property) between Australians and non-residents where the agreement effectively shifts profits from Australia.
A non-resident trust to which a resident has made, or is deemed to have made, a transfer of property or services (Division 6AAA of Part III).
Transferor trust measures
The transferor trust measures deal with the accruals taxation of Australian residents who have directly or indirectly transferred value to a non-resident trust. Broadly, the rules operate to accruals tax the undistributed income of the trust.
Underlying tax means the amount by which the section 23AI part of a non-portfolio dividend would have been greater if no foreign tax had been paid by the company paying the dividend on the profits out of which that dividend is paid.
An unlisted country means a foreign country which is not a listed country.
Note: Unless specified otherwise, all references to legislation are to the Income Tax Assessment Act 1936.
Last modified: 29 Jun 2010QC 22886