Chapter 2: Key concepts for the FIF measures
This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.
End of attention
What is a FIF?
A FIF is any foreign company or foreign trust. [SUBSECTION 481(1)]
A company is a foreign company if it is not a resident of Australia. Whether a company is a resident of Australia is a question of fact which must be decided by reference to the definition of a 'resident of Australia' in subsection 6(1) of the Income Tax Assessment Act 1936 (the Act) and the residency provisions of any relevant double taxation agreement. [SUBSECTION 481(2)]
A trust estate is a foreign trust if it:
- is not an Australian trust and
- did not result from:
- a will, a codicil or a court order that varied or modified a will or a codicil, or
- intestacy or a court order that varied or modified the application of the law relating to the distribution of the estates of persons who die without leaving a will. [SUBSECTION 481(3)]
What is a FLP?
A FLP is a life assurance policy issued by an entity that was a non-resident of Australia at any time in the income year.
The FIF measures apply only to certain life policies. Four categories of policies are not included in the measures. They are:
- an Australian policy, as defined by section 110 of the Act , issued by an entity authorised under the Life Insurance Act 1995 to carry on life insurance business in Australia when it issued the policy
- policies which provide only life cover or life or permanent disability cover
- policies issued before 1 July 1992 which cannot, after that date, be cancelled, surrendered or redeemed and for which the terms have not been materially altered
- a contract of reinsurance of pure life cover between a resident insurer and a non-resident reinsurer. [SECTION 482]
What is an interest in a FIF?
An interest in a FIF is:
- a share in the company including an ordinary, a preference, a bonus, a deferred and a redeemable preference share other than an eligible finance share, or
- a legal document that confers an entitlement to acquire such a share-including an entitlement arising from an option or convertible note. [SUBSECTION 483(1)]
Your name does not have to be on a share certificate or share register of a foreign company as the legal owner of those shares. You will have an interest in a FIF if you have a beneficial interest in that FIF without the legal title to it. [SECTION 488]
An interest in a foreign trust is:
- an interest in the capital or income of the trust-including a unit in a unit trust, or
- a legal document that confers an entitlement to acquire such an interest-including an entitlement arising from an option or convertible note. [SUBSECTION 483(2)]
A share in a company is an eligible finance share if:
- the shareholder is an Australian financial institution or subsidiary
- the share was issued by the company in the ordinary course of business carried on by the shareholder, and
- the shareholder is not an associate of the company.
Section 327 of the Act has more detail.
What is an interest in a FLP?
You have an interest in a FLP if you have the legal title to the FLP. [SUBSECTION 483(3)]
Interests in a FIF or FLP subject to the FIF measures
The FIF measures apply to your interest in a FIF for a notional accounting period that ended in your income year if you:
- had an interest in a FIF at the end of the income year, and
- were a resident of Australia at any time in that income year. [SUBSECTION 485(3)]
The measures do not apply to an interest in a FIF if you dispose of that interest on or before 30 June. However, the normal provisions of the Act may apply to the interest-for example, capital gains tax.
The FIF measures apply to your interest in a FLP for a notional accounting period that ended in your income year if you:
- had an interest in a FLP at any time during that year, and
- you were a resident of Australia at any time in that year. [SUBSECTION 485(4)]
As a transitional arrangement, the measures did not apply to an interest in a FLP if you disposed of that interest before 30 June 1993. [SUBSECTION 485(5)]
The FIF measures will not attribute income to a dual resident of Australia and another country where Australia has agreed, in a double taxation agreement, to treat that resident solely as a resident of the other country.
Notional accounting period of a FIF
The FIF measures apply to an accounting period of a FIF called a notional accounting period. This provides a measurement point for the application of the FIF provisions. A notional accounting period is referred to for a variety of purposes including the application of the various methods of determining FIF income and for some of the exemptions. In particular, you must return attributable income from the FIF for the notional accounting period which ends in your income year.
The notional accounting period of a FIF will generally coincide with your income year. [SUBSECTION 486(2)]
If the period for which a FIF prepares its accounts is different to your income year and this period is not more than 12 months, then you may elect for the notional accounting period of the FIF to coincide with the period for which the accounts of the FIF are prepared. This election is irrevocable for as long as you have the FIF interest. [SUBSECTIONS 486(3) and (4)]
Gary acquires an interest in a FIF on 1 March 1996. The FIF prepares its annual accounts for the accounting period 1 April to 30 March and Gary elects to align the notional accounting period with the accounting period of the FIF.
He would have to return attributable income from the FIF for the period 1 March 1996, the date of acquisition, to 30 March 1996, the end of the elected notional period, in his return for the income year ended 30 June 1996. This is because the notional accounting period of the FIF ended during the Australian financial year for which Gary is lodging his tax return.
If the FIF prepared its annual accounts for the accounting period 1 January to 31 December each year and Gary elected to align the notional accounting period with the accounting period of the FIF, he would have to return attributable income from the FIF for the period 1 March 1996-the date of acquisition-to 31 December 1996-the end of the elected notional accounting period-in his return for the year ended 30 June 1997 as that is the year in which the notional accounting period ended.
End of example
The FIF legislation refers to an interest that is a share in a foreign company or an interest in the capital or income of a foreign trust. Where foreign investments are personally and directly owned by an Australian taxpayer, and not through a company or a trust, the legislation does not cover physical assets such as land, livestock, plant and debt instruments, or intangibles such as goodwill, patents and copyright. Other provisions of the income tax law apply to such investments.
Bare trustee or nominee arrangements
Where a trustee holds an interest in a FIF or FLP on behalf of a beneficiary who is absolutely entitled to the interest in the FIF or FLP, the beneficiary will be taken to hold the interest under the FIF measures. [SUBSECTION 484(1)]
Foreign trusts that are deceased estates are excluded from the FIF measures. For further information, see What is a FIF?
Note that other trust provisions of the Act may apply to deceased estates.
Last modified: 08 Jun 2005QC 27386