• ### Determining market value

Warning:

This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

End of attention

You determine market value by referring to the quoted market values for the FIF interests. Only quotations from an approved stock exchange will be accepted. See Appendix 1: Approved stock exchanges. [section 539]

If you have interests in certain FIFs that are not listed on an approved stock exchange, you may be able to use:

• a buy-back, offer or redemption price, or
• the price of an offer to purchase a particular FIF by an associate of that FIF.

The buy-back, offer or redemption price must be:

• publicly available
• offered to all persons having an interest of that class in the FIF
• worked out by reference to the market value of the assets of the company or trust, and
• representing an arm's length valuation of the interest on that day. [subsection 539(3)]

Worksheet 1: Market value method will help you to understand the following examples. The letters in brackets refer to the boxes on worksheet 1.

Example: FIF income included in assessable income

The opening value of a FIF interest at 1 July 2005 was HK\$50,000 (C).

At the end of the notional accounting period, 30 June 2005, the closing value of the interest was HK\$53,000 (A).

There were no brought forward losses or acquisitions or disposals during the notional accounting period (D).

On 30 April 2005, during the notional accounting period, there was a distribution - an interim dividend - of HK\$1,000 (B).

The FIF amount, as worked out in step 1 is:

[HK\$53,000 (A) + HK\$1,000 (B)] − [HK\$50,000 (C) − nil (D)] = HK\$4,000 (E)

This amount is converted to Australian currency, using the rate of exchange that applied at the end of the notional accounting period (30 June 2005). Assuming that the exchange rate is A\$1.00 = HK\$5.00, the FIF income is A\$800 - that is, HK\$4,000 divided by five.

The distribution of HK\$1,000 = A\$200 and is assessable under section 44 of the ITAA 1936.

Because the distribution received was a distribution to which subsection 530(1) applies, the FIF income of A\$800 (H) is reduced by the amount of the distribution: A\$200 (J). Therefore, your assessable income would include A\$600 FIF income. Write the dividend amount (A\$200) at (J). Subtract (J) from (H) and write the answer at (K).

End of example

Example: Unapplied previous FIF loss

The opening value of a FIF interest was HK\$50,000 (C) and, at the end of the notional accounting period (30 June) the closing value of the interest was HK\$45,000 (A).

There were no brought forward losses or acquisitions, disposals (D) or distributions (B) during the accounting period.

The decrease in market value - that is, the FIF amount - would be:

[HK\$45,000 (A) + nil (B)] − [HK\$50,000 (C) − nil (D)] = HK\$5000 (E)

This FIF loss of HK\$5,000 may be used to reduce gross FIF income in later years.

End of example

### Deemed rate of return method

You may use this method where you cannot apply the market value method and you do not elect to use the calculation method.

The following four steps will help you to complete Worksheet 2: Deemed rate of return method for FIFs.

#### Step 1: Group your interests

Apply the deemed rate of return method separately to each group of interests. Determine the group or groups of interests you hold in a FIF at the end of the FIF's notional accounting period. [section 544]

##### Meaning of a group of interests in a FIF

If you had only one interest in a FIF during the notional accounting period, that interest is a group. [subsection 544(2)]

Interests in a FIF that are of the same class - for example, two parcels of class A shares - and which you held during the same period, are treated as a group of interests. However, if interests are of different classes - for example, class A and B shares with different rights - treat each class as a separate group. Shares of the same class which are not held for the same period during the FIF's notional accounting period also form different groups. If you had two or more interests in a FIF that are not of the same group of interests, apply the deemed rate of return method separately to each group. [subsections 544(3), (4) and (5)]

#### Step 2: Working out the opening value - box A

This step determines the opening value of your interest in the FIF at the beginning of the notional accounting period.

##### Opening value where the interests in a FIF were acquired during a notional accounting period

If you acquired the interests in a FIF during the notional accounting period, the opening value of the interests is the consideration you paid or gave for the acquisition. [section 554]

##### Opening value where the deemed rate of return method applied in the previous year

Where you applied the deemed rate of return method to a group of FIFs in the immediately previous notional accounting period, work out the opening value of the FIF for the current period as follows:

• use the opening value of the group of FIFs at the beginning of the previous period
• add the FIF income for the previous notional accounting period
• take away any distributions made by the FIF in the previous notional accounting period. [section 551]

Distributions include any amount paid or credited or property distributed to you by the FIF, either as income or capital. They include the issue to you of further interests in the FIF in lieu of your entitlement to a payment by the FIF.

Distributions do not include the issue to you of further interests where you do not pay consideration or forgo payment in exchange for those further interests. [section 474]

##### Opening value where the market value method applied in the previous year

If the market value method applied in the immediately previous notional accounting period, the opening value for the current year is the market value of the interest in the FIF at the end of that period. [section 553]

##### Opening value where the calculation method or an exemption applied in the previous year

Where the calculation method or an exemption from FIF taxation applied or the operative provision did not apply in the immediately previous notional accounting period, use one of the following methods to decide the opening value for the current period.

• Where the FIF interest was quoted on an approved stock exchange at any time during the immediately previous notional accounting period, use the quoted price for the latest day of that period as the opening value for the current period.
• If the FIF interest was not quoted on an approved stock exchange on the last day of the previous notional accounting period, begin with the original consideration paid and apply the deemed rate of return notionally to every notional accounting period, from the date of acquisition up to the immediately previous notional accounting period. This determines an opening value for the current period. [section 552]
##### Previous year losses

When you switch to the deemed rate of return method, you cannot apply previous year FIF losses that you accumulated under either the calculation method or the market value method.

#### Step 3: Working out the FIF amount - box C

Once the opening deemed value has been decided, the FIF amount - that is, the movement in the value of the FIF during the notional accounting period - is worked out by applying the following formula.

(Opening value × deemed rate of return) × (number of days held ÷ 365)

Opening value means the amount worked out in step 2 above.

Deemed rate of return is the 'base' interest rate as 4%.

The base interest rate is the monthly average yield of the 90-day bank accepted bill rate [subsection 8AAD(2) of the Taxation Administration Act 1953]. The interest rate is published by the Reserve Bank of Australia every quarter. If two or more rates apply in the income year, use the weighted average of those rates.

Number of days held is the number of days in the notional accounting period in which you had the interests in the group.

#### Step 4: Determining the amount of FIF income to include in assessable income

The final step in applying the deemed rate of return method is to convert the FIF amount to Australian currency. [sections 556 and 557]

Use the rate of exchange that applied at the end of the notional accounting period to convert the FIF amount worked out in step 3 for each group of interests to the corresponding amount in Australian currency. If there is only one group of interests, the FIF income will be the amount converted into Australian currency. If there is more than one group, the FIF income will be the total of the FIF amounts. [section 556]

Include the FIF income in your assessable income subject to reduction by certain assessable distributions from the FIF [sections 529 and 557]. See Reduction of FIF income for distributed profits in chapter 6 for more information.

Example

On 1 January 2007, Harold acquired 2000 Class A shares and 1000 Class B shares in a Hong Kong company. Each class of shares is a different group.

The parcel of Class A shares had a value of HK\$200,000 and the parcel of Class B shares had a value of HK\$100,000. Harold worked out his FIF income under the deemed rate of return method as follows:

Opening value × 9.62% (see Note) × (number of days held ÷ 365)

 Class A shares: HK\$200,000 × 9.62% × (181 ÷ 365) FIF amount: HK\$9,541 Class B shares: HK\$100,000 × 9.62% × (181 ÷ 365) FIF amount: HK\$4,770

The FIF amounts for the groups are HK\$9,541 and HK\$4,770, respectively.

The opening deemed values for the following notional accounting period would be HK\$209,541 for the Class A shares and HK\$104,770 for the Class B shares.

Note: 9.62% = weighted average of two quarterly rates
[(9.63 × 90 ÷ 181) + (9.61 × 91 ÷ 181)]

Harold acquired 1000 Class C shares on 1 October 2005, 92 days into the FIF's notional accounting period, for HK\$240,000. He applied the deemed rate of return method for the group constituted by the Class C shares as follows:

Opening value × 9.62% (see Note 2) × (number of days held ÷ 365)

 Class C shares: HK\$240,000 × 9.62% × (273 ÷ 365) FIF amount: HK\$17,269

Assume that the exchange rate is A\$1.00 = HK\$5.00. The FIF income for the three groups of A, B and C class shares is the sum of:

 Class A shares: HK\$9,541 ÷ 5 = A\$1,908 Class B shares: HK\$4,770 ÷ 5 = A\$954 Class C shares: HK\$17,269 ÷ 5 = A\$3,454 Total FIF income A\$6,316

Harold included A\$6,316 in his assessable income. [section 529]

Note 2: 9.62% = weighted average of three quarterly rates
[(9.62 × 92 ÷ 273) + (9.63 × 90 ÷ 273) + (9.61 × 91 ÷273)]

End of example

### Calculation method

#### Overview

To use the calculation method, you must work out the calculated profit or calculated loss of a FIF for a notional accounting period.

You will need access to detailed information about your FIF interest. The calculation method uses a simplified version of Australian taxation law to work out the profit of your FIF which is then attributed to you and included in your assessable income. The calculation method applies to foreign companies and foreign trusts. [sections 580 and 582]

If there is a calculated loss, you may carry your share forward and take it into account for subsequent notional accounting periods.

If there is a calculated profit, you must determine your share. Do this by multiplying the calculated profit of the FIF for the notional accounting period by your percentage interest in the FIF at the end of that period. Work out the calculated profit or loss in the currency of the FIF accounts and then convert the amount to Australian currency at the exchange rate that applies for the last day of the notional accounting period. Include the resulting amount in your assessable income for the income year in which the notional accounting period of the FIF ends. [sections 558, 559 and 572]

#### Election to use the calculation method

You can use the calculation method only if you elect to do so. You must then apply it to all interests in a particular FIF. If you subsequently use another method for the same FIF interests, you cannot use the calculation method again for that FIF or any interests you acquire in that FIF in the future. [section 535]

If you make an election to use the calculation method, you must also elect to use the period for which the FIF makes out its accounts as its notional accounting period. [subsections 486(3) and 535(5)]

The first notional accounting period of the FIF for which you use the calculation method may be for a shorter period than the period for which the FIF makes out its accounts. In this case, you would work out FIF income for the entire period for which the FIF makes out its accounts and apportion the resulting FIF income on a time basis.

#### Working out the calculated profit or loss of the FIF

To determine the calculated profit or calculated loss of a FIF, first work out the notional income of the FIF.

The second step is to work out the notional deductions for that notional income. If the notional income is greater than the notional deductions, the difference is the calculated profit of the FIF for the notional accounting period. If the notional income is less than the notional deductions, the difference is the calculated loss of the FIF for the notional accounting period. [section 559]

##### Step 1: Determining the notional income of a FIF - box A

The notional income of a FIF takes into account the gross income and profits or gains of a capital or revenue nature that the FIF derives during its notional accounting period. [subsection 560(1) and section 566]

It includes:

• amounts grossed up for foreign or Australian taxes paid by the FIF
• net income from partnerships
• discounted amounts or deferred interest from securities treated as derived in the FIF accounts, and
• income, profits or gains reinvested, accumulated, capitalised, carried to a reserve, sinking fund, insurance fund or similar fund on behalf of the FIF. [sections 560 to 566]

Profits of a revenue nature and gains of a capital nature are included in notional income when 'derived' by the FIF, usually as a net amount. The net amount does not include any amount previously taken, or subsequently to be taken, into account because an amount cannot be deducted twice. [subsections 560(2) and 574(2)]

If a first tier FIF has an interest in another FIF or a FLP - a second tier FIF - during the notional accounting period of the first tier FIF that ended in your income year, an amount of second tier FIF income will be included in the notional income of the first tier FIF. [section 576]

When applying the FIF measures to the second tier FIF, you can elect to use the calculation method to determine its FIF income only if you have elected to use the calculation method for the first tier FIF. The income for the second tier FIF is worked out as though the first tier FIF were a resident but with only the exemption for interests in certain FIFs resident in the United States being granted. No other exemptions available to Australian residents are allowed. [section 575]

If you do not make an election to use the calculation method for the second tier FIF, you must work out the FIF income arising from the second tier FIF using the market value method or the deemed rate of return method. [section 535]

If you elect to use the calculation method for a second tier FIF, the notional income of the second tier FIF will include FIF income from a FIF or a FLP - a third tier FIF - in which the second tier FIF has an interest. [section 579]

However, you cannot use the calculation method for a third tier FIF. The notional income of the second tier FIF includes FIF income from a third tier FIF using either the market value method or the deemed rate of return method. [subsection 577(2)]

The notional income of a FIF for a notional accounting period which ended during the income year does not include any dividend or distribution paid to the FIF by another FIF. [section 564]

##### Step 2: Determining the notional deductions - box B

Most expenses of a FIF are deductible in the notional accounting period in which they are incurred, provided that those expenses relate to income and profits or gains of a revenue or capital nature that has been included when working out the notional income of the FIF. [sections 567 to 574]

Notional deductions include:

• expenditure in acquiring trading stock except acquisition costs of securities, interest in shares, trusts or partnerships which are brought to account on a revenue basis
• the FIF's share of a partnership loss where the FIF was a partner at the end of the partnership's accounting period that ends in the notional accounting period of the FIF
• calculated unapplied losses of the FIF for previous periods used in the order in which they were incurred
• Australian and foreign taxes paid by the FIF that relate to the notional income of the FIF for the relevant period
• amortisation of acquisition costs of plants and articles and industrial properties based on the effective life of such items but only if such amounts are included in the FIF's accounts
• net capital losses but not
• amounts previously allowed as a notional deduction
• amounts that would have been allowed as a notional deduction if the calculation method had been applied but was not because, for example, an exemption applied.

Notional deductions do not generally include:

• acquisition costs - other than for incidental costs and trading stock
• debt repayments
• expenditure previously allowed as a notional deduction, and
• amortisation of acquisition of property except plant and equipment, licences and patents.

#### Working out the attribution percentage for interests in a FIF

##### Attribution percentage for interests in a foreign company - boxes E and G

The attribution percentage for your FIF interest is equal to the percentage that you hold or were entitled to acquire at the end of the notional accounting period in:

• the total paid-up share capital of the company
• the total rights to vote or to participate in decision making in relation to
• distributions of profit or capital of the company
• the constituent document of the company
• a variation to the share capital of the company, or

• the total rights to distributions of profit or capital on winding-up, or at any other time.

The FIF attribution percentage will be the greatest of these percentages if different percentages arise under the different types of rights described above. [section 581]

Where Australian residents hold or were entitled to acquire attribution percentages which together are greater than 100% for a particular FIF, the total percentage is reduced to 100% and each individual taxpayer's attribution percentage is reduced proportionately. [subsection 581(4)]

##### Attribution percentage for interests in a foreign trust - boxes E and G

When all the income, profits or gains - referred to below as income - derived by a foreign trust during a notional accounting period consist of either or both:

• income to which beneficiaries were presently entitled, and
• income to which beneficiaries were not presently entitled, but which was distributed to beneficiaries during, or within two months after the end of, the notional accounting period,

then the attribution percentage is the percentage of the total income derived by the trust to which you were presently entitled or were not presently entitled but which was distributed to you during, or within two months after the end of, the notional accounting period.

If the income, profits or gains of a foreign trust are not fully distributed or allocated to beneficiaries, your attribution percentage will be equal to the greater of the percentages of your interest in or entitlement to acquire:

• the income of the trust, or
• the capital of the trust. [subsection 582(7)]

Where the total of all Australian residents' attribution percentages is greater than 100%, each individual taxpayer's attribution percentage is reduced proportionately so that the total is 100%. [subsection 582(6A)]

#### Working out the amount to include in assessable income

To work out the FIF income, multiply the calculated profit of a FIF for a notional accounting period by your attribution percentage in the FIF at the end of that period. [sections 580 and 582]

Taxpayer's share of FIF income = calculated profit × attribution percentage

The FIF income is included in your assessable income subject to reduction by certain assessable distributions from the FIF. See Chapter 6: Avoiding double taxation for more information.

##### Part-year holding

The calculation method allows for an interest in a FIF that you acquired during a notional accounting period. Modify the above formula by multiplying it by the proportion of the period (in days) that you held the interest.

Example

Agostino acquired a 1% interest in a FIF on 1 January 2007. He uses the calculation method and accordingly elects for the notional accounting period of the FIF to be the same as the period for which the FIF makes out its accounts - that is, 1 July to 30 June each year. The calculated profit of the FIF for the period 1 July 2006 to 30 June 2007 is A\$10 million. Agostino would include A\$49,589 in his assessable income, worked out as follows:

A\$10 million × 1% × (181 ÷ 365) = A\$49,589

End of example