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  • Attributed foreign income

    Attention

    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

    If you have attributed foreign income, you may be entitled to a foreign income tax offset for foreign income tax, income tax or withholding tax paid by the controlled foreign company (CFC) or foreign investment fund (FIF) in which you hold an interest.

    Specifically, a foreign income tax offset may arise:

    In these circumstances, the attributable taxpayer is deemed to have paid foreign income tax in respect of their CFC or FIF interest, with the tax paid counting towards their tax offset. In their assessable income, the section 456, 457 and section 529 amounts must be grossed up by the amount of the foreign income tax that is deemed to have been paid.

    For more information on the tax treatment of attributed income, refer to the publication Attributed foreign income.

    Resident company with interest in CFC or foreign company FIF

    A resident company with a CFC or foreign company FIF interest can treat foreign income tax as having been paid by them in respect of their attributed income if the following conditions are met:

    • their assessable income includes an amount under sections 456, 457 or 529 of the ITAA 1936 in relation to their CFC or foreign company FIF interest
    • where the income is included in the company's assessable income under section 457, foreign income tax, income tax, or withholding tax has been paid by the CFC
    • where the income is included in the company's assessable income under sections 456 or 529, foreign income tax, income tax or withholding tax has been paid by the CFC on part or all of its notional assessable income for its relevant statutory accounting period or by the foreign company FIF on part or all of its notional income for the relevant notional accounting period
    • they have an attribution percentage of 10% or more, worked out at the end of the CFC's statutory accounting period for a section 456 amount, at residence-change time for a section 457 amount or at the end of the notional accounting period for a section 529 amount.

    If these conditions are met, the amount of foreign income tax they are deemed to have paid is worked out as follows:

    • for a section 456 amount, the sum of the foreign income tax, income tax or withholding taxes paid for the statutory accounting period of the CFC multiplied by the attributable taxpayer's attribution percentage (worked out at the end of the CFC's statutory accounting period)
    • for a section 457 amount, the sum of the foreign income tax, income tax or withholding taxes paid, to the extent that they are attributable to the section 457 amount included in the company's assessable income
    • for a section 529 amount, according to the following formula:

    Sum of all of the tax amounts for the notional accounting period × (entity's share of calculated profit ÷ FIF's calculated profit)

    where:

    • 'entity's share of calculated profit' is the share of the foreign company/trust's calculated profit for the notional accounting period to which the entity is entitled, as determined under the calculation method
    • 'FIF's calculated profit' means the foreign company/trust's calculated profit for the notional accounting period, as determined under the calculation method
    • The tax that is deemed to have been paid by the resident company counts towards its tax offset. The section 456, 457 and 529 amounts must be grossed up by the amount of the foreign income tax that is deemed to have been paid.

    Example 19: Foreign income tax paid by a CFC

    Austco owns 50% of the paid-up capital of Foreignco, a CFC. Foreignco's attributed income for the statutory accounting period is worked out as $1m, on which it has paid foreign income tax of $200,000. As Austco's attribution percentage is 50%, it includes $500,000 under section 456 in its assessable income for the income year in which the CFC's statutory accounting period ends.

    Austco meets the conditions for the tax-paid deeming rules to apply in relation to its interest in the CFC, namely that:

    • it is a resident company
    • foreign income tax has been paid by the CFC in respect of the amount included in its notional assessable income for the relevant statutory accounting period, and
    • it has an attribution percentage of 10% or more at the end of the relevant statutory accounting period.

    The amount of foreign income tax that Austco is deemed to have paid on its attributed income is the $200,000 paid by Foreignco multiplied by Austco's attribution percentage of 50% (that is, $100,000). Austco must also gross-up its assessable income by the $100,000 of foreign income tax that it is deemed to have paid.

    End of example

    Tax paid deeming rule applies only to a resident company directly subject to attribution

    The tax-paid deeming rule only applies to resident companies that are directly subject to attribution under section 456, 457 or 529. Where a resident company is a partner in a partnership or a beneficiary in an Australian trust with a CFC or foreign company FIF interest, the resident company is assessed on their share of the partnership or trust net income under sections 92 or 97 of the ITAA 1936 rather than under sections 456, 457 or 529.

    In this case, the partnership or Australian trust is the attributable taxpayer and it includes in its net income the relevant attribution amount under sections 456, 457 or 529. As the partnership or Australian trust is not a resident company and the resident company is not the attributable taxpayer, the tax-paid deeming rules cannot apply to the CFC or foreign company FIF interests held by the resident company through a partnership or Australian trust.

    Example 20: Tax-paid deeming rule applies only to a resident company directly subject to attribution

    Oz Co Pty Ltd, a Part X Australian resident, has a 50% interest in partnership X formed in Foreign Country 1. Partnership X wholly owns For Co, a company that is resident in Foreign Country 2. For Co is a CFC for Australian tax purposes.

    During the income year, For Co pays income tax under the laws of Country 2.

    Oz Co Pty Ltd, a Part X Australian resident, has a 50% interest in partnership X formed in Foreign Country 1. Partnership X wholly owns For Co, a company that is resident in Foreign Country 2. For Co is a CFC for Australian tax purposes. During the income year, For Co pays income tax under the laws of Country 2. As partnership X is a partnership for Australian income tax purposes, Oz Co’s assessable income will include its share of the partnership’s net income, calculated as if it were an Australian resident. As For Co is a CFC and partnership X is an attributable taxpayer by virtue of its being an Australian partnership for the purposes of Part X of the ITAA 1936, the partnership net income includes attributed income under section 456 of the ITAA 1936. In calculating For Co’s attributed income, a notional allowable deduction is allowed for the foreign income tax paid. However, the foreign income tax paid by For Co does not count towards Oz Co’s foreign income tax offset for the relevant income year because Oz Co is not treated, pursuant to section 770-135 of the ITAA 1997, as having paid the foreign income tax for the purposes of subsection 770-10(1) of the ITAA 1997.

    As partnership X is a partnership for Australian income tax purposes, Oz Co's assessable income will include its share of the partnership's net income, calculated as if it were an Australian resident.

    As For Co is a CFC and partnership X is an attributable taxpayer by virtue of it being an Australian partnership for the purposes of Part X of the ITAA 1936, the partnership net income includes attributed income under section 456 of the ITAA 1936.

    In calculating For Co's attributed income, a notional allowable deduction is allowed for the foreign income tax paid. However, the foreign income tax paid by For Co does not count towards Oz Co's foreign income tax offset for the relevant income year because Oz Co is not treated, pursuant to section 770-135 of the ITAA 1997, as having paid the foreign income tax for the purposes of subsection 770-10(1) of the ITAA 1997.

    End of example

    Foreign trust FIF interests

    Where an attributable taxpayer with a foreign trust FIF interest includes an amount in their assessable income under section 529, they can treat foreign income tax as having been paid by them on their attributed income if the following conditions are met:

    • the section 529 amount is worked out under the calculation method, and
    • foreign income tax, income tax or withholding tax has been paid by the foreign trust FIF on part or all of their notional income for the relevant notional accounting period.

    If the relevant conditions are met, the foreign income tax they are deemed to have paid is worked out using the same formula as for a foreign company FIF interest.

    Example 21: Foreign income tax deemed to have been paid

    Ab co has a 30% interest in Cd unit trust, a foreign trust FIF. Ab co works out its attributed income under section 529 using the calculation method. Cd's calculated profit or notional income for the relevant notional accounting period is $2m, after a notional deduction of $200,000 is allowed for foreign income tax actually paid by Cd unit trust on its notional income. Ab co includes an amount of $600,000 in its assessable income under section 529, being the notional income of Cd co, multiplied by Ab co's attribution percentage of 30%.

    Ab co meets the conditions for the tax-paid deeming rules to apply in relation to its interest in Cd unit trust, a foreign trust FF, in that:

    • it includes an amount in its assessable income under section 529 under the calculation method, and
    • foreign income tax has been paid by Cd unit trust on its notional income for the relevant notional accounting period.

    The foreign income tax that Ab co is deemed to have paid on its attributed income is worked out by multiplying $200,000, the tax actually paid by Cd, by Ab co's share of Cd unit trust's calculated profit (as worked out under the calculation method), divided by Cd unit trust's calculated profit of $2m. As Ab co's share of the calculated profit of Cd unit trust, worked out under the calculation method, is 30%, the amount of foreign income tax that it is taken to have paid is $200,000 multiplied by 30% (that is, $60,000). Ab co must also gross-up its assessable income by the $60,000 of foreign income tax that it is deemed to have paid.

    End of example

    Tax paid deeming rules apply only in respect of first-tier FIF interests

    The tax-paid deeming rules only apply to attributable taxpayers in respect of first-tier FIF interests. Where an attributable taxpayer has an interest in a FIF that in turn has an interest in another FIF, or an attributable taxpayer has an interest in a CFC that in turn has a FIF interest, the tax paid by the second-tier FIF does not come within the scope of the tax-paid deeming rules that apply to attributable taxpayers.

    Specifically, this is because the tax-paid condition only applies to foreign income tax actually paid by the first-tier FIF or CFC, not any foreign income tax paid by the second tier FIF. This is the case even though the notional income of the first tier FIF or CFC may include an amount in its notional income or notional assessable income that relates to its interest in the second tier FIF and the attributable taxpayer in turn includes the relevant attributed income amount that relates to the second tier FIF interest in its assessable income under sections 529 or 456.

    Example 22: Foreign income tax paid by a FIF

    A co has a 100% interest in a CFC, which in turns holds a 30% interest in a FIF. In working out the CFC's attributed income, $1m is included in its notional assessable income for income attributable to its FIF interest, worked out under the calculation method. Foreign income tax of $100,000 is paid by the FIF but the CFC pays no foreign income tax.

    As A co is the attributable taxpayer in relation to the CFC and an amount is included in its assessable income under section 456, it is only the tax paid by the CFC on its notional assessable income for the statutory accounting period that A co is deemed to have paid. As the foreign income tax of $100,000 is paid by the FIF, none of it is deemed to have been paid by A co.

    End of example

    Foreign income tax paid on NANE income

    Resident taxpayers are entitled to a foreign income tax offset for foreign income tax they pay on an amount that is non-assessable non-exempt (NANE) income of the taxpayer under sections 23AI or 23AK of the ITAA 1936.

    For more information on how the attribution account rules work in relation to attributable taxpayers with CFC or FIF interests, refer to chapter 1 of the Foreign income return form guide and chapter 4 of the Foreign investment fund guide.

    Only foreign income tax amounts that are paid in respect of income that is NANE under sections 23AI or 23AK count towards a tax offset. Also, the amount of foreign income tax taken to be paid on the distribution is not affected by the tax-paid deeming rules that apply to previously attributed income amounts included in the taxpayer's assessable income.

    Usually, the foreign income tax will be a withholding amount on a dividend distribution. In such a case, where the tax is paid by someone else under the law of a foreign country, the tax-paid deeming rules similarly apply to treat the attributable taxpayer as having paid the foreign income tax, providing it can be demonstrated that such tax is paid in respect of the section 23AI or 23AK amounts.

    The tax offset limit is increased by the relevant amount of foreign income tax paid in respect of section 23AI or 23AK amounts.

    Example 23: Foreign income tax paid on NANE income

    Lynette owns 100% of Forco paid-up capital. She has previously included in her assessable income $1m in respect of Forco under section 456. Forco subsequently declares and pays a dividend of $1m to Lynette, on which withholding tax of $100,000 is imposed.

    As the dividend amount does not exceed her attribution account surplus in relation to Forco, it is treated as her NANE income under section 23AI. Lynette is also deemed to have paid the $100,000 foreign income tax withheld (which counts towards her tax offset), as it is paid in respect of the dividend income.

    End of example

    Where a resident taxpayer is a partner in a partnership or a beneficiary of an Australian trust with a CFC or FIF interest, the partnership or trust is the attributable taxpayer. These entities include, in their net income, the relevant attributed amount under sections 456, 457 or 529. In turn, the partner or beneficiary includes, in their assessable income, their share of the partnership or trust net income that relates to the attributed amount.

    However, where a CFC makes a distribution to the partnership or trust out of profits that have been previously subject to attribution, the attribution account rules ensure that the resident partner or beneficiary with an interest in the partnership or trust will get the benefit of section 23AI or 23AK.

    Last modified: 05 Aug 2020QC 22894