Resident company with interest in CFC
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A resident company with a CFC 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 or 457 of the ITAA 1936 in relation to their CFC 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 section 456, 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
- 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 or at residence-change time for a section 457 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.
The tax that is deemed to have been paid by the resident company counts towards its tax offset. The section 456 and 457 amounts must be grossed up by the amount of the foreign income tax that is deemed to have been paid.
Austco owns 50% of the paid-up capital of Foreignco, a CFC. Foreignco's attributable income for the statutory accounting period is worked out as $1m, which takes into account a notional allowable deduction for foreign income tax that Foreignco has paid 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
- 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.
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 or 457. Where a resident company is a partner in a partnership or a beneficiary in an Australian trust with a CFC 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 or 457.
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 or 457. 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 interests held by the resident company through a partnership or Australian trust.
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.