• Appendix 2 – Accruals taxation on the change of residence of a controlled foreign company (CFC) from an unlisted country to a listed country or to Australia

    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

    The attributable taxpayers in relation to a CFC are taxed under section 457 on the amount that relates to the period until the change of residence. Non-portfolio dividends received by the CFC during the period are not included.

    Change of residence of a CFC from an unlisted country to Australia

    If a CFC changes residence from an unlisted country to Australia, a resident taxpayer who is an attributable taxpayer of the CFC is taxable on the taxpayer’s attribution percentage of the adjusted distributable profits of the CFC. The amount of the distributable profits that is taxable to a resident taxpayer includes the adjusted tainted income of the CFC (excluding non-portfolio dividends) less any expenses relating to that adjusted tainted income.

    Example 1

    AustCo owns 75% of CFC1, a CFC that is resident in an unlisted country. CFC1 becomes a resident of Australia on 30 September 2006. CFC1 has a statutory accounting period of 1 July–30 June. For the period 1 July–30 September, CFC1 earned the following amounts of income:

    Portfolio dividends

    $10,000

    Non-portfolio dividends

    $15,000

    Tainted interest income

    $12,000

    Tainted services income

    $23,000

     

    $60,000

    CFC1’s adjusted tainted income is $45,000. It incurs expenses of $5,000 in earning the adjusted tainted income.

    CFC1’s adjusted distributable profits are $40,000.

    As a result, the amount attributable to AustCo under section 457 is 75% x $40,000 = $30,000.

    End of example

    Change of residence of a CFC from an unlisted country to a listed country

    If a CFC changes residence from an unlisted country to a listed country, a resident attributable taxpayer has to include in assessable income a share of the adjusted distributable profits of the CFC.

    The amount to be included is worked out in the same way as the amount that arises where an unlisted country CFC becomes a resident of Australia. However, a further adjustment is made to the CFC’s distributable profits; the CFC is treated as having disposed of all of its tainted assets for their market value at the time it changed residence. Accordingly, the distributable profits also include a net profit arising on the deemed disposal of those assets.

    Example 2

    AustCo owns 75% of CFC2, a CFC that is resident in an unlisted country. CFC2 becomes a resident of a listed country on 30 September 2006. CFC2 has a statutory accounting period of 1 July–30 June. For the period 1 July–30 September, CFC2 earned the following amounts of income:

    Portfolio dividends

    $10,000

    Non-portfolio dividends

    $15,000

    Tainted interest income

    $12,000

    Tainted services income

    $23,000

     

    $60,000

    CFC2’s adjusted tainted income is $45,000. It incurs expenses of $5,000 in earning the adjusted tainted income. The net profit (deemed) arising on CFC2’s tainted assets at 30 September is $100,000.

    CFC2’s adjusted distributable profits are $140,000.

    As a result, the amount attributable to AustCo under section 457 is 75% x $140,000 = $105,000.

    End of example

    Treatment of residence changes arising from changes to the lists of countries

    If an unlisted country CFC is treated as having changed residence to a listed country as a result of the unlisted country becoming listed, section 457 will not apply to this type of change in residence.

      Last modified: 04 Aug 2014QC 39785