Active income test

The active income test seeks to determine whether the amount of tainted income that an active business has derived is small enough to ensure that no mischief will be caused by exempting it from the controlled foreign company rules. The active income test does this by applying a formula to the company's gross income, which compares the company's gross turnover from tainted sources to its turnover from all other sources:


Gross tainted turnover
Gross turnover

The result of this calculation is known as the 'tainted income ratio'.

As long as a controlled foreign company's gross tainted income is less than 5% of its gross turnover from all sources, the active income test will be passed and none of the tainted income will be attributed.

If the company's tainted income ratio is 5% or higher, the active income test is failed and the tainted income may be subject to attribution.

There are also a number of other requirements that must be satisfied before the active income test can be passed. For example, the controlled foreign company must carry on business through a permanent establishment in its country of residence. For further information on these requirements see sections 432 and 433 of the ITAA 1936.

Remember that if a controlled foreign company passes the active income test, the controlled foreign company rules will not apply in most cases.

There are other types of income that can be subject to tax under the controlled foreign company rules irrespective of whether the company passes the active income test. These include income derived under the transferor trust rules.

If a controlled foreign company has passed the active income test, it will not generally have any attributable income for that year of income.

Example - active income test example 1

Example - active income test example 2

If a controlled foreign company from an unlisted country has failed the active income test, its attributable income will be income that is adjusted tainted income.

Example - active income test example 3

Further Information

For more detailed information, including conditions to be met, the application of the formula and examples refer to the Foreign income return form guide 2010-11.

End of further information
    Last modified: 21 Feb 2012QC 25356