Part 8A of the regulations and associated schedules deal with the taxation of foreign source income. The provisions:
- declare those countries that are to be treated as broad-exemption or limited-exemption listed
- provide that Swiss Cantonal taxes are to be treated as Federal taxes
- specify when capital gains are taken to have been subject to tax for the purposes of the CFC measures, the transferor trust measures and the non-assessable non-exempt income treatment of branches of Australian companies in listed countries
- contain rules for determining whether an amount is designated concession income
- set out the accruals taxation laws of other countries that are recognised for the purposes of providing relief from double accruals taxation.
The regulations specify those countries which are to be treated as broad-exemption and limited-exemption listed. These lists are reproduced at attachment A.
Broad-exemption listed countries
Amounts taxed at full rates by countries on the list are exempt from accruals taxation and are not assessable on repatriation to Australia.
Limited-exemption listed countries
Amounts taxed at full rates by countries on the list are generally not assessable on repatriation to Australia. An exemption from accruals taxation will not be available, however, on the basis that an amount has been taxed in a limited-exemption listed country.
Swiss Cantonal taxes
Swiss Cantonal tax is to be treated as if it were an additional federal foreign tax of Switzerland.
Capital gains deemed subject to tax
Broadly, a gain will be taken to be subject to tax in a listed country if the gain was not subject to tax because of a rollover provision of a kind specified in the regulations. Rollover relief provides for the deferral of tax on a capital profit arising from the disposal of an asset.
Designated concession income
Normally, amounts derived in a broad-exemption listed country are exempt from accruals taxation. The exemption does not apply, however, for amounts of eligible designated concession income. Broadly, an amount is treated as designated concession income if it is concessionally taxed in a broad-exemption listed country. The amount will be treated as eligible designated concession income if it is not subject to full tax in any broad-exemption listed country.
What kinds of income or profits are specified as designated concession income?
The following types of income or profits are designated concession income:
- capital gains which are exempt from tax in a broad-exemption listed country
- interest, royalties, shipping income or offshore income that is subject to a reduction of tax in a broad-exemption listed country
- income or profits derived by an entity, where the entity is of a type specified in the regulations. A list of these entities is shown at attachment B.
Capital gains which are exempt from tax in a broad-exemption listed country
Capital gains are defined in the regulations as gains or profits of a capital nature that arise from the sale or disposal of an asset.
A capital gain will not be treated as non-assessable non-exempt for this purpose if the gain would have been taxed in a listed country if not for rollover provisions of a kind specified in the regulations.
Interest, royalties, shipping and offshore income
Definitions from the regulations
This term refers to interest and amounts in the nature of interest - for example, discounts - and amounts that would be assessable income under Division 16E of Part III of the Act if the entity deriving the amount were a resident of Australia.
The term royalties has the same meaning as it has in subsection 6(1).
This term includes rental income from the leasing of ships and containers and income derived from normal shipping operations - that is, from the carriage of goods, passengers, mail and livestock.
This term is defined in the regulations as income derived by an entity from carrying on an:
- offshore banking business
- offshore financial business
- offshore insurance business
- offshore investment business, or
- offshore re-insurance business.
When are interest, royalties and shipping income not treated as designated income?
Interest income and royalties are not to be regarded as designated concession income if they are taxed in a broad-exemption listed country on a withholding tax basis at the normal company tax rate that applies in the broad-exemption listed country.
Shipping income derived from sources outside a broad-exemption listed country is not designated concession income if it is taxed on a withholding tax type basis in the country where it originates at a rate which is not less than 5% of the gross amount of shipping income.
Income or profits subject to a reduction of tax
Amounts will be treated as subject to a reduction of tax if they are:
- not assessable
- subject to a concessional rate of tax
- not used as a basis for determining the taxable income, taxable profits or tax base, as the case may be, or in establishing the tax liability of an entity - for example, amounts derived by foreign sales corporations located in certain countries which are taxed on a cost-plus basis
- reduced other than for normal expenses or losses - for example, reduced on an arbitrary or notional basis in accordance with a statutory or administrative formula or
- subject to other tax benefits which would have the effect of reducing the amount of tax otherwise payable.
What does 'normal expenses and losses' mean?
Normal expenses and losses would include:
- capital or revenue amounts taxed in a broad-exemption listed country
- prior year capital or revenue expenses
- losses, incurred by a group company, which have been transferred to the CFC.
For the purposes of the above tests, a company is treated as belonging to the same company group as another company if one of the companies is a subsidiary of the other or if they are both subsidiaries of a third company. Broadly, a company is a subsidiary of another company if the other company holds 60% or more of the total rights to distributions of profits from the company.
Companies in a chain of subsidiary companies are treated as group companies.
A company which transfers losses to a CFC must also be a CFC and be resident in the same broad-exemption listed country as the CFC to which the losses were transferred. The following conditions must also be satisfied:
- the broad-exemption listed country must allow the transfer
- both companies must be CFCs
- the company that incurred the loss must have been a CFC in relation to the same attributable taxpayer during the period from when the loss was incurred until the end of the period in which the loss is offset.
Loss transfers from a group company to a branch of an Australian company in a broad-exemption listed country are also available if that country permits the loss transfer and the group company is a CFC resident in the broad-exemption listed country.
What are 'other tax benefits'?
A tax benefit includes a credit, rebate or other tax concession provided for income or profits, other than a credit or rebate for tax payable under a law of another country.