The Australian controllers of a CFC are normally taxed under section 457 on the CFC's accumulated profits if the CFC changes residence from an unlisted to a listed country or to Australia. The profits are taxed at the residence change time because they are likely to be low taxed and can be distributed as exempt dividends after the CFC becomes a resident of a listed country.
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 distributable profits of the CFC. However, the amount of the distributable profits that is taxable to a resident taxpayer does not include:
- amounts that represent income which has been previously attributed or
- if the resident taxpayer is a company with a non-portfolio interest in the CFC, the exempting profits of the CFC.
Example 1: Attribution percentage
Ausco owns 75% of a CFC that is a resident of an unlisted country. The CFC became a resident of Australia on 1 July 2003. Its distributable profits at that time were $20,000.
The amount included in the assessable income of Ausco for 1997-98 was 75% of $20,000 - that is, $15,000.
End of example
Example 2: Exempting profits
Ausco owns 75% of a CFC that is a resident of an unlisted country. The CFC became a resident of Australia on 1 October 2003. Ausco's 2003-04 income year commenced on 1 October 2003, as did the statutory accounting period of the CFC. The accounting period of the CFC is accepted as its income year.
The distributable profits of the CFC at the time of change of residence were as follows:
Exempting profits |
$10,000 |
Other profits |
$20,000 |
On 1 October 2003, Ausco had an attribution surplus of $10,000 in its attribution account for the CFC.
The amount to be included in the assessable income of Ausco for 2003-04 was worked out as follows:
Distributable profits on 1 October 2003 |
$30,000 |
Take away exempting profits |
$10,000 |
Subtotal |
$20,000 |
Ausco's share (75% of 20,000) |
$15,000 |
Take away attribution surplus |
$10,000 |
Amount to be included in Ausco's income for 2003-04 |
$5,000 |
End of example
Tax consequences of a 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 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 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 3
Distributable profits
Ausco owns 75% of a CFC that is a resident of an unlisted country. The CFC became a resident of a listed country on 1 July 2003. Its distributable profits at the time of change of residence were $30,000. This includes an amount of $10,000 that would arise if all the assets of the CFC were disposed of at the time of the change of residence.
Ausco's assessable income will include the following amounts:
Distributable profits on 1 July 2003 |
$30,000 |
Take away exempting profits |
$10,000 |
Subtotal |
$20,000 |
Ausco's share (75% of 20,000) |
$15,000 |
Take away distribution surplus |
$10,000 |
Amount to be included in Ausco's income for 1997-98 |
$5,000 |
End of example
Treatment of residence changes arising from changes to the lists of countries
The operation of section 457 is modified where an unlisted country CFC is treated as having changed residence to a listed country as a result of the unlisted country becoming listed. In this case, section 457 will not apply to tax the retained profits of a CFC if the CFC was a resident of the newly listed country for three or more years before the country became listed.
Where a CFC has been a resident of a newly listed country for less than three years, section 457 does apply but only to the realised profits of the CFC. Gains on the disposal of assets held at the residence change time are included in the attributable income of the CFC when they are realised. These gains are included in attributable income even though the CFC may satisfy the active income test in the period when the gains are realised.