The notional assessable income of a CFC includes only amounts that fall into specified categories. All other amounts are treated as notional exempt income.
The excluded amounts depend on whether the CFC passed or failed the active income test.
What if a CFC fails the active income test?
If a CFC fails the active income test, amounts that would be assessable if the CFC were a resident are included in attributable income to the extent they represent the following:
- adjusted tainted income derived by the CFC directly
- adjusted tainted income derived by the CFC indirectly as a partner in a partnership
- trust amounts arising directly
- trust amounts arising indirectly because the CFC is a partner in a partnership
- foreign investment fund (FIF) income derived by the CFC directly or indirectly as a partner in a partnership
- low-taxed third country income derived by a CFC in a limited-exemption listed country.
What if a CFC passes the active income test?
If a CFC passes the active income test, amounts that would be assessable if the CFC were a resident are included in attributable income to the extent they represent the following:
- FIF income derived by the CFC directly or indirectly as a partner in a partnership
- trust amounts arising to the CFC directly
- trust amounts arising to the CFC indirectly because the CFC is a partner in a partnership
- low-taxed third country income derived by a CFC in a limited-exemption listed country.
These amounts are explained in sections 5 and 6. Any other income is notional exempt income
Diagram of amounts taken into account
What is adjusted tainted income?
Adjusted tainted income is based on the definition of tainted income used for the active income test. Broadly, it comprises amounts that are either passive income, tainted sales income or tainted services income.
The main difference in the definition of tainted income for the active income test and the definition for working out attributable income is that net gains are included in determining the active income test whereas the entire consideration on disposal of an asset is included when working out attributable income.
Low-taxed third country income
The notional assessable income of a CFC in a limited-exemption listed country includes amounts derived from sources outside the CFC's country of residence if the amounts are not subject to tax in a listed country. This rule does not apply to amounts of adjusted tainted income - these amounts are included in attributable income if the CFC fails the active income test. The source of an amount is to be determined according to the laws of the CFC's country of residence.
FIF income
The FIF rules apply in working out the attributable income of a CFC because of the assumption that the company is a resident of Australia. However, rules apply to prevent double taxation where a company FIF is also a CFC. These rules provide an exemption from the FIF measures for an interest held by a CFC in a company FIF if a share of the attributable income of the company FIF is included in your assessable income under the CFC measures for:
- a statutory accounting period coinciding with the notional accounting period of the company FIF for FIF taxation purposes or
- statutory accounting periods ending and commencing during the notional accounting period of the company FIF.
For the purposes of the above tests, the Tax Office will accept that a share of the attributable income of a company FIF has been included in your assessable income if no amount was included solely because the company FIF had no attributable income. Refer to Taxation Determination TD 93/167 for further assistance.
Amounts not included
Some amounts that would normally be assessable if derived by a resident company are treated as notional exempt income in working out the attributable income of a CFC. Certain exemptions are also disregarded when working out attributable income. These exemptions have been replaced with similar provisions that are tailored for working out attributable income.
Amounts taxed in Australia
Amounts that have been taxed in full in Australia are not included in notional assessable income. Amounts will be treated as taxed in full if they have been included in a CFC's assessable income - for example, income sourced in Australia from a CFC's branch in Australia would normally be included in the CFC's assessable income in Australia. Amounts that will not be considered fully taxed, although subject to Australian taxation, are:
- amounts subject to interest or dividend withholding tax
- certain shipping income, film and video tape royalties and insurance premiums.
Dividends that are franked under the imputation provisions are treated as notional exempt income.
Branch in a broad-exemption listed country
An amount derived by a CFC in an unlisted country from carrying on business through a permanent establishment - for example, a branch - in a broad-exemption listed country is excluded, provided that the amount has been comparably taxed. An amount will be treated as comparably taxed if it is subject to tax in a broad-exemption listed country and is not eligible designated concession income.
Exclusion of dividends
Most dividends paid to the CFC by a foreign company are not included in the notional assessable income of the CFC. The only dividends you must include for a CFC resident in an unlisted country are:
- dividends that are not non-portfolio dividends - see chapter 3 - paid to the CFC
- non-portfolio dividends paid to the CFC by a non-CFC that was a resident of an unlisted country when the dividends were paid unless the dividends were paid from profits taxed in a listed country.
The only dividends you must include for a CFC resident in a limited-exemption listed country are:
- dividends - other than non-portfolio dividends - paid to the CFC by a company that was a resident of an unlisted country when the dividends were paid
- non-portfolio dividends paid to the CFC by a non-CFC that was a resident of an unlisted country when the dividends were paid, unless the dividends were paid from profits taxed in a listed country.
These dividends will not be included in notional assessable income if they are paid from profits which have previously been attributed to you.