Whether branch profits are treated as non-assessable non-exempt income depends on whether the branch is in a broad-exemption or limited-exemption listed country. If you are applying the exemption for amounts derived by a branch before 1 July 1997, treat countries on the former list of comparable tax countries - refer to attachment A of appendix 1 - as broad-exemption listed countries. Branches in other countries were not eligible for the exemption.
Non-assessable non-exempt income treatment
Branches in broad-exemption listed countries
In general, non-assessable non-exempt income treatment is available for income derived by a resident company through a branch in a broad-exemption listed company if the income:
- is from carrying on a business in the country
- is subject to tax in the country on a current basis and
- is not eligible designated concession income.
You must test each item of income individually against these criteria to see if it is non-assessable non-exempt income.
Branches in limited-exemption listed countries
Non-assessable non-exempt income treatment is generally available for income derived by a resident company through a branch in a limited-exemption listed country if the income:
- is from carrying on a business in the country
- is subject to tax in the country on a current basis
- is not adjusted tainted income or is adjusted tainted income and the branch satisfies an active income test.
The same concept of adjusted tainted income is used for this purpose as that used in determining the attributable income of a CFC. The following modifications apply, however, in determining the adjusted tainted income of a branch:
- the passive income of a branch conducting life assurance activities is not reduced under subsection 446(2)
- a branch and its Australian head office are treated as separate legal entities for the purpose of determining whether the branch has derived tainted sales income
- branches of Australian financial institutions (AFIs) are provided with an exemption for banking income broadly consistent with the exclusion from accruals taxation available under the CFC measures for AFI subsidiaries
An active income test concession is provided to allow branches in limited-exemption listed countries to derive up to 5% of gross turnover as tainted income and still obtain non-assessable non-exempt income treatment under section 23AH for income amounts.
Broadly, this active income test is the same as that for CFCs. The following modifications are made to the test for branches:
- the only amounts taken into account are those derived through the branch
- the year of income of the company with the branch is used for the purposes of the test
- those conditions of the active income test relating to the existence and residency of a CFC do not apply because they are not relevant to branches
- the modifications to the adjusted tainted income of a branch referred to above also apply in determining the adjusted tainted income of the branch for the purposes of the active income test.
The meaning of income subject to tax on a current basis
The income of a branch for an accounting period is treated as subject to tax in a foreign country on a current basis if the income is included in the tax base of the country for a tax year ending or commencing in the accounting period.
What branch capital gains are non-assessable non-exempt income?
Capital gains derived by a resident company on disposal of plant, equipment, land and buildings that are used wholly or principally for deriving foreign income through a branch in a listed company is non-assessable non-exempt income if:
- the whole of the gain is subject to tax in the country in which the branch is located, and
- the asset was used at some time in the income year in which is was disposed of, or in the previous year, in carrying on business through the branch.
Non-assessable non-exempt income treatment will not apply to a gain derived by a branch in a broad-exemption listed country if the gain gives rise to an amount of eligible designated concession income. Similarly, non-assessable non-exempt income treatment will not apply to a gain derived by a branch in a limited-exemption listed country if the gain gives rise to an amount of adjusted tainted income.
Non-assessable non-exempt income treatment is also available if the above conditions are satisfied for capital gains arising on the disposal of assets on the closure of a branch.
Disposals of assets other than those mentioned above, such as goodwill, will be subject to Australian tax.
Branch income derived through a partnership or trust
The net income of the partnership or trust is worked out for this purpose as if the branch income, that would have been non-assessable non-exempt if derived directly by the resident company, were non-assessable non-exempt income.
Effect of non-assessable non-exempt income treatment on a resident company's deductions, losses and foreign tax credits
A deduction is not allowable for:
- outgoings or expenses connected to branch income and gains that are non-assessable non-exempt income
- capital losses on the disposal of a branch asset if, had there been a profit on the disposal, the profit would have been non-assessable non-exempt income.
Current year losses or carried forward losses of a resident company are not reduced by branch income or gains that are non-assessable non-exempt income.
Foreign tax credits are not allowed for foreign taxes paid on branch income that is non-assessable non-exempt income.