If an amount of income or gain is to be included in your assessable income as a result of tracing control through a foreign entity and that foreign entity has also been taxed on that amount under the accruals tax laws of another country, you may reduce your assessable income by an amount calculated as follows:
Indirect attribution interests through a controlled foreign entity (CFE) × foreign accruals-taxed attributable income
Your indirect attribution interest through a CFE is your attribution interest in a CFC traced through the CFE.
The foreign accruals-taxed attributable income is that part of an amount of income or gain derived by a CFC on which an interposed CFE has been taxed under an accruals tax law of a listed country. The income or gain must be taxed at that country's normal company rate of tax and during a tax accounting period which commences or ends either in your year of income or the statutory accounting period of the CFC.
Only countries listed in the Income Tax Regulations as having accruals tax laws are recognised for the purpose of granting this relief. They are:
- New Zealand
- United Kingdom of Great Britain and Northern Ireland
- United States of America
Ausco owns 50% of the share capital of US Co - a company resident in the United States - which in turn owns 50% of the share capital of a company that is a resident of an unlisted country. Ausco also holds a direct interest of 25% of the unlisted country company.
Because of the interests Ausco holds in US Co and the unlisted country company, both foreign companies are CFCs.
For the 2004-05 period, the unlisted country CFC's only item of income was interest income. The amount of this interest income was determined to be $8,000 under Australia's income tax laws.
The United States taxed US Co on an accruals basis on the item of interest income derived by the unlisted country CFC. US Co's interest in the unlisted country company was 50%. Therefore, only half of the item of interest income was attributed to US Co by the United States.
Australia applied the transfer pricing provisions to an interest-free loan which the unlisted country company provided to a related CFC. Consequently, another $2,000 interest income was included in the unlisted country CFC's attributable income under Australia's accruals tax laws. This amount was not included in the unlisted country CFC's attributable income under the accruals tax laws of the United States.
Working out the amount to be attributed to Ausco
Step 1 - Determine Ausco's otherwise assessable amount
Ausco's attributed percentage of the attributable income of the unlisted country CFC is:
direct attribution interest
indirect attribution interest
Ausco's otherwise assessable amount is $5,000 (50% attribution percentage) x ($8,000 interest income + $2,000 interest income), arising from the application of the transfer pricing provisions.
Step 2 - Determine Ausco's indirect attribution interests through US Co
Ausco's indirect attribution interest in the unlisted country CFC through US Co is 25% - that is, Ausco's 50% direct interest in US Co multiplied by US Co's 50% interest in the unlisted country CFC.
Step 3 - Determine the unlisted country CFC's foreign accruals-taxed attributable income
The unlisted country CFC's foreign accruals-taxed attributable income worked out under Australian accruals tax rules equals $8,000. This amount is referable to the item of interest income included in the attributable income of the unlisted country CFC under the United States' accruals tax laws. It is important to note that the amount is not necessarily the same as the amount worked out under the United States' accruals tax laws.
Step 4 - Determine the amount by which Ausco's otherwise assessable amount is to be reduced
Reduce the otherwise assessable amount by $2,000 - that is, step 2 multiplied by step 3.
Step 5 - Determine Ausco's assessability in respect of the unlisted country CFC's attributable income
Ausco's assessability for the unlisted country CFC's attributable income is $3,000 - that is, step 1 minus step 4.End of example