Australian resident companies are entitled to a foreign tax credit as worked out in section 1. In addition, in some circumstances a company - other than a company in the capacity of trustee - may be:
- entitled to a credit for tax paid by a CFC on amounts attributed to the Australian company
- not assessable on foreign non-portfolio dividends- see part 1 of this chapter, or
- not assessable on foreign income derived through a foreign branch - see part 2 of this chapter.
Credits available to resident companies for direct and underlying tax
- An Australian resident company which receives a dividend from a related company may be entitled to a credit for the direct foreign tax - for example, withholding tax - on the dividend received.
This credit will generally be available only if the dividend is included in assessable income. The only exception is where a dividend is received from a related foreign company and is treated as paid out of income previously attributed to the resident company under the accruals tax system. A tax credit can be claimed for both the direct foreign tax and underlying tax on these non-assessable non-exempt dividends.
- An Australian resident company that is related to a CFC may also be entitled to a foreign tax credit in relation to the assessable, attributable income.
Related foreign companies
Under section 160AFB, an Australian company is treated as related to any number of linked foreign companies provided that:
- each company in the chain - starting with the Australian company - has at least a 10% voting interest in the company in the tier below it, and
- the Australian company has a direct or indirect interest of at least 5% in the voting shares of each foreign company that is a member of the chain.
A chain of related companies cannot include a trust or partnership - that is, the chain will be broken by the interposition of a trust or partnership.
Example 12: Related foreign companies
Australian company A has a 50% voting interest in foreign company B, which in turn has a 10% voting interest in foreign company C. Both B and C will be treated as related to A.
Step 1
Are the companies members of the same group?
Yes - each company in the chain, starting with the Australian company, has at least a 10% voting interest in the company in the tier below it.
Step 2
Does company A have a 5% or more direct or indirect voting interest?
Yes - company A has a voting interest of 50% (50% × 100%) in company B and a voting interest of 5% (50% × 10%) in company C.
Step 3
Are the companies related?
Yes - both tests are satisfied for both companies B and C. Therefore, they are both related to company A.
End of exampleCredits available to resident companies for attributed income
Working out the foreign tax credit when income is attributed
If a company is related to a CFC at the end of the CFC's statutory accounting period and the assessable income of the company includes a share of the attributable income of the CFC - see chapter 1 - the company is allowed a credit for an amount of tax equal to its attribution percentage of the CFC's notional allowable deductions for taxes paid.
A CFC can claim a notional deduction for foreign or Australian tax paid by the CFC on amounts included in the CFC's notional assessable income.
Example 13: Foreign tax credit for attributed income
An Australian resident company AustCo has a 60% interest in a CFC, ForCo, a resident of an unlisted country
ForCo
Profits from a foreign branch (not attributable income) |
$2,000 |
Tax paid in the foreign country on the foreign branch income |
$600 |
Income derived in an unlisted country (attributable income) |
$10,000 |
Tax paid in the unlisted country on all income (including foreign branch income) |
$1,200 |
AustCo is deemed to have paid the following amount of tax on the attributed income:
Attribution percentage |
60% |
Tax paid on attributed income |
$1,000 |
Tax deemed paid by AustCo |
$600 |
AustCo must gross up its assessable foreign income by this amount. AustCo can claim a foreign tax credit for $600.
End of exampleCredits where dividends are deemed to have been paid to an Australian resident taxpayer
If a benefit provided by a CFC to a resident taxpayer is deemed to be a dividend paid to that taxpayer under section 47A, credit for foreign tax paid will be allowed only if:
- the amount of the deemed dividend is included in the taxpayer's assessable income in their return lodged in the year of the distribution, or would be so included apart from section 23AI, or
- the taxpayer notifies the Tax Office, in writing, within 12 months after the end of the income year in which the benefit was provided.
Credits where income is attributed due to a change in residence of a CFC
A resident company is allowed a credit for foreign tax paid by a CFC if an amount of income is attributed to it because the CFC changed its residence from an unlisted country to a listed country or to Australia. However, the credit is available only if the resident company is related to the CFC at the time of the change of residence - see section 160AFCB. The company is allowed a credit for the foreign tax and the Australian tax paid by the CFC on the attributed amount.
Working out a foreign tax credit when a dividend is paid from income that was previously attributed to an Australian resident company
A dividend paid out of income previously attributed to an Australian resident is non-assessable non-exempt income - see part 1 of this chapter. In addition, an Australian resident company is allowed a credit for foreign tax - including foreign underlying tax - paid on a non-portfolio dividend from attributed income. The credit for the underlying tax is limited to the amount by which the section 23AI part of the dividend would have been greater if no foreign tax had been paid.
The formula to work out the foreign tax for which a credit is due when a dividend is received from previously attributed income is:
FTP = (EP × DT) + (AEP × UT) − AT
FTP |
foreign tax paid on previously attributed income for which a credit is now allowable |
EP |
percentage of the payment which is non-assessable non-exempt because the income has been previously attributed |
DT |
amount of foreign tax which the taxpayer is taken to have paid, and to have been personally liable for, in relation to the attribution account payment |
AEP |
percentage that would be EP if the attribution account payment were reduced by any part of the payment that is non-assessable non-exempt income under section 23AJ |
UT |
where the taxpayer is a company and the attribution account payment is a non-portfolio dividend, UT equals the amount by which the section 23AI non-assessable non-exempt part would have been greater if an attribution account entity had not paid foreign tax on its profits |
AT |
amount of the attributed tax account debit arising from the payment of the dividend that is equal to or less than AEP x UT |
Example 14: Credit for foreign taxes on a dividend paid from profits attributed to an Australian company
Austco has a wholly owned subsidiary, Subco, in an unlisted country. Subco had distributable profits of $10,000 on which it paid foreign tax of $1,000. These profits have previously been attributed to Austco.
On 1 August 2004, Subco paid a dividend of $10,000 to Austco. The unlisted country levied dividend withholding tax at a rate of 10%.
The dividend received by Austco is non-assessable non-exempt income because it was paid from previously attributed income. At the attribution stage, Austco would have received a credit of $1,000 for foreign tax paid.
Even though the dividend is not included in Austco's assessable income, a foreign tax credit is available for withholding tax and underlying tax relating to the dividend. This is because the profits out of which the dividend was paid were attributed to Austco and taxed in Australia.
The method by which this credit is granted is as follows:
Work out the foreign tax credit for dividend withholding tax and for underlying tax on the dividend as though the dividend was paid from income that had not been attributed to Austco.
The formula for working out the foreign tax credit Austco can claim is as follows:
FTP = (EP × DT) + (AEP × UT) − AT
This formula can be broken down as follows:
EP × DT = percentage of the dividend paid from previously attributed income × tax paid on the dividend
100% × $1,000 (dividend withholding tax) = $1,000
AEP × UT = adjusted exempt percentage of the dividend × underlying tax paid on the dividend (excluding tax paid under a foreign accruals regime)
100% × $1,000 = $1,000
AT = tax for which a credit was allowed when the income of the unlisted country CFC was attributed to Austco
= $1,000
FTP = foreign tax paid on previously attributed income for which a credit is now allowable
$1,000 + $1,000 − $1,000 = $1,000
In this example, when the income of $10,000 was attributed to Austco and a credit was given for $1,000, Austco would have opened accounts as follows:
Attributed income |
$10,000 |
Tax credited |
$1,000 |
When the dividend is received, Austco will debit the attribution account $10,000 and treat the dividend as non-assessable non-exempt income. It will also debit $1,000 to the attributed tax account.
This debit is the amount referred to as AT. Attributed tax accounts are dealt with below.
End of exampleEvidence of underlying tax paid
Your company should retain full particulars of the material on which its underlying tax credit has been worked out. Obtain a statement from the company which paid the dividend, certifying the amount of tax paid on the distributable profits out of which the dividend was paid. When underlying tax paid is traced down a chain of related foreign companies, such details will be required for each company in the chain.
Attribution accounts relevant to foreign tax credits for companies
Attributed tax accounts
What is the purpose of attributed tax accounts?
A resident company can claim a foreign tax credit for dividend withholding tax and certain underlying taxes on a non-assessable non-exempt dividend paid from previously attributed profits.
The credit is initially worked out on the basis that no foreign tax credit was allowed at the time the profits were attributable. The foreign tax credit worked out in this way is then reduced by the credit allowed at the time the attributable income of the CFC was included in the assessable income of the resident company. The attributed tax accounts trace the foreign tax credit allowed at the attribution stage so that this reduction can be made.
Who should maintain attributed tax accounts?
Attributed tax accounts are to be maintained by a resident company to which the attributable income of a related foreign company has been attributed under the CFC measures. Other taxpayers need not maintain these accounts.
Attributed tax account credits
An attributed tax account credit can arise in relation to a CFC where an amount is attributed under any of the following sections:
- section 160AFCA where the attribution of income of the CFC arises under section 456, or
- section 160AFCB where the attribution of income of the CFC on a change of residence arises under section 457.
Each time a credit is made to an attribution account - as explained in part 1 of this chapter - a corresponding credit must be made to an attributed tax account for the entity for which the attribution account is operated.
Attributed tax account debits
An attributed tax account debit must be made each time the attribution account entity pays a dividend. The attributed tax account debit is worked out using the following formula.
Attributed tax account debit = (attribution debit ÷ attribution surplus) × attributed tax account surplus
In order to claim a credit for foreign tax paid on income that was previously attributed, the amount of attributed tax account debit must be verifiable. The attributed tax accounts for each of the relevant entities in respect of the taxpayer claiming the credit must be available or a credit will not be allowed.
Example 15: Credit for foreign tax reduced by credits previously allowed
Forco1 is a resident of an unlisted country and is a wholly owned subsidiary of Ausco. Forco1 derived income of $16,500 from sources in its country of residence, all of which is attributed to Ausco, and pays foreign tax of $1,500.
Forco1 has distributable profits of $15,000 ($16,500 − $1,500).
It pays a dividend of $10,000 to Ausco in the following year, from which withholding tax of $1,500 was deducted - the net dividend is therefore $8,500.
The dividend Ausco received is non-assessable non-exempt income. Ausco is also entitled to a credit for foreign tax paid on the income which was previously attributed. The credit is reduced, however, to the extent a credit for foreign tax was allowed when the income was attributed to Ausco. The non-assessable non-exempt income is not included in working out the Australian tax payable on the foreign income and thus does not increase Ausco's foreign tax credit limit.
The credit is worked out as follows:
FTP = (EP × DT) + (AEP × UT) − AT
FTP |
foreign tax paid on previously attributed income for which a credit is now allowable |
EP |
percentage of the payment which is non-assessable non-exempt income because the income has been previously attributed. In this example EP is 100% as the dividend is paid from previously attributed income. |
DT |
amount of foreign tax which the taxpayer is taken to have paid, and to have been personally liable for, in relation to the attribution account payment - in this example, $1,500 withholding tax. |
AEP |
percentage that would be EP if the attribution account payment were reduced by any amount of that payment which is non-assessable non-exempt income under section 23AJ. |
UT |
foreign underlying tax credit allowable for the attribution account payment, other than CFC-type foreign tax - that is, foreign tax arising from laws that generally correspond with Australia's accruals measures |
(Dividend ÷ distributable profits) × tax on distributable profits
($10,000 ÷ $15,000) × $1,500 = $1,000
AT = amount of the attributed tax account debit for the tax credit previously allowed on the attributed income that is equal to or less than AEP × UT. The attributed tax account debit is equal to
(Attribution debit ÷ attribution surplus) × attributed tax account surplus
($10,000 ÷ $15,000) × $1,500 = $1,000
Note: When $15,000 income was attributed to Ausco, Ausco would have credited an attribution account for Forco1 with $15,000. It would also have credited $1,500 tax to the attributed tax account for Forco1 - that is, tax for which a credit was allowed at the attributed stage. When the dividend was paid by Forco, this would have remained as an attribution surplus. The dividend of $10,000 is an attribution account payment.
FTP |
$1,500 + $1,000 − $1,000 |
$1,500 |
End of example
Transfer of excess foreign tax credits
A resident company that is a member of a company group may transfer an excess credit to another member of the group if:
- there is 100% common ownership within the group
- there is a shortfall of foreign tax credits in a class of income for the company receiving the transfer
- the shortfall is for income of the same class as that for which there is an excess foreign tax credit in the company transferring the credit
- both companies retain a record of the transfer showing the credit transferred.
The transfer of an excess credit may include credit carried forward from five previous years as well as the current year. The transfer operates only for the following two classes of income:
- passive income
- other income - excluding offshore banking income.
A company can transfer only an amount equal to the credit shortfall for that class of income - that is, the transferee cannot carry forward the transferred amount.
Note: The grouping provisions for wholly owned groups were removed as part of the introduction of the consolidations tax regime. From July 1 2003 unconsolidated wholly owned groups are generally no longer able to transfer excess foreign tax credits between entities in the group.
Carry forward of foreign losses by companies
An overall foreign loss for a class of assessable foreign income may be carried forward indefinitely and used to reduce a future year's assessable foreign income for that class.
Losses incurred by a company before the 1990 income year can be carried forward only for seven years and are therefore no longer available.