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Chapter 1: Introduction

Last updated 7 June 2005


A major element of Australian taxation is the comprehensive system for taxing foreign source income. The foreign investment fund (FIF) measures, introduced by the Income Tax Assessment Amendment (Foreign Investment) Act 1992, formed the third and final element in the development of that system. The FIF measures operated from 1 January 1993.

The first element, introduced in 1987–88, was the foreign tax credit system. The second element, introduced in 1990–91, was the foreign source income measures relating to controlled foreign companies (CFCs) and transferor trusts.

Prior to the foreign tax credit system, most foreign source income of Australian residents was exempt from taxation. With the introduction of the foreign tax credit system, most foreign income derived by a taxpayer was taxed in Australia, with a credit for the foreign tax paid.

However, the foreign tax credit system did not address the problem of Australian residents investing offshore in companies that did not declare dividends and in non-resident trusts in which the investor had no present entitlement to the trust income and which did not distribute the trust income. In the vast majority of these cases, it was obvious that income was accumulating for the benefit of the Australian investors in foreign companies and foreign trusts. However, the law was unable to tax this income as it accrued. The foreign source income measures introduced the taxation of income as it accrued to Australian residents in CFCs and controlled foreign trusts (CFTs). These measures focused on substantial investments or involvement by Australians in foreign companies and foreign trusts which were able to shelter low-taxed income.

The foreign source income measures went some way towards overcoming the tax deferral available under the foreign tax credit system. However, gaps still existed. For example, Australian residents could avoid current Australian taxation of income accumulating in the companies and trusts for their benefit if they had:

  • investments in foreign companies that were not CFCs, and
  • an interest in, but no present entitlement to, the income of a foreign trust.

The FIF measures were introduced to reduce the extent to which Australian residents can defer Australian tax where they hold interests in foreign entities. The measures apply to income and gains accumulating in foreign companies that are not controlled by Australians or foreign trusts that fall outside the scope of the foreign source income measures. They also apply when working out the income of the CFCs and CFTs. The FIF measures extend to certain foreign life assurance policies (FLPs) that have an investment component, such as life bonds.

Additional information

Although this guide is quite comprehensive, it is not possible, in a publication of this nature, to include all of the qualifications and conditions contained in the law which may affect how you work out the amount of FIF income to include in your assessable income for a particular year.

For further information, contact the Australian Taxation Office (ATO).