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Rules that do not apply in working out the attributable income of a trust estate
The following rules do not apply in working out the attributable income of a trust estate:
- the general currency conversion rules
- the exemption for distributions from profits that have been taxed under the CFC measures
- the rules in sections 38 to 43 dealing with the taxation of a business only partly carried on in Australia
- the exemption for amounts that have been subject to withholding tax in Australia, and
- the CFC measures.
Conversion of income and expenses to Australian dollars
When calculating attributable income you must convert all amounts into Australian currency. This conversion is done using the conversion rules under the usual operation of the Act. For more information see the fact sheet Forex: The general translation rule(NAT 9339).
Choice to use functional currency
The transferor trust may choose to have its attributable income calculated in the sole or predominant currency in which it keeps its accounts (ledgers, journals, statements of financial performance etc). This sole or predominant currency is called the 'functional currency'.
When calculating attributable income in functional currency, all amounts that are not in the functional currency (including Australian currency amounts) must be converted into the functional currency. This conversion is done using the conversion rules under the usual operation of the Act. However, when applying these rules, the functional currency is taken not to be foreign currency and all other amounts (including Australian currency) are taken to be foreign currency.
Once the attributable income is calculated, that amount is converted into Australian currency.
The choice of functional currency must be in writing but the transferor trust is not required to notify the Commissioner. The transferor trust must keep written evidence of the choice for as long as it is required to keep its tax records.
Generally, the choice will apply to the income year immediately following the one in which the choice is made. However, it will apply to the income year in which the choice is made where the choice is made within 90 days of the beginning of that income year, or by 16 January 2004 (if this is later).
The choice to use the functional currency applies until you withdraw it. You can only withdraw a choice where the functional currency has ceased to be the sole or predominant currency in which the trust keeps its accounts. The withdrawal has effect from immediately after the end of the income year in which the choice is withdrawn. The withdrawal must be in writing and retained with your tax records. You may make a new choice applicable to subsequent income years.
Modified application of trading stock provisions
All items of trading stock are to be valued at cost when brought to account by a non-resident trust estate.
Modified application of depreciation provisions
A non-resident trust estate is allowed depreciation on the same basis as a resident taxpayer. However, assets are treated as having been held for the production of assessable income in income years where there was no calculation of attributable income.
Where the trustee has used a property during an income year partly for producing exempt income and partly for producing assessable income, the Tax Office can determine the amount that is an allowable deduction.
Modified application of the transfer pricing rules
The Tax Office can make adjustments reflecting arm's length values to amounts used in working out the attributable income of a trust estate. To avoid double taxation, the Tax Office can make a corresponding adjustment to an amount in determining the taxable income of another taxpayer.
Modifications relating to capital gains tax
The capital gains tax provisions of the Act - that is, Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 - apply as if the non-resident trust estate were a resident trust for CGT purposes. This ensures that a capital gain on the disposal of a CGT asset not having the necessary connection with Australia is taken into account under the transferor trust measures. It also ensures that the pre-20 September 1985 status of assets is retained.
Special rules apply to prevent double taxation of capital gains where a trust estate was formerly a resident of Australia. In this case, the cost base of assets that were taxed under the capital gains tax provisions at the residence change time is taken to be the market value of the assets at that time.
Modification of loss provisions
Losses are not available for income years before the year starting 1 July 1990.
De minimis exemption
The de minimis exemption ensures that the transferor trust measures do not apply to small amounts derived by a trust estate in a listed country.
The de minimis exemption is worked out having regard to the total of the attributable incomes of all trust estates for which a taxpayer is an attributable taxpayer. The de minimis exemption will be satisfied if the total of the attributable incomes of all the trust estates is equal to or less than the lesser of:
- $20,000, or
- 10% of the total of the net incomes of those trust estates.
If these tests are satisfied, the attributable income of listed country trust estates will not be included in the assessable income of the attributable taxpayer. The attributable income from unlisted country trust estates would still be included.
Last modified: 05 Dec 2006QC 18000