• What income is non-assessable non-exempt?

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    Whether branch profits are treated as non-assessable non-exempt income depends on whether the branch is in a listed or unlisted country.

    Non-assessable non-exempt income treatment

    Branches in listed countries

    In general, non-assessable non-exempt income treatment is available for income derived by a resident company through a branch in a listed country if:

    • the income is from carrying on a business in the listed country, and
    • the branch satisfies an active income test.

    Non-assessable non-exempt income treatment is not available for income derived through a branch in a listed country if:

    • the branch does not satisfy the active income test, and
    • the income is both adjusted tainted income and 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 unlisted countries

    Non-assessable non-exempt income treatment is generally available for income derived by a resident company through a branch in an unlisted country if:

    • the income is from carrying on a business in the unlisted country, and
    • the branch satisfies an active income test.

    Non-assessable non-exempt income treatment is not available for income derived through a branch in an unlisted country if:

    • the branch does not satisfy the active income test, and
    • the income is adjusted tainted income.

    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, and
    • 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 both listed and unlisted 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, and
    • 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.
    Last modified: 05 Dec 2006QC 18000