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Credits available to resident companies for direct and underlying tax

Last updated 4 December 2006

An Australian resident company which receives a dividend from a related company is 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.

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 13: 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 example

QC18000