• Condition 3 - Does the CFC keep proper records?

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    The figures used in the active income test are mainly drawn from accounting records and, in general, are not adjusted to comply with tax law concepts. Therefore, the accounts of the company must be properly prepared.

    The accounts must be prepared in accordance with commercially accepted accounting principles. Where there are commercially accepted accounting principles in the country of residence of the CFC, it is acceptable if the accounts of the CFC comply with those principles. In other cases, it is acceptable if the accounts of the CFC comply with Australian commercially accepted accounting principles.

    • The documents you must take into consideration are:
    • the profit and loss statement and balance sheet
    • any ledgers or journals, and
    • any notes, statements or reports that are attached to, or meant to be read with, these accounts.

    The accounts of a CFC for a statutory accounting period must give a true and fair view of the financial position of the CFC. If the accounts are prepared in accordance with commercially accepted accounting principles but do not give a true and fair view, the CFC will fail the active income test.

    Treatment of partnerships

    Where a CFC is a partner in a partnership, the CFC's share of the partnership income must be taken into account. This means that the partnership must also keep proper accounts. If the partnership does not keep proper accounts, the CFC will fail the active income test.

    Has the CFC and every partnership in which it was a partner kept proper accounts that give a true and fair view?

    Yes

    Read on.

    No

    The CFC has failed the active income test. Go straight to part 3.

    Last modified: 05 Dec 2006QC 18000