• What interests in a foreign company are taken into account in the control tests?

    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

    In most cases, an interest in a foreign company will be held in the form of shares. This interest can be held either directly or indirectly through other entities. At a particular time, your interests in a foreign company include the interests you hold in the company as well as the interests you are entitled to acquire.

    The interests of your associates in a foreign company are also relevant for determining whether you have an interest in the company.

    Direct control interest in a foreign company

    Your direct control interest in a foreign company is the greatest of the percentages that you hold, or are entitled to acquire, of the following:

    • total paid-up share capital in the foreign company
    • total rights to vote, or to participate in any decision making, in relation to
      • the distributions of capital or profits
      • the changing of constituent documents
      • the varying of share capital of the company
       
    • total rights to distributions of capital or profits of the company on winding-up
    • total rights to distributions of capital or profits of the company other than on winding-up.

    Example 5

    Direct control interest in a foreign company

    A foreign company is established issuing 100 ordinary shares. An Australian taxpayer purchases 50 of these shares which entitle the taxpayer to 50% of the income, voting and capital rights of the company. The direct control interest of the Australian taxpayer in the foreign company is 50%.

    Example 6

    Direct control interest in a foreign company where shares confer different rights

    An Australian company has a 50% voting interest and a 75% income interest in a foreign company. The direct control interest of the Australian company in the foreign company is 75%.

    How is a direct control interest measured if the test time occurs before the end of an accounting period?

    A taxpayer's direct control interest in a company has to be measured at a point in time - referred to as the test time.

    However, in some cases it may not be possible to measure the percentage a taxpayer holds of the total rights to the profits of a company, or to a distribution of capital on winding up of the company, before the end of the accounting period of the company.

    This would be the case, for example, if some shareholders are entitled to a fixed return of capital or profits.

    In these cases, the taxpayer's rights to capital or profits are measured at the end of the accounting period of the company. It is assumed for this purpose that the rights held by the taxpayer at the test time are held at the end of the accounting period of the company.

    Exclusion of eligible finance shares

    Eligible finance shares are not taken into account in working out an entity's direct control interest in a company. Broadly, these are shares issued under preference share financing arrangements with Australian financial intermediaries - for example, banks - and their subsidiaries. In effect, the shares are issued in place of loans.

    Exclusion of real estate investment trust shares

    Real estate investment trust shares are not taken into account in working out an entity's direct control interest in a United States real estate investment trust that derives income or holds assets principally in the United States. Control interests held through a United States real estate investment trust will still be taken into account in determining whether a subsidiary of the trust qualifies as a controlled foreign company (CFC). This will attribute income from a real estate investment trust subsidiary where a taxpayer has a direct interest in the subsidiary.

    This exemption applies to statutory accounting periods of CFCs ending on or after 2 July 1998.

    Last modified: 05 Dec 2006QC 18000