• Calculation method

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

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    Overview

    To use the calculation method, you must work out the calculated profit or calculated loss of a FIF for a notional accounting period.

    You will need access to detailed information about your FIF interest. The calculation method uses a simplified version of Australian taxation law to work out the profit of your FIF which is then attributed to you and included in your assessable income. The calculation method applies to foreign companies and foreign trusts. [sections 580 and 582]

    If there is a calculated loss, you may carry your share forward and take it into account for subsequent notional accounting periods.

    If there is a calculated profit, you must determine your share. Do this by multiplying the calculated profit of the FIF for the notional accounting period by your percentage interest in the FIF at the end of that period. Work out the calculated profit or loss in the currency of the FIF accounts and then convert the amount to Australian currency at the exchange rate that applies for the last day of the notional accounting period. Include the resulting amount in your assessable income for the income year in which the notional accounting period of the FIF ends. [sections 558, 559 and 572]

    Worksheet 3: Calculation method will help you to work out your calculated profit or loss. This worksheet can also be used by taxpayers with an interest in a FIF that is a company who have elected, within the calculation method, to calculate the notional income and notional deductions of the FIF using the CFC rules.

    Election to use the calculation method

    You can use the calculation method only if you elect to do so. You must then apply it to all interests in a particular FIF. If you subsequently use another method for the same FIF interests, you cannot use the calculation method again for that FIF or any interests you acquire in that FIF in the future. [section 535]

    If you make an election to use the calculation method, you must also elect to use the period for which the FIF makes out its accounts as its notional accounting period. [subsections 486(3) and 535(5)]

    The first notional accounting period of the FIF for which you use the calculation method may be for a shorter period than the period for which the FIF makes out its accounts. In this case, you would work out FIF income for the entire period for which the FIF makes out its accounts and apportion the resulting FIF income on a time basis.

    Working out the calculated profit or loss of the FIF

    To determine the calculated profit or calculated loss of a FIF, first work out the notional income of the FIF.

    The second step is to work out the notional deductions for that notional income. If the notional income is greater than the notional deductions, the difference is the calculated profit of the FIF for the notional accounting period. If the notional income is less than the notional deductions, the difference is the calculated loss of the FIF for the notional accounting period. [section 559]

    Step 1: Determining the notional income of a FIF

    Box A

    The notional income of a FIF takes into account the gross income and profits or gains of a capital or revenue nature that the FIF derives during its notional accounting period. [subsection 560(1) and section 566]

    It includes:

    • amounts grossed up for foreign or Australian taxes paid by the FIF
    • net income from partnerships
    • discounted amounts or deferred interest from securities treated as derived in the FIF accounts, and
    • income, profits or gains reinvested, accumulated, capitalised, carried to a reserve, sinking fund, insurance fund or similar fund on behalf of the FIF. [sections 560 to 566]

    Profits of a revenue nature and gains of a capital nature are included in notional income when 'derived' by the FIF, usually as a net amount. The net amount does not include any amount previously taken, or subsequently to be taken, into account because an amount cannot be deducted twice. [subsections 560(2) and 574(2)]

    If a first tier FIF has an interest in another FIF or a FLP - a second tier FIF - during the notional accounting period of the first tier FIF that ended in your income year, an amount of second tier FIF income will be included in the notional income of the first tier FIF. [section 576]

    When applying the FIF measures to the second tier FIF, you can elect to use the calculation method to determine its FIF income only if you have elected to use the calculation method for the first tier FIF. The income for the second tier FIF is worked out as though the first tier FIF were a resident but with only the exemption for interests in certain FIFs resident in the United States being granted. No other exemptions available to Australian residents are allowed. [section 575]

    If you do not make an election to use the calculation method for the second tier FIF, you must work out the FIF income arising from the second tier FIF using the market value method or the deemed rate of return method. [section 535]

    If you elect to use the calculation method for a second tier FIF, the notional income of the second tier FIF will include FIF income from a FIF or a FLP - a third tier FIF - in which the second tier FIF has an interest. [section 579]

    However, you cannot use the calculation method for a third tier FIF. The notional income of the second tier FIF includes FIF income from a third tier FIF using either the market value method or the deemed rate of return method. [subsection 577(2)]

    The notional income of a FIF for a notional accounting period which ended during the income year does not include any dividend or distribution paid to the FIF by another FIF. [section 564]

    Step 2: Determining the notional deductions

    Box B

    Most expenses of a FIF are deductible in the notional accounting period in which they are incurred, provided that those expenses relate to income and profits or gains of a revenue or capital nature that has been included when working out the notional income of the FIF. [sections 567 to 574]

    Notional deductions include:

    • expenditure in acquiring trading stock except acquisition costs of securities, interest in shares, trusts or partnerships which are brought to account on a revenue basis
    • the FIF's share of a partnership loss where the FIF was a partner at the end of the partnership's accounting period that ends in the notional accounting period of the FIF
    • calculated unapplied losses of the FIF for previous periods used in the order in which they were incurred
    • Australian and foreign taxes paid by the FIF that relate to the notional income of the FIF for the relevant period
    • amortisation of acquisition costs of plants, articles and industrial properties based on the effective life of such items, but only if such amounts are included in the FIF's accounts
    • net capital losses but not
      • amounts previously allowed as a notional deduction
      • amounts that would have been allowed as a notional deduction if the calculation method had been applied but was not because, for example, an exemption applied.
       

    Notional deductions do not generally include:

    • acquisition costs - other than for incidental costs and trading stock
    • debt repayments
    • expenditure previously allowed as a notional deduction, and
    • amortisation of acquisition of property except plant and equipment, licences and patents.

    Working out the attribution percentage for interests in a FIF

    Your assessable income must include your attribution percentage of a FIF's calculated profit.

    Attribution percentage for interests in a foreign company

    Boxes E and G

    The attribution percentage for your FIF interest is equal to the percentage that you hold or were entitled to acquire at the end of the notional accounting period in:

    • the total paid-up share capital of the company
    • the total rights to vote or to participate in decision making in relation to
      • distributions of profit or capital of the company
      • the constituent document of the company
      • a variation to the share capital of the company, or
       
    • the total rights to distributions of profit or capital on winding-up, or at any other time.

    The FIF attribution percentage will be the greatest of these percentages if different percentages arise under the different types of rights described above. [section 581]

    Where Australian residents hold or were entitled to acquire attribution percentages which together are greater than 100% for a particular FIF, the total percentage is reduced to 100% and each individual taxpayer's attribution percentage is reduced proportionately. [subsection 581(4)]

    Attribution percentage for interests in a foreign trust

    Boxes E and G

    When all the income, profits or gains - referred to below as income - derived by a foreign trust during a notional accounting period consist of either or both:

    • income to which beneficiaries were presently entitled, and
    • income to which beneficiaries were not presently entitled, but which was distributed to beneficiaries during, or within two months after the end of, the notional accounting period,

    then the attribution percentage is the percentage of the total income derived by the trust to which you were presently entitled or were not presently entitled but which was distributed to you during, or within two months after the end of, the notional accounting period.

    If the income, profits or gains of a foreign trust are not fully distributed or allocated to beneficiaries, your attribution percentage will be equal to the greater of the percentages of your interest in or entitlement to acquire:

    • the income of the trust, or
    • the capital of the trust. [subsection 582(7)]

    Where the total of all Australian residents' attribution percentages is greater than 100%, each individual taxpayer's attribution percentage is reduced proportionately so that the total is 100%. [subsection 582(6A)]

    Working out the amount to include in assessable income

    To work out the FIF income, multiply the calculated profit of a FIF for a notional accounting period by your attribution percentage in the FIF at the end of that period. [sections 580 and 582]

    Taxpayer's share of FIF income

    =

    calculated profit

    X

    attribution percentage

    The FIF income is included in your assessable income subject to reduction by certain assessable distributions from the FIF. See Chapter 6: Avoiding double taxation for more information.

    Part-year holding

    The calculation method allows for an interest in a FIF that you acquired during a notional accounting period. Modify the above formula by multiplying it by the proportion of the period (in days) that you held the interest.

    Example: Use of the calculation method for a part-year holding

    Agostino acquired a 1% interest in a FIF on 1 January 2007. He uses the calculation method and accordingly elects for the notional accounting period of the FIF to be the same as the period for which the FIF makes out its accounts - that is, 1 July to 30 June each year. The calculated profit of the FIF for the period 1 July 2006 to 30 June 2007 is A$10 million. Agostino would include A$49,589 in his assessable income, worked out as follows:

    A$10 million x 1% x (181/365) = A$49,589

    Last modified: 04 Feb 2010QC 21777