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  • Foreign income return form guide 2012-13

    About this guide

    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 Foreign income return form guide contains an explanation of measures relating to the taxation of foreign income derived by, or attributed to, Australian residents.

    For 2010–11 and later income years, the Foreign Investment Fund (FIF) and deemed present entitlement rules (sections 96B and C of the Income Tax Assessment Act 1936 (ITAA 1936) have been repealed. In relation to these measures, this guide deals only with aspects of ongoing relevance: for example, relief to prevent double taxation where FIF attribution has previously occurred.

    For an explanation of the foreign income tax offset (FITO) measures, see the Guide to foreign income tax offset rules (NAT 72923). The chapters in this guide are:

    Chapter 1

    Attribution of the current year profits of a controlled foreign company (CFC)

    Chapter 2

    Transferor trust and related measures

    Chapter 3

    Taxation of foreign dividends and branch profits

    Chapter 4

    Taxation of foreign investment fund (FIF) interests

    Chapter 5

    Proving your assessment

    Chapter 6

    Consolidation (consolidated income tax treatment for groups of entities)

     

    Summary sheets at the end of this guide provide a quick reference to assist you in determining if the measures apply to you, and to what extent. Where necessary, worksheets have also been provided to help you work out your tax liability.

    Although the guide is detailed, it may not cover all the qualifications and conditions contained in the law that relate to your circumstances: for example, it does not discuss the special rules in Subdivision F of Division 8 of Part X of the ITAA 1936 that apply in working out attributable income for companies conducting banking or insurance activities.

    If you are not sure about the application of the law, phone 13 28 66.

    Under our tax treaties, the Australian Taxation Office (ATO) regularly receives information from foreign tax authorities regarding foreign source income paid to Australian resident taxpayers (and tax withheld from such payments). We are making increasing use of information-matching technology to verify the correctness of tax returns. You should ensure that all information is fully and correctly declared in the relevant tax return.

    Unless otherwise stated, references in this guide to provisions of the law are to provisions of the ITAA 1936.

    What's new?

    Subdivision 815-A of the Income Tax Assessment Act 1997 (ITAA 1997) has been enacted and confirms:

    • Australia's ability to assess tax based on the associated enterprises article in Australia's tax treaties, and
    • the relevance of Organisation for Economic Cooperation and Development (OECD) guidance material.

    Abbreviations and glossary

    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

    Abbreviations

    Some abbreviations used in this publication without accompanying explanation are:

    CGT

    capital gains tax

    CFC

    Controlled foreign company

    Commissioner

    Commissioner of Taxation

    EDCI

    eligible designated concession income

    FIF

    foreign investment fund

    FLP

    foreign life assurance policy

    ITAA 1936

    Income Tax Assessment Act 1936

    ITAA 1997

    Income Tax Assessment Act 1997

    MEC group

    Multiple entry consolidated group

     

    Glossary

    Accruals taxation

    Accruals taxation is the taxation of Australian residents on profits derived through a foreign company or trust as they are earned by the company or trust. Normally, the profits would not be taxed in Australia until they are distributed to the taxpayer as a dividend or a trust distribution.

    Act

    In this guide, the term ‘the Act’ means the Income Tax Assessment Act 1936, as amended. Unless specified otherwise, all references to legislation are to the ITAA 1936.

    Active income test

    The active income test ensures that small amounts of tainted income derived by a CFC mainly engaged in carrying on an active business are exempt from accruals taxation. An exemption is provided from accruals taxation for most amounts derived by a CFC if the test is satisfied.

    Adjusted tainted income

    Adjusted tainted income comprises passive, tainted sales and tainted services income.

    Arm’s-length amount

    This expression means, in relation to an actual transfer of property or services to a non-resident trust estate, the amount that the trustee of the non-resident trust might reasonably be expected to pay to the transferor for the property or services if the property or services had been transferred under an arrangement between independent parties dealing at arm’s length with each other.

    Associates

    There are four parts to determining who are the associates of an entity. They deal with:

    1. associates of an individual
    2. associates of a company
    3. associates of a trustee
    4. associates of a partnership.
    Part 1 – Associates of an individual

    The associates of an individual (other than an individual acting in the capacity of a trustee) are:

    • relatives of the individual – that is, the parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of the individual or of his or her spouse; and the spouse of the individual or of any other person mentioned above
    • a partner of the individual, or a partnership of which the individual is a partner
    • the spouse, including de facto spouse, or child of a partner, where the partner is also an individual (other than an individual acting in the capacity of a trustee)
    • the trustee of a trust, where the individual or another entity that is an associate by virtue of this part benefits under the trust
    • a company where that company is sufficiently influenced by
      • the individual, or
      • another entity that is an associate of the individual because of the rules in this part, or
      • another company which is sufficiently influenced by the individual, or
      • two or more of the above entities, or
       
    • a company where the capacity to cast or control greater than 50% of the maximum votes at a general meeting of the company is held by
      • the individual
      • associates of the individual under the rules in this part, or
      • the individual and the associates.
       
    Part 2 – Associates of a company

    Part 2 deals with the associates of a company, called company A. The associates of company A include:

    • a partner of company A
    • a partnership of which company A is a partner
    • where a partner of company A is an individual otherwise than in the capacity of a trustee, the spouse or child of the partner
    • the trustee of a trust where company A, or an entity that is an associate of company A, benefits under the trust
    • an entity (entity B) that exerts sufficient influence over company A or holds a majority voting interest in company A. The influence may be exerted by entity B alone or together with other entities. The majority interest may be held by entity B alone or together with entities that would be associates of entity B if it were treated as company A
    • a company (company C) that is sufficiently influenced by company A or in which company A holds a majority voting interest. The influence may be exerted by company A alone or together with other entities that are sufficiently influenced by company A or in which company A holds majority voting interests. The majority voting interests may be held by company A alone or together with entities that are associates of company A, and
    • any other entity (entity D) that would be an associate of a third entity (entity E) which would be an associate of company A if the associates of entity E were determined by treating it as company A.

    Majority voting interest

    An entity holds a majority voting interest in a company if the following shareholdings amount to 50% or more of the maximum number of votes that can be cast at a general meeting of the company:

    • the entity’s direct shareholding in the company, and
    • the entity’s indirect shareholding in the company – for example, through a subsidiary.

    An example is where a company has a wholly owned subsidiary that has a 75% voting interest in another company. Both the parent and subsidiary would be associates of the third company because the subsidiary has a majority voting interest in the third company and the parent has a majority voting interest in the subsidiary.

    Sufficient influence

    An entity is sufficiently influenced by a second entity or other entities if the entity is accustomed, under an obligation, or might reasonably be expected to act in accordance with directions, instructions or wishes of the second entity or other entities.

    Part 3 – Associates of a trustee

    The associates of a trustee are:

    • any entity that benefits under the trust
    • any entity that is an associate of an individual who benefits under the trust, or
    • an entity that is an associate of a company, where the company is an associate of the trustee under either of the two bullet points above.

    Rules relating to public unit trusts

    In applying the tests for associates, the trustee of a public unit trust is treated as if it were a company. Special rules apply to determine whether a public unit trust is sufficiently influenced by another entity, or whether an entity has a majority voting interest in the public unit trust.

    Generally, a public unit trust will be sufficiently influenced by another entity or entities where the trust is accustomed to act, or is under an obligation to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of the entity or entities.

    The concept of a majority voting interest in relation to a public unit trust is determined by reference to the capital or income of the trust. If an entity is entitled to, or is entitled to acquire, 50% or more of the income or capital of the trust, the entity is considered to hold a majority voting interest in the public unit trust. Corresponding rules apply to test whether a group of entities have a majority voting interest in the trust.

    Part 4 – Associates of a partnership

    The associates of a partnership are:

    • a partner in the partnership
    • any entity that would be an associate of an individual, where the partner is an individual, or
    • any entity that would be an associate of a company, where the partner is a company.

    Attributable income

    Amounts taxed on an accruals basis under the CFC or transferor trust measures.

    Attributable taxpayer

    An attributable taxpayer is an Australian entity that has an associate inclusive control interest in a CFC of not less than the specified level.

    Attribution

    The process by which income is taxed on an accruals basis under the CFC or transferor trust measures.

    Attribution percentage

    The attribution percentage is the pro rata share of a CFC’s attributable income that will be attributed to a particular taxpayer’s assessable income.

    Australian 1% entity

    An Australian 1% entity, in relation to a company or trust, is an Australian entity whose associate inclusive control interest in the company or trust is at least 1%.

    Australian entity

    An Australian entity is an Australian partnership, an Australian trust, or an entity (other than a partnership or trust) that is a Part X Australian resident.

    Australian partnership

    An Australian partnership is a partnership of which at least one of the partners is an Australian entity. A foreign hybrid limited partnership with at least one Australian resident partner, and a foreign hybrid company with at least one Australian resident shareholder, may also qualify as an Australian partnership.

    Australian trust

    An Australian trust is a trust which at a particular time (or at a time in the 12 months before that time) has a trustee who is a Part X Australian resident or has its central control and management in Australia. It includes a corporate unit trust and a public trading trust as defined in the Act.

    Branch

    See Permanent establishment.

    CFC measures

    The CFC measures deal with the accruals taxation of Australian residents that have a controlling interest in a foreign company.

    Controlled foreign company (CFC)

    Broadly, a controlled foreign company is a company that is not a resident of Australia and is controlled by five or fewer Australian entities.

    Designated concession income

    Designated concession income is income or profits of a kind specified in the Income Tax Regulations 1936. Broadly, it refers to income or profits that are subject to a tax concession in a listed country. Details of the specified types of income and profits are set out in appendix 1 of this guide.

    Discretionary trust estate

    A discretionary trust estate is a trust estate for which:

    • both of the following conditions are satisfied:
      • a person (including the trustee) has a power of appointment or other discretion, and
      • the exercise of, or the failure to exercise, the power or discretion has the effect of determining, to any extent, either or both of the following
       

    the persons who may benefit under the trust

    how the beneficiaries are to benefit under the trust

    or

    • one or more of the beneficiaries under the trust have a contingent or defeasible interest in some or all of the capital or income of the trust estate

    or

    • the trustee of another trust estate that satisfies both conditions in the first dot point above benefits or is capable of benefiting under the first-mentioned trust estate.

    Double-taxation agreement

    A double-taxation agreement is an agreement made between the Australian Government and another government under the International Tax Agreements Act 1953.

    Eligible designated concession income (EDCI)

    Eligible designated concession income is designated concession income, in relation to a particular listed country, derived by an entity in an income year:

    • that is not subject to tax in another listed country in a tax accounting period that ends before the end of, or commences during, that income year, or
    • is subject to tax in another listed country in a tax accounting period that ends before the end of, or commences during, that income year, but is also designated concession income in relation to that other listed country.

    Eligible transferor

    For the purposes of accruals taxation under the CFC measures, an eligible transferor is an Australian entity or a controlled foreign entity that has transferred property or services in certain specified circumstances to a non-resident trust.

    If the transfer was to a trust which is a discretionary trust before the IP time, the transferor will be an eligible transferor if the transferor was able to control the trust at any time after the IP time and before the test time. An exception is made where the transfer was an ordinary business transaction for full value. The IP time is 7.30pm, by standard time in the Australian Capital Territory, on 12 April 1989.

    If the transfer was made at or after the IP time, the transferor will be an eligible transferor unless the transfer was for full value.

    If the transfer was made after the IP time to a trust that is a non-discretionary trust or a public unit trust at the test time, the transferor will be an eligible transferor if the transfer was made for no consideration or for inadequate consideration.

    Financial intermediary business

    A financial intermediary business is a banking business or a business whose income is principally derived from the lending of money.

    Foreign investment fund (FIF)

    A foreign investment fund was defined under the FIF rules as any foreign company or foreign trust, other than a deceased estate. The FIF rules have now been repealed.

    Foreign life assurance policy (FLP)

    An FLP was defined for the purposes of the FLP rules as a life assurance policy issued by an entity that was not a resident of Australia at any time in the income year.

    The FIF measures applied only to certain life assurance policies, and did not include:

    • a policy issued in Australia, provided that the entity that issued the policy was authorised under the Life Insurance Act 1995 to carry on life insurance business in Australia when it issued the policy
    • policies that provided for payment of money only on death, or on death or permanent disability, and for which the premiums or premium instalments are calculated solely by reference to the period for which the life concerned was expected to continue, or within which the life concerned was expected to terminate
    • policies issued before 1 July 1992 that cannot, after that date, be cancelled, surrendered or redeemed, and for which the terms have not been materially altered
    • a contract of reinsurance of pure life cover between a resident insurer and a non-resident reinsurer (former section 482).

    The FLP rules have now been repealed.

    FIF measures

    The FIF measures dealt with the accruals taxation of Australian residents that have a non-controlling interest in a foreign company or foreign trust.

    Income year

    An income year (or year of income) is a 12-month period ending on 30 June, or a 12-month period ending on another date, where the Commissioner of Taxation (Commissioner) has approved that other date under section 18 of the Act.

    Life assurance policy

    A life assurance policy was defined for the purposes of the FLP rules as a policy that provided for the payment of money:

    • upon death, other than death by accident or specified sickness only, or
    • on the happening of a specified event which related to the ending or continuing of a human life.

    The FLP rules have now been repealed.

    A life assurance policy also included an instrument securing the grant of an annuity for a term dependent upon a human life (former subsection 482(2))

    Listed country

    A foreign country that is declared by the Income Tax Regulations 1936 to be a listed country for the purposes of the CFC rules: see attachment A of appendix 1.

    Net income

    In relation to a non-resident trust estate, net income in section 95 of the Act broadly means the total assessable income of the trust estate less all allowable deductions, worked out as though the trustee were an Australian resident and a taxpayer.

    Non-discretionary trust estate

    A non-resident trust estate is a non-discretionary trust estate if it is not a discretionary trust estate.

    Non-portfolio dividends

    Broadly, non-portfolio dividends are dividends paid to a company where that company has a 10% or greater voting interest in the company paying the dividend.

    Non-resident trust estate

    A non-resident trust estate is a trust other than a resident trust.

    Notional assessable income

    Notional assessable income is the assessable income of a CFC for the purposes of determining the CFC’s attributable income.

    Part X Australian resident

    A Part X Australian resident is a resident of Australia who is not treated solely as a resident of a treaty partner country under a double-taxation agreement between Australia and that country.

    Passive income

    Passive income includes certain types of dividend, interest, royalty, annuity and rental income (section 446). It also includes gains on the disposal of assets that produce passive income or that are not used solely in carrying on a business.

    Permanent establishment

    A permanent establishment is widely defined in subsection 6(1). Generally, it can be described as a place through, or at which, an entity in Australia conducts its business in another country. A permanent establishment is also referred to as a ‘branch’ in this publication.

    Property

    This term includes money, a chose in action, any trust estate and interest, right or power, whether at law or in equity, in or over property.

    Section 404 country

    A foreign country that is declared by the Income Tax Regulations 1936 to be a section 404 country for the purposes of the CFC rules: see attachment A of appendix 1.

    Services

    This term includes any benefit, right, privilege or facility. Services include a right in relation to real or personal property, as well as an interest in real or personal property. Services also include a right, benefit, privilege, service or facility that is provided or is to be provided:

    • under an arrangement for, or in relation to:
      • the performance of work, whether or not property was also provided as part of the work performed
      • the provision of entertainment, recreation or instruction or the use of facilities for entertainment, recreation or instruction, or
      • the conferring of benefits, rights or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar payment
       
    • under a contract of insurance, including life assurance, or
    • under an arrangement for, or in relation to, the lending of money.

    Spouse

    Your 'spouse' includes another person (whether of the same sex or opposite sex) who:

    • you were in a relationship with that was registered under a prescribed state or territory law
    • although not legally married to you, lived with you on a genuine domestic basis in a relationship as a couple.

    Statutory accounting period

    A statutory accounting period is the period used to determine the attributable income of a CFC.

    Tainted income

    Tainted income includes passive income, tainted sales income and tainted services income.

    Tainted rental income

    Tainted rental income includes rental income of a CFC where:

    • land is leased to an associate or the rent is paid by an associate, or
    • land is leased by a lessor company not resident in the same country as the land is located, or
    • the land is leased by a lessor company which is resident in the same country as the land, and the lessor does not carry out substantial management activities in relation to the leased land.

    It can also include rental income from particular leases on ships, aircraft or cargo containers.

    Tainted sales income

    Tainted sales income is income of a CFC from the sale of goods purchased from or sold to:

    • an associate who is an Australian resident, or
    • an associate who is not an Australian resident but carries on business in Australia through a permanent establishment.

    Tainted services income

    Tainted services income is, in very broad terms, income derived from the provision of services by a CFC:

    • to an Australian resident, or
    • in connection with a permanent establishment in Australia.

    Transfer

    Transfer is defined in broad terms. In relation to the transfer of property, it includes a disposal of property by assignment, creation of a trust or any other manner, or the provision of property. For the transfer of services, it includes such concepts as allow, confer, give, grant, perform or provide.

    Transfer pricing rules

    Transfer pricing rules are contained in section 136AD of the Act, the associated enterprises articles in Australia's tax treaties and in Subdivision 815-A of the ITAA 1997. Where an agreement to acquire or supply property (including services and the right to use intangible property) is between parties who are not at arm's length, Section 136AD enables ‘arm's-length’ consideration to be substituted for the amount actually agreed.

    Transferor trust

    A non-resident trust to which a resident has made, or is deemed to have made, a transfer of property or services (Division 6AAA of Part III).

    Transferor trust measures

    The transferor trust measures deal with the accruals taxation of Australian residents who have directly or indirectly transferred value to a non-resident trust. Broadly, the rules operate to accruals tax the undistributed income of the trust.

    Underlying tax

    Underlying tax means the amount by which the section 23AI part of a non-portfolio dividend would have been greater if no foreign tax had been paid by the company paying the dividend on the profits out of which that dividend is paid.

    Unlisted country

    An unlisted country means a foreign country which is not a listed country (for Listed countries see attachment A of appendix 1).

    Chapter 1: Attribution of the current year profits of a controlled foreign company (CFC)

    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

    This chapter explains the accruals tax system for residents with interests in foreign companies.

    The accruals tax system applies to Australian residents who have a substantial interest in a foreign company controlled by Australians, referred to as a CFC. The system operates to include a taxpayer's share of specified income and gains of a CFC in the taxpayer's assessable income: this is called attribution. Subject to some modifications, the income and gains of CFCs are worked out using the same tax rules that apply for residents.

    Part 1

    Are you subject to the CFC measures?

    Part 2

    Does the CFC satisfy the active business test?

    Part 3

    Working out attributable income and the amount to include in your assessable income

     

    Part 1: Are you subject to the CFC measures?

    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 accruals tax system may apply to you if you are an Australian resident who has a substantial interest in a CFC. This part explains:

    • when a foreign company is a CFC
    • the types of interests in a foreign company that are taken into account in testing whether that company is a CFC
    • the size of an interest in a CFC you need before you must include an amount in your assessable income
    • how to determine the size of your interest in a CFC
    • whether income of a CFC is to be included in your assessable income for the current income year.

    Summary of part 1

    Section 1

    Is there a CFC?

    Section 2

    Are you an attributable taxpayer?

    Section 3

    Is the CFC’s income generally exempt from accruals taxation?

    Section 4

    What types of attribution can apply?

    Section 5

    Do you have to work out the attributable income of a CFC?

     

    Section 1: Is there a CFC?

    Three control tests

    A CFC is a non-resident company that satisfies one of three control tests. Whether a company is a resident of a foreign country is determined according to Australian tax law as modified by double-taxation agreements with other countries.

    The three control tests are the:

    • strict control test
    • assumed controller test
    • de facto control test.

    Strict control test

    A foreign company will be treated as a CFC under the strict control test if a group of five or fewer Australian ‘1% entities’, together with their associates, owns or is entitled to acquire a control interest of at least 50% in the foreign company.

    An Australian 1% entity is an Australian entity that, together with its associates, holds an interest of at least 1% in the foreign company.

    An Australian entity is an Australian partnership, an Australian trust, or an entity (other than a partnership or trust) that is a Part X Australian resident. A Part X Australian resident is a resident of Australia who is not treated solely as a resident of another country under a double-taxation agreement between Australia and that country.

    The associate-inclusive control interest of an entity is the sum of interests held by the entity and its associates in the foreign company. Interests that the entity and its associates are entitled to acquire are also taken into account.

    Example 1
    Strict control test

    This test will be satisfied if three Australian residents each hold interests of 30%, 10% and 10% respectively in a foreign company.
    End of example

    Assumed controller test

    A foreign company will normally be treated as a CFC under the assumed controller test if a single Australian entity owns, or is entitled to acquire, an associate-inclusive control interest of at least 40% in the foreign company. An entity's associate-inclusive control interest in a foreign company is the sum of the interests held in the company by the entity and the associates of the entity. However, a foreign company will not be treated as a CFC under the assumed controller test if the company is controlled by a party or parties unrelated to the single resident or its associates.

    Example 2
    Assumed controller test

    If an Australian entity holds 45% of the interests in a foreign company and the remaining 55% is held by several non-residents, it would be assumed under this test that the Australian entity controls the foreign company.
    End of example

    De facto control test

    A foreign company will be treated as a CFC under the de facto control test if a group of five or fewer Australian entities, either alone or with associates, effectively controls the foreign company.

    Example 3
    De facto control test

    If an Australian entity can control the appointment of the directors of a foreign company, the Australian entity will generally be taken to have de facto control of that foreign company.
    End of example
    When is control measured?

    A statutory accounting period of a CFC is a period of 12 months ending 30 June, unless the CFC makes an election to use another period. The control test is applied at the end of a CFC's statutory accounting period to check whether income of the CFC is to be attributed.

    It may also be necessary to measure control at the time a CFC pays a dividend to another CFC or to a controlled foreign trust or at the time a CFC changes residence.

    Election to change a CFC's statutory accounting period

    A CFC can make an election to change its statutory accounting period only if the accounting period is:

    • regularly used by the CFC for complying with the tax law of a foreign country, or
    • regularly used by the CFC for reporting to its shareholders.

    A CFC may also make a written election, and send it to the ATO, to adopt a statutory accounting period ending on a date other than 30 June if the period is regularly used for complying with the tax laws of the CFC's country of residence or is regularly used for reporting to the CFC's shareholders. You may make this election on behalf of a wholly owned CFC.

    A CFC may subsequently elect another statutory accounting period ending on any date, including 30 June, provided the above conditions are satisfied.

    Where a CFC chooses another statutory accounting period, it must complete the current statutory accounting period. The intervening statutory accounting period – that is, from the last day of the current period to the beginning of the new period – will be less than 12 months. The new and subsequent statutory accounting periods will be 12 months.

    Example 4
    Statutory accounting periods

    If a company with a statutory accounting period ending 30 June 2002 elected on 30 August 2001 to change to a statutory account period ending 30 September, it would have statutory accounting periods of:
    • 1 July 2001 to 30 June 2002
      • 1 July 2002 to 30 September 2002
      • 1 October 2002 to 30 September 2003, and
      • subsequent 12-month statutory accounting periods ending 30 September.
       
    It is not necessary for a CFC to complete the current statutory accounting period before beginning a new period if the election is made when the CFC first comes into existence or when a company first becomes a CFC.
    End of example
    What interests in a foreign company are taken into account in the control tests?

    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 largest 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%.
    End of example

    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%.
    End of example

    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.

    For example, this would be the case 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.

    Indirect control interest in a company

    A taxpayer may hold a direct control interest in an entity (Entity A) which holds a direct control interest in another entity (Entity B). In this case, the taxpayer has an indirect control interest in Entity B.

    A taxpayer's indirect control interest in Entity B is obtained by multiplying the direct control interest of the taxpayer in Entity A by the entity's direct control interest in Entity B.

    This process of multiplication is continued where there are further entities in the chain.

    Indirect control interest may only be traced through a controlled foreign entity

    An indirect control interest in a foreign entity can be traced only through controlled foreign entities (CFEs). These are CFCs, controlled foreign partnerships and controlled foreign trusts.

    A controlled foreign partnership is a partnership which does not have a resident partner and has at least one CFC or a controlled foreign trust as a partner. A controlled foreign trust is a trust, other than an Australian trust:

    • that has an eligible transferor, or
    • where five or fewer residents and their associates hold, or are entitled to acquire, 50% or more of the income or capital of the trust.

    Deeming rules for tracing an indirect control interest

    For determining the indirect control interest in an entity (but not for working out the amount of the income to be attributed to a taxpayer) a resident or an interposed CFC is deemed, in the following specified circumstances, to own a 100% interest in a lower-tier entity.

    The control tracing interest of an entity will be treated as 100% if, together with associates, the entity:

    • has an interest of at least 50% in a foreign company
    • satisfies the assumed controller test in relation to a foreign company
    • actually controls the foreign company
    • is a partner in a partnership that is not an Australian partnership
    • is an eligible transferor in relation to a trust, or
    • has an interest of at least 50% in a trust that is not an Australian trust.

    Example 7
    Indirect control interest

    A resident company holds a 60% interest in a foreign company, FC1, which holds a 35% interest in another foreign company, FC2. FC2 holds a 60% interest in foreign company FC3. Another resident holds a 20% interest in FC2.
    The indirect control interest of the resident company in FC3 is:
    Resident company Direct control interest
    %
    Control tracing
    interest
    %

    FC1

    60

    100

    FC2

    35

    35

    FC3

    60

    100

     

    The indirect control interest of the resident company in FC3 is worked out as follows:

    100% x 35% x 100% = 35%

    It is possible to trace interests through FC2 because it is a CFC. FC3 is also a CFC because the resident company has an indirect control interest of 35% in FC3 and another resident has an indirect control interest of 20% in FC3 (that is, 20% in FC2 x 100% interest for tracing control of FC2 in FC3).
    End of example
    Associate-inclusive control interest

    Your associate-inclusive control interest in a foreign company is the sum of:

    • your direct control interests in the foreign company
    • your indirect control interests in the foreign company
    • the direct and indirect control interests of your associates in the foreign company.

    To avoid double counting, an indirect control interest is not taken into account when determining a direct control interest or another indirect control interest.

    Section 2: Are you an attributable taxpayer?

    If you have an interest in a CFC, you must determine if you are an attributable taxpayer. You are only required to include an amount of attributable income from a CFC in your assessable income if you are an attributable taxpayer in relation to the CFC.

    You will be an attributable taxpayer if:

    • you have an associate-inclusive control interest of 10% or more in a CFC, or
    • all of the following rules apply:
      • the CFC is a CFC because of the application of the de facto control test
      • you are an Australian 1% entity, and
      • you are part of a group of five or fewer Australian entities who, alone or with associates (regardless of whether the associates are Australian entities) controls the CFC.
       
    What share of the attributable income of a CFC must you include in your assessable income?

    If you are an attributable taxpayer, you may be attributed a share of a CFC's attributable income. Your share is called an attribution percentage and is based on your rights to profits from the CFC.

    Working out your attribution percentage

    Your attribution percentage in a CFC is the sum of your:

    • direct attribution interest in the CFC, and
    • indirect attribution interests in the CFC.

    The interests of your associates are not included.

    Direct attribution interest in a CFC

    Your direct attribution interest in a CFC is the largest of the percentages that you hold, or are entitled to acquire, of the following:

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

    Test time

    Your direct attribution interest in a CFC is measured at a point in time called a test time. The test time may occur during the accounting period of a CFC.

    In some cases, it may not be possible to measure the percentage you hold 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 company's accounting period.

    In these cases, your 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 you held at the test time are held at the end of the company's accounting period.

    Exclusion of eligible finance shares

    In working out your direct attribution interest in a CFC, eligible finance shares in the CFC are not taken into account.

    Exclusion of real estate investment trust shares

    Real estate investment trust shares are not taken into account in working out an entity’s direct attribution 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 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.

    Indirect attribution interest in a CFC

    You may hold an attribution tracing interest in an entity (Entity A) which holds an attribution tracing interest in another entity (Entity B).

    Your indirect attribution interest in Entity B is obtained by multiplying your attribution tracing interest in Entity A by that entity's attribution tracing interest in Entity B.

    This process of multiplication is continued where there are further CFEs in the chain of entities.

    Attribution tracing interests in a CFC

    Your attribution tracing interest in a CFC is equal to your direct attribution interest in the CFC. The deemed 100% rule for tracing control does not apply when tracing your attribution percentage.

    Attribution tracing interest in a controlled foreign partnership

    The attribution tracing interest of a partner in a partnership is the percentage the partner holds, or is entitled to acquire, of the profits of the partnership or of the partnership property. Where the two percentages differ, the attribution tracing interest will be the greater of those percentages.

    Attribution tracing interest in a controlled foreign trust

    The attribution tracing interest that a beneficiary of a trust holds in the trust is the percentage of the income or property of the trust representing the share of the income or property to which the beneficiary is entitled, or is entitled to acquire. If the percentage of the income and the percentage of the property differ, the higher percentage is treated as the attribution tracing interest.

    An eligible transferor has an attribution tracing interest in the controlled foreign trust equal to 100%. See part 1 of chapter 2 to determine whether you are an eligible transferor.

    Reduction of the attribution percentage where the total percentage is more than 100%

    In some cases, the total of the attribution percentage of all attributable taxpayers may be more than 100%. In these cases, the aggregate is reduced to 100% by reducing proportionately the interest of each attributable taxpayer.

    Example 8
    Reduction where attribution percentage is more than 100%
    A foreign company has two classes of shares on issue. Class A carries the right to vote, but no income rights. Class B carries the right to income and is non-voting. An Australian resident (Res1) owns 25% of the Class A shares and 75% of the Class B shares. Another resident (Res2) owns the remaining shares in each class. The foreign company is a CFC and both residents are attributable taxpayers.

    Res1's attribution percentage
    (greater of 25% and 75% )

    75%

    Res2's attribution percentage
    (greater of 75% and 25% )

    75%

    Total interest of residents

    150%

     

    Each attributable taxpayer's attribution percentage is reduced in proportion, so that the aggregate interests of all attributable taxpayers is 100%.

    Res1's reduced attribution percentage

    =

                attribution percentage            
    total interest of attributable taxpayers

     

    =

     

     75
    150

    = 50%

    Res2's reduced attribution percentage

    =

                attribution percentage            
    total interest of attributable taxpayers

     

    =

     

     75
    150

    = 50%

     

    End of example

    Section 3: Is the CFC's income generally exempt from accruals taxation?

    A number of exemptions from accruals taxation are provided for amounts taxed in a comparable tax country listed in the Income Tax Regulations 1936.

    The countries listed in attachment A of appendix 1 are called listed countries. The countries not listed are called unlisted countries. (A subset of unlisted countries is ‘section 404 countries’).

    Summary of terms used to refer to countries

    Listed countries

    Listed countries are those listed in Schedule 10 of the Income Tax Regulations 1936. Amounts taxed at full rates by listed countries are generally exempt from accruals taxation.

    Unlisted countries

    Unlisted countries are those that are not listed countries. This includes section 404 countries for all purposes of the CFC rules except the application of section 404.

    Section 404 countries

    Section 404 countries are those listed as ‘section 404 countries’ in Schedule 10 of the Income Tax Regulations 1936. The list of section 404 countries is in attachment A of appendix 1.

    Section 404 excludes from attributable income dividends paid from a company resident in a listed country or section 404 country to a CFC that is also resident in a listed or section 404 country.

    When is a CFC a resident of a listed country?

    A CFC is treated as a resident of a listed country if:

    • the CFC is not a Part X Australian resident, and
    • the CFC is treated as a resident of a listed country under the tax laws of that country.
    When is a CFC a resident of a section 404 country?

    A CFC is a resident of a section 404 country if:

    • the CFC is not a Part X Australian resident
    • the CFC is treated as a resident of a section 404 country under the tax laws of that country, and
    • the CFC is not treated as a resident of a listed country at that time for the purposes of the tax law of the listed country.
    When is a company a resident of an unlisted country?

    A company is treated as a resident of an unlisted country if the company is neither a Part X Australian resident nor a resident of a listed country.

    Rules that determine the particular unlisted country of residence

    In some cases, it is necessary to determine whether a company is treated as a resident of a particular unlisted country, for example, for determining the active income test.

    A company is treated as a resident of a particular unlisted country if:

    • the company is treated as a resident under a tax law of the unlisted country, and
    • the company is not treated as a resident of any other unlisted country under the tax law of that country.

    If a company is treated as a resident of more than one unlisted country under the tax laws of those countries and is incorporated in one of those countries, it is treated as a resident in the country of incorporation.

    If a company is not treated as a resident under the tax law of any unlisted country, it will be a resident of the unlisted country in which its management and control is solely or principally located.

    If a company is not treated as a resident under the tax law of any unlisted country and does not have its central management and control solely or principally in an unlisted country, it will be a resident of the unlisted country in which it is incorporated.

    Section 4: What types of attribution can apply?

    Sections 1 and 2 asked the following questions:

    • Is there a CFC?
    • Are you an attributable taxpayer?

    If the answer to both of these questions is yes, the next step is to determine whether you must include an amount in your assessable income.

    Attribution on change of residence

    If you were an attributable taxpayer of a CFC resident in an unlisted country and the CFC changed its residence to a listed country or to Australia while you were an attributable taxpayer, you may be subject to attribution on your share of the accumulated profits of the CFC.

    Attribution of current year profits

    If you are an attributable taxpayer of a CFC at the end of the CFC's statutory accounting period, you may need to include the whole or a part of the profits of that period in your assessable income.

    The attribution of current year profits of a CFC may be reduced if you have been subject to dividend attribution or attribution on change of residence by the CFC. Read chapter 3 and appendix 2 to see whether either of these applies to you.

    Section 5: Do you have to work out the attributable income of a CFC?

    This section will tell you whether you need to work out the attributable income of the CFC. A brief description of the calculation follows.

    Overview of the calculation

    If you are an attributable taxpayer, your assessable income may include a share of the profit, if any, from certain types of income and gains of the CFC. The profit of the CFC is called attributable income and is worked out before taking into account your share of the profit (called your attribution percentage).

    You work out attributable income based on the existing rules for working out the taxable income of a resident company. However, not all of the profits of a CFC are taken into account in working out the attributable income of the CFC.

    The general rule

    The general rule is that only amounts that arise from certain transactions (called tainted income) which are classified as prone to tax minimisation are taken into account. These will only be taken into account if a CFC is not mainly engaged in genuine business activities, that is, where the CFC fails the active income test.

    Exception for a listed country

    An exception to the general rule is made for a CFC that is resident in a listed country and derives certain untaxed income or gains (of a kind specified in the Income Tax Regulations 1936) from sources outside listed countries. These amounts are taken into account whether or not the CFC passes the active income test.

    Exception for trust amounts

    Another exception to the general rule is for certain trust amounts derived by a CFC. These will be taken into account whether or not the CFC passes the active income test.

    Exception for comparably taxed amounts

    Amounts are generally only taken into account if they are not taxed in full in Australia or comparably taxed in a listed country. Amounts arising in a listed country are assumed to be comparably taxed if they do not qualify as eligible designated concession income as described in Schedule 9 of the Income Tax Regulations 1936 and in appendix 1.

    Relevant period

    An amount will normally only be included in your assessable income if the CFC's statutory accounting period ends in your income year.

    Example 9
    Taxpayer with a standard year of income

    A taxpayer whose income year ends on 30 June has a CFC with a statutory accounting period which also ends on 30 June. For the taxpayer's income year ending 30 June 2007, the taxpayer must include a share of the attributable income of the CFC for the statutory accounting period ending 30 June 2007.
    End of example

    Example 10
    Taxpayer who balances early

    A taxpayer whose income year ends on 31 March has a CFC with a statutory accounting period ending 30 June. For the taxpayer's income year ending 31 March 2007, the taxpayer must include a share of the attributable income of the CFC for the statutory accounting period ending 30 June 2006. The CFC's attributable income for the period 1 July 2006 to 30 June 2007 would not be included in the taxpayer's assessable income until the income year ending 31 March 2008.
    End of example
    Special rule for companies that cease to exist

    If a company that was a CFC at the beginning of its statutory accounting period ceases to exist before the end of that period, the end of the company's statutory accounting period is deemed to be immediately before it ceased to exist.

    Example 11
    Shortened statutory accounting period when a company ceases to exist

    A CFC elects a statutory accounting period that aligns with its usual accounting period of 1 January to 31 December. The company members pass a resolution to wind up the company on 1 August 2007 and it is finally de-registered on 2 November 2007 in accordance with the corporation law in the company's country of residence. As the company ceased to exist during what was its statutory accounting period, the company's statutory accounting period is taken to be from 1 January 2007 to 2 November 2007.
    End of example
    Conditions to be met before you work out attributable income

    You only need to work out attributable income if a foreign company is a CFC at the end of the foreign company's statutory accounting period. In addition, you will only need to work it out if you are an attributable taxpayer at the end of the period.

    If you have an interest in a CFC at the end of the CFC's statutory accounting period, you must work out the attributable income of the CFC for the entire period, not just for the time you held the interest.

    Example 12
    Disposal of a CFC before the end of a statutory accounting period

    A resident individual with an income year ending 30 June has a CFC with a statutory accounting period that coincides with the individual's income year. On 31 December 2006, the individual disposes of the CFC to an unassociated resident company.
    In this case, the resident individual will not be an attributable taxpayer for the CFC's statutory accounting period ending 30 June 2007. As a result, the resident individual will not include in their assessable income any of the attributable income of the CFC for the period.
    End of example

    Example 13
    Acquisition of a CFC part way through a statutory accounting period

    Changing the facts from the previous example so that the CFC was acquired (not disposed of) on 31 December 2006, the resident company would be an attributable taxpayer for the CFC's statutory accounting period ending 30 June 2007. As a result, the company would be taxed on the attributable income of the CFC for the entire period, even though the company owned the foreign company for only the second half of that period.
    An arrangement that is designed to avoid the CFC measures by selling an interest before the end of a CFC's statutory accounting period and acquiring the interest after the end of the period will be treated as if the interest were not sold.
    End of example

    Were you an attributable taxpayer at the end of the CFC's statutory accounting period?

    No

    You do not need to work out attributable income. You do not need to continue reading this chapter.

    Yes

    Read on.

     

    Part 2: Does the CFC satisfy the active income test?

    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

    Part 2 deals with the operation of the active income test but does not cover the operation of the special rules for banks, other financial institutions and insurance companies in Subdivision F of Division 8 of Part X of the ITAA 1936.

    Section 1

    Terms used in this part

    Section 2

    Conditions to be met to satisfy the active income test

    Section 3

    Is the tainted income ratio less than 5%?

     

    Section 1: Terms used in this part

    Meaning of passive income

    Dividends

    Passive income includes dividends (within the meaning of section 6) and:

    • unit trust dividends received from a corporate unit trust or a public trading trust
    • a distribution made by a liquidator which is deemed to be a dividend.

    Interest income

    Passive income includes tainted interest income, which is all interest income except for interest derived through an offshore banking unit. It also specifically includes:

    • amounts in the nature of interest (for example, discounts)
    • income earned from hire purchase and other property financing transactions
    • accrued interest on discounted and other deferred interest securities issued after 16 December 1984
    • interest deemed to be derived where a CFC assumes the rights of a lender through the purchase of securities through a secondary market
    • factoring income.
    Tainted rental income

    There are three categories of tainted rental income:

    • rent from associates
      • income from any leases between a CFC and an associate and any income that arises where rent is paid to the CFC by an associate
       
    • lease of land
      • income from related party lease transactions
      • income from leases of land, including fixtures, in respect of land situated in a country other than the CFC’s country of residence
      • income from leases of land, including fixtures, in respect of land situated in the CFC’s country of residence, unless a substantial part of the income is attributable to the provision of labour-intensive ‘property management services’ by directors or employees of the CFC in connection with the land
       
    • ships and aircraft
      • income from the lease of ships or aircraft, cargo containers for use on ships or aircraft or plant or equipment for use on board ships, unless the income relates to the provision of operating crew in relation to ships and aircraft or maintenance or management services by the CFC's directors or employees.
       

    Special excluded rental income

    An amount of rental income will not be treated as tainted if the following three requirements are satisfied:

    • the amount is derived from an associated CFC resident in the same country
    • the amount is taxed at the normal company rate of tax in that country, and
    • the payment of the amount did not wholly or partly give rise to a notional allowable deduction for the associated CFC.

    The second requirement is based on whether an amount has been taxed at the normal company rate of tax in a country. For an amount to be treated as taxed at a country's normal company rate, the amount must be taxed at the same rate applicable to the company's other non-dividend income or at a higher rate. In addition, there can be no entitlement to a credit, offset or tax concession in the taxation of the amount.

    For the third requirement, it is assumed that the associated CFC failed the active income test. The requirement will not be satisfied if a payment would have resulted in a notional allowable deduction for an associated CFC if the CFC had been required to work out its attributable income.

    Tainted royalty income

    Tainted royalty income includes income derived from assigning any copyright, patent, trademark or other like property or right.

    Specifically excluded from tainted royalty income are royalties received from unrelated persons in the course of carrying on a business where the CFC substantially develops or improves the property or right for which the royalty is paid. For example, if a CFC develops software and licenses it to an unrelated party, the royalty income is not tainted.

    Net gains on the disposal of tainted assets

    The net gain (that is, the sum of gains, less losses) from the disposal of tainted assets is included in passive income.

    What is a tainted asset?

    Tainted assets include:

    • all shares, interests in trusts and interests in partnerships
    • most financial instruments, such as loans, forward and futures contracts, swaps, other securities and life assurance policies
    • rights or options over any of the above.

    An asset will also be tainted if it is held by a CFC to derive tainted rental income. In order to determine whether an asset is used to produce tainted rental income, you must look at the use of the asset over the whole time of ownership. If the purpose changed during that period, the asset will be treated as being used to produce tainted rental income if this was the purpose for the majority of the period of ownership.

    Also, an asset will be treated as a tainted asset if it is not trading stock or is not used solely in carrying on business.

    The tainted assets referred to in the preceding paragraphs, such as shares, will be tainted assets whether or not they are trading stock or are used in carrying on business. Exclusion of commodity investments

    Commodity investments are not tainted assets; they are treated separately when working out net tainted commodity gains.

    Proceeds from trading in tainted assets

    Income derived in carrying on a business of trading in tainted assets is included in passive income.

    Net tainted commodity gains and losses

    The net gain on the disposal of tainted commodity investments is included in passive income.

    What is a tainted commodity gain or loss?

    A tainted commodity gain or loss arises from the disposal of a tainted commodity investment.

    What is a tainted commodity investment?

    Commodity investments that are tainted include futures or forward contracts for a commodity (or a right or option on such a contract) unless the contract relates to carrying on a business of:

    • producing or processing the commodity, or
    • using the commodity as a raw material in a production process.

    Where these conditions are not met, the investment can be excluded from being a tainted commodity investment if the contract, right or option relates to a transaction where the resultant physical sale of the commodity will not be tainted sales income. The contract must also have been entered into for the sole purpose of eliminating or reducing adverse financial consequences from fluctuations in the price of the commodity.

    Net tainted currency exchange gains and losses

    A net tainted currency gain is the total of the tainted currency exchange gains less the total of the tainted currency exchange losses. If this is a positive figure, there is a net gain; if not, the amount is ignored.

    What is a tainted currency exchange gain or loss?

    A gain or loss from a currency exchange fluctuation will be tainted unless it falls within one of the following categories:

    • the underlying transaction was for the purchase of goods from an unassociated person
    • the underlying transaction was for the purchase or sale of depreciable plant or equipment that was used mainly to produce income that is not passive, tainted sales or tainted services
    • the underlying transaction was a hedge for one of the preceding transactions
    • the CFC was carrying on business as a currency trader and no other party to the transaction was an associate or an Australian resident.
    Meaning of tainted sales income

    The tainted sales income of a CFC includes that part of gross turnover that represents sales income where the goods sold were purchased from or sold to:

    • an associate who is a Part X Australian resident, or
    • an associate who is not a Part X Australian resident but carried on business in Australia through a permanent establishment.

    Sales which result in tainted sales income

      Purchased from Tainted sales?

    Sold to anyone

    Associated Australian

    Yes

    Associated non-resident (via Australian branch)

    Yes

    Unassociated Australian

    No

    Associated non-resident (not via Australian branch)

    No

    Unassociated non-resident

    No

     

    Purchases which result in tainted sales income on sale

      Sold to Tainted sales?

    Purchased from
    anyone

    Associated Australian

    Yes

    Associated non-resident (via Australian branch)

    Yes

    Unassociated Australian

    No

    Associated non-resident (not via Australian branch)

    No

    Unassociated non-resident

    No

     

    Exclusions from tainted sales income

    Manufacturing exclusion

    The main exclusion from tainted sales income is sales where the CFC manufactures, extracts, produces or substantially alters the goods sold: for example, this would include sales from mining and quarrying operations.

    This exclusion will apply only where the goods sold were manufactured, produced or substantially altered by the directors or employees of the CFC. The packaging and labelling of goods is not considered to be a substantial alteration of those goods.

    The exclusion will not be available where the CFC subcontracts the manufacture, production or substantial alteration to agents or subcontractors. However, the fact that a CFC subcontracts some operations will not disqualify it from the manufacturing exclusion if directors or employees of the CFC carry out a substantial part of the manufacture, production or substantial alteration.

    Hospitality exclusion

    Also excluded from tainted sales income are sales that, broadly, arise from the tourism and hospitality industry. These are sales provided in connection with a hotel, motel, guesthouse, restaurant, bar or other place of entertainment or recreation.

    Passive income exclusion

    Amounts of passive income are excluded from tainted sales income. This prevents double counting.

    Meaning of tainted services income

    Tainted services income, in broad terms, means income derived from the provision of services by a company to:

    • a resident (except in connection with a foreign permanent establishment of the Australian resident), or
    • a non-resident in connection with the non-resident’s Australian permanent establishment.

    Tainted services income also includes income derived from services provided indirectly to Australian residents, subject to certain requirements.

    Services includes any benefit, right or privilege provided under an arrangement for the performance of work or the provision of facilities: for example, performance of technical, managerial or transport work.

    Tainted services income

    Provided to Tainted services?

    Associated Australian

    Yes

    Associated non-resident (via Australian branch)

    Yes

    Unassociated Australian

    Yes

    Associated non-resident (not via Australian branch)

    No, subject to indirect services rule

    Unassociated non-resident (via Australian branch)

    Yes

    Unassociated non-resident (not via Australian branch)

    No

     

    Exclusions from tainted services income

    General exclusions

    Tainted services income does not include:

    • royalties
    • any income in respect of a lease of land
    • any income from trading in assets, or
    • gains from currency exchange rate fluctuations, commodity investments and assets.

    Manufacturing exclusion

    There is an exclusion from tainted services income where the service relates to goods manufactured by a CFC – for example, payments for after-sales service or income derived under a service contract for equipment manufactured by a CFC.

    Hospitality exclusion

    Also not included in tainted services income are services that, broadly, arise from the tourism and hospitality industry: these amounts are services provided in connection with a hotel, motel, guesthouse, restaurant, bar or other place of entertainment or recreation.

    Passive and tainted services income exclusion

    Tainted services income does not include passive income or tainted sales income; this prevents double counting.

    Indirect services rule

    Income from services provided to an Australian resident or Australian permanent establishment of a non-resident is tainted services income. Income from services provided indirectly to certain Australian residents or Australian permanent establishments will also be tainted services income where the following conditions are met:

    • services provided by the company to an associated entity are received by another entity that is an Australian resident
    • the services are provided under a scheme (as defined in section 995-1 of the ITAA 1997), and
    • the income from the services would have been tainted income if they had been provided directly by the company to the ultimate recipient.

    The services originally provided by the company have to be the same services that are provided to the ultimate recipient.

    Example 14

    Architect Co and Plans Co are both members of the same corporate group, and both are CFCs of AustCo, an Australian resident company. Architect Co provides architectural services (house designs) to Australian customers. Plans Co also develops building and house plans.
    Plans Co provides Architect Co (an entity that is an associate) with a suite of highly specific house designs. Architect Co markets these into the Australian market, assisting customers in choosing the most appropriate design, but otherwise making no changes. In this case, Plans Co has indirectly provided services to Australian customers, with the house designs received by those customers the same as those originally provided by Plans Co to Architect Co.
    The application of the indirect services rule means that AustCo may have to include an amount in its assessable income that is tainted services income in relation to the services provided by Plans Co to Architect Co.
    End of example

    Section 2: Conditions to be met to satisfy the active income test

    A CFC has to satisfy the following five conditions to pass the active income test:

    Condition 1 – the CFC is a resident of a foreign country

    The CFC must be a resident of a particular country throughout the statutory accounting period. A change of residence of the CFC does not mean that the CFC will fail the active income test. However, it must have been a resident of a particular country both before and after the change, and must have been in existence at the end of the statutory accounting period.

    New companies

    If a CFC was in existence for only part of a statutory accounting period, it must be a resident of a particular country throughout the period in which it existed – that is, in the period from incorporation to the end of the statutory accounting period.

    Treatment of dormant companies

    The term ‘in existence’ does not include a company that is dormant within the meaning of former Part VI of the Companies Act 1981. A CFC that is dormant for the whole of the statutory accounting period will fail the active income test. However, because the CFC is dormant, it will have no income or gains and will have no attributable income.

    Is the CFC resident in a particular country?

    Yes

    Read on.

    No

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

     

    Condition 2 – the CFC carries on business at or through a permanent establishment in its country of residence

    The CFC must carry on business at or through a permanent establishment in its country of residence for the whole of a statutory accounting period in which it is in existence.

    What is a permanent establishment?

    The definition of permanent establishment is contained in section 6 of the Act. The term includes a fixed place of business through which the CFC carries on business operations. However, it specifically excludes a place where a person:

    • is engaged in business dealings through a commission agent or broker who is acting in the ordinary course of business and receiving customary rates of remuneration
    • is carrying on business through an agent who does not have, or does not usually exercise, a general authority to negotiate and conclude contracts or to fill orders from stock situated in the country
    • maintains the place solely for the purpose of purchasing goods or merchandise.

    Did the CFC carry on business through a permanent establishment in its country of residence?

    Yes

    Read on.

    No

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

     

    Condition 3 – the CFC kept proper records

    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; as a result, 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 financial statements
    • any ledgers or journals
    • 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.

     

    Condition 4 – the CFC can substantiate a claim that it has met the active income test?

    A CFC must have, and be able to produce, accounts to substantiate your claim that the CFC has passed the active income test. If the CFC is a partner in a partnership, that partnership must also keep accounts to substantiate amounts derived by the partnership. If the CFC or partnership does not have the accounts, or does not produce them, the CFC is taken to have failed the active income test. See chapter 5 for details of the substantiation requirements and the procedures.

    Is the CFC and any partnership in which it is a partner able to substantiate your claim?

    Yes

    Read on.

    No

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

     

    Condition 5 – the CFC’s tainted income ratio is less than 5%

    To pass the active income test, the tainted income ratio of a CFC for a statutory accounting period must be less than 0.05: that is, less than 5%. If both the bottom line and the top line of the relevant formula are nil, the CFC is taken to have passed the active income test.

    Section 3: Is the tainted income ratio less than 5%?

    The tainted income ratio for a CFC is worked out as follows:

    gross tainted turnover
    gross turnover

     

    Gross turnover

    Broadly, the gross turnover of a CFC is the sum of the company’s net gains and gross revenue. Work out the gross turnover using the following five steps:

    1. identify the total gross revenue derived by the CFC
    2. exclude certain comparably taxed amounts
    3. exclude the proceeds of certain asset disposals
    4. add back net gains arising from certain asset disposals
    5. add the CFC's share of the gross turnover of each partnership in which it was a partner.

    The figures used are mainly drawn from the accounts of the CFC. If the accounts are prepared in a foreign currency, there is no need to convert the amounts to Australian dollars.

    Step 1 – Identify total gross revenue

    The total gross revenue is the sum of amounts shown in the accounts of a CFC as gross revenue: that is, deductions are not taken into account.

    Do not include amounts that have not been brought to account in the period; for example, an amount may not be recognised in the accounts because its receipt is extremely doubtful. This amount would not be included in gross revenue. However, the exclusion of the amount must be in accordance with commercially accepted accounting principles and give a true and fair view of the CFC's financial position.

    Step 2 – Exclude comparably taxed amounts

    Certain comparably taxed amounts are excluded from the active income test. They are:

    • a franked dividend
    • an amount included in the CFC’s assessable income in any year of income, unless the amount is only subject to dividend or interest withholding tax or is not fully taxed; for example, certain shipping or insurance premiums
    • an amount arising from the disposal of an asset that is taxable Australian property
    • an amount that is an attribution account payment to the extent that the profits from which the payment was made have been previously attributed to you
    • an amount derived through a branch in a listed country if the amount is taxed in that country
    • a non-portfolio dividend from a foreign company.

    Because trust amounts arising to a CFC are attributed regardless of whether the CFC passes the active income test, they are also excluded from the tainted income ratio calculation.

    Step 3 – Exclude proceeds from certain asset disposals

    Amounts that arise from asset disposals are excluded from the gross revenue. However, this exclusion does not extend to disposals of trading stock. Amounts included in gross revenue from currency exchange rate fluctuations and commodity investments are also excluded.

    Step 4 – Add back net gains

    The amounts that were excluded under step 3 are brought back into gross turnover as net amounts. There are three separate net amounts:

    • the net gain from the disposal of commodity investments
    • the net gain from currency exchange rate fluctuations
    • the net gain from the disposal of other assets that are not trading stock or commodity investments.

    In each case, to determine the net gain, the sum of the individual gains is reduced by the sum of the losses. If there is a net loss, the amount is ignored and does not reduce the gross turnover. It is important to note that there is a separate calculation of net gain for each of the categories. Do not take comparably taxed amounts into account.

    Consideration paid or received for asset disposals must be included at market value. Where an amount has been written down in the accounts, the write-down is to be ignored.

    Step 5 – Include partnership turnover

    A CFC's share of the gross turnover of a partnership must be added to the CFC's gross turnover. This is done for each partnership in which the CFC is a partner. This means that you must go through the same process (steps 1 to 4) for each partnership.

    In working out the total, treat the partnership as if it were a CFC. The partnership is assumed to be a resident of the same country as the CFC.

    Result of steps 1 to 5

    Add the amounts at steps 2 and 3. Take this total away from the total revenue at step 1. The balance is the gross revenue after exclusions.

    Add the totals of steps 4 and 5. This is the CFC's gross turnover.

    Gross tainted turnover

    Gross tainted turnover is the part of the gross turnover that is either passive income, tainted sales income or tainted services income.

    Broadly, passive income includes:

    • dividends
    • tainted interest income
    • annuity income
    • tainted rental income
    • tainted royalty income
    • amounts derived as consideration for the assignment in whole or part of any copyright, patent, design, trademark or other like property or right
    • net gains on the disposal of a tainted asset
    • income derived in carrying on a business of trading in tainted assets
    • net tainted commodity gains
    • net tainted currency exchange gains.

    Tainted sales income and tainted services income are, broadly, income from certain transactions with, or originating from, associates or Australian residents.

    The gross tainted turnover is worked out using the following five steps:

    Step 1

    Identify the part of gross revenue that is passive income.

    Step 2

    Add the part of gross revenue that is tainted services income.

    Step 3

    Add the part of gross revenue that is tainted sales income.

    Step 4

    Add the part of the gross turnover that is net tainted gains.

    Step 5

    Add the CFC's share of the gross tainted turnover of each partnership in which it was a partner.

    Identify the tainted part of gross revenue (steps 1, 2 and 3)

    Identify which parts of the gross revenue are passive income, tainted sales income or tainted services income: that is, determine the tainted part of the result after step 3 of the calculation of gross turnover.

    Identify tainted net gains (step 4)

    Identify the parts of the net gains that are tainted; that is:

    • the part of the net gain from the disposal of commodity investments that is tainted
    • the part of the net gain from currency exchange rate fluctuations that is tainted, and
    • the part of the net gain from the disposal of assets (other than trading stock or commodity investments) that is tainted.

    Each of the net tainted gains is calculated separately and cannot exceed the amount of the net gain to which it relates. In each case, you will need to calculate the net gain and the net tainted gain. If the net tainted gain is greater than the net gain, use the net gain instead of the net tainted gain.

    Identify the CFC's share of a partnership's gross tainted turnover (step 5)

    Go through steps 1 to 4 for each partnership in which a CFC was a partner. The CFC's share of the gross tainted turnover of each partnership is then added to the CFC's tainted income that was derived directly.

    Working out the tainted income ratio

    The tainted income ratio is worked out by dividing the gross tainted turnover of a CFC by the gross turnover of the CFC.

    The following is a simple example of how to work out the tainted income ratio:

    Example 15
    Working out the tainted income ratio

     
      HK$
    (shown in accounts)

    Interest (passive)

    2 million

    Royalty (passive)

    1 million

    Business income from goods manufactured in Hong Kong 

    60 million

    Manufacturing expenses 

    40 million

     

    Tainted income ratio

    = gross tainted turnover
             gross turnover

    = 3 million
       63 million

    = 4.8% of gross turnover

    As a result, the CFC passes the test.
    End of example

    Is the tainted income ratio less than 5%?

    Yes

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

    No

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

     

    Part 3: Working out attributable income and the amount to include in your assessable income

    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

    This part explains how to work out the attributable income of a CFC. Your share of the attributable income is included in your assessable income.

    Even if the CFC passes the active income test, you will still need to read on – passing the test will eliminate many, but not all, types of attributed income and gains.

    Summary of part 3

    Section 1

    General assumptions for working out the attributable income of a CFC

    Section 2

    General modifications to the law

    Section 3

    Modifications to the treatment of capital gains and capital losses

    Section 4

    Quarantining of losses

    Section 5

    Working out the net income of a partnership

    Section 6

    Trust amounts

    Section 7

    Reduction of attributable income because of interim dividends

    Section 8 

    Relief from double accruals taxation

    Section 9 

    How much is included in assessable income

     

    Section 1: General assumptions for working out the attributable income of a CFC

    Attributable income is included directly in your assessable income. It is not necessary to aggregate amounts of attributable income as you trace through a chain of CFCs.

    Example 16
    Attribution directly to taxpayer

    Assume you wholly own a foreign company which, in turn, wholly owns another foreign company. Also assume that the first company has $300,000 attributable income, and the second company has $200,000 attributable income.
    End of example

    You include an amount in your assessable income as follows:

    Like this

    Do include $300,000 from the first company and $200,000 from the second in your income.

    Do include $300,000 from the first company and $200,000 from the second in your income.

    Not like this

    Do not include $200,000 from the second company in the income of the first company, and $500,000 income from the first company in your own income.

    Do not include $200,000 from the second company in the income of the first company, and $500,000 income from the first company in your own income.

    Attributable income is taxable income

    Attributable income is a hypothetical amount. It is the amount that would be the taxable income of a CFC, based on certain assumptions. These are explained below.

    Assume the CFC is a resident taxpayer

    To work out attributable income, it must first be assumed that the CFC is both a resident of Australia and a taxpayer for the whole of a statutory accounting period. You can then work out the attributable income in the same way you work out the taxable income of a resident company. Amounts derived by a CFC from all sources will be taken into account because residents are taxable on their worldwide income and gains.

    To distinguish the calculation of attributable income from a 'real' calculation of taxable income, the amounts used to work out attributable income are called notional amounts. Attributable income is the amount by which the notional assessable income is greater than notional allowable deductions. Income that is not notional assessable income is notional exempt income.

    The assumption that a CFC is a resident of Australia does not change the nature of the activities of the CFC; that is, events that occur in a foreign country will not be taken to have occurred in Australia.

    Modifications in working out the attributable income of a CFC

    In applying the Act to work out a CFC's hypothetical taxable income, you will need to read the Act as if certain modifications (dealt with later in this chapter) have been made to it.

    In some cases, provisions are ignored because the application is not appropriate. In other cases, provisions have been replaced with similar provisions that are tailored to the way the attributable income is worked out.

    In addition, provisions have been included that are not comparable to other provisions of the Act. These modifications are explained later in this part.

    Some provisions of the Act clearly cannot apply when working out attributable income; for example, Part IV, which deals with the making of returns or assessments. Although these provisions of the Act are not specifically excluded from the calculation, for practical purposes they have no effect and can be ignored.

    Accounting period is the year of income

    Taxable income is worked out for a period called an income year. To apply the Act, the statutory accounting period of a CFC is assumed to be an income year. The particular income year referred to in working out attributable income will be the income year of the attributable taxpayer in which the statutory accounting period ends.

    Example 17

    Assume you are working out the amount to be included in assessable income for the year ending 30 June 2007 and the statutory accounting period of the CFC ended on 30 September 2006. The attributable income of the CFC for that statutory accounting period is to be worked out in accordance with the provisions of the Act that applied for the year ended 30 June 2007.
    End of example
    Work out attributable income separately

    You must work out your attributable income for a CFC separately to other attributable taxpayers. Different taxpayers may work out different amounts of attributable income for a CFC; that is, the amount included in assessable income may be different for each attributable taxpayer, even if they have the same attribution percentage in the CFC.

    There are differences in working out attributable income, depending on whether a CFC is a resident of a listed country or unlisted country.

    Modifications for an unlisted country

    The notional assessable income of a CFC includes only amounts that fall into specified categories. All other amounts are treated as notional exempt income.

    The excluded amounts depend on whether the CFC passed or failed the active income test.

    What if a CFC fails the active income test?

    If a CFC fails the active income test, amounts that would be assessable if the CFC were a resident are included in attributable income to the extent they represent the following:

    • adjusted tainted income derived by the CFC directly
    • adjusted tainted income derived by the CFC indirectly as a partner in a partnership
    • trust amounts arising to the CFC directly
    • trust amounts arising to the CFC indirectly because the CFC is a partner in a partnership
    • transferor trust amounts arising to the CFC directly or indirectly as a partner in a partnership.

    What if a CFC passes the active income test?

    If a CFC passes the active income test, amounts that would be assessable if the CFC were a resident are included in attributable income to the extent they represent the following:

    • trust amounts arising to the CFC directly
    • trust amounts arising to the CFC indirectly because the CFC is a partner in a partnership
    • transferor trust amounts arising to the CFC directly or indirectly as a partner in a partnership.

    These amounts are explained in section 5 and section 6. Any other income is notional exempt income.

    Diagram 1: Amounts taken into account – unlisted country CFC

    Trust (including transferor trust) income derived directly or indirectly via a partnership are always included; tainted income derived directly or indirectly via a partnership is only included if the CFC fails the active income test; other income is not included.

    Trust (including transferor trust) income derived directly or indirectly via a partnership are always included; tainted income derived directly or indirectly via a partnership is only included if the CFC fails the active income test; other income is not included.

    What is adjusted tainted income?

    Adjusted tainted income is based on the definition of tainted income used for the active income test. Broadly, it comprises amounts that are either passive income, tainted sales income or tainted services income.

    The main difference in the definition of tainted income for the active income test and the definition for working out attributable income is that net gains are included in determining the active income test, whereas the entire consideration on disposal of an asset is included when working out attributable income.

    Amounts not included

    Some amounts that would normally be assessable if derived by a resident company are treated as notional exempt income in working out the attributable income of a CFC. Certain exemptions are also disregarded when working out attributable income. These exemptions have been replaced with similar provisions that are tailored for working out attributable income.

    Amounts taxed in Australia

    Amounts that have been taxed in full in Australia are not included in notional assessable income. Amounts will be treated as taxed in full if they have been included in a CFC's assessable income; for example, income sourced in Australia from a CFC's branch in Australia would normally be included in the CFC's assessable income in Australia. Amounts that will not be considered fully taxed, although subject to Australian taxation, are:

    • amounts subject to interest or dividend withholding tax, and
    • certain shipping income, film and video tape royalties, and insurance premiums.

    Dividends that are franked under the imputation provisions are treated as notional exempt income.

    Branch in a listed country

    An amount of income or profits derived by a CFC in an unlisted country from carrying on a business through a permanent establishment (for example, a branch) in a listed country is excluded, provided the amount is not eligible designated concession income (EDCI) in relation to any listed country.

    Exclusion of dividends

    Most dividends paid to a CFC by a foreign company are not included in the notional assessable income of the CFC. The only dividends you may need to include for a CFC that is resident in an unlisted country are dividends that are portfolio dividends paid to the CFC (see chapter 3).

    Modifications for a listed country

    Working out attributable income for a CFC resident in a listed country is similar to working out attributable income for a CFC resident in an unlisted country. However, more exemptions are provided for CFCs in listed countries.

    What if a CFC fails the active income test?

    If a CFC fails the active income test, amounts that would be assessable if the CFC were a resident are included in attributable income to the extent they represent the following:

    • EDCI that is adjusted tainted income arising to the CFC directly or indirectly as a partner in a partnership
    • low-taxed third-country income arising to the CFC directly or indirectly as a partner in a partnership (only where it is of a kind specified in the Income Tax Regulations 1936)
    • trust amounts arising to the CFC directly that are not subject to tax in a listed country or are subject to tax and are designated concession income
    • trust amounts arising to the CFC indirectly because the CFC is a partner in a partnership, if the amounts are not subject to tax in a listed country or are subject to tax and are designated concession income
    • transferor trust amounts arising to the CFC directly or indirectly as a partner in a partnership.

    Any other amounts are notional exempt income.

    What if a CFC passes the active income test?

    If a CFC passes the active income test, amounts that would be assessable if the CFC were a resident are included in attributable income to the extent they represent the following:

    • low-taxed third-country income arising to the CFC directly or indirectly as a partner in a partnership (only where it is of a kind specified in the Income Tax Regulations 1936)
    • trust amounts arising to the CFC directly that are not subject to tax in a listed country or are subject to tax and are designated concession income
    • trust amounts arising to the CFC indirectly because the CFC is a partner in a partnership, if the amounts are not subject to tax in a listed country or are subject to tax and are designated concession income
    • transferor trust amounts arising to the CFC directly or indirectly as a partner in a partnership.

    Any other income is notional exempt income.

    Diagram 2: Amounts taken into account – listed country CFC

    Other income is not included; tainted EDCI derived directly or indirectly via a partnership is only included if CFC fails the active income and de minimis tests; low-taxed third-country income (of a kind specified in the Income Tax Regulations 1936) is always included unless the de minimis test is satisfied; trust (including transferor trust) income derived directly or indirectly via a partnership is always included.

    Other income is not included; tainted EDCI derived directly or indirectly via a partnership is only included if CFC fails the active income and de minimis tests; low-taxed third-country income (of a kind specified in the Income Tax Regulations 1936) is always included unless the de minimis test is satisfied; trust (including transferor trust) income derived directly or indirectly via a partnership is always included.

    See Exemption for small amounts for more information concerning the de minimis tests.

    Adjusted tainted income

    Adjusted tainted income is based on the definition of tainted income used for the active income test. Broadly, it comprises amounts that are either passive income, tainted sales income or tainted services income.

    The difference in the definition of tainted income for the active income test and the definition for working out attributable income is that net gains are included in determining the active income test, whereas the entire consideration on disposal of an asset is included when working out attributable income.

    Low-taxed third-country income

    The notional assessable income of a CFC in a listed country includes amounts derived from sources outside the CFC's country of residence if the amounts are of a kind specified in the Regulations. This rule does not apply to amounts of eligible designated concession income (these amounts may be included if the CFC fails the active income test).

    Amounts taxed in Australia

    Amounts that have been taxed in full in Australia are not included in notional assessable income. Amounts will be treated as taxed in full if they have been included in a CFC's assessable income. Amounts that will not be considered fully taxed, although subject to Australian taxation, are:

    • amounts subject to Australian interest or dividend withholding tax, and
    • certain shipping income, film and videotape royalties and insurance premiums.

    Dividends that have been franked under the imputation provisions are treated as notional exempt income.

    Dividends not included

    Most dividends paid to a CFC by a foreign company are not included. The only dividends you must include are dividends (other than non-portfolio dividends) paid to the CFC by a company that was a resident of an unlisted country (other than a section 404 country) when the dividends were paid.

    These amounts will not be included in notional assessable income if the profits from which the dividends were paid have previously been attributed to you.

    Exemption for small amounts

    An exemption applies for CFCs in listed countries if the total of:

    • eligible designated concession income (if the active income test was not passed), and
    • low-taxed third-country income (of a kind specified in the Regulations)

    is not greater than a threshold amount.

    There is no similar exemption for a CFC that is a resident of an unlisted country.

    Threshold amount

    If the CFC has a gross turnover of $1 million or more, the threshold amount is $50,000: that is, the exemption will only apply if the total of the amounts is $50,000 or less.

    If a CFC has a gross turnover of less than $1 million, the threshold amount is 5% of the CFC's gross turnover: that is, the exemption will only apply if the sum of the amounts is less than or equal to 5%.

    How does the exemption operate?

    If the threshold is not exceeded, a CFC's eligible designated concession income and low-taxed foreign source income are not included in the notional assessable income of the CFC. The general anti-avoidance provisions of the Act may apply where attempts are made to split income among a number of CFCs to take advantage of the exemption.

    Section 2: General modifications to the law

    This section explains a number of general modifications to the taxation law which apply when working out the attributable income of a CFC. There are also modifications to:

    • the treatment of gains and losses made by a CFC on the disposal of a capital asset
    • the treatment of losses incurred by a CFC, including the quarantining of deductions
    • the treatment of amounts derived through a partnership.


    These modifications are dealt with in section 3, section 4 and section 5 of part 3.

    Elections to be made by the taxpayer

    You can make most elections on behalf of a CFC in working out its attributable income: you must make the elections when you lodge your tax return. The ATO may extend the time for making the elections.

    Lodgment of elections

    In the case of companies and superannuation funds, no notice of the election is to be sent to the ATO: only give notice if the ATO requests you to do so.

    Exceptions to the rule

    An election for rollover relief under the capital gains tax provisions must normally be made by a CFC, although you can make the election for a wholly owned CFC. The rules for making these elections are explained in section 3 of part 3.

    Functional currency elections are also an exception to the general rule that allows you to make most elections when working out the attributable income of a CFC: see ‘Choice to use functional currency’ below.

    Foreign currency conversion rules

    When calculating attributable income, you must convert all amounts into Australian currency. This conversion is done using the conversion rules under the usual operation of the Act: see Foreign exchange (forex): the general translation rule.

    Choice to use functional currency

    You can choose to calculate attributable income in the sole or predominant currency in which the CFC keeps its accounts (ledgers, journals, statements of financial performance). This sole or predominant currency is called the applicable functional currency.

    When calculating attributable income in a functional currency, all amounts that are not in the applicable functional currency (including Australian currency amounts) must be converted into the applicable functional currency. This conversion is done using the conversion rules under the usual operation of the Act. However, when applying these rules, the applicable functional currency is taken not to be foreign currency and all other amounts (including Australian currency) are taken to be foreign currency.

    Once you have calculated your attributable income, you then convert that amount into Australian currency in accordance with the relevant conversion rules.

    The choice of applicable functional currency must be in writing, but you are not required to notify the Commissioner of Taxation (Commissioner). You must keep written evidence of the choice for as long as you are required to keep your tax records.

    Generally, the choice will apply to the CFC’s statutory accounting period immediately following the one in which you make the choice. However, it will apply to the statutory accounting period in which you make the choice, where you make the choice within 90 days of the beginning of that statutory accounting period.

    The choice to use the applicable functional currency applies until you withdraw it. You can only withdraw a choice where the functional currency has ceased to be the sole or predominant currency in which the CFC keeps its accounts. The withdrawal has effect from immediately after the end of the CFC’s statutory accounting period in which the choice is withdrawn. The withdrawal must be in writing and retained with your tax records. You may make a new choice applicable to subsequent statutory accounting periods.

    Treatment of foreign and Australian taxes

    Deduction for taxes

    A notional allowable deduction is available for foreign or Australian tax paid on amounts included in the attributable income of a CFC. An Australian tax is defined to be a withholding or income tax. It does not include additional amounts, such as late payment penalties. If the tax is paid in a subsequent year, the earlier year's assessment can be amended to allow a deduction for the tax, subject to the time limits for amendments.

    Trading stock provisions

    Valuation is cost only

    In working out attributable income, you must value trading stock at cost. The normal rules for determining the cost of trading stock apply.

    What happens to obsolete stock?

    In working out taxable income, a special valuation is allowed for obsolete stock. This valuation is not allowed when working out attributable income.

    Depreciation provisions

    Basis for depreciation

    Generally, the normal depreciation rules apply for working out the attributable income of a CFC. This means you can choose to depreciate assets by the diminishing value method or the prime cost method. In addition, the rates of depreciation that apply for working out taxable income will also apply in working out attributable income.

    Example 18
    Deduction for depreciation

    A CFC purchased a depreciable asset on 1 July 2005 and uses it solely for the production of notional assessable income. For the statutory accounting period ended 30 June 2006, depreciation would be worked out as follows, using the diminishing value method:

    Base value at 1 July 2005

    $20,000

    Effective life of asset

    7.5 years

    Adjustable value at 30 June 2006

    $16,000

    Notional depreciation for 2005–06

    $4,000

     

    The formula for the diminishing value method is:

    decline in value

    =

    Base value

    x

    days held
    365

    x

               150%           
    asset's effective life

     

    End of example

    Apportionment for exempt usage

    A notional allowable deduction for depreciation must be reduced if an asset is only partially used for the production of notional assessable income. The normal rules apply in working out the reduction.

    Example 19
    Apportionment of deduction for depreciation

    A CFC purchased a depreciable asset on 1 July 2006 and used it for the production of income. For the statutory accounting period ended 30 June 2007, only 50% of the usage was for the production of notional assessable income. Notional depreciation, using the diminishing value method, would be worked out as follows:

    Base value at 1 July 2006

    $20,000

    Depreciation to 30 June 2007

    $4,000

    Adjustable value at 30 June 2007

    $16,000

    Notional depreciation in 2006–07 (50% of $4,000)

    $2,000

     

    End of example

    Asset used in a non-attributable period

    Special rules apply for an asset held by a CFC during a period for which it was either:

    • not necessary to work out the attributable income of the CFC, or
    • not necessary to take depreciation on the asset into account in working out the attributable income of the CFC.

    In such cases, the depreciation rules apply as if the asset were held solely for the production of notional assessable income during the period.

    Example 20
    Deduction for depreciation in non-attributable period

    A CFC purchased a depreciable asset on 1 July 2004 and used it for the production of income. It was not necessary to work out the attributable income of the CFC for the statutory accounting period ending 30 June 2005. For the statutory accounting period ended 30 June 2006, only 50% of the usage was for the production of notional assessable income. In working out the notional depreciation for the 2005–06 statutory accounting period using the diminishing value method, the first step is to notionally depreciate the asset to the beginning of the income year:

    Base value at 1 July 2004

    $20,000

    Depreciation to 30 June 2005

    $4,000

    Notional adjustable value at 30 June 2005

    $16,000

     

    The next step is to determine the depreciation for the 2005–06 income year:

    Notional opening adjustable value at 1 July 2005

    $16,000

    Depreciation to 30 June 2006

    $3,200

    Notional adjustable value at 30 June 2006

    $12,800

     

    The last step is to apportion the depreciation because the asset is not used wholly for the production of notional assessable income:

    Notional depreciation in 2005–06 (50% of $3,200)

    $1,600

     

    End of example

    Sale of a depreciable asset

    Under the normal operation of the Act, a deduction for the difference may be allowed where an asset is sold for less than the notional depreciated value of the asset. This deduction is also allowable in working out the attributable income of a CFC.

    Example 21
    Deduction on disposal

    In the next statutory accounting period, the depreciable asset in example 20 was again used for 50% of the time to derive notional assessable income. At the end of the year it was sold for $9,000. The depreciation calculation would be as follows:

    Notional opening adjustable value at 1 July 2006

    $12,800

    Depreciation to 30 June 2007

    $2,560

    Notional adjustable value at 30 June 2007

    $10,240

    Proceeds of sale

    $9,000

    Notional loss

    $1,240

    Notional depreciation in 2006–07 (50% of $2,560)

    $1,280

    Notional deduction for loss (50% of $1,240)

    $620

     

    End of example

    An amount may also be included in notional assessable income as a result of the sale of the asset.

    Example 22
    Notional assessable income on disposal

    Assume that the asset was sold for $18,000. In this case an amount would be included in notional assessable income as follows:

    Base value at 1 July 2004

    $20,000

    Depreciation allowed

    $2,880

    Adjustable value at 30 June 2007

    $17,120

    Proceeds of sale

    $18,000

    Less adjustable value

    $17,120

    Notional assessable income on disposal

    $880

     

    End of example

    For more information, phone 13 28 66.

    What about other capital deductions?

    There are other provisions of the Act that allow for a deduction of the capital amounts and these may apply when working out attributable income. Where the assets were used in a non-attributable income period, the amount of the deduction allowed or the recoupment included in notional assessable income needs to be determined. However, it is not expected that this will often occur.

    For more information, phone 13 28 66.

    Transfer pricing rules

    Division 13 of Part III

    The Act contains measures to counter arrangements designed to move profits from one entity to another: these arrangements are commonly called transfer pricing or profit shifting. Broadly, the transfer pricing rules allow the ATO to increase a taxpayer’s assessable income or decrease allowable deductions to negate the effect of the arrangement.

    Tax treaty

    Subdivision 815-A of the ITAA 1997 confirms Australia's ability to assess tax based on the associated enterprises article in Australia's tax treaties. The rules apply only where there is a relevant tax treaty. For the purpose of applying the definitions in such a tax treaty, the CFC is treated as a resident of a foreign country. The result is that the associated enterprises article may apply to arrangements involving the CFC.

    Example 23
    CFC in an unlisted country

    Unlist Co1, which you wholly own, is a CFC resident of an unlisted country. In turn, Unlist Co1 wholly owns another CFC (Unlist Co2) in an unlisted country. Unlist Co1 lends Unlist Co2 $1 million and there is no interest payable on the loan. The market interest rate is 10%.

    The taxpayer owns 100% of Unlist Co1, which owns 100% of Unlist Co2. Unlist Co1 lends $1 million to Unlist Co 2.

    The taxpayer owns 100% of Unlist Co1, which owns 100% of Unlist Co2. Unlist Co1 lends $1 million to Unlist Co 2.

    Unlist Co1 will be taken to have received $100,000 on the loan. This amount will be tainted interest income and will be included in the tainted income of the company. If the company fails the active income test, the notional assessable income of Unlist Co1 will include $100,000.
    End of example

    Application of the transfer pricing rules to non-arm’s-length arrangements involving CFCs resident in the same listed country

    The transfer pricing rules do not apply to arrangements involving CFCs resident in the same listed country at any time when a tax treaty is in force.

    Impact on active income test

    The ATO can make adjustments reflecting arm’s-length values to amounts used in determining whether a CFC has passed the active income test. An adjustment can be made if, in working out the attributable income of a CFC, the ATO would make a transfer pricing adjustment in relation to the acquisition or supply of property by the CFC.

    Requests for rulings

    You can request a ruling from the ATO on whether Division 13, as modified, applies to an arrangement.

    Compensating adjustments

    To avoid double taxation, the ATO may make adjustments in the assessment of another taxpayer to compensate for a transfer pricing adjustment. For example, a compensating adjustment may be made where a transfer pricing adjustment decreases the amount of a royalty payment made to a related company. In this case, a compensatory adjustment could be made to reduce the amount included in the assessable income of the related company as a result of the royalty payment.

    As with the usual operation of the transfer pricing rules, where one CFC’s notional assessable income or notional allowable deductions are adjusted, the ATO may make a compensating adjustment to:

    • a taxpayer’s allowable deductions or assessable income
    • another CFC’s notional assessable income or notional allowable deductions, or
    • the attributable income of a transferor trust estate.

    Similarly, compensating adjustments may be made to the attributable income of a CFC when the transfer pricing rules have been applied to:

    • a taxpayer’s allowable deductions or assessable income, or
    • the attributable income of a transferor trust estate.
    Deduction for eligible finance shares

    A deduction is not normally available for the payment of a dividend. However, a notional allowable deduction is available for an eligible finance share dividend paid by a CFC. Broadly, this is a dividend paid on a share issued under a preference share financing arrangement with an Australian financial intermediary (for example, a bank) and its subsidiaries. In effect, the issue of eligible finance shares is treated as a type of loan.

    Dividends on eligible finance shares are treated as an interest expense. A notional allowable deduction is available for the dividends, to the extent a notional allowable deduction would have been available if the dividends had been an interest outgoing.

    Deduction for widely distributed finance shares

    A deduction, similar to that provided for eligible finance shares, is available for dividends paid by a CFC on widely distributed finance shares. Widely distributed finance shares include shares issued by a CFC as a public issue under a preference share financing arrangement to persons who are not associates of the CFC and who have provided finance on arm’s-length terms. To qualify, the shareholders should have no interest in the CFC apart from ensuring repayment of the funds and regular payment of the dividends in a form which is, in effect, a substitution for interest on a loan.

    Diagram 3: Operation of widely distributed finance share measures

    members of the public

    ->

    funds raised by public issue of widely distributed finance shares

    ->

    CFC A

    ->

    funds may be lent

    ->

    CFC B

     

    A deduction is available from the attributable income of CFC A for dividends paid on its widely distributed finance shares. In addition, CFC B is allowed a deduction for interest paid to CFC A on the loan from that company.

    Section 3: Modifications to the treatment of capital gains and losses

    The operation of the capital gains tax provisions of the tax acts is modified for working out the attributable income for a controlled foreign company (CFC).

    Assets included in the calculation

    Capital gains and losses taken into account in working out attributable income for a CFC are those arising on the disposal of assets, other than capital gains tax (CGT) assets which are taxable Australian property.

    A capital gain or loss on the disposal of a CGT asset which is taxable Australian property is taken into account in working out the actual assessable income of the CFC as a non-resident taxpayer; as a result, it is excluded from the calculation of the CFC's attributable income.

    This exclusion applies even if the relevant asset is not subject to CGT because it was acquired before 20 September 1985.

    What is a CGT asset which is taxable Australian property?

    In determining whether an asset is a CGT asset that is taxable Australian property, the assumption that the CFC is a resident of Australia is ignored. However, in most cases, the residency assumption will make no difference.

    There are five categories of CGT assets that are taxable Australian property. They are:

    1. Taxable Australian real property which is directly held.

    This includes:
    • real property situated in Australia, and
    • mining, quarrying or prospecting rights, where minerals, petroleum or quarry materials are situated in Australia.
    Where such assets are depreciating assets, then capital gains and losses are disregarded for CGT purposes.

    2. Indirect Australian real property interest (other than interests in category 5).

    A membership interest held by an entity in another entity where the following two tests are met:
    • non-portfolio interest test (broadly where the interest in an entity, whether foreign or Australian, must be at least 10%), and
    • principal asset test (where the market value of the entity’s assets is principally attributable to Australian real property).
    Note: Where an indirect Australian real property interest held on 10 May 2005 was not previously subject to CGT, its cost base is reset to its market value on that day. For the reset to occur, on 10 May 2005 the following must be satisfied:
    • the interest was held by a foreign resident (or trustee of a non-resident trust)
    • the interest was a post-CGT asset, and
    • the membership interest did not have the necessary connection with Australia (within the meaning of the law on 10 May 2005) disregarding the operation of items 5(b) and 6(b) of the table in section 136-25.
    As a result, unrealised capital gains and capital losses on 10 May 2005 are not subject to CGT.

    3. Business assets used in an Australian permanent establishment of a foreign resident (other than assets in category 1, 2 or 5).

    4. Options or rights over category 1, 2 or 3 assets.

    5. Assets where a CGT gain or loss is deferred when an entity ceases to be an Australian resident.

    The specific list of CGT assets which are taxable Australian property are set out in section 855-15 of the ITAA 1997.

    Assets used to produce notional exempt income

    In working out taxable income, the capital gains tax provisions do not normally apply to the disposal of assets used solely for the production of exempt income. However, in working out attributable income, capital gains or losses on the disposal of assets used to derive notional exempt income can be taken into account.

    Removal of exemption of pre-20 September 1985 assets

    When applying the capital gains tax provisions in working out attributable income, all CGT assets other than taxable Australian property that a CFC owns are deemed to have been acquired on 30 June 1990 or a later date (being the last day of the most recent period during which there was not an attributable taxpayer with a positive attribution percentage). As such, the exemption for pre-20 September 1985 assets does not apply in working out attributable income.

    Cost base of assets

    The cost base of assets owned by a CFC is the market value at the later of:

    • the last day of the most recent period during which there was not an attributable taxpayer with a positive attribution percentage in relation to the CFC, and
    • 30 June 1990.

    This day is called the ‘commencing day’.

    Example 24
    Cost base of asset

    A company is a CFC from 31 December 1990. However, there is not an attributable taxpayer with a positive attribution interest until 1 March 1993 at 5.00pm. The CFC acquired an asset on 1 May 1992, and disposes of the asset on 1 October 2006.
    Consequences
    The asset will be deemed to have been acquired for market value on 1 March 1993. This is the commencing day, as it is the last day of the most recent period during which an attributable taxpayer did not have an attribution percentage. The capital gain or capital loss is worked out using the change in the asset's value between 1 March 1993 and 1 October 2006.
    End of example
    Working out a gain or loss on disposal

    You work out the amount to include in a CFC’s notional assessable income in broadly the same way as for the usual operation of the capital gains tax provisions: that is, you must determine the excess of a CFC’s capital gains over the CFC’s capital losses and include that excess (the net capital gain) in the CFC’s notional assessable income. A net loss can only be carried forward to be offset against future capital gains. However, there are certain modifications to the CGT provisions that apply when working out attributable income.

    Valuation date for assets owned at the end of the commencing day

    An unrealised gain that accumulated on or before the commencing day will not be taxed. Correspondingly, any unrealised loss accumulated up to that date will not be allowed. This is done by valuing the assets on the commencing day and, in general, using that value as the consideration paid.

    However, where an asset had decreased in value on or before the commencing day, the gain using the market value as the consideration paid could be bigger than the actual gain. Similarly, where the asset had appreciated in value on or before the commencing day, the loss using the market value as the consideration paid could be greater than the actual loss. In either of these cases, only the actual gain or loss is taken into account. To achieve this result, you must use as the consideration paid for such assets either the market value of the asset at the commencing day or the actual cost base of the asset, whichever produces the smaller gain or loss. That is:

    • in working out a gain, use the greater of the unindexed cost base and the market value on the commencing day
    • in working out a loss, use the lower of the unindexed cost base and market value on the commencing day.
    Indexation of the cost base

    The cost base of an asset acquired by a company on or before 21 September 1999 may be indexed for inflation. However, the cost base of the asset may only be indexed for inflation up until 21 September 1999 if that asset was held for at least 12 months.

    Indexation factor

    The indexation factor used is the same as that normally used under the capital gains tax provisions; that is, the consumer price index (CPI).

    Adjustment to the cost base

    In some cases, the cost base of an asset will need to be adjusted; for example, this would occur where there was a return of capital on shares or a tax-free distribution from a unit trust.

    For more information, phone 13 28 66.

    Provisions for profit-making ventures

    The provisions of the Act that include in assessable income a capital gain from the disposal of an asset purchased for profit-making by sale or from carrying out a profit-making undertaking or that allow a deduction for a loss – that is, sections 25A and 52 of the ITAA 1936 and sections 1515 and 2540 of the ITAA 1997 – do not apply in respect of the disposal of a non-taxable Australian asset of a CFC.

    Treatment of a net capital loss under the capital gains tax provisions

    In working out taxable income, capital losses are offset against capital gains to determine the net capital gain to include in assessable income. Where there is a net capital loss, you cannot use the loss to reduce assessable income. The same rules apply in working out attributable income.

    A CFC cannot use a net capital loss under the CGT provisions to reduce its notional assessable income. It can only carry the loss forward for offset against capital gains in subsequent years.

    You cannot transfer a loss: for example, you cannot use the loss of one CFC to reduce the notional assessable income of another CFC or your own assessable income.

    In working out attributable income, you cannot take into account a capital loss incurred on the disposal of an asset where the disposal occurred before 1 July 1990.

    Where a company becomes a CFC after 30 June 1995, asset disposals made before it became a CFC are not taken into account when working out attributable income.

    This ensures that a capital loss is not available where it is incurred before a company becomes a CFC.

    Rollover of assets under the capital gains tax provisions

    Forced disposals

    The capital gains tax provisions allow you to defer working out a capital gain or capital loss where the disposal was:

    • as a result of a breakdown of marriage
    • caused by the loss or destruction of the asset
    • from certain resumptions of property
    • from the disposal of certain mining leases.

    These rollover provisions will apply in working out the attributable income because of the assumption that the CFC is a resident.

    Most of these provisions require that the person disposing of the asset must make an election. You can make the election on behalf of a wholly owned CFC: for more information, see Procedures for electing that the rollover provisions apply.

    Group transfers

    The CGT rollover provisions allow companies that have 100% common ownership to defer, in certain circumstances, capital gains or capital losses on assets transferred between companies in the group. In the case of asset transfers between CFCs with 100% common ownership, the circumstances under which the rollover provisions apply are modified. These are set out in the table below:

    Residence of CFC Recipient company residence Asset requirement

    Resident of a listed country

    Either a resident of that listed country or an Australian resident

    Any asset

    Resident of a listed country

    A resident of a particular unlisted country

    The asset must have been used in connection with a permanent establishment of the CFC in an unlisted country

    Resident of an unlisted country

    Either a resident of an unlisted country at that time or an Australian resident

    Any asset

     

    The assumption that a CFC is a resident of Australia is ignored in determining its residence for the group transfer provisions.

    Procedures for electing that the rollover provisions apply

    How to elect for rollover relief

    If an election for rollover relief is required, a CFC (or in the case of group rollovers, both the transferor and transferee) must elect in writing that the particular rollover provision applies.

    The CFC must normally make the election. However, an attributable taxpayer may make an election on behalf of a wholly owned CFC.

    Timing of elections

    An election must be lodged with the ATO on or before the lodgment of a return by an attributable taxpayer that is affected by the election. If more than one attributable taxpayer is affected, the election will be valid if made on or before the lodgment of the affected tax returns.

    Self-assessment – extension of time to make an election

    The self-assessment guidelines do not apply to an election by a CFC for rollover relief and Taxation Ruling IT 2624– Income tax: company self-assessment; elections and other notifications; additional (penalty) tax; false or misleading statement does not authorise an extension of time in which to make the election. If an extension of time is required, the CFC or its agent should approach the ATO. For convenience, the request should go to the ATO office where the tax return of the largest attributable taxpayer is lodged. If this is not readily apparent, the request can be lodged at any ATO office.

    Which officer makes the election?

    The person who acts for the CFC should make the election. In Australia, that person would normally be the public officer of the company; however, foreign laws may require a different officer to act for the company. Whoever is authorised (whether under the foreign law or, if no law governs this, under the constituent document of the CFC) may make the election.

    Election by an agent in Australia

    The requirement that a CFC make an election will also be satisfied where an agent makes the election for or on behalf of the CFC, provided that the person is authorised by the CFC to do so: for example, the Australian parent of the CFC or the CFC’s tax agent in Australia, if authorised, could make the election.

    Reduction of disposal consideration where attributable income is not distributed

    An adjustment will be made to the consideration received by a CFC in respect of the disposal of an interest in an attribution account entity if the income or profits of that entity have been attributed to you, but have not been distributed. The adjustment only applies where the consideration is included in working out notional assessable income, whether under the capital gains tax provisions or any other provision.

    The adjustment is mandatory and does not depend on any finding that the share price reflects the retained earnings. If you think that it applies to the CFC, you can contact the ATO office where you lodge your return for more information.

    CGT concession for active foreign companies

    For certain CGT events happening on or after 1 April 2004, a CFC may be able to reduce its capital gains or capital losses arising in relation to its interest in a foreign company, including a CFC. This can be done when:

    • the CFC holds shares in a company that is a foreign resident (excluding eligible finance shares and widely distributed finance shares)
    • a CGT event occurs in respect of the CGT asset that is the share in the foreign company, and
    • the CFC has held a direct voting percentage of at least 10% in that foreign company for a continuous period of 12 months in the 24 months before the time of the CGT event.

    The gain or loss resulting from the CGT event is reduced by a percentage – calculated at the time of the CGT event – called the active foreign business asset percentage. The method for calculating the active foreign business asset percentage is explained below.

    Active foreign business asset

    An asset will be an active foreign business asset if, at the time of the CGT event, it is:

    • an asset included in the total assets of the foreign company, and
    • is used or held ready for use by the foreign company in the course of carrying on a business,

    and is not

    • a CGT asset that is taxable Australian property
    • a membership interest in an Australian resident company
    • a membership interest in a resident trust for CGT purposes, or
    • an option or right to acquire a membership interest of the type referred to in the previous two bullet points in this list.

    Goodwill of the foreign company is included as an active business asset, but financial instruments (other than shares and trade debts) and certain other assets are not included (section 768-540 of the ITAA 97).

    To be included in the total assets of the foreign company, the asset must be a CGT asset that is owned by the foreign company at the time of the CGT event.

    Active foreign business asset percentage

    You can work out the active foreign business asset percentage of a foreign resident company in relation to the CFC using either the market value method or the book value method. If you do not choose either method, the effect of the default method is that you will not gain any benefit under the concession.

    Market value method

    The active foreign business asset percentage is worked out under the market value method using the following formula:

    market value of all active foreign business assets
    market value of the total assets

     

    Book value method

    The active foreign business asset percentage is worked out under the book value method using the following formula:

    average value of active foreign business assets
    average value of total assets

     

    The average value of the active foreign business assets is worked out using the following formula:

    value of the active foreign business assets at the end
    of the most recent period + the value of the assets of the previous period

    2

     

    The average value of the total assets of the foreign company are worked out in a similar way.

    After applying the formula under either method, the active foreign business asset percentage is determined as follows:

    Result of calculation Active foreign business asset percentage

    Less than 10%

    0%

    10% to less than 90%

    The result of the calculation

    90% or more

    100%

     

    Foreign wholly owned groups

    In certain circumstances where the determination of the active foreign business asset percentage involves a tier of foreign companies, the calculation may be done on a consolidated basis for wholly owned companies comprising or within that tier of companies. This removes the need to determine the active foreign business asset percentage for each individual company in the tier, where those companies are considered part of the wholly owned group. Rather, one calculation is performed for the top foreign company in the wholly owned group that also covers all its wholly owned foreign subsidiary companies.

    Section 4: Quarantining of losses

    Quarantining

    If a CFC’s notional allowable deductions are more than the notional assessable income for an accounting period, the excess cannot be claimed against notional assessable income of another CFC. However, the CFC will be able to offset a revenue loss against a net capital gain because of the repeal of subsection 424(2) of the ITAA 1936.

    The excess loss incurred by a CFC is carried forward and can be claimed as a notional allowable deduction against the notional assessable income of that CFC in a later year.

    Different quarantining rules apply to prior years of income ending on or before 30 June 2008. For more information, see the Foreign income return form guide for that year.

    Application of transitional foreign loss rules to CFCs

    A CFC with unutilised losses quarantined into the four classes of notional assessable income for an earlier statutory accounting period must convert those losses at the commencement of the statutory accounting period starting on or after 1 July 2008.

    What is a convertible CFC loss?

    A CFC must convert to one loss bundle any loss in relation to notional assessable income of a particular class that has not yet been taken into account. A CFC will have a loss, for an earlier statutory accounting period, if:

    • it has an undeducted loss in relation to notional assessable income of a particular class
    • the loss was made in any of the most recent 10 statutory accounting periods ending before the commencement period, and
    • a loss remains after disregarding certain amounts.

    The amount of the loss is the sum of each loss in relation to notional assessable income of a particular class for the earlier period, after disregarding certain amounts.

    How does a CFC reduce a loss of a particular class of notional assessable income?

    Before summing together each loss of a particular class of notional assessable income, the CFC is required to reduce each loss according to the conversion rules, using a step-by-step approach.

    The first step applies only to a CFC that has an existing loss in respect of the 'all other amounts' class of notional assessable income. The CFC must reduce the loss, except to the extent it is attributable to income that would be its notional assessable income or sometimes-exempt income.

    The second step requires a CFC with a loss older than seven years, but not more than 10 years (from the first statutory accounting period starting on or after the 1 July following commencement) to halve the loss that remains after step 1 (where applicable).

    The result is the amount of the convertible CFC loss for the earlier statutory accounting period. This removes the classes of notional assessable income, leaving the CFC with a single convertible CFC loss for some or all of the most recent 10 statutory accounting periods ending before 1 July 2008.

    What happens to a convertible CFC loss?

    A convertible CFC loss will be treated as a loss only for the purpose of applying Part X to statutory accounting periods beginning on or after 1 July 2008. This ensures that the CFC cannot deduct the convertible CFC loss from notional assessable income in accounting periods prior to commencement.

    Deductions for sometimes exempt income loss

    You may claim a notional allowable deduction for a ‘sometimes exempt income loss’. A sometimes exempt income loss can arise for a CFC in an accounting period if:

    • the CFC passed the active income test for the period, or
    • the CFC gained the benefit of the de minimis exemption for the period, and
    • the CFC has any expenses that are not notional allowable deductions, but would have been if the CFC had not passed the active income test or gained the benefit of the de minimis exemption.
    How is the sometimes exempt income loss worked out?

    The sometimes exempt income loss is worked out by:

    • assuming that the CFC had passed the active income test and did not have the benefit of the de minimis exemption
    • working out the amounts that would be included in the notional assessable income, called the sometimes exempt income
    • working out notional allowable deductions that would be available if the sometimes exempt income were assessable, called ‘sometimes exempt deductions’.

    If sometimes exempt deductions are more than the sometimes exempt income, the difference is a sometimes exempt income loss.

    How is a sometimes exempt income gain worked out?

    In contrast, a sometimes exempt income gain will arise where the amount of sometimes exempt income is more than the sometimes exempt deductions. The sometimes exempt income gain reduces a CFC’s loss. Losses in the current period are reduced before losses carried forward from a previous period.

    Conditions before a loss is allowed

    You are allowed a notional deduction for a previous year’s loss only if the CFC was a CFC when the loss was incurred and at the end of each period until the loss is claimed.

    In working out the CFC’s previous years’ losses, you must assume that you were always an attributable taxpayer who was required to work out attributable income. It is possible to carry forward a loss from a period when you were not an attributable taxpayer.

    You cannot take into account any loss incurred in a statutory accounting period that commenced before 1 July 1983.

    Residency requirement for losses

    A loss that was incurred in a previous statutory accounting period is only allowable if the CFC was a CFC at the end of that statutory accounting period in which the loss arose and at the end of each of the following statutory accounting periods before the eligible period.

    In addition, certain residency requirements must be met before the loss may be applied against the notional assessable income in the eligible period. If these are not satisfied the loss will not be taken into account.

    Modifications to the general rule deal with cases where a company:

    • remains a resident of the same country, but
    • is treated as changing residence from a listed country to an unlisted country, or vice versa, as a result of changes to the lists of countries or political developments: for example, as a result of the dissolution of a country.

    In these cases, the losses incurred by a CFC in an earlier period are not denied solely because the listing status of a CFC’s country of residence changes.

    The following table summarises the availability of losses incurred in previous statutory accounting periods:

    CFC’s country of residence at end of eligible period CFC’s country of residence at end of the substituted accounting period in which loss arose Consequence

    Listed

    Listed

    Allowable

    Listed

    Unlisted

    Generally not allowable unless the unlisted country:

    • arose from the dissolution of the listed country, or
    • is the same country as the listed country.
     

    Unlisted

    Unlisted

    Allowable

    Unlisted

    Listed

    Generally not allowable unless the listed country is the same as the unlisted country.

     

    Losses are not allowable if they were denied in an earlier statutory accounting period.

    Section 5: Working out the net income of a partnership

    The notional assessable income of a CFC includes the CFC’s share of the net income of a partnership. You work out the net income of the partnership in accordance with the partnership provisions of the Act. However, it is assumed that:

    • the partnership derived only certain income and gains
    • the operation of the Act is modified.
    Assumption about income and gains

    The assumptions made for amounts derived by a partnership mirror the assumptions made for working out the income and gains of a CFC, except where the assumption applies only to companies. The amounts taken into account in working out the net income of the partnership depends on whether the CFC passes the active income test. The amounts also depend on whether the CFC is a resident of a listed country or an unlisted country.

    If a CFC is resident in an unlisted country and it:

    • passes the active income test, then the only amounts taken into account in determining the net income of the partnership are trust amounts (including transferor trust) arising for the partnership
    • fails the active income test, then only the following amounts are taken into account in determining the net income of the partnership:
      • adjusted tainted income
      • trust amounts (including transferor trust) arising for the partnership.
       

    If a CFC is resident in a listed country and it:

    • passes the active income test, then only the following amounts are taken into account in determining the net income of the partnership:
      • low-taxed third-country income of a kind specified in the Regulations
      • trust amounts arising for the partnership that are not subject to tax in a listed country or are subject to tax and are designated concession income, and
      • transferor trust amounts arising for the CFC as a partner in a partnership
       
    • fails the active income test, then only the following amounts are taken into account in determining the net income of the partnership:
      • eligible designated concession income that is adjusted tainted income,
      • low-taxed third-country income of a kind specified in the Regulations
      • trust amounts arising for the partnership that are not subject to tax in a listed country or are subject to tax and are designated concession income, and
      • transferor trust amounts arising for the CFC as a partner in a partnership.
       
    Assumption about modifications to the Act

    The modifications that apply in working out the net income of a partnership are similar to those that apply for working out notional assessable income and notional allowable deductions of a CFC: see section 3, section 4 and section 5.

    Additional modifications to the Act

    Three additional modifications are made in working out the net income of a partnership:

    1. The partnership is treated as a resident of the same country as the CFC.
    2. A dividend will not be notional exempt income of a partnership unless the dividend is paid out of previously attributed income.
    3. The capital gains tax provisions apply to assets acquired by a partnership after 19 September 1985 (the deemed acquisition of assets on 30 June 1990 for CFCs does not apply to assets held by partnerships).

    Section 6: Trust amounts

    The notional assessable income of a CFC may include certain trust amounts arising for the CFC in the statutory accounting period. There are three types of trust amounts:

    • amounts derived as a beneficiary of a trust estate where the CFC is presently entitled to a share of the net income of the trust estate
    • other amounts paid to, or applied for the benefit of, the CFC by the trustee of a trust estate
    • amounts attributed to the CFC under the transferor trust measures.
    CFC a beneficiary of a trust – present entitlement

    Where the CFC is presently entitled to a share of the net income of a trust estate, the CFC must include the share of the net income in notional assessable income. The calculation of the net income of the trust estate is made under the existing trust provisions of the Act. The modifications that apply in working out the net income of a trust are similar to those that apply for working out notional assessable income and notional allowable deductions of the CFC: see section 3, section 4 and section 5.

    Additional modifications that apply when working out the net income of a trust are outlined below.

    Trust is a resident of the same country as the CFC

    A trust estate is treated as a resident of the same country as the CFC.

    Dividends

    A dividend will not be notional exempt income of a trust unless the dividend is paid out of previously attributed income.

    Trust is treated as a resident trust estate

    A trust is treated as a resident trust estate or a resident unit trust for the purposes of the capital gains tax provisions.

    Modifications to capital gains tax provisions

    The modifications to the capital gains tax provisions (see section 4) that provide for the removal of the exemption for assets acquired before 20 September 1985 do not apply in working out the net income of a trust. As a result, the capital gains tax provisions apply to assets acquired by a trust after 19 September 1985.

    Transferor trust measures

    The transferor trust measures apply in working out the attributable income of a CFC: see chapter 2 to determine whether the CFC will have an amount attributed to it.

    Section 7: Reduction of attributable income because of interim dividends

    The attributable income of a CFC is reduced if you are taxed on a dividend paid by the CFC out of current year profits and you would be assessable on those profits under the CFC rules at the end of the statutory accounting period of the CFC.

    An interim dividend is considered to have been paid out of the attributable income of the current statutory accounting period only if there are no earlier profits available out of which the dividend could have been paid. When there are such earlier profits, the dividend is considered to have been paid out of those profits. Any balance of interim dividend is considered to have been paid out of the attributable income of the current statutory accounting period.

    Taxation Determination TD 2003/27 – Income tax: how is double taxation avoided in the following situations where a Controlled Foreign Company (CFC) pays a dividend to an attributable taxpayer provides further guidance on how the attributable income of a CFC is reduced in these circumstances.

    Working out the reduction

    Dividend paid to an attributable taxpayer

    If the dividend is paid to you, the amount of the reduction in attributable income is worked out as follows:

          amount of the dividend assessed     
    your attribution percentage in the CFC

     

    Example 25
    Dividend paid wholly out of attributed income

    A taxpayer has a 50% attribution percentage in a CFC resident of an unlisted country. The CFC has no profits from previous years, and $1 million current year profits are distributed as a dividend. The dividend was paid wholly from profits referable to the attributable income of the CFC. The $500,000 received by the taxpayer is included in the taxpayer’s assessable income.
    The amount by which the attributable income would be reduced is worked out as follows:

    $500,000
    50%

    =

    $1 million

     

    End of example

    Example 26
    Dividend paid partly out of attributed income

    A taxpayer has a 50% attribution percentage in a CFC resident of an unlisted country. The CFC has an accumulated profit of $2 million; it pays total dividends of $2.2 million. The dividend would be taken to have been paid out of the accumulated profits first. The whole of the $200,000 component of the dividend paid from current year profits is referable to the attributable income of the CFC.

    The reduction would be:

    $100,000
    50%

    =

    $200,000

     

    End of example

    Example 27
    Dividend is exempt

    A resident company has a 50% interest in a CFC resident of a listed country. The CFC has no profits from previous years and distributes all of the current year profits as an exempt dividend.
    There is no reduction of attributable income in this case because the dividend was not assessable income.
    End of example

    Section 8: Relief from double accruals taxation

    If an amount of income or gain is to be included in your assessable income as a result of tracing control through a foreign entity, and that foreign entity has also been taxed on that amount under the accruals tax laws of another country, you may reduce your assessable income by an amount calculated as follows:

    Indirect attribution interests through a controlled foreign entity

    x

    Foreign accruals-taxed attributable income

     

    Your indirect attribution interest through a controlled foreign entity is your attribution interest in a CFC traced through the controlled foreign entity.

    The foreign accruals-taxed attributable income is that part of an amount of income or gain derived by a CFC on which an interposed controlled foreign entity has been taxed under an accruals tax law of a listed country. The income or gain must be taxed at that country’s normal company rate of tax and during a tax accounting period which commences or ends either in your year of income or the statutory accounting period of the CFC.

    Only countries listed in the Income Tax Regulations 1936 as having accruals tax laws are recognised for the purpose of granting this relief. They are:

    • Canada
    • France
    • Germany
    • Japan
    • New Zealand
    • United Kingdom of Great Britain and Northern Ireland
    • United States of America.

    Example 28
    Reduction of an otherwise assessable section 456 amount

    Scenario
    Ausco owns 50% of the share capital of US Co (a company resident in the United States) which in turn owns 50% of the share capital of a company that is a resident of an unlisted country. Ausco also holds a direct interest of 25% of the unlisted country company.
    Because of the interests Ausco holds in US Co and the unlisted country company, both foreign companies are CFCs.
    For the 2004–05 period, the unlisted country CFC’s only item of income was interest income; the amount of this interest income was determined to be $8,000 under Australia’s income tax laws.
    The United States taxed US Co on an accruals basis on the item of interest income derived by the unlisted country CFC. US Co’s interest in the unlisted country company was 50%: as a result, only half of the item of interest income was attributed to US Co by the United States.
    Australia applied the transfer pricing provisions to an interest-free loan which the unlisted country company provided to a related CFC: as a result, another $2,000 interest income was included in the unlisted country CFC’s attributable income under Australia’s accruals tax laws. This amount was not included in the unlisted country CFC’s attributable income under the accruals tax laws of the United States.
    Working out the amount to be attributed to Ausco
    Step 1 – Determine Ausco’s otherwise assessable amount
    Ausco’s attributed percentage of the attributable income of the unlisted country CFC is:

    direct attribution interest

    25%

    indirect attribution interest

    25%

    Attribution percentage

    50%

     

    Ausco’s otherwise assessable amount is $5,000 (50% attribution percentage) x ($8,000 interest income + $2,000 interest income), arising from the application of the transfer pricing provisions.
    Step 2 – Determine Ausco’s indirect attribution interests through US Co
    Ausco’s indirect attribution interest in the unlisted country CFC through US Co is 25%: that is, Ausco’s 50% direct interest in US Co, multiplied by US Co’s 50% interest in the unlisted country CFC.
    Step 3 – Determine the unlisted country CFC’s foreign accruals-taxed attributable income
    The unlisted country CFC’s foreign accruals-taxed attributable income worked out under Australian accruals tax rules equals $8,000. This amount is referable to the item of interest income included in the attributable income of the unlisted country CFC under the United States’ accruals tax laws. It is important to note that the amount is not necessarily the same as the amount worked out under the United States’ accruals tax laws.
    Step 4 – Determine the amount by which Ausco’s otherwise assessable amount is to be reduced
    Reduce the otherwise assessable amount by $2,000: that is, step 2 multiplied by step 3.
    Step 5 – Determine Ausco’s assessability in respect of the unlisted country CFC’s attributable income
    Ausco’s assessability for the unlisted country CFC’s attributable income is $3,000: that is, step 1 minus step 4.
    End of example

    Section 9: How much is included in assessable income

    You need to work out how much of the attributable income of the CFC to include in your assessable income. Multiply your attribution percentage in the CFC at the end of the statutory accounting period by the attributable income of the CFC; include the result in your assessable income.

    Chapter 2: Transferor trust and related measures

    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

    This chapter:

    • helps Australian residents who have transferred, or are deemed to have transferred, property or services to a non-resident trust estate to:
      • determine whether, under the transferor trust measures, any income or capital gains derived by the trust estate should be attributed to them for inclusion in their assessable income
      • work out the amount to be attributed
       
    • helps Australian beneficiaries who have received a distribution from a non-resident trust estate to determine whether it is assessable and whether an interest charge applies to the distribution.

    Introduction

    Under the transferor trust measures, residents of Australia who have transferred property (including money) or services to a non-resident trust estate, are subject to accruals taxation on certain profits derived by the trust. The reference to transfer of property or services to a trust includes the transfer of property or services by way of creation of a trust.

    Section 99B can assess amounts paid to, or applied to the benefit of, a resident beneficiary of a foreign trust estate; for example, it can apply to distributions out of accumulated foreign income or gains of the trust.

    Related measures operate to impose an interest charge on certain trust distributions from non-resident trusts that are included in the assessable income of a resident beneficiary. Broadly, the interest charge applies if the profits of the trust from which the distribution was made were not subject to tax:

    • in a listed country, or
    • because of attribution under the transferor trust provisions.

    See the glossary at the start of this guide for the meaning of terms used in this chapter.

    Part 1

    Are you subject to the transferor trust measures?

    Part 2

    Application of section 99B, and the interest charge for beneficiaries of non-resident trust estates.

    Part 1: Are you subject to the transferor trust measures?

    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

    This part helps you determine whether you are subject to the transferor trust measures. It also shows how to work out the amount to include in your assessable income if the measures do apply.

    Section 1

    Are you a transferor in relation to a non-resident trust estate?

    Section 2

    Are you subject to the transferor trust measures?

    Section 3

    What amount do you have to include in your assessable income?

    • Subsection 1: Working out your assessable income where information is available from the trust
    • Subsection 2: Working out your assessable income where you do not have sufficient information to work out attributable income
    • Subsection 3: What happens if there is more than one transferor?

    Section 1: Are you a transferor in relation to a non-resident trust estate?

    Transfers of property or services

    If you have transferred property or services to a non-resident trust estate, the profits of the trust may be attributed to you: that is, the profits may be included in your assessable income, even though you have not received a distribution from the trust.

    You will be regarded as a transferor if you:

    • have at any time transferred property or services to a non-resident discretionary trust estate, or
    • transferred property or services after 7.30pm on 12 April 1989 to a non-resident trust estate that is non-discretionary for either no consideration or for consideration less than an arm’s-length amount.
    Deemed transfers

    Certain transfers of property or services made to another entity may be deemed to have been made to a trust estate if the transfer is connected with a transfer to the trust estate.

    Example 1
    Deemed transfer to a trust estate

    Entity A transfers property to Entity B on condition that Entity B transfers the property to a trust estate. In this case, Entity A would be deemed to have transferred to the trust estate the property transferred by Entity B.
    End of example

    Example 2
    Marketing of units in a unit trust

    The trustee of a unit trust issues units to Entity A, which acts as manager, underwriter or dealer for the placement of the units. Entity A transfers property or services to the trust for the purpose of acquiring the units. Entity A then disposes of the units to Entity B, which transfers property or services to Entity A as consideration for the acquisition of the units.
    In this case, Entity B is deemed to have transferred the property or services that Entity A originally transferred to the unit trust; as a result, Entity A will not be taken to have transferred property or services to the trust estate.
    End of example

    Where a partnership has transferred property or services to a non-resident trust estate, each partner is deemed to have transferred property or services in proportion to their interest in the partnership.

    Where a trust estate – that is, a discretionary trust that is an Australian trust or a controlled foreign trust – has transferred property or services to a non-resident trust estate, each person who has transferred property or services to the first-mentioned trust estate is deemed to have transferred property or services to the second-mentioned trust estate.

    If the partnership or trust estate is in existence at the end of the non-resident trust estate’s year of income, any attributable income of the non-resident trust estate is attributed to the partnership or trust estate. If the partnership or trust estate is not in existence at the end of the non-resident trust estate’s year of income, any attributable income of the non-resident trust estate is attributed to the partners of the partnership, or the original transferors to the trust estate.

    The ATO may also treat you as having transferred property or services to a trust if you benefited from a transfer by a company, partnership or trust that ceases to exist.

    If you need further information on deemed transfers, contact the ATO.

    Section 2: Are you subject to the transferor trust measures?

    The amount to be included in the assessable income of a resident transferor for profits derived by a non-resident trust estate is called ‘attributable income’; the resident transferor to whom it is attributed is called an ‘attributable taxpayer’.

    Exemptions from the transferor trust measures

    A number of exemptions are provided from the transferor trust measures. These exemptions depend on the type of trust estate to which you have transferred property or services.

    Public unit trusts

    The transferor trust measures do not apply to a transfer of property or services to a non-resident trust estate if:

    • the trust estate is a public unit trust at all times during the transferor’s year of income
    • the transfer was made for arm’s-length consideration, or
    • the sole purpose of the transfer was the arm’s-length acquisition of units in the unit trust.

    A unit trust will be a public unit trust if, at any time during the income year, any of the units were listed on a stock exchange in Australia or elsewhere, or were offered to the public. A unit trust will also be a public unit trust if the units in the unit trust were held by 50 or more individuals at all times during the income year.

    The transferor trust measures will apply to you if you make a transfer of property or services to a non-resident public unit trust on or after 12 April 1989 for less than an arm’s-length consideration.

    Deceased estates

    The transferor trust measures generally do not apply to a trustee of a deceased estate who transfers property or services to a non-resident trust estate according to directions contained in the deceased person’s will or codicil, or according to a court order which varies the will or codicil. However, the measures will apply if:

    • the transfer is made through the exercise of the power of appointment or of a discretion by the trustee or any other person; for example, where the trustee of a deceased estate has a discretion to invest money of the trust estate and decides to transfer the money to a discretionary trust estate, or
    • the trustee transfers property or services to a non-resident trust estate but the transfer was caused by another entity (other than a deceased person), in which case the entity that caused the transfer is treated as a transferor, or
    • under a scheme, the trustee transfers property or services to an entity, and another entity transfers property or services to a trust. In this case, the trustee is treated as having transferred the property or services to the trust.
    Non-resident family trusts

    The transferor trust measures do not apply to an individual who has transferred property or services to a non-resident family trust. However, the trust must be a non-resident family trust at all times when it is in existence after the beginning of the transferor’s 1990–91 income year until the end of the current income year: that is, the income year for which the transferor is working out assessable income.

    An exemption from the transferor trust measures is also available to an individual who:

    • first becomes an Australian resident after 12 April 1989
    • makes a transfer to a non-resident family trust before taking up residency in Australia.

    To qualify, the trust estate must be a non-resident family trust at all times after the transferor becomes a resident of Australia.

    The exception does not apply to an individual who, as trustee, transferred any property or services to the non-resident family trust from any other trust estate.

    Two types of non-resident family trusts are covered by this exception:

    • post-marital family trusts
    • family relief trusts.

    Post-marital family trusts

    Post-marital family trusts come into existence after a decree or order of dissolution or annulment of a marriage, or a decree or order of judicial separation or similar instrument. Trusts resulting from the breakdown of a de facto marriage also qualify. The beneficiaries of the trust estate must be non-resident individuals and:

    • the spouse or former spouse of the individual, or
    • a child of the individual or the individual’s spouse, or
    • a child of the individual’s former spouse during the marriage.

    Family relief trusts

    Family relief trusts are established and operated to help non-resident family members. Trusts with Australian or non-family beneficiaries do not qualify as family trusts. The only beneficiaries permitted are non-residents who are related to the transferor. The following persons are treated as related to the transferor for this purpose:

    • a spouse or former spouse
    • a parent of the transferor or of the transferor’s spouse or former spouse
    • a child of the transferor or of the transferor’s spouse or former spouse
    • a grandparent of the transferor
    • a grandchild of the transferor
    • a brother or sister of the transferor or of the transferor’s spouse or former spouse
    • a child of the transferor’s brother or sister
    • a child of a brother or sister of the transferor’s spouse or former spouse.

    A trust estate will generally not qualify as a family trust if the assets of the trust are excessive given the requirements of the beneficiaries. The exception to this rule is if there have been no transfers of property or services to the trust after 12 April 1989; in this case, the trust can have excessive assets and still qualify as a family trust.

    Contingent beneficiaries

    A trust estate can still be a family trust estate if, in the event of the death of a family member, one or more individuals benefit or are capable of benefiting under the trust. However, these persons must be:

    • non-residents, and
    • children of the deceased family member.

    If all beneficiaries die, the trust estate can still be a family trust estate if there are one or more funds, authorities or institutions covered by an item in the tables in Subdivision 30B of the ITAA 1997 or item 2 of the table in section 3015 of the ITAA 1997 (the gift provisions) that would benefit or be capable of benefiting under the trust.

    Migrant transferors

    An individual who first became an Australian resident after 12 April 1989 will not be subject to the transferor trust measures if they transferred property or services to a non-resident trust estate before becoming a resident and they were not in a position to control the trust estate.

    Discretionary trust estates

    The transferor trust measures do not apply to a transferor who has transferred property or services to a discretionary trust estate if both the following conditions are met:

    • the transfer was made in the course of carrying on a business, and
    • the transfer was made in terms identical or similar to those that relate to transactions undertaken by the transferor, at or about the time of the transfer, in the ordinary course of business with ordinary clients or customers: that is, on an arm’s-length basis and subject to similar terms and conditions.

    If the transfer was not made on an arm’s-length basis in the course of carrying on a business, the transferor trust measures will normally apply if at any time after the transfer the transferor or the transferor’s associates were in a position to control the trust estate. However, if the transfer was made before 12 April 1989, the transferor trust measures will only apply if the transferor or the transferor’s associates were in a position to control the trust after 12 April 1989.

    If a transferor subsequently gains control of the discretionary trust estate, all years before the commencement of the transferor trust measures become subject to the measures.

    A transferor is taken to be in a position to control a non-resident trust estate if the transferor or any associates:

    • have power, by whatever means, to obtain the beneficial enjoyment of the corpus or income of the trust estate
    • were able to control, directly or indirectly, the application of the income or corpus of the trust estate
    • were capable, under a scheme, of gaining the enjoyment or control referred to in the above two bullet points
    • could expect the trustee to follow their directions, instructions or wishes, or
    • have the ability to remove or appoint any trustees of the trust estate.

    All factors must be taken into account in determining whether the trustee of a trust estate was accustomed, or might reasonably be expected, to follow directions, instructions or wishes of a transferor or an associate of the transferor.

    For example, a requirement in a trust deed for the trustee to ignore directions, instructions or wishes would not pre-empt the examination of the actual circumstances to determine whether the transferor or an associate controls the trustee. The way in which the trustee has acted in the past, the relationship between the transferor or transferor’s associate and the trustee, and the amount of property or services transferred to the trust estate, are some of the other matters that need to be considered.

    Non-discretionary trust estates

    The transferor trust measures will not apply to a transferor who transferred property or services to a non-discretionary trust estate before 12 April 1989. In addition, the measures will not apply to a transfer of property or services after 12 April 1989 if:

    • the trust estate was a non-discretionary trust estate at all times during the transferor’s current year of income, and
    • the transfer was made for an arm’s-length consideration.

    If:

    • one transferor (the original transferor) makes transfers of property or services to a non-resident non-discretionary trust estate which were all made for consideration at an arm’s-length amount, and
    • another transferor (the second transferor) makes a transfer of property or services to the same non-resident trust estate on or after 12 April 1989 which is made for no consideration or consideration at less than an arm’s-length amount

    the second transferor (but not the original transferor) would become an attributable taxpayer in relation to the trust estate. As a result, all the attributable income of the trust estate would be attributed to the second transferor.

    Section 3: What amount do you have to include in your assessable income?

    This section is relevant only if you are an attributable taxpayer in relation to a non-resident trust estate.

    You must follow the steps in subsection 1 to work out your attributable income if you can obtain the necessary information.

    If you cannot reasonably be expected to have access to the necessary information, work out the amount to be included in your assessable income following the steps in subsection 2.

    Once you have worked out the amount to include in your assessable income, you may be able to apply for a reduction of this amount: Subsection 3 explains how to do this.

    Subsection 1: Working out your assessable income where information is available

    Working out the attributable income of a non-resident trust estate

    To determine the attributable income of a non-resident trust estate, you must first work out its net income. The net income of a trust estate is worked out as though the trust estate were an Australian resident and taxpayer.

    In working out the net income of a non-resident trust estate, you need to identify whether it is a listed country trust estate.

    If it is a listed country trust estate, only the trust’s eligible designated concession income is taken into account when working out the net income. The balance of the income of the trust estate is treated as exempt income.

    If it is an unlisted country trust estate, all its income or gains are included in working out its net income.

    A non-resident trust estate is treated as a listed country trust estate if all the income of the trust estate (other than eligible designated concession income) is either subject to tax in a listed country or is assessable in Australia in the hands of the trustee or a beneficiary.

    Amounts that may be excluded from attributable income

    In determining the attributable amount, the net income of a non-resident trust estate is reduced by the following amounts to the extent they relate to amounts included in the net income of the trust estate:

    • amounts that have been included in the assessable income of a beneficiary under section 97 of the Act: that is, amounts to which a beneficiary is presently entitled
    • amounts where the trustee of the non-resident trust estate has been assessed and is liable to pay tax under section 98 of the Act: for example, on behalf of a resident beneficiary under a legal disability
    • amounts where the trustee of the non-resident trust estate has been assessed and is liable to pay tax under section 99 or 99A: for example, where the trust has undistributed Australian source income
    • amounts paid to beneficiaries who are residents of a listed country if those amounts are paid during the non-resident trust estate’s income year or within one month after the end of the income year; these amounts must be subject to tax in a listed country in a tax accounting period ending before the income year or commencing during the income year
    • franked dividends: that is, dividends paid by Australian companies or similar amounts paid by corporate unit trusts and public trading trusts, out of profits that have been subject to Australian tax
    • amounts included in the assessable income of the trustee of a trust estate where a dividend is grossed up for dividend imputation purposes 
    • amounts received by a trustee from another trust estate to the extent that the amount has already been attributed to a transferor
    • amounts received by the trustee that are referable to the income or profits of a CFC that have been included in the assessable income of any resident taxpayer under the CFC measures
    • income or profits of the trust estate (other than eligible designated concession income) that are subject to tax in any listed country in a tax accounting period ending before the end of, or commencing during, the non-resident trust estate‘s income year
    • amounts of foreign tax or Australian tax paid by the trustee or a beneficiary on amounts included in the attributable income of the trust estate.

    For a listed country trust estate, exclude only the amounts that relate to the part of the net income that consists of eligible designated concession income.

    Modifications made to Australian tax law

    Rules that do not apply in working out the attributable income of a trust estate

    The following rules do not apply in working out the attributable income of a trust estate:

    • the exemption for distributions from profits that have been taxed under the CFC measures
    • the exemption for amounts that have been subject to withholding tax in Australia
    • the CFC measures
    • conduit foreign income.

    Conversion of income and expenses to Australian dollars

    When calculating attributable income, you must convert all amounts into Australian currency. This conversion is done using the conversion rules under the usual operation of the Act; for more information, see Foreign exchange (forex): the general translation rule.

    Choice to use functional currency

    The transferor trust may choose to have its attributable income calculated in the sole or predominant currency in which it keeps its accounts: for example, ledgers, journals, and statements of financial performance. This sole or predominant currency is called the 'applicable functional currency'.

    When calculating attributable income in functional currency, all amounts that are not in the applicable functional currency (including Australian currency amounts) must be converted into the applicable functional currency. This conversion is done using the conversion rules under the usual operation of the Act. However, when applying these rules, the applicable functional currency is taken not to be foreign currency, and all other amounts (including Australian currency amounts) are taken to be foreign currency.

    Once the attributable income is calculated, it is converted into Australian currency in accordance with the relevant conversion rules.

    The choice of applicable functional currency must be in writing, but the transferor trust is not required to notify the Commissioner. The transferor trust must keep written evidence of the choice for as long as it is required to keep its tax records.

    Generally, the choice will apply to the income year immediately following the one in which the choice is made. However, it will apply to the income year in which the choice is made where the choice is made within 90 days of the beginning of that income year.

    The choice to use the applicable functional currency applies until you withdraw it. You can only withdraw a choice where the functional currency has ceased to be the sole or predominant currency in which the trust keeps its accounts. The withdrawal has effect from immediately after the end of the income year in which the choice is withdrawn; and the withdrawal must be in writing and retained with your tax records. You may make a new choice applicable to subsequent income years.

    Modified application of trading stock provisions

    All items of trading stock are to be valued at cost when brought to account by a non-resident trust estate.

    Modified application of depreciation provisions

    A non-resident trust estate is allowed depreciation on the same basis as a resident taxpayer. However, assets are treated as having been held for the production of assessable income in income years where there was no calculation of attributable income.

    Where the trustee has used a property during an income year partly for producing exempt income and partly for producing assessable income, the ATO can determine the amount that is an allowable deduction.

    Modified application of the transfer pricing rules

    The ATO can make adjustments reflecting arm’s-length values to amounts used in working out the attributable income of a trust estate. To avoid double taxation, the ATO can make a corresponding adjustment to an amount in determining the taxable income of another taxpayer.

    Modifications relating to capital gains tax

    The capital gains tax provisions of the Act (that is, Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997) apply as if the non-resident trust estate were a resident trust for CGT purposes. This ensures that a capital gain on the disposal of a CGT asset which is not taxable Australian property is taken into account under the transferor trust measures. It also ensures that the pre-20 September 1985 status of assets is retained.

    Special rules apply to prevent double taxation of capital gains where a trust estate was formerly a resident of Australia. In this case, the cost base of assets that were taxed under the capital gains tax provisions at the residence change time is taken to be the market value of the assets at that time.

    Modification of loss provisions

    Losses are not available for income years before the year starting 1 July 1990.

    De minimis exemption

    The de minimis exemption ensures that the transferor trust measures do not apply to small amounts derived by a trust estate in a listed country.

    The de minimis exemption is worked out having regard to the total of the attributable incomes of all trust estates for which a taxpayer is an attributable taxpayer. The de minimis exemption will be satisfied if the total of the attributable incomes of all the trust estates is equal to or less than the lesser of:

    • $20,000, or
    • 10% of the total of the net incomes of those trust estates.

    If these tests are satisfied, the attributable income of listed country trust estates will not be included in the assessable income of the attributable taxpayer. The attributable income from unlisted country trust estates would still be included.

    Working out the amount of attributable income to include in your assessable income

    If you are an attributable taxpayer in relation to a non-resident trust estate, all the attributable income of the non-resident trust estate for an income year coinciding with your income year is included in your assessable income.

    If there is more than one attributable taxpayer, the ATO may allow a reduction of the amount of attributable income to be included in the assessable income of each attributable taxpayer. To obtain the reduction, the taxpayer must apply to the ATO; see subsection 3 for more information.

    Resident for part of a year

    If you are a resident for only part of the income year, the attributable income included in your assessable income is reduced. The amount included is worked out as follows:

    Notional attributable income

    x

    the number of days during
    the period that you were a resident
    total number of days in the period

     

    Example 3
    Part-year residency

    George is a resident of Australia for 200 days out of the 365 days in the relevant year of income. He is an attributable taxpayer in relation to YZ trust that was a non-resident trust with the same income year. The attributable income of the trust estate was $40,000.
    The amount George is required to include in assessable income for that year of income is:
    $40,000 x (200/365) = $21,917
    End of example

    Overlapping years of income

    If you are an attributable taxpayer and your income year is different from that of a non-resident trust estate, the trust estate’s attributable income for the two income years which overlap your income year is apportioned using the number of days that fall within your current income year.

    Example 4
    Overlapping years of income

    Helen’s current income year is 1 July 2006 to 30 June 2007. She is an attributable taxpayer in relation to XY trust estate. The trust estate’s income years are 1 January 2006 to 31 December 2006, and 1 January 2007 to 31 December 2007. The attributable income of the trust estate is $30,000 for the 2006 income year, and $40,000 for the 2007 income year.
    The amount worked out for the trust estate’s 2006 income year is:

    $30,000 x (184/365) = $15,123

    For the trust estate’s 2007 income year, the amount is:

    $40,000 x (181/365) = $19,835

    Helen adds the amounts to give a total attributable income of $34,958 for her 2006–07 income year.
    End of example

    Partnerships and trusts

    The attributable income from a trust estate is included in working out the net income of a partnership or a trust estate and is treated as having a foreign source.

    Where a partner of a partnership or a beneficiary of a trust estate is an Australian resident for the whole income year, they are to include in their assessable income their share of the net income (including attributable income) of the partnership or trust estate.

    Where a partner or beneficiary is a non-resident of Australia at all times during an income year, they would not include any attributable income of the partnership or trust estate in their assessable income.

    Subsection 2: Working out your assessable income where you do not have sufficient information to work out attributable income

    If you are unable to obtain the information necessary to work out the attributable income of a trust estate, you must include an amount worked out using the following formula in your assessable income.

    The formula is to be used for each transfer of property or services you made to the trust estate that is subject to the transferor trust measures.

    Work out the amount to include in your assessable income by applying the deemed rate of return to the market value of the property or services you transferred to the trust estate. The market value is adjusted for this calculation to reflect deemed returns for previous periods.

    The deemed rate of return applicable to assessments for the income year commencing 1 July 2009 is 5% above the rate of interest that applies for that period under subsection 8AAD(2) of the Taxation Administration Act 1953. If there are two or more rates of interest for 2009–10, you use the weighted average of these rates for the income year.

    Use the following formulas to determine the amount to include in your assessable income for transfers of property or services after 12 April 1989.

    Transfers made after 12 April 1989

    Amount to be included in assessable income

    =

    Adjusted value of the transfer

    x

    Weighted statutory interest rate plus 5%

     

    The adjusted value for transfers made during the current income year is worked out as follows:

    Adjusted value of the transfer

    =

    Market value, immediately before the transfer of property or services of the transferred property or services

    x

    Days after the transfer to
    the end of the income year
    days in income year

     

    Example 5
    Transfer during current income year

    An attributable taxpayer transferred property worth $30,000 to a non-resident trust estate on 31 May 2008. There are 30 days between the transfer on 31 May and the end of the year (30 June 2008).
    The adjusted value is worked out as follows:

    $30,000 x (30/365) = $2,465

    End of example

    If the transfer occurred before the taxpayer’s current income year, the adjusted value of the transfer is the total of:

    • the market value, immediately before the transfer, of the property or services transferred, and
    • the total of the amounts that would have been included in the transferor’s assessable income for that transfer in the income years preceding the taxpayer’s current income year, if this method had been used in those years.

    Where more than one transfer was made after 12 April 1989, the formula is applied separately to each transfer and then the relevant amounts are added together.

    Transfers made before 12 April 1989

    Use the following formula to determine the amount to include in your assessable income for transfers of property or services before 12 April 1989.

    Amount to be included in assessable income

    =

    Adjusted net worth of the trust estate

    x

    Weighted statutory interest rate plus 5%

     

    The adjusted net worth of a trust estate is its net worth adjusted for the deemed return on the property or services transferred before 12 April 1989.

    The net worth of the trust estate is determined on 1 July 1990. Its net worth on that date is the market value of its assets at 1 July 1990, reduced by its liabilities on 1 July 1990.

    To determine the adjusted net worth, the net worth is increased by the total of amounts that would be worked out in each previous income year commencing on or after 1 July 1990 using the above formula.

    When using the formula method to work out the amount to include in your assessable income, if two or more taxpayers have transferred property or services to the trust estate, the ATO is empowered to provide relief along lines similar to those referred to in subsection 3.

    Subsection 3: What happens if there is more than one transferor?

    The assessable income of a transferor in relation to a non-resident trust estate will include the part of the attributable income of the trust estate relating to the period that the transferor was a resident of Australia. This can have the effect of subjecting more than one person to tax for the same income.

    The ATO can reduce the amount included in your assessable income if there is more than one transferor. When determining the amount of the reduction, the ATO takes into account the amount of attributable income of the trust estate that relates to the property or services transferred to the trust estate and to any other matters that are considered relevant. You will need to apply to the ATO for the reduction.

    Part 2: Application of section 99B, and the interest charge for beneficiaries of non-resident trust estates

    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

    This part explains how distributions received by Australian residents from non-resident trusts are taxed under section 99B of the Act.

    It also explains when an interest charge will be payable on these distributions.

    Section 1

    Have you received an assessable distribution from a non-resident trust estate?

    Section 2

    Do you have to pay an interest charge?

    Section 1: Have you received an assessable distribution from a non-resident trust estate?

    This section broadly explains the tax treatment under section 99B of distributions made by a non-resident trust estate.

    Is the distribution assessable?

    Broadly, under section 99B, distributions made by a non-resident trust estate to or for the benefit of Australian resident beneficiaries are assessable in the hands of the beneficiaries, except in the following cases:

    1.

    the distribution is corpus of the trust estate (an amount derived by the trust estate which would have been included in assessable income if it had been derived by a resident taxpayer will not be taken to represent corpus)

    2.

    the distribution is an amount that has been taxed or is liable to tax in the hands of the beneficiary under section 97 or in the hands of the trustee under sections 98, 99 or 99A

    3.

    the distribution is an amount that is reasonably attributable to a part of the net income of another trust estate in respect of which the trustee of that other trust is assessed and liable to pay tax under subsection 98(4)

    4.

    an amount that is non-assessable non-exempt income of the beneficiary as conduit foreign income under section 80217 of the ITAA 1997

    5.

    the distribution paid to or applied for the benefit of a resident taxpayer (other than a company not acting in the capacity as a trustee) represents an amount of attributable income of a non-resident trust estate that has previously been included in the assessable income of any taxpayer

    6.

    the distribution paid or applied for the benefit of a company represents an amount of attributable income of a non-resident trust estate that has previously been included in the assessable income of that same company. This exemption applies where the company is acting as a beneficiary, not as a trustee

    7.

    the distribution is from any amount that would not have been assessable income in the hands of a resident taxpayer (for example, exempt income or non-assessable non-exempt income). This would include an amount that, if it had been derived by a resident taxpayer, would have been not assessable under section 23AH

    8.

    the distribution is of an amount included in the assessable income of any taxpayer under the transferor trust provisions.

     

    Section 2: Do you have to pay an interest charge?

    If you are an Australian resident beneficiary of a non-resident trust estate and section 99B includes a distribution of accumulated income from the non-resident trust estate in your assessable income, you may be liable to pay additional tax in the nature of an interest charge on the distribution.

    The interest charge may apply to a distribution of profits from a non-resident trust estate to the extent the distribution was made from profits that:

    • are referable to eligible designated concession income derived in an income year when the trust was a resident of a listed country, or
    • were not subject to tax in a listed country and were derived in an income year when the trust was a resident of an unlisted country.

    The charge is not applicable for distributions from a public unit trust unless it is a controlled foreign trust.

    The interest charge does not apply to an amount included in your assessable income if you received the amount from the estate of a deceased person where the amount was paid to, or applied for the benefit of, you as a beneficiary of the estate beneficiary within three years of the death of that person.

    Working out the amount of the interest charge

    The amount on which interest is payable is worked out using the following formula:

    Amount on which interest is payable

    =

    (distributed amount x applicable rate of tax)

    _

    foreign income tax offset

     

    Distributed amount

    The distributed amount is the amount of the distribution that is included in your assessable income under section 99B. This amount is grossed up for any foreign tax you can claim on that share.

    Applicable rate of tax

    The applicable rate of tax for a company is the general rate of Australian tax imposed on companies for the income year in which the company receives a trust distribution. The general rate will apply irrespective of the actual rate of tax applicable to the company.

    For a taxpayer other than a company, the applicable rate of tax is the maximum marginal rate that applies for the income year of the taxpayer in which the trust distribution is received. The maximum rate would apply irrespective of the actual marginal rate of tax applicable to the taxpayer.

    Foreign income tax offset

    The foreign income tax offset is the amount you can claim for foreign income tax paid on an amount included in your assessable income for the distribution made by the non-resident trust.

    Example 6
    Unlisted country trust estate

    During the 2008–09 income year, a resident individual received a distribution of $10,000 from an unlisted country trust estate. The entire amount was included in the taxpayer’s assessable income under section 99B. The distribution was paid from $20,000 foreign income derived by the trust in the 1998–99 income year. The income was not subject to tax in a listed country and the trust paid foreign tax of $5,000.
    Interest is payable on the distributed amount of $10,000 grossed up by the amount of foreign tax relating to the distributed amount ($3,333) multiplied by the applicable rate of tax (45%) less the amount of foreign tax credit.

    ($13,333 x 45%) – $3,333 = $2,666

    The foreign income tax offset is worked out by allocating, on a pro rata basis, the foreign tax paid by the trust estate on its foreign income. The profits and income of the trust estate that were available for distribution were:

    $20,000 – $5,000

    $15,000

    Amount of the distribution

    $10,000

    Foreign tax attributable to the distribution =

    $10,000 x $5,000
    15,000

    $3,333

     

    End of example
    Period over which the interest charge accrues

    The interest charge accrues as follows:

    • where the trust distribution is paid out of trust income or profits accumulated before 1990–91, the charge will accrue from the start of the beneficiary’s 1990–91 income year
    • where the trust distribution is paid out of trust income accumulated by the non-resident trust estate in the 1990–91 or a subsequent income year, the charge will accrue from the start of the beneficiary’s next income year: that is, the income year first following the income year of the trust estate for which the income would have been included in the assessable income of the trust if the trust had been a resident trust estate.

    The interest charge will cease to accrue on the last day of the income year in which the distributed amount is included in the assessable income of the beneficiary.

    What interest rate applies?

    The rate of interest that applies from 14 September 2006 is the applicable rate under section 8AAD of the Taxation Administration Act 1953. The applicable rate of interest prior to 14 September 2006 is:

    • from 1 July 1999 until 14 September 2006, the rate applying under section 214A of the ITAA 1936
    • from 1 July 1994 until 30 June 1999, the rate applying under section 214A of the ITAA 1936 less four (4) percentage points
    • before 1 July 1994, the rate applying under section 10 of the Taxation (Interest on overpayments) Act 1983.

    Chapter 3: Taxation of foreign dividends and branch profits

    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

    This chapter explains the taxation treatment of foreign dividends and of branch profits derived by Australian companies.

    Part 1

    Taxation of foreign dividends

    Part 2

    Taxation of branch profits

    Part 1: Taxation of foreign dividends

    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

    This part explains how dividends paid by a foreign company are taxed in Australia. This can occur in two ways:

    • when a resident taxpayer is taxed on a dividend received from a non-resident company, or
    • when an attributable taxpayer in relation to a controlled foreign company (CFC) or a controlled foreign trust is liable to tax on the taxpayer’s share of a dividend paid by an unlisted country CFC directly or indirectly to another CFC or controlled foreign trust.

    Section 1

    How do you treat a dividend received from a non-resident company?

    Section 2

    What if a CFC receives a dividend from another CFC?

    Section 3

    When is a CFC deemed to have paid a dividend?

    Section 1: How do you treat a dividend received from a non-resident company?

    This section sets out the basis for taxing dividends received by a resident from a non-resident company.

    Non-portfolio dividends

    Definition of non-portfolio dividends

    The concept of a non-portfolio dividend is central to the scheme of taxation of foreign dividends. A dividend is a non-portfolio dividend for these purposes if the following two conditions are met:

    • the dividend is paid to a company, and
    • the company receiving the dividend has a 10% or greater voting interest in the voting power of the company that paid the dividend.

    The voting power in a company is the maximum number of votes that can be cast on a poll at, or arising out of, a general meeting of the company as regards all questions that can be submitted to such a poll.

    A company is taken to have a voting interest in another company if:

    • the company is the beneficial owner of the shares that carry the required voting interest
    • the voting interest is held at the time the dividend is paid, and
    • there is no arrangement in force at that time by which any person is in a position, or may become in a position, to affect the voting right.

    Non-portfolio dividends received from a foreign company

    Non-portfolio dividends received by a resident company from a company that is a resident of a foreign country are non-assessable non-exempt income where either or both of the following apply:

    • they are paid out of profits of a CFC that have been previously attributed to the resident company under the accruals tax measures (section 23AI)
    • they are paid from a foreign company and the recipient company does not receive the dividend in the capacity of a trustee (section 23AJ).

    Example 1
    Non-portfolio dividend paid partly from profits taxed on an accruals basis

    Amdoy, a resident company, wholly owns a CFC in a listed country. Attributable income of $10,000 from the CFC was included in Amdoy’s assessable income for the 2004–05 income year.
    The CFC then paid a non-portfolio dividend of $25,000 to Amdoy on 1 August 2008.
    Amdoy can treat part of the non-portfolio dividend ($10,000) as non-assessable non-exempt income under section 23AI, as it is a distribution out of previously attributed income.
    The $15,000 balance of the non-portfolio dividend can be treated as non-assessable non-exempt income under section 23AJ.
    End of example

    Non-portfolio dividends received by a resident individual from a company that is a resident of a foreign country may also be treated as non-assessable non-exempt income if they are paid out of profits of a CFC that have been previously attributed to the resident individual under the accruals tax measures (section 23AI).

    Distributions of attributed income: maintaining records to support a claim that an amount is not assessable

    Attribution accounts

    To be able to work out what distributions out of a CFC’s attributed income are non-assessable non-exempt income, you will need to keep certain records called attribution accounts.

    You must maintain an attribution account for:

    • each CFC from which income is attributed to you; this account will contain a record of:
      • income attributed to you from the CFC, and
      • income distributed to you by the CFC which is treated as distributed from attributed income
       
    • each entity through which the income of that CFC is distributed to you; these entities may be
      • partnerships
      • trusts, or
      • companies that are not Part X Australian residents 
       
    • each CFC that has changed residence from an unlisted country to Australia. Dividends paid by a company out of profits which were attributed to you before the company becoming a resident of Australia are non-assessable non-exempt income.

    These accounts are used to keep track of profits that have been taxed on an accruals basis so that you determine what amounts are non-assessable non-exempt income when you receive a distribution from those profits.

    Example 2
    Attribution accounts

    A resident company, Amdoy, owns all the share capital of a CFC that is a resident of an unlisted country. The CFC commenced business on 1 July 2004. For the 2004–05 income year, its only income was attributable income of $2,500; it paid no tax. On 1 August 2005, it paid a dividend of $2,500 to Amdoy.
    Attribution credit
    Amdoy will open an attribution account for the CFC and credit it with $2,500 on 30 June 2005 because this amount was included at that time in Amdoy’s assessable income under the CFC measures. The CFC is called an attribution account entity.
    Attribution debit
    Amdoy will debit $2,500 to the attribution account for the CFC on 1 August 2005 because of the dividend paid by the CFC. The debit is referred to as an ‘attribution debit’. The amount of the debit cannot be more than the credit balance in the account (called the 'attribution surplus') at the time the debit is made; in this case, the debit could not be more than $2,500.
    The dividend received by Amdoy is non-assessable non-exempt income to the extent the dividend gave rise to an attribution debit. In this case, Amdoy can claim the whole amount of the dividend as non-assessable non-exempt income in the 2005–06 income year; the effect is that Amdoy only pays tax on the CFC’s income when it is attributed, and not again when it is distributed.
    End of example

    An attribution account maintained by you for a CFC is specific to you; this means that when you sell shares in a CFC, you cannot transfer the attribution account to the purchaser of the shares.

    Tracing the path of distributions of attributed income

    There are a number of ways you can receive amounts that were paid from profits that have previously been attributed to you. In general, these amounts will be distributed to you as a dividend. The dividend may be distributed to you directly, or indirectly through a chain of companies, partnerships, or trusts.

    When are attribution account payments made?

    To work out your exemption, you will need to know the date on which attribution account payments are taken to have been made.

    The following table sets out:

    • the types of attribution account payments that can occur
    • the entities that are treated as making and receiving an attribution account payment
    • the date on which the payment is taken to be made.
    Type of attribution payment Entity making payment Entity receiving payment Date payment made

    Dividend

    Paying company

    Shareholder

    On date dividend is paid

    Partner’s share in the net income of a partnership

    Partnership

    Partner

    At the end of the income year of the partnership

    Share of the net income of a trust estate equal to the beneficiary’s present entitlement

    Trust

    Beneficiary

    At the end of the income year of the trust

    Whole or part of the net income of a trust estate is assessable to the trustees. Sections 99 or 99A

    Trust

    Trustee

    At the end of the income year of the trust

    Other distribution of accumulated trust income

    Trust

    Beneficiary

    Income year in which the distribution was made

     

    What accounting entries should you make?

    As mentioned earlier, attribution accounts link distributions a CFC has made to you (either directly or through other entities) to the income of the CFC that has already been attributed to you. The link is made when you:

    • debit the attribution account of the entity that makes the payment, and
    • credit the account of the entity that receives the payment.

    Continue this process down a chain of entities until you receive a distribution made by the CFC.

    Example 3
    Distribution of attributed income

    A resident company, Amdoy, owns all of the shares of CFC1, which owns all of the shares of CFC2. The CFCs are residents of unlisted countries.
    CFC2 commenced business on 1 July 1997, and for the 2004 income year CFC2 derived $100 which was attributed under the CFC measures. The company paid no tax on the attributed amount. On 1 August 2004, the company paid its first dividend of $100 to CFC1, which paid the dividend to Amdoy on the same day.

    All the entities close accounts to 30 June 2005.

    CFC 2 pays a dividend of $100 to CFC 1, which pays a dividend of $100 to the resident company.

    Attribution accounts
    CFC2
    Debit Credit

    1 August 2004 dividend to CFC1

    $100

    30 June 2004 amount attributed to Amdoy

    $100

    CFC1
    Debit Credit

    1 August 2004 dividend to Amdoy

    $100

    30 June 2004 amount attributed to CFC2

    $100

     

    As the $100 attributed from CFC2 to Amdoy on 30 June 2004 was included in Amdoy’s 2004 assessable income, and as the distribution Amdoy received on 1 August 2004 is no more than the income already attributed, Amdoy will treat the dividend as non-assessable non-exempt income.
    End of example
    Proportionate interests in the CFC and in interposed entities

    A resident taxpayer might hold only a proportion (that is, less than 100%) of the interests in a CFC. That interest may be held directly or indirectly through interests in other foreign entities.

    If you hold an interest of less than 100% in a CFC, only a proportion of the attributable income of the CFC is included in your assessable income. The proportion you use depends on the interest (called the attribution percentage) you have in the CFC: see chapter 1.

    When tracing a distribution made by a CFC through a chain of interposed entities to yourself, note any proportionate interests you have in any of these entities.

    Your interest in the CFC, and in each interposed entity, is called your attribution account percentage. This interest may differ from your attribution percentage in an entity. The foreign entities in the chain, along which the attributed income of the CFC is later distributed to you, need not necessarily be controlled foreign entities.

    If you have both direct and indirect attribution account interests in an entity, then your attribution account percentage in that entity is the sum of the interests as follows:

    Attribution account percentage

    =

    Direct attribution account interest

    +

    Indirect account attribution interest

     

    How do you work out your direct attribution account interest in an entity?

    Your direct attribution account interest in an entity will depend on the type of entity it is.

    If the entity is a foreign company, your direct attribution account interest in the company is the same as your direct attribution interest in that company.

    If the entity is a partnership of which you are a partner, your direct attribution account interest is the percentage that you hold (and any percentage you are entitled to acquire) of either the partnership’s profits or the partnership’s property. If the two percentages differ, use the higher percentage as your direct attribution account interest.

    Your interest in a partnership is measured at the end of the accounting period in which the dividend is distributed through the partnership to you. The date of the dividend payment is called the test time. You should assume that you held the same interest in the profits and property of the partnership throughout the accounting period that you held at the test time. When working out your interest in the profits, use the amount of profit for the whole of the period.

    Example 4
    Attribution account interest in a partnership

         A resident company owns 100% of CFC 1 which owns a 50% interest in a partnership which owns 50% of CFC 2. CFC 2 pays a dividend to the partnership on 1 August 2005. Income is attributed to the resident company for 2004–05.

     

    It is necessary to measure the direct attribution account interest of CFC 1 in the partnership in order to measure the attribution account percentage of the resident company in the partnership when the dividend is paid.
    End of example

    If the entity is a trust of which you are a beneficiary, your interest in the trust is the percentage of either the income or property of the trust to which you are presently entitled, and any percentage you are entitled to acquire. If the two percentages differ, use the higher percentage as your attribution account interest.

    As in the case of an interest in a partnership, your interest in a trust is measured at the end of the accounting period of the trust in which the dividend is distributed through the trust to you: the date of this payment is called the test time. You should assume that you held the same interest in the income or property of the trust throughout the accounting period as you held at the test time. When working out your interest in the income, use the amount of income earned for the whole period.

    How do you work out your indirect attribution account interest in an entity?

    Your attribution account percentage in an entity is the sum of your direct and indirect attribution account interests in that entity. To work out your indirect interest in an entity (Entity B) which is held through another entity (Entity A), multiply your direct interest in Entity A by Entity A’s direct interest in Entity B.

    If there are more than two entities in a chain, continue the process of multiplication along the chain until you reach the entity in which you are measuring your indirect interest.

    Example 5
    Attribution account interest

     The resident company has a 60% direct interest in CFC 1, which has a 60% direct interest in CFC 2. As a result, the resident company has a 36% indirect attribution account interest (60% x 60%) in CFC 2. In addition, the resident company has a direct attribution account interest in CFC 2 of 25%.

     

     
    In this case, the resident taxpayer’s attribution account percentage in CFC2 is 61%: that is, the taxpayer has a direct attribution account interest of 25%, plus an indirect attribution account interest of 36%.
    End of example

    Example 6
    Direct and indirect attribution account percentage

    The following example shows how to work out direct and indirect attribution account interests and the attribution account percentage in an entity.

    A resident company owns 50% of the share capital of CFC1, and CFC1 owns 50% of the share capital of CFC2. The CFCs are residents of unlisted countries. CFC2 commenced business on 1 July 2004. For the 2004–05 financial year, the only income of CFC2 was attributable income of $100. On 1 August 2005, CFC2 paid a dividend of $50 to CFC1.

    The resident company owns 50% of CFC 1, which owns 50% of CFC 2. CFC 2 pays a $50 dividend to CFC 1. The resident company’s attributable income is $25 (50% of $50).

     

     
    The resident company’s attribution percentage in CFC2 is 25%: that is, 50% of 50%. As a result, the resident company’s share of the attributable income of the CFC is $25: that is, 25% of $100.
    The dividend of $50 paid to CFC1 is an attribution account payment. When the dividend is paid to CFC1, it is necessary to measure how much of the dividend can be treated as a distribution of CFC2’s previously attributed income. The amount is worked out by applying the attribution account percentage of the resident company in CFC1 to the dividend paid to CFC1.
    The attribution account percentage of the resident company in CFC1 is 50%.
    As a result, up to $25 of the dividend can be treated as paid from previously attributed income.
    End of example
    Example 7
    Attribution debit
    A resident individual has a direct attribution account interest of 80% in CFC1. CFC1 has a direct attribution interest of 90% in CFC2. The CFCs are resident in unlisted countries.
    CFC2 commenced business on 1 July 2004. For the 2005 income year, its only income was attributable income of $100: it paid no tax. On 1 August 2005, it distributed its 2005 income. On the same day, CFC1 distributed the full amount of the dividend it received from CFC2.
    Attribution accounts
    CFC2
    Debit Credit

    1 August 2005 dividend to CFC1 (see note 2)

    $72

    30 June 2005 attributed income
    (see note 1)

    $72

    CFC1
    Debit Credit

    1 August 2005 dividend to the resident individual (see note 4)

    $72

    30 June 2005 dividend from CFC2
    (see note 3)

    $72

     

    Note 1: This represents CFC2’s attributable income of $100, multiplied by the resident’s attribution percentage in CFC2: that is, 80% (interest of the resident in CFC1) x 90% (interest of CFC1 in CFC2) x $100 = $72.
    Note 2: This represents the resident’s attribution account percentage in the dividend received by CFC1: that is, 80% of the $90 dividend.
    Note 3: The resident’s attribution account percentage in the dividend received by CFC1, worked out as in note 2.
    Note 4: The dividend paid by CFC1 to the resident.
    The dividend of $72 received by the resident individual is non-assessable non-exempt income to the extent of the attribution debit that arose when the dividend was paid. As this debit was also $72, the entire dividend is non-assessable non-exempt income.
    End of example

    When should you make a credit in an attribution account?

    You must make a credit in an attribution account if you include an amount in your assessable income because an amount of the CFC’s income has been attributed to you (section 456). The credit amount will be the amount of the attributed income included in your assessable income under section 456 without any addition for foreign or Australian tax paid by the CFC on that income. You must enter the credit at the end of the CFC’s statutory accounting period. Where a company is a CFC at the beginning of its statutory accounting period but ceases to exist during that period, the statutory accounting period is deemed to end immediately before the company ceases to exist. However, in this circumstance, the credit arises at the beginning of the statutory account period.

    An amount is included in your assessable income under section 457 where the CFC has both:

    • ceased to be a resident of an unlisted country, and
    • become a resident of a listed country or of Australia.

    Where section 457 applies, the amount of the credit will be the amount you included in your assessable income under section 457, without any addition for foreign or Australian tax the CFC paid on that amount. You must normally enter the credit at the time the CFC changed residence. However, you have the option to defer the credit to the extent it relates to an amount included in attributable income under section 457 for an unrealised gain on a tainted asset.

    The credit may be deferred until the CFC pays a dividend out of profits arising from the subsequent disposal of the asset.

    You must also make a credit in an entity’s attribution account if:

    • that entity receives an attribution account payment from another entity, and
    • the payment gives rise to an attribution debit for the paying entity.

    The credit amount will be the same as the attribution debit. You must enter the credit on the date of the attribution account payment.

    How are credits made when the taxpayer is an Australian partnership or Australian trust?

    Only the taxpayer who is actually liable to tax on the attributed income of the CFC can obtain an exemption from tax for distributions of that income. While the Australian partnership is the attributable taxpayer and has attributable income included in its net income, it is the partners of the partnership that are liable for tax in respect of this income as their assessable income includes their share of the net income of the partnership.

    A similar result applies in relation to presently entitled trust beneficiaries where the net income included in a presently entitled trust beneficiary’s assessable income includes income attributed to the trust under the CFC provisions.

    The attribution accounts are intended to ensure that only the relevant partners or trust beneficiaries are entitled to the exemption on distributions of previously attributed income. In these cases, the partners or beneficiaries keep attribution accounts in respect of the relevant CFCs and partnerships or trusts; for attribution account purposes, these entities are known as ‘attribution account entities’.

    This means that if the income of a CFC is attributed to an Australian partnership (which may include a foreign hybrid limited partnership or foreign hybrid company) or Australian trust, the credit made in the CFC’s account is for the partner of the partnership or for the trust beneficiary who is presently entitled to the trust income. If there is no such beneficiary, the credit arises for the trustee.

    The credit does not normally arise directly for the partnership or trust itself. There is an exception where the trust is a corporate unit trust, a public trading trust, an approved deposit fund, an eligible superannuation fund or a pooled superannuation trust; there is also an exception for Australian corporate limited partnerships, which are treated as Australian companies for tax purposes.

    The amount of the credit made for the partner of a partnership is equal to the increase in the amount included under section 92 in the partner’s assessable income, resulting from attributed income being included in the partnership net income. For a trust beneficiary, the credit equals the increase in the amount included under section 97, 98A or 100 in the beneficiary’s assessable income, resulting from attributed income being included in the trust net income; the amount calculated is called the ‘tax detriment’.

    When should you make debits in attribution accounts?

    You must make an attribution debit in an entity’s attribution account if that entity makes an attribution account payment to either:

    • an attributable taxpayer, or
    • another attribution account entity.

    You must also observe the following two rules:

    • You can only make a debit if there is an attribution surplus in the attribution account at the time the attribution account payment is made: that is, the account balance must be more than nil.
    • The debit cannot be more than the amount of the surplus in the account at the time.

    What is the amount of the attribution debit?

    Again, there are two rules to observe:

    • If an entity makes an attribution account payment to a resident taxpayer, the debit is the same as the amount of the payment.
    • If the entity makes an attribution account payment to another entity, the debit will equal the resident taxpayer’s attribution account percentage of the payment received by the second entity.

    How are debits made when the attributable taxpayer is an Australian partnership or Australian trust?

    If a CFC makes an attribution account payment to an Australian partnership, an attribution debit will arise for the CFC in relation to a partner in the partnership provided that, immediately before the payment is made, there is an attribution account surplus for the CFC in relation to the partner.

    The amount of the attribution debt is the lesser of:

    • the attribution surplus for the CFC in relation to the partner, and
    • the partner’s attribution account percentage (in the partnership) of the attribution account payment.

    Similarly, an attribution account payment made by a CFC to an Australian trust will give rise to an attribution debit for the CFC in relation to a beneficiary of the trust where there is an attribution account surplus for the CFC in relation to the trust: in this case, the attribution debit will be the lesser of:

    • the attribution account surplus for the CFC in relation to the beneficiary, and
    • the beneficiary’s attribution account percentage (in the trust) of the attribution account payment.

    Where such a debit is made for a CFC in relation to a partner in a partnership or beneficiary in a trust, a corresponding attribution credit must also be made for the partnership in relation to the partner or the trust in relation to the beneficiary. This is so that, when calculating the partner’s share of the partnership net income, or the beneficiary’s share of the trust net income, at year end, there is an attribution account surplus against which to debit the attribution account payment arising from that calculation.

    Example 8
    Attribution account entries for interest in a CFC held by a foreign hybrid limited partnership

    A resident company (Oz Co) has a 50% interest in the net income of a foreign hybrid limited partnership (FHLP) which owns all of the shares of a CFC. The CFC is a resident of an unlisted country. The unlisted country does not impose tax on these entities. FHLP is an Australian partnership, as Oz Co is a partner. All the entities close their accounts to 30 June.
    In the 2006 income year, the CFC derived a profit of $200, which was attributed to the foreign hybrid limited partnership under the CFC measures. On 1 August 2006, the CFC paid a dividend out of these profits of $200 to FHLP, to which Oz Co is entitled to 50%: that is, $100.

     MEI28180image009.jpg

    Attribution accounts
    CFC
    Debit Credit

    1 August 2006 Dividend to FHLP (see note 2)

    $100

    30 June 2006 Attributed income (see note 1)

    $100

    FHLP
    Debit Credit

    30 June 2007

    Share of net partnership income
    (see note 4)

    $100

    1 August 2006 Dividend from CFC (see note 3)

    $100

     

    Note 1: This represents the tax detriment to Oz Co resulting from income being attributed to FHLP ($200). The income attributed to FHLP gives rise to an attribution credit for the CFC in relation to Oz Co of $100 – subsection 371(6).
    Note 2: This represents Oz Co’s attribution account percentage in the dividend paid by CFC to FHLP on 1 August 2006 – that is, 50% of the $200 dividend. Oz Co’s attribution account percentage of the dividend gives rise to an attribution debit for the CFC in relation to Oz Co of $100 – subsection 372(2).
    Note 3: This represents the attribution credit for FHLP in relation to Oz Co corresponding to the debit for CFC in relation to Oz Co arising as a result of CFC’s dividend – subsection 371(1)(d).
    Note 4: This represents the calculation of Oz Co’s share of the net partnership income of FHLP. The debit arises at the end of the year of income – subsections 365(1)(b) and 372(1) and (2).
    Oz Co’s share of the net partnership income is an attribution account payment by FHLP to Oz Co. As FHLP has an attribution account surplus in relation to Oz Co equal to the amount of the attribution account payment, Oz Co will treat the entire attribution account payment as non-assessable non-exempt income.
    End of example
    Dividends other than non-portfolio dividends

    Portfolio dividends are generally taxable unless they are paid from profits taxed previously on an accruals basis. Portfolio dividends are dividends that do not qualify as non-portfolio dividends.

    You must maintain an attribution account for each CFC from which income is attributed to you: see Attribution accounts for an explanation of how these accounts are maintained.

    Section 2: What if a CFC receives a dividend from another CFC?

    Non-portfolio dividends paid by a foreign company to a CFC are non-assessable non-exempt income of the CFC. Such dividends cannot form part of the attributable income of the CFC in relation to which an attributable taxpayer may be assessable under section 456.

    Section 3: When is a CFC deemed to have paid a dividend?

    It is possible that a resident taxpayer with an interest in an unlisted country CFC may try to minimise Australian tax by arranging for the CFC to distribute benefits in a form other than dividends to its shareholders or their associates.

    There are rules to prevent this form of tax avoidance in section 47A. These rules deem certain transfers and payments made by an unlisted country CFC to be dividends; these dividends are then taxed in the normal way.

    For section 47A to apply, a CFC must provide a benefit to:

    • a resident who is a shareholder or an associate of a shareholder of the CFC, or
    • another CFC or controlled foreign trust, directly or through other entities, where the first entity that received the dividend is a shareholder or an associate of a shareholder of the CFC.
    When should you deem a dividend to have been paid by a CFC?

    Types of benefits that are covered under section 47A

    The following seven types of benefits provided by a CFC could be treated as dividends:

    1.

    the waiver by the CFC of a debt owed by another entity

    2.

    the grant by the CFC of a non-arm’s-length loan to another entity

    3.

    the grant by the CFC of a loan (whether at arm’s length or not) to another entity to facilitate, directly or indirectly, the payment by that entity of a dividend that would be non-assessable non-exempt income

    4.

    the transfer by the CFC to another entity of property or services for no consideration, or for inadequate consideration

    5.

    a payment made by the CFC for allotment of:

    • shares in a company
      • rights or options to acquire shares
      • units in a unit trust, or
      • rights or options to acquire units
       
     

    6.

    a payment made by the CFC in respect of calls on shares in another company

    7.

    the grant by the CFC of a loan (whether at arm’s length or not) to another entity to facilitate a transaction of the type referred to in any of the above points.

     

    Treat the fifth and sixth types of payments as dividends only if:

    • a shareholder of the CFC (or shareholder’s associate) holds any direct interest, or later acquires any direct interest, in any of the shares of the company in which the CFC acquired shares or in the unit trust in which the units were acquired, or
    • the company (or unit trust) uses the proceeds of the issue to facilitate a transaction providing any of the above types of benefits.

    Entities providing and receiving the benefit

    For a benefit to be treated as a deemed dividend, the benefit must be provided by the CFC to a shareholder or an associate of a shareholder.

    The benefit must be provided by either:

    • an unlisted country CFC, or
    • another entity under an arrangement with the CFC, where the CFC has transferred property or services in consideration for the benefit to:
      • the other entity, or
      • any other entity.
       

    These transfers of property or services are referred to as arrangement transfers.

    The time the benefits are deemed to have been provided

    The following table sets out some of the types of benefits provided by a CFC that are subject to section 47A, the time at which they are taken to be provided and the amount of the benefit.

    Type of benefit Time Amount

    Waiver of a debt

    Time the debt was waived

    Amount of the debt

    Non-arm’s-length loan

    Time the loan was made

    Amount of the loan

    Transfer of property for no consideration

    Time the property was transferred

    Market value at time of transfer

    Transfer of property or services for a consideration less than market value

    Time the property or services were transferred

    Difference between the market value of the property or services and the consideration paid

    Payment or transfer of property for the allotment of shares or units

    Time the payment or transfer was made

    Amount paid or market value of the property transferred

    Benefit provided by another entity under an arrangement with the CFC (if there is one ‘arrangement transfer’)

    Time the CFC made the arrangement transfer

    Amount of the arrangement transfer or market value of arrangement transfer

    Benefit provided by another entity under an arrangement with the CFC (if there are several arrangement transfers)

    Time the agreement to make the arrangement transfers was entered into

    Total amount of the arrangement transfers or the total market value of the arrangement transfers

     

    Working out the amount of the deemed dividend

    The amount of a benefit that can be treated as a dividend paid by a CFC cannot be more than the CFC’s profits at the time the benefit was provided.

    In this context, ‘profits’ do not mean distributable profits: ‘profits’ in this situation mean ‘commercial profits’ of either an income or capital nature that the company has at the time the benefit is provided. Work out these profits at the time the company provided the benefit.

    If the CFC provided a benefit by transferring property or services at less than their market value, work out the CFC’s profits at the time the benefit was provided as if the property or services were transferred for their full market value.

    Effect of deeming a benefit to be a dividend

    A deemed dividend paid to a resident taxpayer is generally treated the same as other dividend payments; for example, a deemed dividend that is a non-portfolio dividend paid by an unlisted country CFC to an Australian company is treated as non-assessable non-exempt income.

    Disclosure of deemed dividends

    You will be denied access to certain tax offsets and concessions in relation to a section 47A deemed dividend if you:

    • do not disclose the deemed dividend in your tax return, and
    • do not notify the ATO of the deemed dividend within one year of the end of the income year in which the dividend is deemed to have been paid.

    The tax offsets and concessions you lose are:

    • any tax offsets for foreign taxes you have paid on the dividend, and
    • any possibility that a part of the deemed dividend may qualify as non-assessable non-exempt income under section 23AI.

    The deemed dividend will also not give rise to an attribution credit.

    Part 2: Taxation of branch profits

    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

    Foreign branch income of a resident company that is not assessable

    Which resident companies qualify?

    Two broad groups qualify to have certain branch profits treated as non-assessable non-exempt income. These are resident companies that either:

    • carry on business through a permanent establishment, for example, a branch, or
    • are partners of a partnership or are presently entitled beneficiaries of a trust, and that partnership or trust carries on business through a permanent establishment.

    Non-assessable non-exempt income treatment does not apply to resident taxpayers, other than companies, with foreign permanent establishments.

    What is a permanent establishment?

    A permanent establishment includes a fixed place of business. The term ‘permanent establishment’ is defined in section 6 of the Act.

    If the country in which an Australian company has a permanent establishment is one with which Australia has a double-taxation agreement, the meaning of the term permanent establishment is determined by the agreement.

    Permanent establishments are referred to as branches in this part.

    What income is non-assessable non-exempt?

    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 may be 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. However, the following modifications apply 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 are provided with an exemption for banking income broadly consistent with the exclusion from accruals taxation available under the CFC measures for Australian financial institution’s 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 income year 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.
    What branch capital gains are non-assessable non-exempt income?

    Permanent establishment in a listed country

    A resident company includes in the calculation of its net capital gains any capital gain or capital loss as a result of a capital gains tax (CGT) event happening in relation to a tainted asset that is used in carrying on a business through a permanent establishment in a listed country if:

    • the gain is also eligible designated concession income, or
    • there is a loss, but there would have been eligible designated concession income if the loss had instead been a gain.

    Permanent establishment in an unlisted country

    A resident company includes in the calculation of its net capital gains any capital gain or capital loss arising as a result of a CGT event happening in relation to a tainted asset that is used in carrying on a business through a permanent establishment in an unlisted country.

    Effect of non-assessable non-exempt income treatment on a resident company’s deductions, losses and foreign income tax offsets

    A deduction is not allowable for:

    • outgoings or expenses incurred in producing branch income and gains that are non-assessable non-exempt income
    • capital losses on the disposal of a branch asset if, had there been a profit on the disposal, the profit would have been non-assessable non-exempt income.

    Current year losses or carried forward losses of a resident company are not reduced by branch income or gains that are non-assessable non-exempt income.

    Foreign income tax offsets are not allowed for foreign taxes paid on branch income that is non-assessable non-exempt income.

    Chapter 4: Taxation of foreign investment fund (FIF) interests

    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

    Overview

    This chapter explains the tax treatment of Australian residents when they receive distributions from a FIF (foreign investment fund), or dispose of their interests in a FIF, if they had previously been subject to accruals taxation on their FIF interest.

    The FIF measures have been repealed and do not apply to taxpayers from the 2010–11 income year. Further details of the FIF measures in earlier income years are provided in the FIF Guide for those years.

    The FIF measures applied to income and gains accumulating in foreign companies that were not controlled by Australians and foreign trusts that, broadly speaking, fell outside the scope of the deemed present entitlement and transferor trust measures. The FIF measures also applied when working out the income of controlled foreign companies (CFCs) with FIF interests, and to certain foreign life policies (FLPs) that had an investment component, such as life bonds.

    Taxpayers are no longer subject to accruals taxation on income and gains accumulating in FIFs. As FIF income is no longer attributable, any unapplied previous FIF losses can not be used to reduce future FIF income.

    If you have an interest in a FIF, you will be subject to the tax rules applicable to your circumstances; for example, if you have an interest in a foreign trust, you will be subject to the general tax rules relating to trust income (Division 6 of Part III) and may be subject to the transferor trust provisions (Division 6AAA of Part III). For more information, see chapter 2 of this guide.

    If you have an interest in a foreign company to which the CFC measures do not apply, you will be subject to the general tax rules relating to dividend income and shares. For more information, see our publication You and your shares.

    Certain aspects of the FIF measures have been retained to ensure that you are not subject to double taxation when you receive a distribution or other attribution account payment from a FIF, or dispose of an interest in a FIF.

    Double taxation is avoided through the maintenance of FIF attribution accounts. FIF attribution accounts record the income attributed or distributed to you from each of your interests in a FIF or a FLP; they allow you to claim exemptions for FIF income previously attributed to you when you receive a distribution from a FIF or dispose of an interest in a FIF. This is only relevant for taxpayers who have a post FIF abolition surplus in respect of their FIF interest.

    Exemptions

    Exemption of distributions

    A dividend or other FIF attribution account payment you receive from a FIF attribution account entity may be treated as non-assessable non-exempt income. (section 23AK).

    The amount of the FIF attribution account payment that will be non-assessable non-exempt income when you receive the payment will be determined by the post FIF abolition surplus in the attribution account of the FIF making the distribution. If the payment is more than the attribution surplus, only the part of the payment equal to the surplus will be non-assessable under section 23AK.

    FIF attribution accounts are explained in detail in the section FIF attribution accounts.

    Exemption of distributions derived through a partnership or trust

    If you receive the distribution from a FIF or FLP through an interposed partnership or trust, the amount will be treated as non-assessable non-exempt income where:

    • after the distribution of an amount from the FIF to the partnership or trust, you would be required to include an amount in respect of the trust or partnership in your assessable income, and
    • at the time of that distribution, you had a post FIF abolition surplus in relation to the FIF or FLP.

    The distribution to the partnership or trust will still be included when working out the net income of the trust or partnership. However, once your share of that net income is determined, an amount equal to your attribution surplus will be non-assessable non-exempt income.

    Reduction of disposal consideration if FIF attributed income is not distributed

    The disposal of an interest in a FIF attribution account entity is normally taken into account in working out your assessable income under the existing provisions of the ITAA 1936: for example, either as income under section 6-5 of the ITAA 1997, or under the capital gains tax provisions in Part 3-1 of the ITAA 1997.

    To avoid double taxation, the consideration received on the disposal of an interest in a FIF attribution account entity, which is to be taken into account for the purposes of the relevant assessment provision, will be taken to be reduced by any amount previously attributed to you that has not been distributed to you (the post FIF abolition surplus) - paragraph 23B(1)(c). A post FIF abolition debit for the same amount arises at the time you dispose of the FIF interest – paragraphs 23B(1)(d) and (e).

    If you dispose of only part of an interest in a FIF attribution account entity, your post FIF abolition surplus that can be used to reduce the consideration on disposal is reduced proportionately – paragraphs 23B(1)(c) and (e) and subsection 23B(2).

    FIF attribution accounts

    FIF attribution accounts record the income attributed and distributed to you from each of your interests in a FIF or a FLP. Attribution accounts operate on the basis of credits and debits.

    In the FIF measures:

    • a credit was previously referred to as a FIF attribution credit, and is now referred to as a post FIF abolition credit
    • a debit was referred to as a FIF attribution debit, and is now referred to as a post FIF abolition debit.

    To correctly maintain attribution accounts and claim exemptions for FIF income previously attributed to you, you need to keep records of:

    • income attributed to you from a FIF or a FLP
    • income distributed to you by a FIF or a FLP either directly or through interposed FIF attribution account entities, and
    • the amount of any reduction of consideration you can claim on disposal of an interest in the FIF or FLP

    Where the amount of credits in an attribution account exceeds the amount of debits, the excess is referred to as a post FIF abolition surplus. The following section explains these concepts.

    FIF attribution account entity

    A FIF attribution account entity is:

    • a company that is not a resident of Australia
    • a partnership
    • a trust, or
    • a FLP.

    (former section 601)

    FIF attribution account payments

    A FIF attribution account payment occurs when a FIF in which you have an interest makes a payment to you or to another FIF in which you also have an interest.

    FIF attribution account payments include:

    • a dividend paid by a company to a shareholder
    • an amount of interest paid to the holder of a convertible note
    • a partner's share of the net income of a partnership for the income year
    • a beneficiary's share of the net income of a trust estate for the income year
    • an amount included in the assessable income of a beneficiary under section 99B during the income year for a distribution made by a trust estate
    • an amount of net income of a trust estate on which the trustee would be assessable under section 99 or 99A
    • a payment made by the entity which issued a FLP to a person who has an interest in the FLP
    • superannuation, termination of employment and similar payments included in your assessable income under Division 82, 301, 302, 304 or 305 of the ITAA 1997 or Division 82 of the Income Tax (Transitional Provisions) Act 1997. (former section 603).
    Post FIF abolition surplus

    The surplus in a FIF attribution account, at the time that a FIF attribution account payment is made, is the amount by which the total FIF attribution credits and post FIF abolition credits are more than the total FIF attribution debits and post FIF abolition debits – subsection 23AK(5).

    Where an attribution account has a surplus, it generally means that a greater amount of income from a FIF has accrued to you than has been distributed to you.

    Post FIF abolition credit
    1. Following the repeal of the FIF measures, a FIF attribution credit will only occur where you maintain attribution accounts for two FIFs and one FIF makes a distribution (that is, an attribution account payment) to the second FIF – subsection 23AK(6).
    2. The post FIF abolition credit arises when the attribution account payment is made – subsection 23AK(8).
    3. The amount of the post FIF abolition credit is equal to the amount of the post FIF abolition debit for the FIF attribution account entity making the distribution – subsection 23AK(7).
    Post FIF abolition debit

    A post FIF abolition debit will occur when the FIF in which you have an interest makes a distribution to you. Post FIF abolition debits trace the movements of profits included in your assessable income under the FIF measures and prevent that income, where it has been attributed to you, from being taxed again.

    You will have a post FIF abolition debit for a FIF attribution account entity where:

    • the entity makes a FIF attribution account payment to you or to a FIF attribution account entity in which you have an interest, and
    • immediately before the payment is made, the entity making the FIF attribution account payment has a post FIF abolition surplus in relation to you – subsection 23AK(2).

    The post FIF abolition debit arises when the FIF attribution account payment is made – subsection 23AK(4).

    The amount of the post FIF abolition debit is the lesser of the post FIF abolition surplus and:

    • if the FIF attribution account payment was made to you, the FIF attribution account payment
    • in any other case, your FIF attribution account percentage for the FIF that receives the FIF attribution account payment – subsection 23AK(3).

    The post FIF abolition debit may be reduced if a first-tier FIF was previously a CFC under Part X. The current post FIF abolition debit may be reduced only where an attribution debit under the CFC measures was recorded for the entity when it was a CFC. The reduction for the current post FIF abolition credit is equal to the CFC attribution credit recorded when the FIF was a CFC. This allows the FIF attribution credit to be deferred until the attribution surplus for the CFC is used – subsection 23AK(3).

    A post FIF abolition debit will also arise where you dispose of a FIF interest and the consideration or capital proceeds from the disposal are reduced: see disposal of interests.

    FIF attribution account percentage

    Your FIF attribution account percentage in relation to a FIF attribution account entity is the interest you hold, directly or indirectly through one or more interposed FIF attribution account entities, in the income or profits of the entity (former section 602).

    Example 1
    Attribution accounts

    Beryl, a resident individual, has an interest in a foreign company (Forco) that is not a CFC. Forco's notional accounting period ends on 30 June, as does Beryl's income year. In the year ended 30 June 2010, she had FIF income in respect of Forco of $5,000: this $5,000 would have been included in her assessable income under section 529.
    In this case, she will treat the next $5,000 of dividends paid by Forco as non-assessable non-exempt income under section 23AK. To achieve this, Beryl would credit the FIF attribution account for Forco with the $5,000 at the end of Forco's notional accounting period as follows:
    Beryl's FIF attribution account – Forco

    Debit

    Credit

     

    30/6/10

    Attribution

    $5,000

     

    In the year ended 30 June 2011, Beryl does not have FIF income because the FIF measures have been repealed. On 31 December 2010, Forco paid her a dividend of $3,000.
    The dividend is a post FIF abolition account payment. Beryl would debit her FIF attribution account with the $3,000 at the time the dividend was paid as follows:
    Beryl's FIF attribution account – Forco

    Debit

    Credit

    31/12/10

    Dividend

    $3,000

    30/6/10

    Attribution

    $5,000

     

    The $3,000 dividend that Beryl received would be non-assessable non-exempt income under section 23AK, and Beryl would have a post FIF abolition surplus of $2,000. If on 31 December 2011, Forco paid Beryl a dividend of $7,000, Beryl would debit the FIF attribution account with $2,000 (the lesser of the dividend and the surplus in the account) at the time the dividend was paid.
    Beryl's FIF attribution account – Forco

    Debit

    Credit

         

    30/6/10

    Attribution

    $5,000

    31/12/10

    Dividend

    $3,000

    31/12/10

    Surplus

    $2,000

    31/12/11

    Dividend

    $2,000

    31/12/11

    Surplus

    $0

     

    Beryl would include in her assessable income the amount of the dividend that is more than the amount debited to the FIF attribution account: that is, $5,000. The remainder of the attribution account payment ($2,000) would be non-assessable non-exempt income under section 23AK.

    Note: The foreign income tax offset (FITO) rules have replaced the foreign tax credit system. For further information about the FITO rules, see Guide to foreign income tax offset rules.

    Chapter 5: Proving your assessment

    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

    Overview

    You will need to keep receipts, invoices, ledgers and other accounting records of a company or trust that relate to the calculation of its notional assessable income.

    In addition, you will need to keep details of your interest in the company, the interests of your associates and how you worked out the amount you included in your assessable income.

    This chapter also explains the substantiation requirements of the active income test, the use of offshore information notices, and the keeping of records of elections.

    This chapter also explains the record-keeping requirements for accessing FIF exemptions.

    Part Subject Applies to Action If not done

    Part 1

    Record keeping for CFC attributable taxpayers

    Attributable taxpayer

    Keep records of CFC attributable amount

    Prosecution, with a maximum penalty of $3,300

    Part 2

    Passing the active income test

    Attributable taxpayer

    Supply accounts and accounting information to ATO

    No offence if not supplied, but CFC fails active income test

    Part 3

    Can the ATO ask you to get information from overseas?

    Taxpayer

    Produce documents

    Evidentiary sanction: no documents can be used in evidence without the consent of the Commissioner of Taxation (Commissioner)

    Part 4

    What records of elections must you keep?

    CFC or taxpayer

    Make election

    Treated as if no election made

    Part 5

    Record keeping for FIF attributable taxpayers

    Taxpayer

    Keep records of FIF attribution accounts

     

     

    Part 1: Record keeping for CFC attributable taxpayers

    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

    Who needs to keep records?

    You must keep records (as set out below) if you are an attributable taxpayer of:

    • a controlled foreign company (CFC), or
    • a non-resident trust estate.

    An attributable taxpayer is a person who:

    • alone, or together with associates, has an interest in a CFC or a controlled foreign trust of at least 10%, or
    • is a transferor of a non-resident trust, or
    • is one of the actual controllers of the CFC with an interest of at least 1%.

    Record keeping for a controlled foreign company

    You will need to keep records of your interest in a CFC and of its financial transactions if you meet both of the following conditions:

    • you are an attributable taxpayer of a controlled CFC at the end of the company’s statutory accounting period, and
    • the company has attributable income.

    You must keep records of:

    • the circumstances that resulted in your becoming an attributable taxpayer for the statutory accounting period of the CFC
    • how you worked out your direct and indirect attribution interest and your attribution percentage for the CFC’s statutory accounting period, and
    • how you worked out the amount you included in your assessable income.

    You must keep records of your calculations even if they show that no amount is to be included in your assessable income.

    Specific record-keeping requirements called attribution accounts apply where an amount is included in an attributable taxpayer’s assessable income because a CFC paid a dividend to another controlled entity.

    Record keeping for non-resident trusts

    You are required to keep records for a non-resident trust estate if you are an attributable taxpayer in relation to the trust estate.

    You must keep records of:

    • how you became an attributable taxpayer for the non-resident trust
    • how you worked out the trust’s attributable income for each of the trust’s income years which falls wholly or partly within your year of income, and
    • how you worked out the amount included in your assessable income.

    If you cannot get the information necessary to work out the trust’s attributable income, the amount to be included in your assessable income is worked out using a formula: see chapter 2.

    You must keep these records even if no amount is to be included in your assessable income.

    Record keeping for partnerships

    A partnership needs to keep records if it is an attributable taxpayer.

    A partnership may be an attributable taxpayer if it:

    • has transferred property or services to a non-resident trust, or
    • is an attributable taxpayer in relation to a controlled foreign company.

    It is important to note that each individual partner could be liable if the partnership breaches the record-keeping requirements.

    What happens if the records are not kept?

    You may be prosecuted and fined up to $3,300 by a court if you fail to keep adequate records.

    You will not be convicted if you can show that any of the following statutory defences apply to you:

    • you did not know that you had an obligation to keep the records and you had no reason to suspect the obligation existed – if you suspected that the record-keeping requirements applied to you, you won’t be able to claim the benefit of this exemption, or
    • you did not know that you had an obligation to keep the records even after you had made all reasonable efforts to find out whether there was an obligation to keep the records, or
    • if you have made all reasonable efforts to obtain the information required but simply can’t get it. If you had actual or effective control of the company or another entity which has the information, you would not be considered to have made a reasonable effort unless you used your position of influence in a genuine attempt to get the information required.

    If you wish to take advantage of any of these exemptions, you will have to prove that reasonable grounds existed or that you made reasonable efforts; to do this, you will need to keep a record of the efforts you have made to get the information.

    How should the records be kept and for how long?

    If you are required to keep records, you must do the following:

    • Keep written records in English. If records are not in a written form (for example, if kept on magnetic tape or computer disc) you must be able to get access to them readily to convert them into written English.
    • Keep records in a way that allows your tax liability to be readily determined.
    • Keep the records either for five years after they were prepared or obtained, or for five years after the completion of the transactions to which those records relate, whichever is the later.

    The records need not necessarily be kept in Australia, but they must be kept by the attributable taxpayer; this means that you, as the attributable taxpayer, are responsible for the custody and control of the records. If an Australian company allows its CFC to physically keep records outside Australia, the Australian company must maintain custody and control of those records.

    Are you required to keep attribution accounts?

    There is no legal requirement for an attributable taxpayer of a CFC to keep attribution accounts. However, taxpayers are required to keep records that explain all transactions and other acts relevant to (among other statutes) the Income Tax Assessment Act 1936 and Income Tax Assessment Act 1997. A taxpayer must maintain adequate records to substantiate their tax treatment of dividends paid by a CFC: for example, as non-assessable non-exempt income, or as conduit foreign income.

    Part 2: Passing the active income test

    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

    Who has to prove they have passed the test?

    A person who is an attributable taxpayer for a CFC and who claims that the CFC has passed the active income test may be asked to prove that the CFC has passed the test.

    How do you prove that you meet the requirements?

    If you wish to claim a tax exemption on the basis that a CFC has passed the active income test (see chapter 1) you must:

    • ensure that the company has kept accounts for the statutory accounting period; these accounts must
      • be prepared in accordance with commercially accepted accounting principles
      • give a true and fair view of the financial position of the company
       
    • ensure that the CFC will assist by providing accounting and other information which the ATO may ask you to supply.

    Commissioner’s notice to an attributable taxpayer

    If you prepared a tax return claiming the active income test exemption, the ATO may give you a Commissioner’s notice asking you to prove that the test has been passed. In this notice, the Commissioner will ask you to get copies of accounts and other documents from the CFC.

    If the documents are not in English, you will have to translate them and give the documents and translations to the ATO within the allotted time.

    The ATO will allow you a minimum of 90 days to produce these documents. If you want extra time, you must apply in writing to the ATO before the time runs out. The ATO may agree to extend the time allowed.

    Extra time will be granted if the ATO has not answered your request before the time allowed runs out.

    Taxpayer’s notice to a CFC

    To get the documents from the CFC, you may send the CFC a written request, called a ‘taxpayer’s notice’.

    General accounting records

    So that you can get the documents that the ATO may ask for, the ATO requires the company to keep general accounting records. These may be kept either in Australia or elsewhere.

    These records include:

    • invoices
    • receipts
    • orders for the payment of money
    • bills of exchange
    • cheques
    • promissory notes
    • vouchers
    • other documents of prime entry.

    The records would also include any working papers and other documents necessary to explain how the accounts are made up.

    General accounting records should also correctly record and explain the matters, transactions, acts and operations that are relevant to the preparation of the CFC’s recognised accounts for the statutory accounting period. These records must be available if the ATO needs to check the matters and figures in the accounts.

    Recognised accounts

    Recognised accounts are accounts kept for the statutory accounting period that are:

    • prepared in accordance with commercially accepted accounting principles, and
    • give a true and fair view of the financial position of the company.

    These accounts include:

    • journals
    • ledgers
    • profit and loss accounts
    • balance sheets
    • other financial statements
    • reports and notes attached to, or intended to be read with, the accounts.

    The company must keep both the recognised accounts and the general accounting records for five years, starting from the end of the company’s statutory accounting period.

    If you ask the CFC for copies of documents included in or drawn from the recognised accounts and general accounting records, the CFC must give them to you; but you must allow the CFC at least 60 days to comply.

    In your taxpayer’s notice to the CFC, you may ask the CFC for any or all of the following:

    • copies of the recognised accounts of the company for the statutory accounting period
    • copies of the general accounting records of the company for the statutory accounting period
    • copies of a document showing how the tainted income ratio of the company was worked out for the statutory accounting period; this document will summarise information drawn from the recognised accounts and general accounts to work out the tainted income ratio.

    CFC’s notice to its partnership

    If the CFC is a partner in a partnership, the CFC may ask the partnership for information it needs to answer the taxpayer’s notice. The CFC’s notice must allow the partnership at least 30 days to comply.

    Minimum time for notice to produce documents

    ATO

    —>

    Taxpayer

    —>

    CFC

    —>

    Partnership

       

    minimum 90 days notice

     

    minimum
    60 days

     

    minimum
    30 days

     

    What will happen if you don’t fully meet the substantiation requirements of the active income test?

    If you refuse or fail to comply with the Commissioner’s notice, you have not committed an offence; you will not be prosecuted if the CFC or a partnership involving a CFC does not keep the records listed above.

    However, if you fail to meet the substantiation requirements because you have not produced the documents requested, the CFC will be treated as if it has failed the active income test. As a result, the ATO may amend your tax assessment to include attributable income. You may also have to pay the shortfall interest charge and a penalty in respect of the tax that would have been paid if you had treated the active income test as applying to you.

    Part 3: Can the ATO ask you to get information from overseas?

    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

    Offshore information notices

    If the ATO believes that information relevant to your assessment is held overseas, you may receive a written ‘offshore information notice’ asking to provide the information.

    The ATO will give you 90 days to supply the information. You may ask for extra time by applying in writing to an ATO office before the time runs out. If you are allowed extra time, you will be advised of this in writing. The extra time will be given if the ATO has not answered your request before the time allowed runs out.

    The ATO may change the notice in writing to:

    • reduce its scope, or
    • correct a clerical error or obvious mistake.

    The ATO may also issue you with another notice, or vary or withdraw a notice.

    If you fail or refuse to comply with an offshore information notice, you have not committed an offence.

    However, if you don’t give the ATO all of the information asked for, you could be stopped from using it as evidence in proceedings in which you dispute the assessment.

    The ATO may consent to information being admissible in proceedings where the Commissioner considers that its use would not be misleading.

    Part 4: What records of elections must you keep?

    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

    If you have been required to do any of the following, you are required to keep a record of having done so:

    • make an election
    • make a declaration
    • make a selection, or
    • give certain notices to the ATO when working out your attributable income.

    You are also required to keep a record of a CFC’s election if you are claiming the benefit made either:

    • under capital gains tax rollover provisions, or
    • due to a change in its statutory accounting period.

    Note that the CFC may make an election to vary its statutory accounting period from the standard period ending 30 June.

    Part 5: Record keeping for FIF attributable taxpayers

    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

    You should maintain records relating to your FIF attribution accounts: for more information, see FIF attribution accounts.

    Keeping these records enables you to correctly calculate your entitlement to:

    • the exemption of distributions paid out of profits which were previously attributed to you (section 23AK), and
    • a reduction of the amount to include in your assessable income after the disposal of a FIF interest (section 23B).

    Chapter 6: Consolidation (consolidated income tax treatment for groups of entities)

    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

    This chapter provides a summary of the provisions that relate to the application of income attributed from CFCs and included in the assessable income of a head company of a consolidated group. Detailed information on the operation of consolidation is contained in the Consolidation reference manual: see also More information on consolidation.

    Overview

    For income tax purposes, consolidation is optional. However, if the head company of a wholly owned resident group decides to consolidate, all its wholly owned eligible Australian resident group entities must become members of that consolidated group.

    The choice to consolidate is irrevocable; once a group has consolidated, it is treated as a single entity for income tax purposes.

    Where a foreign company, either directly or through its wholly owned foreign group, has multiple entry points of investment into Australia through Australian resident companies, special multiple entry consolidated (MEC) group rules apply to enable eligible wholly owned resident companies and their eligible wholly owned resident subsidiary entities to consolidate.

    The following losses and tax attributes can generally be brought into a consolidated group or MEC group, and be used by the group's head company:

    • losses
    • franking credits
    • CFC attribution account surpluses
    • Post FIF abolition surpluses.

    Foreign income tax offsets

    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 consolidation regime through the single entity rule ensures that only the head company of a consolidated group includes the foreign income of the consolidated group or MEC group in its assessable income. Once consolidated, only the head company is entitled to foreign income tax offsets for foreign income tax paid on an amount included in the head company’s assessable income. The head company can use foreign income tax offsets to reduce its Australian tax liabilities that would otherwise be payable in respect of amounts included in the head company’s assessable income to prevent double taxation of its worldwide income.

    There are special transitional foreign income tax offset rules which allow the head company to apply pre-commencement excess foreign income tax, including its own pre-commencement excess foreign income tax and any transferred from joining entities at the joining time, provided certain conditions are met.

    Where an entity leaves a consolidated group or MEC group, it is only required to include foreign income in its assessable income for the period it is not a member of any consolidated group. The leaving entity will not be able to use any pre-commencement excess foreign income tax it may have had before joining the consolidated group or MEC group, or any that arose to the head company during the entity’s membership period.

    CFC Attribution account surpluses

    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

    Under consolidation, only the head company can operate attribution accounts for the purposes of the CFC measures.

    Subsidiary members (in this case, companies) transfer the pre-consolidation balances of their attribution accounts to the head company, on formation or when the company joins the consolidated group or MEC group, to facilitate its use of any pre-consolidation surpluses during consolidation.

    The attribution account surpluses are transferred to the head company so that, to the extent that income had previously been attributed to the member entity, subsequent distributions of income from an attribution entity (for example, a CFC that had previously been attributed to the member entity) are not assessed to the head company.

    Once the account balances have been transferred to the head company of a consolidated group or MEC group, the attribution accounts of subsidiary members become inoperative during the period the entity is a member of the consolidated group or MEC group.

    When a company with an interest in a CFC leaves a group, a proportion of the attribution account surpluses that the head company has in relation to the interests in the CFC that leave the group with the leaving company will be transferred to the leaving company.

    Choices

    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

    Section 715-660 of the ITAA 1997 overrides the entry history rule in section 701-5 of the ITAA 1997 to permit the head company of a consolidated group or MEC group to remake certain normally irrevocable choices made by entities before they became subsidiary members of the group. These choices include all irrevocable declarations, elections, choices or selections provided for in Part X of the ITAA 1936. Any such choice (or the absence of it) by a joining entity is ignored for the purposes of the head company’s income tax affairs. The head company may make the choice, if it is eligible.

    Similarly, section 715-700 of the ITAA 1997 overrides the exit history rule in section 701-40 of the ITAA 1997 to permit an entity leaving a consolidated group or MEC group to remake similar choices made by the head company after the entity became a subsidiary member of the group. The head company's choice (or absence of it) is ignored for the purposes of the leaving entity's income tax affairs for income years ending after the leaving time. The leaving entity may make the choice, if it is eligible.

    Post FIF abolition surpluses

    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

    Under consolidation, only the head company can operate FIF attribution accounts for the purposes of avoiding double taxation where it receives a distribution or other attribution account payment from a FIF, or disposes of an interest in a FIF that it is taken to have held under the single entity rule in section 701-1 of the ITAA 1997.The pre-consolidation post FIF abolition surplus balances of the FIF attribution accounts of subsidiary members of the group are transferred to the head company (or MEC group) at formation or when a subsidiary member joins the consolidated group (or MEC group). This ensures that distributions from FIFs are not taxed to the head company where the joining entity has already been subject to FIF taxation.

    Once the post FIF abolition surplus balances have been transferred to the head company of a consolidated group (or MEC group) the FIF attribution accounts of subsidiary members become inoperative during the period the entity is a member of the consolidated group (or MEC group).

    When a company with an interest in a FIF leaves a group, a proportion of the head company’s post FIF abolition surplus that the head company has in relation to the interests in the FIF that leaves the group with the leaving company are transferred to the leaving company.

    More information on consolidation

    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 Consolidation reference manual provides detailed information on the operation of consolidation, including its practical impacts for business.

    If you have any queries, phone 13 28 66.

    More information

    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

    For more information or help in understanding your foreign income tax obligations, phone:

    • 13 28 61 for personal tax enquiries
    • 13 28 66 for business tax enquiries.

    If you do not speak English well, and want to talk to a tax officer, phone the Translating and Interpreting Service (TIS) on 13 14 50.

    If you are deaf or have a hearing or speech impairment, phone the ATO through the National Relay Service (NRS) on the numbers listed below, and ask for the ATO number you need:

    • TTY users, phone 13 36 77. For ATO 1800 free call numbers, phone 1800 555 677.
    • Speak and Listen users, phone 1300 555 727. For ATO 1800 free call numbers, phone 1800 555 727.
    • Internet relay users, connect to the NRS at www.relayservice.com.au

    Our shopfronts around Australia offer a range of services. If you need one-on-one, detailed help, make an appointment for an interview by phoning us on 13 28 61.

    Appendix 1 – Foreign income regulations

    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

    Introduction

    Part 8A of the Income Tax Regulations 1936, and associated schedules, deal with the taxation of foreign source income. The provisions:

    • declare those countries that are to be treated as listed, unlisted and section 404 countries
    • provide that Swiss cantonal taxes are treated as if they were federal taxes
    • contain rules for determining whether an amount is designated concession income
    • specify when the capital gains are taken to have been subject to tax for the purpose of the controlled foreign company (CFC) measures, the transferor trust measures, and the non-assessable non-exempt treatment of foreign branches of Australian companies, and
    • set out the accruals taxation laws of other countries that are recognised for the purpose of providing relief from double accruals taxation.

    Listed countries

    Schedule 10 of the Income Tax Regulations 1936 specifies the countries that are listed countries and section 404 countries. These lists are reproduced in attachment A.

    Designated concession income

    Normally, amounts derived in a listed country are exempt from accruals taxation. This exemption does not apply to amounts of ‘eligible designated concession income’. Broadly, an amount may be designated concession income if it is concessionally taxed in a listed country.

    What kinds of income or profits are specified as designated concession income?

    Income or profits are designated concession income only if:

    • they are of a kind specified in the Income Tax Regulations 1936 in relation to a particular listed country, and
    • they are derived by an entity that is of a type specified in the Income tax Regulations 1936.

    The full list of designated concession income has been reproduced in attachment B.

    Capital gains deemed subject to tax

    Capital gains are defined (except for the purposes of regulation 152D of the Income Tax Regulations 1936) as gains or profits of a capital nature that arise from the sale or disposal of all or part of a capital gains tax (CGT) asset, other than gains or profits that would not be capital gains but for a provision of Australian tax law.

    Regulation 152D provides that a capital gain (defined as gains or profits or other amounts of a capital nature) will be taken to be subject to tax in a listed country where the gain would have been subject to tax except for the operation of a rollover relief provision of a kind specified in the Income Tax Regulations 1936 contained in the tax law of that country. Broadly, the types of rollover relief relate to the types of rollover relief provisions available for capital gains tax purposes under Australian tax law.

    Attachment A

    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

    Listed countries

    • Canada
    • France
    • Germany
    • Japan
    • New Zealand
    • United Kingdom of Great Britain and Northern Ireland
    • United States of America

    Section 404 countries

    • Argentina
    • Austria
    • Bangladesh
    • Belgium
    • Brazil
    • Brunei
    • Bulgaria
    • China (except the Hong Kong Special Administrative Region)
    • Czech Republic
    • Denmark
    • Fiji
    • Finland
    • French Polynesia
    • Greece
    • Hungary
    • Iceland
    • India
    • Indonesia
    • Iran
    • Ireland
    • Israel
    • Italy
    • Kenya
    • Kiribati
    • Korea, Republic of
    • Luxembourg
    • Malaysia
    • Malta
    • Mexico
    • Myanmar
    • Netherlands
    • New Caledonia
    • Norway
    • Pakistan
    • Papua New Guinea
    • Philippines
    • Poland
    • Portugal
    • Romania
    • Russian Federation
    • Saudi Arabia
    • Singapore
    • Slovak Republic
    • Solomon Islands
    • South Africa
    • Spain
    • Sri Lanka
    • Sweden
    • Switzerland
    • Taiwan
    • Thailand
    • Tokelau
    • Tonga
    • Turkey
    • Tuvalu
    • Vietnam
    • Western Samoa
    • Zimbabwe.

    Attachment B

    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

    Items of designated concession income

    Country Entity Kind of income or profit Feature of income or profit under tax law of the country

    Canada

    An entity that operates in Canada as an international banking centre under Canadian law

    All passive income and tainted services income

    Not subject to tax in Canada in a tax accounting period

    Canada

    A company that operates in Canada as an investment corporation, or as a mutual fund corporation, under Canadian tax law

    All passive income

    Not taxed in Canada at the normal company tax rate

    France

    A company that operates in France as a société d'investissement à capital variable (SICAV) under French law

    All passive income

    Not subject to tax in France in a tax accounting period

    France

    A company that is treated as a resident of France for the purposes of the tax law of France, and that has elected to be taxed on a tonnage basis rather than on income or profits

    All income or profits

    Not used as the basis for establishing the amount of taxable income, taxable profits, tax base or tax liability of the entity under the tax law of France

    Germany

    A company that is treated as a resident of Germany for the purposes of the tax law of Germany

    All passive income in carrying on business outside Germany at or through a permanent establishment

    Not subject to tax in Germany in a tax accounting period

    Germany

    Either:

    (a) a company that is treated as a resident of Germany for the purposes of the tax law of Germany, or

    (b) any company in carrying on business in Germany at or through a permanent establishment of the company in Germany

    Capital gains in respect of shares in companies

    Not taxed in Germany at the normal company tax rate

    Germany

    A company that is treated as a resident of Germany for the purposes of the tax law of Germany, and that has elected to be taxed on a tonnage basis rather than on income or profits

    All income or profits

    Not used as the basis for establishing the amount of taxable income, taxable profits, tax base or tax liability of the entity under the tax law of Germany

    Japan

    An entity in carrying on business in Japan at or through a permanent establishment of the entity in that country

    All income or profits derived from Japanese governmental bonds

    Not subject to tax in Japan in a tax accounting period

    New Zealand

    Either:

    (a) a company that is treated as a resident of New Zealand for the purposes of the tax law of New Zealand, or

    (b) any entity in carrying on business in New Zealand at or through a permanent establishment of the entity in New Zealand

    Capital gains in respect of tainted assets

    Not subject to tax in New Zealand in a tax accounting period

    United Kingdom of Great Britain and Northern Ireland

    A company that is treated as a resident of the United Kingdom of Great Britain and Northern Ireland for the purposes of the tax law of the United Kingdom of Great Britain and Northern Ireland

    Capital gains in respect of shares in companies where:

    (a) the CGT assets of the companies, or

    (b) the underlying CGT assets of the companies held through one of more non-resident entities that are associates

    include CGT assets having the necessary connection with Australia

    Not subject to tax in the United Kingdom of Great Britain and Northern Ireland in a tax accounting period as a consequence of the substantial shareholding exemption available under the tax law of the United Kingdom of Great Britain and Northern Ireland

    United Kingdom of Great Britain and Northern Ireland

    A company that is treated as a resident of the United Kingdom of Great Britain and Northern Ireland for the purposes of the tax law of the United Kingdom of Great Britain and Northern Ireland, and that has elected to be taxed on a tonnage basis rather than on income or profits

    All income or profits

    Not used as the basis for establishing the amount of taxable income, taxable profits, tax base or tax liability of the entity under the tax law of the United Kingdom of Great Britain and Northern Ireland

    United Kingdom of Great Britain and Northern Ireland

    An entity that operates in the United Kingdom of Great Britain and Northern Ireland as an open-ended investment company under the law of the United Kingdom of Great Britain and Northern Ireland

    All passive income

    Not taxed in the United Kingdom of Great Britain and Northern Ireland at the normal company tax rate

    United States

    Either:

    (a) a company that is treated as a resident of the United States for the purposes of the tax law of the United States, or

    (b) any entity in carrying on business in the United States at or through a permanent establishment of the entity in that country

    All income or profits derived from tax-exempt governmental bonds

    Not subject to tax in the United States in a tax accounting period

    United States

    An entity that operates in the United States as a regulated investment company under the tax law of the United States

    All passive income

    Not taxed in the United States at the normal company tax rate

     

    Appendix 2 – Accruals taxation on the change of residence of a controlled foreign company (CFC) from an unlisted country to a listed country or to Australia

    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 attributable taxpayers in relation to a CFC are taxed under section 457 on the amount that relates to the period until the change of residence. Non-portfolio dividends received by the CFC during the period are not included.

    Change of residence of a CFC from an unlisted country to Australia

    If a CFC changes residence from an unlisted country to Australia, a resident taxpayer who is an attributable taxpayer of the CFC is taxable on the taxpayer’s attribution percentage of the adjusted distributable profits of the CFC. The amount of the distributable profits that is taxable to a resident taxpayer includes the adjusted tainted income of the CFC (excluding non-portfolio dividends) less any expenses relating to that adjusted tainted income.

    Example 1

    AustCo owns 75% of CFC1, a CFC that is resident in an unlisted country. CFC1 becomes a resident of Australia on 30 September 2006. CFC1 has a statutory accounting period of 1 July–30 June. For the period 1 July–30 September, CFC1 earned the following amounts of income:

    Portfolio dividends

    $10,000

    Non-portfolio dividends

    $15,000

    Tainted interest income

    $12,000

    Tainted services income

    $23,000

     

    $60,000

     

    CFC1’s adjusted tainted income is $45,000. It incurs expenses of $5,000 in earning the adjusted tainted income.
    CFC1’s adjusted distributable profits are $40,000.
    As a result, the amount attributable to AustCo under section 457 is 75% x $40,000 = $30,000.
    End of example

    Change of residence of a CFC from an unlisted country to a listed country

    If a CFC changes residence from an unlisted country to a listed country, a resident attributable taxpayer has to include in assessable income a share of the adjusted distributable profits of the CFC.

    The amount to be included is worked out in the same way as the amount that arises where an unlisted country CFC becomes a resident of Australia. However, a further adjustment is made to the CFC’s distributable profits; the CFC is treated as having disposed of all of its tainted assets for their market value at the time it changed residence. Accordingly, the distributable profits also include a net profit arising on the deemed disposal of those assets.

    Example 2

    AustCo owns 75% of CFC2, a CFC that is resident in an unlisted country. CFC2 becomes a resident of a listed country on 30 September 2006. CFC2 has a statutory accounting period of 1 July–30 June. For the period 1 July–30 September, CFC2 earned the following amounts of income:

    Portfolio dividends

    $10,000

    Non-portfolio dividends

    $15,000

    Tainted interest income

    $12,000

    Tainted services income

    $23,000

     

    $60,000

     

    CFC2’s adjusted tainted income is $45,000. It incurs expenses of $5,000 in earning the adjusted tainted income. The net profit (deemed) arising on CFC2’s tainted assets at 30 September is $100,000.
    CFC2’s adjusted distributable profits are $140,000.
    As a result, the amount attributable to AustCo under section 457 is 75% x $140,000 = $105,000.
    End of example

    Treatment of residence changes arising from changes to the lists of countries

    If an unlisted country CFC is treated as having changed residence to a listed country as a result of the unlisted country becoming listed, section 457 will not apply to this type of change in residence.

    Appendix 3 – Summaries and worksheets

    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

    Overview

    This appendix contains the following summary sheets that may be useful when preparing your tax return.

    Summary sheet 1

    attributed income

    Summary sheet 2

    working out your share of the attributable income of a CFC

    Summary sheet 3

    active income test

    Summary sheet 4

    transferor trust and related measures

    Section 1 also contains the following worksheets:

    • Worksheet 1 – Working out your control and attribution percentages
    • Worksheet 2 – Working out the tainted income ratio for a CFC
    • Worksheet 3 – Working out amounts from partnerships to be included in the tainted income ratio
    • Worksheet 4 – Working out the attributable income of a CFC.

    The summaries and worksheets are intended as guides only and may not cover all the qualifications and conditions contained in the law that may apply to a particular case.

    Summary sheet 1 – Attributed income

    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

    This summary sheet will enable you to total the amounts of attributed income to be included in your tax return. Prepare a separate schedule if you need more space for any part.

    Part A – Attributable income from CFCs

    Include your share of:

    • the attributable income of each CFC in which you have an attribution interest
    • attributable amounts arising where an unlisted country CFC changes residence to a listed country or to Australia.
    Name of the CFC Amount of attributable income

    1

    $

    2

    $

    3

    $

    4

    $

    5

    $

    Total

    $

     

    Refer to summary sheet 2 to determine whether you have to include attributable income from a CFC.

    Part B – Income attributed to you from a non-resident trust under the transferor trust measures

    Name of the trust Amount of attributable income

    1

    $

    2

    $

    3

    $

    4

    $

    5

    $

    Total

    $

     

    Refer to summary sheet 4 to determine whether you have to include attributable income from a trust under the transferor trust measures.

    Part C – Your share of the net income of any partnership or trust that consists of income attributed to the partnership or trust under the accruals tax measures, whether from a CFC or a non-resident trust estate

    Name of partnership or trust Amount of attributable income

    1

    $

    2

    $

    3

    $

    4

    $

    5

    $

    Total

    $

     

    Part D – Total of the amounts in parts A, B and C

    Part A

    $

    Part B

    $

    Part C

    $

    Total

    $

     

    Include this total amount in your tax return at the appropriate labels as set out in TaxPack or the instructions for your tax return.

    Summary sheet 2 – Working out your share of the attributable income of a CFC

    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

    Use this summary sheet if you had an interest in a foreign company during your income year. Use a separate summary sheet for each foreign company.

    Your name

    Tax file number

       

    Name of foreign company

     

     

    1. Were you a Part X Australian resident at the end of the CFC’s statutory accounting period?

    Yes

    Go to question 2.

    No

    You do not have to work out the foreign company’s attributable income for the income year.

     

    2. Was the foreign company a CFC at the end of its statutory accounting period?

    Answer questions 1 to 10 of worksheet 1 to find out if the foreign company is a CFC at the end of its statutory accounting period. Treat references to the test time in worksheet 1 as references to the end of the CFC’s statutory accounting period.

    Yes

    Go to question 3.

    No

    You do not have to work out the foreign company’s attributable income for the income year.

     

    3. Were you an attributable taxpayer at the end of the CFC’s statutory accounting period?

    Answer questions 11 and 12 of worksheet 1 to find out if you were an attributable taxpayer.
    Treat references to the test time in worksheet 1 as references to the end of the CFC’s statutory accounting period.

    Yes

    Work out the CFC’s attributable income. Read on.

    No

    You do not have to work out the CFC’s attributable income for the income year.

     

    4. Was the CFC resident in a listed country or in an unlisted country at the end of the statutory accounting period?

    Listed country Unlisted country

    State below the name of the country or countries of residence.

    State below the name of the country or countries of residence.

       
       

     

    5. Did the CFC pass or fail the active income test?

    Use summary sheet 3 and associated worksheets to determine whether the CFC passed the active income test.

      

    Pass

     

      

    Fail

     

    6. What was the CFC’s attributable income?

    Complete worksheet 4 to answer this question.

    Write the amount from A of worksheet 4 here:

    $               

     

    7. What was your share of the CFC’s attributable income?

    Complete worksheet 4 to answer this question.

    Write the amount from B of worksheet 4 here:

    $               

     

    Summary sheet 3 – Active income test

    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

    Use this summary sheet to determine whether a CFC passes the active income test.

    1. Was the CFC resident in a particular listed country or unlisted country at all times during the CFC’s statutory accounting period?

    Yes

    Go to question 2.

    No

    The CFC has failed the active income test.
    Tick Fail at question 5 of summary sheet 2.

     

    2. Did the CFC, or a partnership in which the CFC was a partner, have a permanent establishment in the CFC’s country of residence at all times during the period?

    Yes

    Go to question 3.

    No

    The CFC has failed the active income test.
    Tick Fail at question 5 of summary sheet 2.

     

    3. Has the CFC, and every partnership in which it was a partner, kept accounts according to commercially accepted accounting principles which give a true and fair view of its financial position?

    Yes

    Go to question 4.

    No

    The CFC has failed the active income test.
    Tick Fail at question 5 of summary sheet 2.

     

    4. Has the CFC complied with the substantiation requirements in chapter 4?

    Yes

    Go to question 5.

    No

    The CFC has failed the active income test.
    Tick Fail at question 5 of summary sheet 2.

     

    5. Is the tainted income ratio less than 0.05?

    Yes

    The CFC passes the income test.
    Tick Pass at question 5 on summary sheet 2.

    No

    The CFC has failed the active income test.
    Tick Fail at question 5 of summary sheet 2.

     

    Use worksheet 2 to work out the CFC’s tainted income ratio.

    Summary sheet 4 – Transferor trust and related measures

    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 following summary sheet will help you to determine:

    • whether a transfer or deemed transfer of property or services you have made to a non-resident trust estate is subject to the transferor trust measures, and
    • whether you may be liable to pay additional tax in the form of an interest charge on distributions from a non-resident trust estate.

    1. Have you, at any time, transferred any property or services to a non-resident trust estate?

    Yes

    Go to question 2.

    No

    Go to question 13.

     

    Individuals, partnerships, trust estates, companies and superannuation funds also need to answer this question at the appropriate items on their tax returns.

    2. Have you, at any time, transferred any property or services to a non-resident trust estate that is a discretionary trust estate?

    Yes

    Go to question 4.

    No

    Go to question 3.

     

    3. Have you, after 7.30pm on 12 April 1989, transferred any property or services to a non-resident trust estate that is a non-discretionary trust estate for less than an arm’s-length amount?

    Yes

    Go to question 4.

    No

    Go to question 13.

     

    4. Have you made one or more transfers to a non-resident trust estate which is a public unit trust?

    Yes

    If none of the transfers to that public unit trust are subject to the transferor trust measures (see chapter 2), you are not an attributable taxpayer in relation to the public unit trust. Go to question 5.

    If one or more of the transfers to the public unit trust is subject to the measures, you are an attributable taxpayer in relation to the public unit trust. Go to both questions 5 and 10.

    No

    Go to question 5.

     

    5. Have you made one or more transfers to a non-resident trust estate under directions contained in a deceased person’s will or codicil, or a court order which varies the will or codicil?

    Yes

    If none of the exceptions applies to any one of the transfers (see chapter 2), you are not an attributable taxpayer in relation to the trust estate. Go to question 6.

    If one of the exceptions applies to any one of the transfers, you are an attributable taxpayer in relation to the trust estate. Go to both question 6 and question 10.

    No

    Go to question 6.

     

    6. Have you made one or more transfers to a non-resident trust estate that is a non-resident family trust?

    Yes

    If, at all times during your income year, the trust estate:

    • has been a non-resident family trust, you are not an attributable taxpayer in relation to the trust estate. Go to question 7.
    • has not been a non-resident family trust, you are an attributable taxpayer in relation to the trust estate. Go to both questions 7 and 10.
     

    No

    Go to question 7.

     

    7. Before migrating to Australia for the first time (provided you migrated after 12 April 1989) did you make a transfer to a non-resident trust estate before migrating?

    Yes

    If you were not in a position to control the trust estate between:

    • the commencement of the first income year after you became a resident, and
    • the end of your current income year

    you are not an attributable taxpayer in relation to the trust estate. Go to question 8.

    If you were in a position to control the trust estate between the two dates mentioned above, you are an attributable taxpayer in relation to the trust estate. Go to both question 8 and question10.

    No

    Go to question 8.

     

    8. Did you make one or more transfers to any other non-resident trust estate that is a discretionary trust estate?

    Yes

    If none of the transfers to that discretionary trust estate are subject to the transferor trust measures, you are not an attributable taxpayer in relation to that trust estate. Go to question 9.

    If one or more of the transfers to that trust estate is subject to the measures, you are an attributable taxpayer in relation to that trust estate. Go to both question 9 and question 10.

    No

    Go to question 9.

     

    9. Did you make one or more transfers to any other non-resident trust estate that is a non-discretionary trust estate?

    Yes

    If none of the transfers to the non-discretionary trust estate are subject to the transferor trust measures, you are not an attributable taxpayer in relation to that non-discretionary trust estate.

    Go to question 10 if you are an attributable taxpayer in relation to another non-resident trust estate. If not, go to question 13.

    If one or more of the transfers to that trust estate is subject to the measures, you are an attributable taxpayer in relation to that non-discretionary trust estate. Go to question 10.

    No

    Go to question 10 if you are an attributable taxpayer in relation to another non-resident trust estate. If not, go to question 13.

     

    10. Do you have, or are you able to obtain, the necessary information to work out the net income of the non-resident trust estate?

    Yes

    Work out the amount of attributable income of the trust estate based on the net income calculation, then go to question 11.

    No

    Work out the amount of attributable income using the deemed rate of return approach. Include this amount in summary sheet 1. Then go to question 13.

     

    11. Is the non-resident trust estate a listed country trust estate?

    Yes

    Work out the total attributable income of all trust estates for which you are an attributable taxpayer.

    If that amount is equal to or less than the lesser of:

    • $20,000, or
    • 10% of the total of the net incomes of each of those trust estates of the year of income in which you have an interest
    • then include in your assessable income only the attributable income of any unlisted country trust estates. Go to question 12.
     

    No

    Go to question 12.

     

    12. Have you worked out an amount of attributable income of a non-resident trust estate other than that excluded by question 11?

    Yes

    Include the amounts in summary sheet 1. Then go to question 13.

    No

    Go to question 13.

     

    13. Have you received a distribution from a non-resident trust estate during your income year?

    Yes

    Work out the amount of the distribution to include in your assessable income. Then go to question 14.

    No

    You have finished this summary sheet.

     

    Individuals, partnerships, trust estates, companies and superannuation funds also need to answer the following question at the appropriate items on their tax returns.

    14. Have you included an amount in your assessable income for a trust distribution from a non-resident trust estate during your income year?

    Yes

    Work out the amount, if any, of the interest charge for the distribution to include on your tax return: see part 2 of chapter 2.

    No

    You have finished this summary sheet.

     

    Worksheet 1 – Working out your control and attribution percentages

    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

    Answer the following questions to determine:

    • if a foreign company is a CFC
    • if you are an attributable taxpayer in relation to a CFC
    • your attribution percentage.

    In the questions that follow, the test time is the end of the statutory accounting period of the foreign company that falls within your income year, or the time at which a dividend was paid by a foreign company. Fill out a separate worksheet for each test time.

    1. Have you or your associates held, or had an entitlement to acquire, any interest in a foreign company during the income year? The interest may be held directly or through other entities.

    Yes

    Go to question 2.

    No

    The CFC measures do not apply.

     

    2. Did you or your associates have an interest in the foreign company at the test time? The interest may be held directly or through other entities.

    Yes

    Go to question 3.

    No

    The CFC measures do not apply.

     

    3. What was your direct control interest in the foreign company at the test time?

    To work this out, take the highest of the following interests that you held, or were entitled to acquire, in the foreign company at the test time:

    • percentage of the total paid-up capital of the company
     

              %

    • percentage of the total rights to vote, or participate in any decision making, concerning any of the following:
     
     
    • making distributions of capital or profits
     

              %

    • changing the constituent documents
     

              %

    • varying the share capital
     

              %

    • percentage of the total rights to distributions of capital of the company on winding up
     

              %

    • percentage of the total rights to distributions of profits on winding up
     

              %

    • percentage of the total rights to distributions of capital of the company other than on winding up
     

              %

    • percentage of the total rights to distributions of profits of the company other than on winding up.
     

              %

    Insert the highest percentage of the above interests at a:

    a

              %

     

    4. At the test time, did any of your associates hold, or have an entitlement to acquire, a direct interest in the foreign company?

    Yes

    Work out the interest and enter it at b:

    b

              %

    No

    Go to question 5.

     

    5. At the test time, did you hold, or have an entitlement to acquire, an indirect control interest in the foreign company through another controlled foreign company, controlled foreign partnership or controlled foreign trust?

    Yes

    Work out the interest and enter it at c:

    Do not include interests taken into account in question 4.

    c

              %

    No

    Go to question 6.

     

    6. At the test time, did any of your associates hold, or have an entitlement to acquire, an indirect interest in the foreign company?

    Yes

    Work out the total of those interests and enter it at d:

    Do not include interests taken into account in questions 3, 4 or 5.

    d

              %

    No

    Go to question 7.

     

    7. At the test time, did you have an associate-inclusive control interest of 1% or more in the foreign company?

    To answer this, add the following amounts:

       
    • your direct interest in the foreign company
      (from a question 3)
     

    a

              %

    • your associates’ direct interest in the foreign company
      (from b question 4)
     

    b

              %

    • your indirect interests in the foreign company
      (from c question 5)
     

    c

              %

    • your associates’ indirect interests in the foreign company
      (from question 6).
     

    d

              %

     

    Total of (a + b + c + d)

              %

     

    This is your associate-inclusive control interest in the CFC.

    If your answer is less than 1%, the CFC measures do not apply.

    If it is 1% or more, go to question 8.

    8. At the test time, did five or fewer Australian entities, each with an associate-inclusive control interest of 1% or more, have a total associate inclusive control interest of 50% or more in the foreign company?

    Yes

    The foreign company is a CFC. Go to question 11.

    No

    Go to question 9.

     

    9. At the test time, was there a single Australian entity whose associate-inclusive control interest in the company was at least 40%? Your answer is NO if the foreign company was controlled by an unassociated party or parties.

    Yes

    The foreign company is a CFC at the test time. Go to question 11.

    No

    Go to question 10.

     

    10. Is the foreign company in fact controlled by a group of five or fewer Australian entities, alone or with associates?

    Yes

    The foreign company is a CFC at the test time. Go to question 11.

    No

    The CFC measures do not apply.

     

    11. At the test time, did you have an associate-inclusive control interest of at least 10% in the CFC? 

    Yes

    You are an attributable taxpayer. You must work out the attributable income of the CFC at the test time. Go to question 13.

    No

    Go to question 12.

     

    12. If the CFC is controlled by a group of five or fewer Australian entities, either alone or with associates, are you an Australian 1% entity who is one of those five entities?

    Yes

    You are an attributable taxpayer. Go to question 13.

    No

    The CFC measures do not apply.

     

    13. What is your direct attribution interest in the CFC? 

    This is the same percentage as the direct control interest.

    Write the answer from at question 3 here.

              %

    Go to question 14.

     

     

    14. What is the total of your indirect attribution interests in the CFC?

    Do not include the interests of your associates.

              %

    Go to question 15.

     

     

    15. Add the answers to questions 13 and 14

    This is your attribution percentage in the CFC at the test time.

              %

     

    Worksheet 2 – Working out the tainted income ratio for a controlled foreign company (CFC)

    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

    You can use this worksheet to work out the tainted income ratio for a CFC.

    Show all amounts in the currency in which the accounts of the company are kept. Do not convert to Australian dollars.

    Part A – Working out the CFC’s gross turnover

    Step 1

    Work out the CFC’s gross revenue as shown in the CFC’s accounts.

    a

    $______________

    Step 2

    Work out the following amounts included in a.
    These amounts are to be excluded from gross turnover.

       

    Category of gross revenue

    Amount $

    Amounts already assessed to the CFC in Australia

    _________________

    Amounts derived through a branch in a listed country that are not EDCI in relation to any listed country and are subject to tax in a listed country

    _________________

    Non-portfolio dividends from a foreign company

    _________________

    Franked dividends

    _________________

    Dividends out of profits previously attributed

    _________________

    Trust amounts

    _________________

    Total:

    b

    $_____________

    Step 3

    Work out the following gross amounts included in a.

    The net amounts are added back at step 4. Do not count amounts that fall in the categories listed in step 2.

    Category

    Amount $

    Revenue from commodity contracts

    _________________

    Revenue from exchange gains

    _________________

    Revenue from other asset disposals

    _________________

    Total:

    c

    $_____________

    Step 4

    Work out net gains to be included in gross turnover. Do not count amounts that fall in the categories listed in step 2.

    Category

    Amount $

    Net commodity gain

    _________________

    Net exchange gain

    _________________

    Net gain from other asset disposals

    _________________

    Total:

    d

    $__________

    Step 5

    Work out the CFC’s share of the gross turnover of partnerships in which the CFC is a partner (refer to worksheet 3).

    Name of partnership

    Amount $

    __________________________________

    _________________

    __________________________________

    _________________

    __________________________________

    _________________

    Total:

    e

    $___________

    Gross turnover (a – b – c + d + e)

    A

    $___________

     

    Part B – Working out the CFC’s gross tainted turnover

    Step 1

    List amounts included in the CFC’s gross revenue after exclusions (item a from part A less items b and c from part A) that fall into the following categories of passive income.

    Category of passive income

    Amount $

    Tainted interest income

    _________________

    Annuities

    _________________

    Tainted royalty income

    _________________

    Tainted rental income

    _________________

    Dividends

    _________________

    Other passive income

    _________________

     

    Total:

    a

    $______________

    Step 2

    Work out the CFC’s gross revenue that is tainted sales income after exclusions (item a from part A less items b and c from part A).

    b

    $______________

    Step 3

    Work out the CFC’s gross revenue that is tainted services income after exclusions (item a from part A less items b and c from part A).

    c

    $______________

    Step 4

    Work out the part of the CFC’s net gains included in gross turnover that are tainted income.

    Category

    Amount $

    Net commodity gain (from step 4 part A)

    _________________

    Net tainted commodity gain

    _________________

    Smaller amount

    _________________

    Net exchange gain (from step 4 part A)

    _________________

    Net tainted exchange gain

    _________________

    Smaller amount

    _________________

    Net gain from assets (from step 4 part A)

    _________________

    Net gain from tainted assets

    _________________

    Smaller amount

    _________________

     

    Total:

    d

    $______________

    Step 5

    Work out the CFC’s share of the gross tainted turnover of partnerships in which the CFC is a partner. See worksheet 3.

    Name of partnership

    Amount $

    __________________________________

    _________________

    __________________________________

    _________________

    __________________________________

    __________________

    Total:

    e

    $__________

    Gross tainted turnover (a + b + c + d + e)

    B

    $__________

     

    Part C – The tainted income ratio

    The tainted income ratio is as follows:

       

    Amount at label B

    (gross tainted turnover)

    ___________

       

    Amount at label A

    (gross turnover)

    ___________

    =

    C                __________

     

    Worksheet 3 – Working out amounts from partnerships to include in the tainted income ratio

    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

    Use a separate worksheet for each partnership. All amounts are to be in the currency in which the accounts of the partnership are kept. Do not convert to Australian dollars.

    Part A – Working out the partnership’s gross turnover

    Step 1

    Work out the partnership’s gross revenue as shown in the partnership’s accounts.

    a  $                         

    Step 2

    Work out the following amounts included in a.

    Do not include these amounts in the ratio.

     

    Category of gross revenue
     

    Amount $

     

    Amounts already assessed to the CFC in Australia 


                             

     

    Amounts derived through a branch in a listed country that is not EDCI in relation to any listed country and are subject to tax in a listed country


                             

     

    Non-portfolio dividends from a foreign company

                             

     

    Dividends out of profits previously attributed 


                             

     

    Franked dividends

                             

     


    Trust amounts


                             

     
     

    Total:

    b  $                         

    Step 3

    Work out the following gross amounts included in a.

    Do not count amounts already excluded under step 2. The net amounts are added back at step 4.

    Category of gross revenue
     

    Amount $

     

    Revenue from commodity contracts 


                             

     

    Revenue from exchange gains 


                             

     

    Revenue from other asset disposals 


                             

     
     

    Total:

    c  $                         

    Step 4

    Work out net gains included in gross turnover.

    Do not count amounts that fall into the categories in step 2.

    Category of net gain
     

    Amount $

     

    Net commodity gain

                             

     


    Net exchange gain


                             

     

    Net gain from other asset disposals


                             

     
     

    Total:
     

    d  $                         

    Gross turnover of the partnership (a – b – c + d)

    A  $                         

     

    Part B – Working out the partnership’s gross tainted turnover

    Step 1

    Work out the partnership’s gross revenue that is passive income after exclusions (item a from part A less items b and c from part A) that falls into the following categories of passive income:

    Category of passive income
     

    Amount $

     

    Tainted interest income

                             

     

    Annuities 

                             

     

    Tainted royalty income 

                             

     

    Tainted rental income 

                             

     

    Dividends 

                             

     

    Other passive income 

                             

     
     

    Total:

    a  $                         

    Step 2

    Work out the partnership’s gross revenue that is tainted sales income after exclusions (item a from part A less items b and c from part A). 

    b  $                         

    Step 3

    Work out the partnership’s gross revenue that is tainted services income after exclusions (item a from part A less items b and c from part A). 

    c  $                         

    Step 4

    Work out the partnership’s net gains included in gross turnover that are tainted income.

     

    Category

    Amount $

     

    Net commodity gain (from part A) 

                             

     

    Net tainted commodity gain 

                             

     

    Smaller amount 

                             

     

    Net exchange gain (from part A) 

                             

     

    Net tainted exchange gain 

                             

     

    Smaller amount 

                             

     

    Net gain from assets (from part A) 

                             

     

    Net gain from tainted assets 

                             

     

    Smaller amount

                              

     

    Total smaller amounts:

     $                         

    Gross tainted turnover of the partnership
    (a + b + c + d)

    B  $                        

     

    Part C – CFC’s share of the gross turnover and the gross tainted turnover

    CFC’s percentage interest in the net income of the partnership:


                             %

     

    CFC’s share of the gross turnover of the partnership:

    Percentage interest in net income from above

    x

    $                           
    (A from part A)

    =

    C  $                           

    Use this amount to fill in step 5 of part A of worksheet 2

     

    CFC’s share of the gross tainted turnover of the partnership:

    Percentage interest in net income from above

    x

    $                           
    (B from part B)

    =

     $                           

    Use this amount to fill in step 5 of part B of worksheet 2

     

    Worksheet 4 – Working out the attributable income of a CFC

    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

    Use this worksheet to work out the attributable income of a CFC and the amount to include in your assessable income.

    Part A – Working out attributable income

    Step 1

    Summary of the notional assessable income of the CFC.

     

    Category of notional assessable income

     

    Amount $

    Net capital gain under Parts 3-1 and 3-3 of ITAA 1997

     

                     

    Other notional assessable income

     

                     

     

    Total:

    a

    $               

     

    Step 2

    Summary of the notional allowable deductions of the CFC.

     

    Amount

    Subtotal

    General notional allowable deductions

                   

    Sometimes exempt income (SEXI) loss

                   

    Converted CFC loss (subject to certain limitations)

                   

     

    Total:

    b

    $               

     

    Converted CFC loss is the notional allowable deduction for previously unutilised losses which exist at the commencement of the statutory accounting period starting on or after 1 July 2008 and that have been converted in accordance with the transitional foreign loss rules for CFCs. A convertible CFC loss will be treated as a loss only for the purpose of applying Part X of ITAA 1936 to statutory accounting periods beginning on or after 1 July 2008.

    Step 3

    Attributable income of the CFC before any reduction for interim dividends paid (item a less item b).

    c

    $               

    Step 4

    Interim dividends paid by the CFC from the amount at item c).

    d

    $               

     

    Attributable income of the CFC

    (c – d): A

    $               

     

    Part B – Working out your share of attributable income

    Step 1

    Insert your attribution percentage in the CFC at the end of the CFC’s statutory period (as previously worked out in worksheet 1).

     

                   

    Step 2

    Work out your assessable income (multiply the amount at item A part A by the attribution percentage).

     

    $               

    Step 3

    Insert the reduction amount you can claim if the CFC has income or gains which were accruals-taxed in a foreign country.

     

    $               

    Step 4

    Take the amount in step 3 part B away from the amount in step 2 part B.


    B


    $               

     

    How self-assessment affects you

    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

    Self-assessment means the ATO uses the information you give on your tax return and any related schedules and forms to work out your refund or tax liability. We do not take any responsibility for checking the accuracy of the details you provide, although our system automatically checks the arithmetic.

    Although we do not check the accuracy of your tax return at the time of processing, at a later date we may examine the details more thoroughly by reviewing specific parts, or by conducting an audit of your tax affairs. We also have a number of audit programs that are designed to continually check for missing, inaccurate or incomplete information.

    What are your responsibilities?

    It is your responsibility to lodge a tax return that is signed, complete and correct. Even if someone else, including a tax agent, helps you to prepare your tax return and any related schedules, you are still legally responsible for the accuracy of your information.

    What if you lodge an incorrect tax return?

    If you become aware that your tax return is incorrect, you must contact us straight away.

    Initiatives to complement self-assessment

    There are a number of systems and entitlements that complement self-assessment, including:

    • the private ruling system (see below)
    • the amendment system (if you find you have left something out of your tax return)
    • your entitlement to interest on early payment or over-payment of a tax debt.

    Do you need to ask for a private ruling?

    If you are uncertain about how a tax law applies to your personal tax affairs, you can ask for a private ruling. To do this, complete a Private ruling application form (not for tax professionals) (NAT 13742) or a Private ruling application form (tax professionals) (NAT 13043), or contact us.

    Lodge your tax return by the due date, even if you are waiting for the response to your application. You may need to request an amendment to your tax return once you have received the private ruling.

    We publish all private rulings on our website. Private rulings are published in an edited form to safeguard taxpayer privacy.

      Last modified: 28 Jun 2013QC 28180