House of Representatives

Taxation Laws Amendment (Foreign Income) Bill 1990

Taxation Laws Amendment (Foreign Income) Act 1990

Taxation (Interest on Non-Resident Trust Distributions) Bill 1990

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. P. J. Keating, M.P.)

Notes on Clauses

TAXATION LAWS AMENDMENT (FOREIGN INCOME) BILL 1990

PART 1 - PRELIMINARY

Clause 1: Short title

This clause provides for the amending Act to be cited as the Taxation Laws Amendment (Foreign Income) Act 1990.

Clause 2: Commencement

The amending Act is to come into operation on the day on which it receives the Royal Assent. But for this clause, the Act would, by reason of subsection 5(1A) of the Acts Interpretation Act 1901, commence on the twenty-eighth day after the date of Assent.

PART 2 - AMENDMENT OF THE INCOME TAX ASSESSMENT ACT 1936

Division 1 - Amendments

Clause 3: Principal Act

This clause facilitates references to the Income Tax Assessment Act 1936, in this Division referred to as the "Principal Act".

Clause 4: Interpretation

Clause 4 will extend the definition of "assessment" in subsection 6(1) of the Principal Act by inserting paragraph (aa) in that definition. The effect will be to include in the term assessment the ascertainment of the amount of interest payable under new section 102AAM Division 6AAA (being inserted in the Principal Act by clause 18) by resident taxpayers who receive taxable distributions from certain non-resident trusts.

Clause 5: Foreign income and foreign tax

Clause 5 will amend section 6AB of the Principal Act. That section specifies the foreign income in respect of which foreign tax credits are allowable under Division 18 of that Act and sets out the categories of foreign taxes for which credit may be allowed. It also sets out the circumstances in which a taxpayer is to be treated as being personally liable for and to have paid foreign tax.

Paragraph (a) of clause 5 will amend subsection 6AB(1) to treat as foreign income an amount that is included in the assessable income of a taxpayer under proposed sections 102AAZD, 456, 457, 458 or 459. Section 102AAZD will be inserted in the Principal Act by clause 18, and sections 456, 457, 458 and 459 by clause 49.

In broad terms, section 102AAZD will include in the assessable income of a taxpayer of a year of income, in specified circumstances, the attributable income of a non-resident trust estate to which that taxpayer has transferred property or services. Section 456 will include in the assessable income of a resident taxpayer that taxpayer's attribution percentage (defined in section 362) of the attributable income of a controlled foreign company (CFC - defined in section 340 of Part X). Section 457 will include in the assessable income of a resident taxpayer, who is an attributable taxpayer (defined in section 317) in relation to a CFC, certain amounts in respect of a change of residence of the CFC from an unlisted country to a listed country (defined in section 320) or to Australia. Sections 458 and 459 will include in the assessable income of a resident taxpayer, in specified circumstances, that taxpayer's attribution percentage of a dividend paid by a CFC. Part X will be inserted in the Principal Act by clause 49.

Paragraph (b) of clause 5 will replace subsection 6AB(2) of the Principal Act which provides the definition of "foreign tax" with a new subsection. The new subsection will, in part, set out the existing provisions of subsection 6AB(2) (paragraph 6AB(2)(a)).

The effect of the insertion of new paragraph 6AB(2)(b) will be to include in the taxes for which foreign tax credit is available certain taxes paid on amounts that are to be included in the assessable income of resident taxpayers under proposed sections 456, 457 and 458. Creditable taxes will also include certain foreign taxes paid in respect of foreign income that will be exempted from tax under proposed section 23AI which, in broad terms, operates to exempt amounts that are paid out of previously attributed income - see notes on clause 8.

Subparagraph (i) includes as a creditable foreign tax an amount of Australian or foreign tax that is taken to have been paid under section 160AFCA (see notes on clause 33) in respect of an amount included in the assessable income of a company taxpayer under section 456.

Subparagraph (ii) includes in creditable foreign tax an amount of tax that is taken to have been paid under section 160AFCB (see notes on clause 33) in respect of an amount included in the assessable income of an attributable taxpayer in relation to a CFC on the change of residence of the CFC from an unlisted country to a listed country or to Australia.

Subparagraph (iii) includes as a creditable foreign tax an amount of tax that a resident company is taken to have paid under section 160AFCC (see notes on clause 33) in respect of that part of a dividend paid by a controlled foreign company (CFC) to another CFC which is included in the assessable income of the resident company under section 458.

Subparagraph (iv) treats as a creditable foreign tax an amount of tax that is taken to have been paid under section 160AFCD (see notes on clause 33) on that part of an attribution account payment that will be exempt from tax under section 23AI (referred to as the "section 23AI exempt part"). The term "attribution account payment" is defined in section 365 of Part X.

Paragraph (c) of clause 5 will insert new subsection (3A) in section 6AB. This amendment has the effect that a taxpayer is not to be taken to have been personally liable for, and to have paid, any foreign tax in respect of:

·
an amount included in assessable income under sections 102AAZD, 456, 457, 458 or 459; or
·
the section 23AI exempt part;

except as provided by sections 160AFCA, 160AFCB, 160AFCC or 160AFCD.

These sections do not treat a taxpayer as having paid any foreign tax on an amount that is included in assessable income under section 102AAZD in respect of the attributable income of a trust estate. Consequently, a credit for foreign tax will not be available in respect of such an amount. Similarly, a credit for foreign tax will not be available in respect of an amount that is included in the assessable income of a taxpayer under section 459.

Under sections 160AFCA, 160AFCB and 160AFCC, only certain resident companies are treated as having been personally liable for and to have paid foreign tax on an amount that is included in assessable income under section 456, 457 or section 458.

Section 160AFCD has the effect that any taxpayer who received an amount that is exempt from income tax under section 23AI is taken to have been personally liable for and to have paid the foreign tax, if any, paid in respect of that amount.

Clause 6: Grossing up of foreign income

This clause will amend section 6AC of the Principal Act by the addition of new subsections (3), (4) and (5).

In broad terms, section 6AC provides that the amount of foreign income that is included in the assessable income of a resident taxpayer is the gross amount of that income before the payment of any foreign tax.

Subsections (3), (4) and (5) will have the effect that an amount included in the assessable income of an attributable company taxpayer under new section 456, 457 or 458 respectively will be increased by the amount of tax taken to have been paid by the company under sections 160AFCA (in the case of a section 456 amount) and 160AFCB (in the case of a section 457 amount) and 160AFCC (in the case of a section 458 amount). However, this increase will not be taken into account in applying the provisions of new sections 160AFCA, 160AFCB or 160AFCC (see notes on clause 33) or section 371 of Part X (see notes on clause 49).

Clause 7: Income beneficially derived

This clause will insert new subsections (1A) and (2AA) in section 6B of the Principal Act and substitute a new paragraph for paragraph (2A)(b).

New subsection 6B(1A) specifies the circumstances in which income derived by a person, being income other than passive income, is to be traced through and deemed to be income attributable to passive income. This tracing mechanism is necessary for the application of the provisions of subsection 160AF(7) to compute the foreign tax credits allowable in respect of passive income separately from that allowable in the case of offshore banking income and other income. It will also be applicable to the carry-forward of certain losses on a class of income basis under section 160AFD of the Principal Act.

Under paragraph (1A)(a), an amount of income derived by a person is deemed to be attributable to passive income where that amount is derived by that person by reason of being beneficially entitled to that income.

By paragraph (1A)(b), income derived by a person as a beneficiary in a trust estate is deemed to be an amount attributable to passive income where the income arises from passive income derived by the trustee of the trust estate. This paragraph will also apply where passive income passes through more than one trust estate before being distributed to the beneficiary.

Subsection 6B(2A) specifies basic rules to identify the particular source of income derived by a person in given situations. By this subsection, the source of income derived by a person (where the income derived is not attributable to dividend or interest by the operation of subsection 6B(1) or (2)) will be:

·
if the income is derived by a person who is beneficially entitled to that income - the same source from which that income is derived (subparagraph (2A)(a)(i)); and
·
if the income is derived by a person as a beneficiary in a trust estate, the same source as the income to which the trust income is attributable (subparagraph (2A)(a)(ii)).

Where the income derived by a person is attributable to a dividend or interest by the operation of subsection 6B(1) or (2), the source of the income derived by that person will be the same as the source of the dividend or interest to which the income is attributable.

Paragraph (b) will amend subsection 6B(2A) by omitting paragraph (b) and substituting a new paragraph. The new paragraph includes a reference to the new subsection (1A). Therefore, where the income derived by a person is attributable to passive income by virtue of the operation of subsection 6B(1A), the source of the income derived by that person will be the same as the source of that passive income.

Paragraph (c) will insert new subsection (2AA) after subsection 6B(2A). The new subsection provides that, in subsections (1A) and (2A), "passive income" will have the same meaning as in section 160AEA (see notes on clause 29).

Clause 8: New sections 23AH, 23AI and 23AJ

Clause 8 will insert new sections 23AH, 23AI and 23AJ in the Principal Act. These sections will exclude from assessable income:

·
certain profits derived by a resident company from carrying on business at or through a permanent establishment of that company in a foreign country - section 23AH;
·
amounts paid to a resident taxpayer out of the income of a CFC that has been attributed to the taxpayer under proposed section 456, 457 or 458 in respect of a dividend paid by a CFC - section 23AI; and
·
certain non-portfolio dividends derived by a resident company from a company that is a resident of a listed country (or from a company that is a resident of an unlisted country where the dividend is paid out of specified income derived by the company from listed countries) - section 23AJ.

Section 23AH: Exemption of foreign branch profits of Australian companies

Section 23AH will exclude from assessable income, with effect from the year of income commencing on 1 July 1990 (including the substituted accounting period in lieu thereof), profits derived by an Australian company from a business carried on in a listed country at or through a permanent establishment of the company in that country, where those profits have been subject to tax in the listed country and are not eligible designated concession income. The term "listed country" is defined in subsection 320(1) of Part X (see notes on clause 49) to mean a foreign country, or part of a foreign country, that is declared by the regulations to be a listed country for the purposes of that Part.

"Permanent establishment" is to have the meaning given in a relevant double tax agreement or in subsection 6(1) of the Principal Act, as the case requires (see notes on subsection 23AH(12)).

The expressions "eligible designated concession income" and "subject to tax" are defined in sections 317 and 324, respectively, of Part X - see notes on those sections.

The exemption can possibly apply to any amount that would otherwise be included in assessable income or to a capital gain that would otherwise accrue to the company under Part IIIA of the Principal Act. Subsections (1) to (5) deal with amounts of foreign income extended for the purposes of section 23AH to encompass all amounts that are assessable except under Part IIIA. Subsections (6) to (11) are concerned with capital gains that would otherwise arise upon the disposal of certain assets of the permanent establishment. Subsection (12) defines terms used in the section or refers to other provisions which do so.

Subsection 23AH(1) specifies the conditions that must be satisfied in relation to foreign income if the income is to be exempt by the operation of section 23AH. By subsection (12), foreign income is given a different meaning than in section 6AB of the Principal Act. For the purposes of section 23AH, the term is to include all amounts included in assessable income other than under Part IIIA, provided they are derived from foreign sources. Thus amounts which are not income by ordinary concepts but which are included in assessable income under the Principal Act (other than Part IIIA) could be exempt provided the conditions set out in section 23AH are satisfied.

To qualify for the exemption, a particular item of foreign income must:

·
be an amount derived by the taxpayer during the year of income commencing on 1 July 1990 (including a substituted accounting period) or in a subsequent year of income (paragraph (1)(a)) in carrying on business in a listed country at or through a permanent establishment of the taxpayer in the listed country (paragraph (1)(b)) - subsection (5) extends the meaning of "derived in carrying on a business";
·
not be eligible designated concession income in relation to any listed country in relation to the year of income (paragraph (1)(c)); and
·
be subject to tax in any listed country in a tax accounting period ending before the end of, or commencing during, the year of income in which the income is derived (paragraph (1)(d)).

Where the conditions set out in paragraphs (a) to (d) are satisfied, paragraphs (e) and (f) provide that, for the purposes of this section, the foreign income is foreign branch income and the taxpayer is the original taxpayer (to distinguish it from an actual taxpayer in subsection (3)).

If the original taxpayer is a company (other than a company in the capacity of trustee), subsection 23AH(2) excludes from the assessable income of the company so much of the foreign branch income as is attributable to a period when the company was a resident.

Subsection 23AH(3) extends the exemption provided by subsection (2) to a resident company's share of the foreign branch income of a trust estate and to a resident company's share of the foreign branch income of a partnership. The exemption is also extended to cases where the assessable income of a resident company would otherwise include income that is referable, through interposed partnerships or trusts, to that branch income.

If the original taxpayer in relation to the foreign branch income is the trustee of a trust estate or a partnership (paragraph (a)), and the conditions specified in paragraph (b) are satisfied in relation to another taxpayer (referred to as the "actual taxpayer"), the actual taxpayer's assessable income does not include so much of the foreign branch income as is attributable to a period when the actual taxpayer was a resident. The conditions specified in paragraph (b) are:

·
the actual taxpayer is a company (other than a company in the capacity of trustee) (subparagraph (b)(i));
·
apart from subsection (3), an amount would be assessed to the actual taxpayer in a year of income under subsection 92(1) (share of the net income of a partner in a partnership) or section 97, 98A or 100 (share of the net income of a trust estate to which a beneficiary is presently entitled) (subparagraph (b)(ii)); and
·
the whole or a part of the amount so included in the actual taxpayer's assessable income is attributable - either directly or indirectly through one or more interposed trusts or partnerships - to the foreign branch income (subparagraph (b)(iii)).

Subsection 23AH(4) provides that subsections (2) and (3) are to be disregarded when applying subsection 160ZA(4) of Part IIIA. Broadly, subsection 160ZA(4) reduces a capital gain to the extent that it includes an amount that is assessable under another provision of the Principal Act. Subsection (4) will therefore prevent the exemption provided under subsections (2) and (3) from being negated by the operation of the capital gains provisions of Part IIIA in some cases.

For the purpose of paragraph (1)(b), foreign income derived in carrying on business at or through a permanent establishment is to be taken to include foreign income derived in the course of disposal of the whole or a part of a business carried on at or through the permanent establishment (subsection 23AH(5)). For example, where a resident company disposes of the whole business of a branch in a listed country and the other conditions of subsection (1) are satisfied, any foreign income derived in the course of disposing of the business is to be exempt.

Subsections 23AH(6), (8) and (9) deal with capital gains that would otherwise accrue to a resident company or the trustee of a trust estate of which a resident company is a beneficiary upon the disposal of an asset used by a permanent establishment of the company or the trustee in a listed country. Subsections 23AH(7), (8) and (9) deal in a similar way with the disposal of partnership assets where the assets are used by a permanent establishment in a listed country of a partnership of which a resident company or a trustee is a partner.

Subsection 23AH(6) sets out the preconditions for exemptions or effective exemptions provided by subsections (8) and (9). First, an asset must be disposed of by a taxpayer in the 1990-91 income year or in a subsequent income year (paragraph (6)(a)). The asset must consist of a unit of depreciable property, a building or land (paragraph (6)(b)) and must not be a taxable Australian asset (paragraph (6)(d)). The asset must have been used wholly or principally (that is, for the most part) by the taxpayer in carrying on business at or through a permanent establishment in a listed country (paragraph (6)(c)). A gain or profit of a capital nature must accrue to the taxpayer as a result of the disposal (paragraph (6)(e)) and that gain or profit must not be eligible designated concession income in relation to any listed country (paragraph (6)(f)). Finally, the gain or profit must be subject to tax in a listed country in a tax accounting period ending in or commencing during the relevant income year (paragraph (6)(q)). Where all these conditions are met, the gain is called a foreign branch capital gain (paragraph (6)(h)) and the taxpayer is referred to as the original taxpayer (paragraph (6)(j)) in subsections (8) and (9).

Subsection 23AH(7) is essentially the same as subsection (6) but modified to deal with the situation where business is carried on in a listed country at or through a permanent establishment of a partnership in which a taxpayer is a partner. In this case the asset is the taxpayer's interest in the assets of the partnership where the conditions in subsection (6) are satisfied. In addition, the same facts must apply to the gain or profit arising on disposal of the asset - that is, it must not be eligible designated concession income and must be subject to tax in a listed country.

Where the original taxpayer is a company carrying on business in the listed country at or through a permanent establishment, in the listed country, of the company or of a partnership in which the company is a partner, no capital gain accrues to the company under Part IIIA as a result of the asset disposal (subsection 23AH(8)). Because the disposal is not the disposal of a taxable Australian asset (paragraph (6)(d)), the subsection only has application to a company which is a resident immediately before the disposal of the asset.

Subsection 23AH(9) mirrors subsection (3) in the case of capital gains made on the disposal of certain assets of the permanent establishment in a listed country of a trustee of a trust estate or of a partnership in which a trustee is partner. The same basic preconditions as in subsection (3) are specified and where those preconditions are met the whole or a part of the capital gain is excluded from the assessable income of a resident company which is, directly or indirectly, a beneficiary under the trust estate.

Where terms taken from Part IIIA of the Principal Act are used in subsections (6),(7) and (8), they are to have the meanings given in Part IIIA (subsection 23AH(10)).

Subsection 23AH(11) will permit regulations to be made for the purposes of section 23AH of the Principal Act in a similar way to which regulations may be made for the purposes of the provisions of Part X of the Principal Act - see notes on clauses relating to subsection 324(2). Broadly, regulations made by virtue of this subsection would, in certain circumstances, have the effect of deeming "foreign income" (see 23AH(1)(d)) or a "gain or profit of a capital nature" (see 23AH(6)(g) and (7)(g)) to be subject to tax.

By subsection 23AH(12), the terms "company", "double tax agreement", "eligible designated concession income", "listed country", "subject to tax", and "tax accounting period" used in this section will have the same meaning as in section 317 of Part X which is being inserted in the Principal Act by clause 49.

The term "foreign income" is to have the meaning given by section 6AB of the Principal Act, but is also to include certain other amounts for the purposes of section 23AH. Those other amounts are amounts that would otherwise be assessable income (except under Part IIIA) and which are derived from sources in a foreign country. For further explanation see the notes on subsection (1).

The term "permanent establishment" is defined in section 6 of the Principal Act to mean, broadly, a place at or through which a person carries on any business. Examples of permanent establishments are branches, factories and mines. That definition will apply except where Australia has a comprehensive double tax agreement with the listed country, in which case the definition of "permanent establishment" contained in that agreement will apply.

Section 23AI: Exemption of amounts paid out of attributed income

Section 23AI exempts from income tax certain attribution account payments (defined in proposed section 365 of Part X) made to a taxpayer by an attribution account entity (defined in proposed section 363 of Part X).

The broad effect of this section is to exempt from tax a payment received by a taxpayer from an attribution account entity to the extent that the payment could be related to amounts included in the assessable income of the taxpayer under proposed sections 456, 457 or 458.

Broadly, section 456 includes in the assessable income of a resident taxpayer a specified part of the attributable income of a CFC. Section 457 includes in the assessable income of a resident taxpayer who has an attributable interest in a CFC certain amounts in respect of a change of residence by that CFC from an unlisted country to a listed country or to Australia. Section 458 includes in the assessable income of a resident taxpayer a specified part of a non-portfolio dividend paid by a CFC resident in an unlisted country to a CFC resident in a listed country or to a partnership, "controlled foreign trust" or "Australian trust" (defined in proposed sections 342 and 338).

When an amount is included in the assessable income of a resident taxpayer under proposed section 456, 457 or 458 in relation to a non-resident entity, that amount is credited to an attribution account to be maintained by the taxpayer in respect of that entity - proposed subsection 371(1).

Where a taxpayer has a direct interest in that entity, a payment made by that entity to the taxpayer, which ordinarily would be included in the assessable income of the taxpayer, is to be exempt under proposed section 23AI up to the amount of the balance in the attribution account. Each time a payment is received, it gives rise to a debit in the attribution account (an "attribution debit", defined in proposed section 372). The debit cannot exceed the balance standing to the credit of the account immediately before the debit is made - subsection 372(2). An amount equal to the attribution debit is to be exempt from tax.

Where the taxpayer has an indirect interest in the attribution account entity through interposed entities, a payment made by the first attribution account entity (as defined in proposed section 363) is to be traced through the series of entities by means of debits and credits to attribution accounts for each of those entities, until the payment reaches the taxpayer. An amount equal to the attribution account debit in relation to the entity that made the payment to the taxpayer is to be exempt from tax under this section.

Subsection 23AI(1) deals with the case where:

·
an attribution account payment of a kind referred to in paragraph 365(1)(a), (b), (c) or (e) (that is, broadly, a dividend, a share of partnership net income, a share of the net income of a trust estate and a distribution from a trust estate - see notes on proposed section 365) is made to a taxpayer other than a partnership or a taxpayer in the capacity of trustee of a trust (subparagraph (a)(i)); or
·
an attribution account payment of a kind referred to in paragraph 365(1)(d) (that is, the whole or part of the net income of a trust of a year of income that is assessable to the trustee under section 99 or 99A of the Principal Act) is made to a taxpayer (subparagraph (a)(ii)); and
·
an attribution debit arises on the making of the payment for the entity making the payment, in relation to the taxpayer (paragraph (b)).

Where paragraphs (a) and (b) apply:

·
if the payment is a dividend paid by a company to a shareholder, the payment is to be exempt from tax to the extent of the debit (paragraph (c));
·
if the payment is the individual interest of a partner in the net income of a partnership of a year of income and, apart from this section, an amount would be included in the taxpayer's assessable income under section 92 of the Principal Act - that amount is not to be included, to the extent of the debit (paragraph (d));
·
if the payment is the share of the net income of a trust estate of a year of income to which a beneficiary is presently entitled and, apart from this section, an amount would be included in the taxpayer's assessable income under section 97, 98A or 100 of the Principal Act or an amount would be assessable to the trustee of the trust estate under section 98 in respect of a share of the net income of the trust of the year of income - that amount is not to be included, or not to be assessable, to the extent of the debit (paragraph (e)); and
·
if the payment is of a kind referred to in paragraph 365(1)(d) (that is, the whole or part of the net income of a trust estate of a year of income that is assessable to the trustee under section 99 or 99A of the Principal Act), the payment is not, to the extent of the, debit, assessable to the taxpayer as mentioned in that paragraph (paragraph (f)); and
·
if the payment is of a kind referred to in paragraph 365(1)(e) (that is, a distribution from a trust estate that would be included in the assessable income of a beneficiary under section 99B of the Principal Act), it is not, to the extent of the debit, included in the assessable income of the taxpayer (paragraph (g)).

Subsection 23AI(2) provides that this section shall be disregarded for the purpose of applying the definition of "foreign income deduction" in sections 79D and 160AFD and of determining deductions allowable to the taxpayer. The effect of this subsection is that expenses incurred in deriving the income that is exempt from tax under this section will not cease to be allowable deductions merely because the income is exempt from tax.

By subsection 23AI(3), the terms "attribution account payment", "attribution debit", "company" and "trust" used in this section will have the same meaning as in Part X - see notes on section 317.

Section 23AJ: Exemption of certain non-portfolio dividends from foreign countries

Section 23AJ will exempt from income tax a non-portfolio dividend paid by a company that is a resident of a listed or unlisted country to a resident company to the extent that it is an exempting receipt of the resident company. Section 380 provides a definition of an exempting receipt of a resident company.

In broad terms, "exempting receipts" of a resident company include:

·
a non-portfolio dividend received directly by a resident company from a company that is a resident of a listed country, to the extent that the payment of the dividend did not give rise to an attribution debit (see notes on section 372) for the paying company in relation to the resident company; and
·
the exempting profits percentage of a non-portfolio dividend - broadly, that part of the dividend, which represents certain profits of a permanent establishment in a listed country or non-portfolio dividends received from a company resident in a listed country and certain other categories of income that is paid by a company which is a resident of an unlisted country to the resident company.

The term "exempting profits percentage" is defined in proposed section 379 of Part X. A "non-portfolio dividend" is defined in section 317 of Part X and, in broad terms, means a dividend paid to a company where that company has a voting interest of at least 10 per cent of the total voting interests in the company paying the dividend.

By subsection 23AJ(2), the terms "company", "exempting receipt", "non-portfolio dividend", "resident of a listed country" and "resident of an unlisted country" used in this section will have the same meaning as in Part X - see notes on section 317.

Clause 9: Insertion of section 47A

Clause 9 will insert section 47A in the Principal Act.

Section 47A: Distribution benefits - CFCs

In broad terms, section 47A will have the effect of treating a distribution payment made by a CFC after 3 June 1990 in relation to a distribution benefit provided to a shareholder of the CFC or to an associate of a shareholder as a dividend paid to the shareholder or associate to the extent that the CFC has profits at the time the distribution payment is made.

Section 47A will characterise a distribution payment as a dividend. Whether the whole or a part of that dividend is to be included in the assessable income of a resident taxpayer would depend on the operation of the other provisions of the amended act. For example, new section 458 will have the effect that a dividend paid by a CFC that is a resident of an unlisted country to a CFC that is a resident of a listed country that does not subject that dividend to tax at its normal rate of company tax will be included in the assessable income of resident taxpayers who have attributable interests in both CFCs. That section also deals with dividends paid by a CFC to a CFT, a partnership or an Australian trust. Section 459 will include in the assessable income of resident taxpayers amounts equal to their attribution percentages in the recipient entities of certain dividends paid by a CFC.

The transitional provisions contained in clauses 55 and 56 are also relevant in determining whether a distribution that is characterised as a dividend will be included in the assessable income of a resident taxpayer. For example, the amendment to be made by clause 55 will have the effect of treating section 458 as though it applied to a distribution benefit that is characterised as a dividend and that was provided after 3 June 1990 and before the commencement of the 1990-91 income year of taxpayer.

Section 47A identifies certain transactions between entities that give rise to the transfer of an "eligible benefit" by one entity to the other. In broad terms, eligible benefits include:

·
the waiver by an entity of a debt due to it by another entity (subsection (5));
·
the grant of a non-arm's length loan by one entity to another (subsection (7));
·
the grant of a loan by one entity to another to facilitate, directly or indirectly, the payment by the recipient of a dividend that would be exempt from tax (subsection (7));
·
the grant of a loan by one entity to another to facilitate another transaction that would give rise to an eligible benefit (subsection (7));
·
a payment by an entity for the allotment of shares in a company or units in a unit trust or of rights or options to acquire shares or units - subject to certain exceptions relating to companies or unit trusts in which the remaining shareholders or unitholders or holders of interests in shares and units are unrelated entities (subsection (8));
·
the transfer by an entity to another of property or services for no consideration or inadequate consideration (subsection (10)); and
·
a payment by an entity in respect of calls on shares, subject to the same exceptions as for allotment of shares (subsection (11)).

An eligible benefit is treated as a "distribution benefit" in relation to a CFC where the CFC provides that benefit to an associated entity (a defined term) or to an entity that would be an associated entity immediately after the provision of the benefit (subsection (3)). The eligible benefit will also be a distribution benefit where the CFC entered into an arrangement with another entity (the arranger) under which the CFC made transfers of property or services (arrangement transfers) to the arranger or to some other entity and that entity or the arranger provided the benefit.

The subsections that deal with the different categories of eligible benefits also contain provisions for the determination of the distribution time for a distribution benefit and for the quantification of the distribution payment in relation to a distribution benefit.

Subsection 47A(1) is the operative provision and sets out the circumstances in which a distribution payment made by a CFC in relation to a distribution time is to be treated as a dividend paid by the CFC.

Paragraphs (1)(a) to (d) provide that the section will apply to a distribution payment made by a company (referred to as the "first company") in relation to a distribution time if:

·
immediately before the distribution time for the distribution benefit, the company has profits (paragraph (1)(a));
·
the distribution time occurred after 3 June 1990 (paragraph (1)(b));
·
the company making the distribution payment was a CFC at the distribution time (paragraph (1)(c)); and
·
the company making the distribution payment was a resident of an unlisted country at the distribution time (paragraph (1)(d)).

If the conditions in paragraphs (a) to (d) are satisfied, the distribution payment is to be taken to be a dividend paid by the CFC to the extent that:

·
it does not exceed the amount of the profits; and
·
it would not be treated as a dividend under the other provisions of the Principal Act other than section 108 (see notes on the amendment of section 108 of the Principal Act to be made by clause 19).

The amount that is taken to be a dividend will be treated as having been paid to the recipient of the distribution benefit as a shareholder in the CFC making the distribution payment (paragraph (1)(e)) out of profits derived by the CFC (paragraph (1)(f)). The dividend will be treated as having been paid at the distribution time (paragraph (1)(g)).

Subsection 47A(1) will have the effect that, where a resident taxpayer prepares a return of income for a year of income on the basis that a distribution payment made by a CFC at the distribution time that falls in that year of income is a dividend, that distribution payment is treated as a dividend for all the purposes of the Principal Act.

Where the taxpayer's return of income does not treat the distribution payment as a dividend, and the distribution payment is subsequently treated as a dividend (for example, as a result of an audit), subsection 47A(2) provides that the distribution payment would not be treated as a dividend for the purposes of Division 18, section 365 or Division 6 of Part X of the Principal Act. The effect of the exclusion of Division 18 will be that a credit for foreign tax will not be available in respect of the amount that is taken to be a dividend under this section. The exclusion of section 365 and Division 6 of Part X means that the amount that is taken to be a dividend will not be treated as an attribution account payment under section 365 or as an exempting receipt under Division 6 of Part X. As a result, the deemed dividend will not qualify for an exemption from income tax under proposed sections 23AI and 23AJ.

Subsection 47A(3) sets out the meaning of the term "distribution benefit" in relation to the first company. Two sets of conditions have to be satisfied for an eligible benefit (described in subsections (5),(7),(8),(10) and (11)) to qualify as a distribution benefit.

The first of these conditions relates to the person to whom the benefit is to be provided (paragraph (3)(a)). The eligible benefit has to be provided to an associated entity (defined in subsection (20)) of the first company (subparagraph (a)(i)), or to an entity that, immediately after the provision of the eligible benefit, was an associated entity of the first company (subparagraph (a)(ii)).

The second condition relates to the entity that provides the benefit. The benefit has to be provided by the first company either directly (subparagraph (b)(i)), or under an arrangement with another entity (subparagraph (b)(ii)). The entity with which the first company makes the arrangement is referred to as the "arranger". The benefit could be provided by the arranger or by a third entity.

Where the CFC entered into an arrangement with an arranger under which a benefit is provided by the arranger or by another entity, the benefit will be treated as a distribution benefit made by the first company if that company made, or entered into an undertaking to make, one or more transfers of property or services to the arranger or to another entity being transfers that are attributable, in whole or in part, to the provision of the benefit. These transfers of property or services are referred to as "arrangement transfers".

Subsection 47A(4) provides that, where the first company entered into an undertaking to make one or more arrangement transfers, the time of the arrangement transfers is the time the undertaking was entered into.

Subsection 47A(5) deals with the case where an entity (referred to as the "provider") waives or releases the obligation of another entity (referred to as the recipient) to pay or to repay an amount to the provider. This subsection refers to the waiver or release of an obligation by any entity and not necessarily the CFC referred to in subsection (1).

Paragraph (5)(a) treats the waiver or release as an eligible benefit provided at the time of waiver or release by the provider to the recipient.

Paragraph (5)(b) determines the distribution time for that benefit where the eligible benefit is a distribution benefit in relation to the first company. Where the eligible benefit was provided by the first company, the distribution time will be the time at which the eligible benefit was provided. Where the eligible benefit was provided by any other entity, and the first company made one or more arrangement transfers to that entity or to any other entity in return for the provision of the eligible benefit, the time at which the arrangement transfer was made, or each of the times at which the arrangement transfers were made, is treated as a distribution time.

Paragraph (5)(c) provides the rules for the determination of the distribution payment in relation to the distribution time. Where the benefit was provided by the first company, the distribution payment is the amount of the payment or repayment which is waived or released (subparagraph (c)(i)). In any other case, the distribution payment would be so much of the amount or market value of the arrangement transfer as is attributable to the provision of the eligible benefit (subparagraph (c)(ii)).

Subsection 47A(6) specifies that an entity is to be taken, for the purposes of subsection (5), to be under an obligation to pay or to repay an amount at a particular time even though that amount is not in fact due for payment or repayment at that particular time but would be payable or repayable at a subsequent time.

Subsection 47A(7) sets out the circumstances in which a loan made by one entity to another is to be treated as an eligible benefit and, where the eligible benefit is a distribution benefit in relation to the first company, provides the rules to determine the distribution time and the distribution payment in relation to that benefit.

One of three conditions have to be satisfied for a loan made by an entity to another to be treated as an eligible benefit.

The first of these conditions is that the parties to the loan are not at arm's length with each other in relation to the loan (paragraph (7)(a)). Whether the parties to a loan are at arm's length in relation to the loan is to be determined having regard to factors such as the amount of the loan, the rate of interest payable, the security for the loan, the terms of repayment, and the capacity of the borrower to repay the loan. A loan will be an arm's length loan where, having regard to these factors, the terms and conditions of the loan are those that would have been agreed between independent parties acting at arm's length.

Paragraph (7)(b) sets out the second condition that would make a loan an eligible benefit. Where the purpose or one of the purposes of making the loan was to facilitate, directly or indirectly, the payment of a dividend that would, in whole or part, be exempt from tax under proposed section 23AJ or be an exempting receipt under new section 377, that loan will be an eligible benefit. In these circumstances, the making of the loan is to be treated as the provision of an eligible benefit irrespective of whether the loan was at arm's length or not.

A loan is to be taken to be one that facilitates the payment of a dividend where, for example, the loan was taken to provide the funds from which the dividend was to be paid. A loan would directly facilitate the payment of a dividend that will be exempt from tax under new section 23AJ if, for example, a CFC that is a resident of an unlisted country made a loan to a CFC that is a resident of a listed country to enable it to pay a dividend to the Australian parent company. An example of the payment of a dividend being facilitated indirectly would be where a company that is a resident of an unlisted country provides a loan to a company that is a resident of a listed country which used the funds made available by the loan to route a dividend to its Australian parent through a third company that was a resident of an unlisted country.

The third condition, set out in paragraph (7)(c), is where the purpose or one of the purposes of the making of the loan was to facilitate, directly or indirectly, the provision of any eligible benefit by the recipient. The distribution benefit could be any one of the types of benefit set out in this section. The eligible benefit must be a distribution benefit in relation to any company.

Where any one of the conditions in paragraphs (a), (b) or (c) is satisfied, paragraph (7)(d) deems the loan made by one entity (the provider) to another (the recipient) to be an eligible benefit provided by the provider to the recipient at the time the loan is made.

Paragraph (7)(e) determines the distribution time for the eligible benefit. Where the benefit is provided by the first company, the distribution time is the time of provision of the benefit (subparagraph (e)(i)). Where the first company makes one or more arrangement transfers to another entity for the provision of the benefit, the time or each of the times when an arrangement transfer is made is taken as a distribution time (subparagraph (e)(ii)).

Paragraph (7)(f) determines the distribution payment in relation to the distribution time. Where the loan is made by the first company, it is the amount of the loan (subparagraph (f)(i)). Where one or more arrangement transfers were made to another entity for the provision of the benefit, it is so much of the amount of each arrangement transfer or of the market value of each arrangement transfer as is attributable to the provision of the benefit (subparagraph (f)(ii)).

Subsection 47A(8) deals with the acquisition by an entity (called the "provider") from a company (called the "recipient") of a share in the recipient or of a right or option to acquire a share in the recipient, as well as with the acquisition by an entity (also called the "provider") from the trustee of a unit trust (also called the "recipient") of a unit in the unit trust or of a right or option to acquire a unit in that trust (paragraphs (8)(a), and (b)).

The acquisition is taken to be an eligible benefit provided by the provider to the recipient at the time the acquisition took place (paragraph (8)(c)). Where the eligible benefit is a distribution benefit in relation to the first company, paragraph (8)(d) identifies the distribution time for the eligible benefit. If the benefit was provided by the first company, it is the time of provision of the benefit (subparagraph (d)(i)). If the first company made one or more arrangement transfers to another entity for the provision of the eligible benefit, it is the time or each of the times of the arrangement transfers (subparagraph (d)(ii)).

Paragraph (8)(e) measures the distribution payment in relation to the distribution time where the eligible benefit is a distribution benefit in relation to the first company. Where the benefit was provided by the first company, it is the amount or market value of the consideration given by the first company for the acquisition (subparagraph (e)(i)). If the first company made an arrangement transfer to another entity for the acquisition, the distribution payment in relation to the distribution time is so much of the amount or market value of the arrangement transfer as is attributable to the provision of the eligible benefit (subparagraph (e)(ii)).

Paragraph (8)(f) provides that where the eligible benefit is a distribution benefit in relation to the first company (subparagraph (f)(i)) and the provider transferred property or services to the recipient as consideration (subparagraph (f)(ii)), the profits of the first company immediately before the distribution time for the distribution benefit are to be determined on the basis of the assumptions set out in subparagraphs (f)(iii) and (iv). Where the benefit was provided by the first company, that company is assumed to have disposed of the property or services, immediately before the distribution time, for consideration equal to the full market value of the property or services (subparagraph (f)(iii)). This would have the effect of bringing to account as profits any unrealised gain on the property or services.

In any other case, the first company is to be assumed to have disposed of property or services that were transferred to the recipient to an unrelated entity and to have received consideration equal to the market value of the property or services (subparagraph (f)(iv)).

Subsection 47A(9) provides an exception to the rule in subsection (8) and excludes the acquisition of the shares or units or of the rights or options referred to in that subsection from being a distribution benefit in certain circumstances. The exception is where no entity is the holder of an eligible equity interest (defined in subsection (21)) in the first company or an associate of that entity (paragraph (9)(a)) and at the same time the holder of an eligible equity interest in the recipient of the benefit (paragraph (9)(b)).

This will be the case, for example, where the recipient is a wholly owned subsidiary of the first company and no entity that holds an equity interest in the first company or an associate of that entity holds an equity interest in the recipient company. This will also be the case where the first company holds an equity interest in the recipient and the only other holders of equity interests in the recipient are entities who are not holders of equity interests in the first company or associates of holders of equity interests in the first company. However, subsection (14) provides for a withdrawal of the exception in certain circumstances.

Subsection 47A(10) sets out the circumstances in which an entity (called the "provider") that transfers property or services to another entity (called the "recipient") will be taken to have provided an eligible benefit to the recipient. It also fixes the distribution time for that benefit and identifies the distribution payment in relation to the benefit.

This subsection treats as an eligible benefit the transfer by the provider to the recipient of property or services (paragraph (10)(a)) for no consideration or for a consideration that is less than the market value of the property or services (paragraph (10)(b)). However, certain transfers or property or services are excluded from the scope of this subsection. These are:

·
services that consist of the making of a loan (paragraph (10)(c));
·
property or services that are transferred as consideration for the purchase from a company of shares in the company or of rights or options over shares (paragraph (10)(d)) or for the acquisition from the trustee of a unit trust of units or of rights or options over units in the trust (paragraph (10)(e)); and
·
a payment in respect of a call on a share in a company (paragraph (10)(f)).

Paragraph (10)(h) identifies the distribution time for the eligible benefit where the benefit is a distribution benefit in relation to the first company. Where the benefit was provided by the first company, it is the time of provision of the benefit (subparagraph (h)(i)). Where arrangement transfers were made by the first company to another entity for the provision of the eligible benefit, it is each of the times when the arrangement transfers were made (subparagraph (h)(ii)).

Paragraph (10)(j) identifies the amount of the distribution payment in relation to the distribution time. Where the benefit was provided by the first company, it is the excess of the market value of the property or services transferred over the consideration (subparagraph (j)(i)). Where there is only one arrangement transfer, it is the amount by which the market value of so much of the property or services transferred as is attributable to the provision of the eligible benefit exceeds the consideration (subparagraph (j)(ii)). Where there is more than one arrangement transfer, the distribution payment in relation to each arrangement transfer is calculated using the formula:

(Total Excess) * (Arrangement transfer)/(Total arrangement transfers)

where:

"Total Excess" refers to the total of the amounts by which the market value of so much of the property or services transferred in all the arrangement transfers as is attributable to the provision of the eligible benefit exceeds the consideration;
"Arrangement transfer" refers to the amount of a particular arrangement transfer or the market value of so much of the property or services transferred in the particular arrangement transfer that is under consideration as is attributable to the provision of the eligible benefit; and
"Total arrangement transfers" refers to the total of the market values of the property or services transferred in all the arrangement transfers as are attributable to the provision of the eligible benefit.

Paragraph (lO)(k) provides that where the eligible benefit is a distribution benefit in relation to the first company and consists of a transfer of property or services by the first company, the profits of the first company immediately before the transfer are to be computed on the assumption that the transfer of the property or services was made to an unrelated entity for consideration equal to full market value (subparagraph (k)(i)).

Where the first entity made one arrangement transfer to another entity for the provision of the benefit, the profits of the first company immediately before the distribution time are to be computed on the assumption that the arrangement transfer was made to an unrelated entity for consideration equal to full market value (subparagraph (k)(ii)).

Where there are two or more arrangement transfers, the assumption that the transfer of property or services was to an unrelated entity for consideration equal to full market value is to be made in relation to each arrangement transfer (subparagraph (k)(iii)).

Subsection 47A(11) deals with the case where, at a particular time, an entity (called the "provider") makes payment in relation to calls on shares held by the entity in a company (called the "recipient").

Paragraph (11)(a) treats the making of the payment as an eligible benefit provided by the "provider" to the "recipient" at the time the payment was made. Paragraph (11)(b) identifies the distribution time for the eligible benefit where that benefit is a distribution benefit in relation to the first company referred to in subsection (1). Where the benefit was provided by the first company, the distribution time is the time when the payment was made (subparagraph (b)(i)). Where arrangement transfers were made by the first company to any other person for the payment of those calls, the distribution time is the time when each arrangement transfer was made (subparagraph (b)(ii)).

Paragraph (11)(c) identifies the amount of the distribution payment in relation to the distribution time. Where the benefit was provided by the first company it is the amount of the payment (subparagraph (c)(i)). Where arrangement transfers were made by the first company to any other person for the payment of those calls, the amount of the distribution payment is so much of the amount or market value of the arrangement transfers as is attributable to the payment of the calls on the shares (subparagraph (c) (ii)).

Subsection 47A(12) provides an exception to the rule in subsection (11). This exception corresponds to that provided in subsection (9) from the rule in subsection (8).

Subsection 47A(13) provides that where an eligible benefit that is referred to in subsections (8) or (11) - that is, a benefit in relation to an allotment of shares or the payment of calls on shares - was not treated as a distribution benefit at the distribution time because of subsection (9) or (12), and it is found at a later time that subsections (9) or (12) are not applicable at that later time, those subsections will be deemed never to have applied. The eligible benefit would then become a distribution benefit at that distribution time.

The time limits that apply to the amendment of assessments by virtue of section 170 of the Principal Act will not apply to an assessment that is made to give effect to the provisions of this subsection.

The exceptions provided by subsection (9) or (12) will cease to apply if an entity that is the holder of an eligible equity interest in the first company (see notes on subsection (1)) or an associate of that entity becomes the holder of an eligible equity interest in the recipient of the eligible benefit.

Subsection 47A(14) deals with the case where an eligible benefit (referred to as the first eligible benefit) that is referred to in subsection (8) or (11) is not a distribution benefit in relation to the first company solely because of the effect of subsection (9) or (12) (paragraph (a)), and the recipient of the benefit provides an eligible benefit to the first company, the provider of the first eligible benefit or to an associated entity in relation to the first company or that provider (paragraph (b)). It must also be the case that the provision of the first eligible benefit facilitated, directly or indirectly, the provision of the other eligible benefit (paragraph (c)).

Where these conditions are satisfied, subsection (9) or (12) will not apply to the provision of the first eligible benefit. The first eligible benefit would then become a distribution benefit in relation to the first company.

The time limits that apply to the amendment of assessments by virtue of section 170 of the Principal Act will not apply to an assessment that is made to give effect to the provisions of this subsection.

Subsection (14) would apply, for example, where a subsidiary of an Australian company that is a resident of an unlisted country subscribes to the share capital of its own subsidiary that is a resident of a listed country and the listed country subsidiary makes a non arm's length loan to the Australian company.

Subsection 47A(15) provides that, in determining whether a company has profits at a particular time, the assumption is to be made that the accounts of the company had been drawn up immediately before that time. This subsection relates to the provision in subsection (1) which has the effect that a distribution payment in relation to a distribution time that would otherwise not be a dividend is to be treated as a dividend to the extent that the CFC that made the payment has profits immediately before that distribution time. Paragraphs (8)(f) and (10)(j) are also relevant to the computation of the profits of the CFC immediately before the distribution time where the distribution payment is a transfer of property or services for no consideration or for a consideration that is less than the market value of the property or services or is a transfer of property or services in exchange for the acquisition of shares in a company, or units in a unit trust or of rights or options over shares or units.

In broad terms, subsections (16), (17) and (18) will have the effect that, where a distribution payment made by a CFC has been deemed under this section to be a dividend up to the amount of the profits of that CFC, those profits will not be taken into account on a subsequent application of this section in relation to another distribution payment made by that CFC to the extent that amounts in respect of that dividend have been included in the assessable income of resident taxpayers who are liable to Australian tax on those amounts. The dividend could have been included in assessable income when received by the taxpayer directly, or attributed to the taxpayer through entitlements to shares of income of interposed entities.

Subsection (16) deals with the case where, under subsection (1), the profits of a company immediately before a distribution time have been treated as a dividend in relation to a distribution payment made by the company, and an amount in respect of that dividend is included in the assessable income of a taxpayer of a year of income (paragraphs (a) and (b)). It must also be the case that, in relation to that year of income, the taxpayer is:

·
a resident natural person or a resident company (subparagraph (c)(i));
·
a trustee of a corporate unit trust (subparagraph (c)(ii)) or of a public trading trust (subparagraph (c)(iii));
·
the trustee of an eligible entity within the meaning of Part IX (subparagraph (c)(iv)); or
·
the trustee of a resident trust estate who is liable to be assessed and to pay tax under section 99 or 99A in respect of a part of the net income of the trust estate (subparagraph (c)(v)).

Where these conditions are satisfied, the amount of those profits equal to the amount included in the assessable income of the taxpayer, is to be disregarded in determining the amount of profits of the company in relation to a subsequent application of this section to another distribution payment made by the company.

Subsection (17) deals with the case where, under subsection (1), the profits of a company immediately before a distribution time have been treated as a dividend in relation to a distribution payment made by the company, and the trustee of a trust estate is liable, under section 98, to pay tax in respect of a share of the net income of the trust estate which includes an amount in relation to that dividend (paragraphs (a), (b) and (c)). Where these conditions are satisfied, an amount of those profits equal to the amount included in the assessable income of the trustee is to be disregarded in determining the amount of the profits of the company in relation to a subsequent application of this section to another distribution payment made by the company.

Subsection (18) deals with the case where, under subsection (1), the profits of a company immediately before a distribution time have been treated as a dividend in relation to a distribution payment made by the company, and an amount in respect of that dividend is included in the assessable income of a taxpayer (referred to as the "original taxpayer") being a trustee of a trust estate or a partnership (paragraphs (a), (b) and (c). The whole or a part of that amount should also be included in the assessable income of another taxpayer (referred to as the "actual taxpayer") by virtue of entitlements, directly or through interposed entities, to a share of the net income of the trust estate or of the partnership.

Where an amount in relation to the dividend is included in the assessable income of a year of income of an actual taxpayer who is a resident in that year, and the actual taxpayer falls within one of the categories of the taxpayers referred to in sub-subparagraphs (d)(ii)(A) to (d)(ii)(F), the amount of profits equal to the amount so included in the assessable income is to be disregarded in a subsequent application of this section to another distribution payment made by the company.

By subsection 47A(19), the question whether a particular transfer represents a transfer of property or services within the meaning of this section will be determined having regard to the rules that are to apply in relation to transfers of property or services to trust estates - see notes on section 102AAJ of Division 6AAA being inserted in the Principal Act by clause 18.

Subsection 47A(20) has the effect that a company will be treated as a resident of an unlisted country for the purposes of this section if it is treated as a resident of an unlisted country for the purposes of Part X (see notes on section 333 of Part X).

Subsection 47A(21) defines certain terms that are used in the section.

"arrangement" is defined in wide terms to mean:

·
any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable or intended to be enforceable by legal proceedings; and
·
any scheme, plan, proposal, action, course of action or course of conduct, whether there are two or more parties or only one party involved.

"associate" is to have the same meaning as in Part X - see notes on section 318.
"associated entity", in relation to a company, means a shareholder in the company or an entity which is an associate of a shareholder in the company.
"CFC" is to have the same meaning as in Part X - see notes on section 340.
"distribution benefit" is to have the meaning given by subsection 47A(3).
"eligible equity interest" is defined to mean:

·
in relation to a company:

· .
a share, or an interest in a share, in the company;
· .
a right to acquire a share or an interest in a share in the company;
· .
an option to acquire a share or an interest in a share in the company; or

·
in relation to a unit trust:

· .
a unit, or an interest in a unit, in the unit trust;
· .
a right to acquire a unit, or an interest in a unit, in the unit trust;
· .
an option to acquire a unit or an interest in a unit, in the unit trust.

"entity" is to have the meaning as in Part X - see notes on section 317.
"loan" is defined to include:

·
an advance of money;
·
the provision of credit or any other form of financial accommodation;
·
the payment of an amount for, on account of, on behalf of or at the request of an entity where there is an obligation (whether express or implied) to repay that amount; and
·
a transaction (whatever its term or form) which in substance effects a loan of money.

"property" is to have the same meaning as in Division 6AAA - see notes on section 102AAB.
"services" is to have the same meaning as in Division 6AAA - see notes on section 102AAB.
"statutory accounting period" is to have the same meaning as in Part X - see notes on section 319.
"transfer" is to have the same meaning as in Division 6AAA - see notes on section 102AAB.

Clause 10: Limitation on deductions for foreign income

Under the existing foreign tax credit system, expenses that would otherwise be allowable deductions may be disallowed under section 79D of the Principal Act. Section 79D provides that such expenses incurred by a taxpayer in a year of income are categorised according to the particular class of income and particular foreign source to which the expenses relate. The section applies so that the amount by which the expenses that relate to a particular class of income from a particular foreign source exceeds the income of that class derived in the year of income from that source is not an allowable deduction. Instead, the loss is available to be carried forward to offset income derived in subsequent years, provided that the income is in respect of the same class of income and is derived from the same foreign source (see notes on clause 34). The classes of income and the sources of income take their meaning from section 160AFD (see notes on clause 34).

Clause 10 will substitute a new section 79D for the existing section 79D of the Principal Act to, broadly, modify the quarantining of expenses related to foreign income to:

·
remove the per source/per country basis for quarantining - that is, the quarantining will be on the basis of class of income;
·
alter the classes of income;
·
exclude from the operation of section 79D foreign income which is exempt income; and
·
make it clear that the quarantining has no application to gains and losses under Part IIIA of the Principal Act.

Subsection 79D(1) will operate where, in a year of income, a taxpayer has one or more foreign income deductions (see notes on subsection (2)) in relation to a class of assessable foreign income (paragraph 79D(1)(a)). Where this is the case, the excess of the foreign income deductions over the assessable foreign income, if any, of that class is not an allowable deduction (paragraphs 79D(1)(c) and (d)), with the effect that a deduction that relates to income of a particular class of foreign income cannot be deducted from foreign income of another class or against income that is not foreign income.

Subsection 79D(2) is an interpretive provision that will give the terms "assessable foreign income", "class of assessable foreign income" and "foreign income deduction" the same meaning as is given to the terms in section 160AFD of the Principal Act (see notes on clause 34). The subsection will also ensure that the income to be taken into account for section 79D takes the same extended meaning that the term income is given by new subsection 160AFD(9) (see notes on clause 34) of the Principal Act. Broadly, this will extend the meaning to include all assessable income that is not sourced in Australia, but will not include amounts that are assessable by virtue of the capital gains provisions of Part IIIA of the Principal Act.

Clauses 11 to 15: Amendment to the carry-forward of losses

Introductory note

Clauses 11 to 15 will change the existing domestic loss provisions of sections 79E, 79F and 80 to 80G. Broadly, deductions for general domestic losses incurred prior to the 1989-90 year of income (other than those incurred in engaging in primary production) and film losses are allowable under sections 80 and 80AAA of the Principal Act. Under section 80, a taxpayer who incurs a loss in a year of income may, subject to certain conditions, carry the loss forward as an allowable deduction against income of any of the succeeding seven years of income. Similarly, section 80AAA provides for film losses incurred prior to the 1989-90 year of income to be deductible against the film income of the next succeeding seven years. Section 80AA provides for the deduction of primary production losses incurred in those years which may be carried forward indefinitely. Sections 79E and 79F provide for the creation and deduction of general domestic losses and film losses incurred during the 1989-90 and later years of income. They are to the same effect as sections 80 and 80AAA except that they do not contain any seven year limit on loss deductibility and do not contain certain subsections that are no longer appropriate. Deductions for primary production losses incurred in the 1989-90 and later years of income will also be dealt with under section 79E. All sections provide that the amount of the loss allowable as a deduction from assessable income is to be reduced by net exempt income.

Clause 11: General domestic losses of post-1989 years of income

In broad terms, section 79E of the Principal Act provides for the calculation of a loss incurred in a year of income. The section only applies to losses incurred in the 1989-90 or later years of income and then only to a loss which is not a film loss. However, a section 79E loss does not include a loss in respect of foreign source income. The section also provides for a loss calculated in accordance with the section to be indefinitely carried forward and allowed as a deduction from the assessable income of a later year of income. Where a part of the loss of the previous year of income was incurred in deriving film income, the loss will be reduced by the amount of the film loss which will be allowed as a deduction in accordance with section 79F. A loss incurred in a year of income is, broadly, calculated as the excess of the allowable deductions (not including a deduction for a loss incurred in a previous year) of the year of income over the assessable income of that year. This excess is then reduced by the "net exempt income" of the year of income - being the excess of expenses incurred in the year that relate to exempt income over the exempt income of the year.

Existing subsections 79E(5) and (6) provide that a loss incurred by a taxpayer in a year of income that falls within section 79E will not offset the foreign income of a taxpayer derived in a subsequent year of income unless the taxpayer elects that this is to occur. Broadly, these provisions ensure that, in effect, the taxpayer is not required to deduct the whole or a part of a loss from foreign income in situations where there is a foreign tax credit that would, in any event, reduce the Australian tax payable on that foreign income. The term "foreign income" in these subsections takes its meaning from 6AB of the Principal Act.

Paragraph (a) of clause 11 will change all references to "foreign income" in subsections 79E(5) and (6) to references to "assessable foreign income", a term which is to be defined in subsection 79E(12) (see notes on paragraph (c) of this clause). This will make it clear that the amounts to which the subsections apply will be extended to include all amounts whether of an income or capital nature (other than amounts that fall within Part IIIA of the Principal Act) which are derived from a source outside Australia provided that the amount is included in assessable income. The term will not include exempt foreign income. However, exempt foreign income will not, in most cases, reduce a loss under section 79E because of the modification made to the term "exempt income" (see notes on paragraph (c) of this clause).

Paragraph (b) of clause 11 will omit the definitions of "class of income" and "foreign source" from subsection 79E(12), the existing interpretive provision of section 79E. These terms are relevant to the exclusion under subsection 79E(14) of a loss incurred in deriving foreign income of a class of income from a foreign source (see notes on paragraph (d) below). With the changes to be made by this Bill to the method of quarantining under section 79D (see notes on clause 10) these terms are no longer necessary.

Paragraph (c) of clause 11 will insert four new definitions in subsection 79E(12). Three of these definitions - "assessable foreign income", "class of assessable foreign income" and "foreign income deduction" - are to take their meaning from section 160AFD, to be inserted by this Bill (see notes on clause 34). These terms are relevant to the exclusion under subsection 79E(14) of a loss incurred in deriving assessable foreign income (see notes on paragraph (d) below). Paragraph (c) will also insert a definition of the term "exempt income" which will modify the ordinary meaning of exempt income to exclude the following:

·
income that is exempt by virtue of section 23AH (certain foreign branch profits of resident companies);
·
income that is exempt by virtue of section 23AI (amounts paid in respect of income or profits of a CFC that have previously been included in the taxpayer's assessable income);
·
income that is exempt by virtue of section 23AJ (certain non-portfolio dividends paid to a resident company by a non-resident company); and
·
for the avoidance of doubt, amounts to which either of paragraph 99B(2)(d) or (e) applies (amounts paid in respect of income of a non-resident trust that have previously been included in a taxpayer's assessable income under Division 6AAA).

This will ensure that amounts that fall into any of these categories will not affect the calculation of a loss incurred in a year of income or the amount of a loss incurred in a previous year of income that may be carried forward to deduct from a taxpayer's assessable income. A consequence of the insertion of this term will be that the meaning of "net exempt income" in section 79F (film losses of post-1989-90 years of income), which is defined by reference to the definition of "net exempt income" in section 79E, will also be similarly altered.

Paragraph (d) of clause 11 will omit existing subsection 79E(14) which has the effect of excluding from section 79E certain losses that relate to amounts derived from a foreign source in respect of a class of income from a foreign source. This is consequential upon the changes to the method of quarantining under section 79D. In its place a new subsection 79E(14) will be inserted. The new subsection is phrased in the same terms as the new section 79D to be inserted by clause 10 (see notes on that clause). In effect, the subsection makes it clear that the amounts disallowed as deductions under section 79D (broadly, the excess of the deductions relating to a class of assessable foreign income over the assessable foreign income, if any, of that class) do not form part of the amounts (called the "non-loss deductions") that are taken into account in determining the loss incurred in a year of income under section 79E. Instead, these amounts will form part of the overall foreign loss which may be carried forward to reduce assessable foreign income of a later year of income under section 160AFD.

Clause 12: General domestic losses of pre-1990 years of income

Existing subsections 80(2B) and (2C) provide that a loss incurred by a taxpayer in a year of income that falls within the terms of section 79D will not offset the foreign income of a taxpayer derived in a subsequent year of income unless the taxpayer elects that this is to occur. This corresponds to subsections 79E(5) and (6) - see notes on paragraph (a) of clause 11. Similarly to that paragraph, paragraph (a) of clause 12 will change all reference to "foreign income" in subsection 80(2B) and (2C) to references to "assessable foreign income", a term which is to be defined in subsection 80(9) (see notes on paragraph (c)). This will have a similar effect in respect of losses incurred prior to the 1989-90 year of income to the corresponding changes made to section 79E (see notes on paragraph (a) of clause 11).

Paragraph (b) of clause 12 will omit subsection 80(3), which defines the term "net exempt income". In its place, a new subsection 80(3) will be inserted, which defines the term "exempt income" and includes a definition of "net exempt income" in the same terms as the existing definition of "net exempt income".

The definition of the term exempt income, used in the definition of net exempt income, will ensure that amounts which is exempt by virtue of any of sections 23AH (certain foreign branch profits of Australian companies), 23AI (amount paid out of previously attributed CFC income or 23AJ (certain non-portfolio dividends from foreign companies), or is excluded from assessable income under either of paragraphs 99B(2)(d) or (e) (previously attributed trust income) will not be taken into account in the calculation of the loss incurred prior to in the 1989-90 year of income - that is, a loss incurred in a year of income will not be reduced by any of these categories of exempt income.

Paragraph (c) of clause 12 is a drafting device which ensures that the meaning of "class of income" and "foreign source" are preserved to the extent that those terms apply for the purposes of section 80 of the Principal Act.

Clause 13: Film losses of pre-1990 years of income

Clause 13 will amend section 80AAA of the Principal Act which provides for the calculation of a film loss incurred in a year of income and its deductibility in a later year of income.

The amendment of section 80AAA by clause 13 will have the same effect in relation to film losses as the amendment of section 80 by paragraph (b) of clause 12 has in relation to section 80 losses - see notes on that paragraph.

Clause 14: Primary production losses of pre-1990 years of income

Clause 14 will amend section 80AA of the Principal Act which provides for the calculation of a primary production loss prior to the 1989-90 year of income. The amendment of section 80AA will have the same effect in relation to primary production losses as the amendment of section 80 by paragraph (b) of clause 12 has in relation to section 80 losses - see notes on that paragraph.

Clause 15: Transfer of loss within company group

Clause 15 will amend section 80G of the Principal Act which, broadly, provides for a loss incurred in a year of income, or in a previous year of income, by a resident company to be transferred to another resident company in the same corporate group. However, the loss is first to be reduced by the transferor company's "net exempt income" and also by the transferee company's "net exempt income". As is the case for losses in general - see notes on clause 11 - the transferred loss is not to be reduced by income that is exempt by virtue of sections 23AH (certain foreign branch profits of Australian companies), 23AI (amounts paid out of previously attributed CFC income) or 23AJ (certain non-portfolio dividends from foreign countries), or is excluded from assessable income under either of paragraphs 99B(2)(d) or (e) (previously attributed trust income).

This will be achieved by repealing existing subsection (19), which defines the term "net exempt income" for the purposes of section 80G and substituting a new subsection (19). The new subsection will define "exempt income" and "net exempt income" to have the same meaning as in section 80 - see notes on clause 12.

Clause 16: Receipt of trust income not previously subject to tax

Clause 16 will amend section 99B of the Principal Act by adding paragraphs (d) and (e) to subsection (2), and inserting subsection (3) to define the term "company" as used in paragraphs (d) and (e).

In broad terms, section 99B includes in the assessable income of a beneficiary of a trust estate an amount, being property of the trust estate, that is paid to, or applied for the benefit of, the beneficiary except to the extent that the amount represents:

·
corpus of the trust estate; or
·
amounts that would not have been assessable income in the hands of a resident taxpayer; or
·
amounts that are otherwise liable to tax in the hands of the beneficiary or that are taxed to the trustee.

New Paragraph 99B(2)(d), being inserted by paragraph (b) of clause 16, will have the effect that a distribution made by a trust estate will not be included in the assessable income of the recipient to the extent that the distribution represents an amount of attributable income of a non-resident trust estate that has been included in the assessable income of any resident taxpayer, other than a company, under section 102AAZD (which is to be inserted in the Principal Act by clause 18).

Paragraph 99B(2)(e), also being inserted by paragraph (b) of clause 16, limits the exemption for distributions out of trust income that had previously been attributed to a resident company to distributions that are made to the same company. This treatment is necessary to ensure that a shareholder in such a company is not able to obtain a double benefit in the form of:

·
dividends paid out of untaxed income that are franked by virtue of the tax paid on the attributed trust income; and
·
an exempt distribution out of that trust income.

Subsection 99B(3), being inserted by paragraph (c) of clause 16, defines the term "company" to mean a company (as defined in subsection 6(1) of the Principal Act) other than a company in the capacity of a trustee.

Clause 17: Revocable trusts

Section 102 of the Principal Act, in broad terms, authorises the Commissioner to tax the trustee of a trust estate on trust income where a settlor has transferred property to a revocable trust, to a trust in which the settlor retains specified interests or to a trust that accumulates income for the settlor's minor children.

Clause 17 will amend subsection 102(2B) of the Principal Act with the effect that the amount in respect of which the trustee is liable to be assessed under section 102 will not include so much of the net income of the trust estate as represents an amount that has been included under section 102AAZD (which is to be inserted in the Principal Act by clause 18) in the assessable income of a person who transferred property or services to that trust paragraph (b)).

Paragraph (a) - which has the effect that the amount in respect of which the trustee is liable to be assessed under section 102 will not include so much of the net income as is attributable to a period when the person who created the trust was not a resident and is also attributable to sources out of Australia - repeats an exclusion already provided for in subsection 102(2B).

Clause 18: Division 6AAA - Special Provisions relating to Non-resident Trust Estates etc.

Clause 18 will insert a new Division - Division 6AAA - in Part III of the Principal Act by which the income of certain non-resident trust estates is to be attributed to Australian residents.

The new arrangements for taxing income of non-resident trusts are broadly described in the main features section of these notes. A brief outline of the existing law and of the structure of new Division 6AAA is given below to assist understanding of the subsequent explanation of each proposed section.

The present law

The existing provisions of the Principal Act that deal with the taxation of the income of a non-resident trust estate are, in broad terms, the same as those for a resident trust estate. Where a resident beneficiary who is not under a legal disability is presently entitled to any income of a non-resident trust estate, that income is included in the beneficiary's assessable income (section 97). (Also, under section 97, where a non-resident beneficiary who is not under a legal disability is presently entitled to any Australian source income of a non-resident trust estate, that income is included in the beneficiary's assessable income.) If the resident beneficiary is under a legal disability, the trust income to which the beneficiary is presently entitled is assessed to the trustee on the beneficiary's behalf (section 98).

Where the non-resident trust estate derives income to which no beneficiary is presently entitled (broadly, accumulating income), only so much of that income that has an Australian source is taxed to the non-resident trustee (sections 99 and 99A). Accumulating foreign sourced income of the non-resident trust estate is subject to tax in the hands of a resident beneficiary only if and when it is paid to or applied for the benefit of that beneficiary (section 99B).

Structure of Division 6AAA

Division 6AAA is divided into four Subdivisions.

Subdivision A
section 102AAA: sets out the object of the Division.
section 102AAB: defines terms used in the Division.
section 102AAC: ensures that each listed country and each unlisted country is to be treated as a separate foreign country.
section 102AAD: states the meaning of the term "subject to tax".
section 102AAE: establishes rules for determining whether a particular non-resident trust estate is a listed country trust estate.
section 102AAF: describes a trust estate that is a public unit trust.
section 102AAG: sets out the situations in which an entity is to be taken to be in a position to control a trust estate.
section 102AAH: describes a trust estate that is a non-resident family trust.
section 102AAJ: clarifies the expression "transfer of property or services".
section 102AAK: deems certain transfers to be transfers of property or services to a trust estate by an entity.
section 102AAL: excludes from the scope of this Division certain transfers made by trustees of deceased estates.
Subdivision B
section 102AAM: contains rules for the calculation of the interest payable on distributions from certain non-resident trust estates. The interest is to be imposed by a separate Act (see the Taxation (Interest on Non-resident Trust Distributions) Bill 1990).
Subdivision C
section 102AAN: relates to the taxation at a concessional rate of distributions made by certain non-resident trust estates that were in existence on 12 April 1989 and are wound up.
section 102AAP: deems certain trust distributions to which section 101 applies to be distributions to which section 99B is to apply.
section 102AAQ: provides that the accruals system of taxation is not to apply to certain trusts that are wound up before 30 June 1991.
section 102AAR: describes the circumstances in which a trust estate is to be treated as completely wound up.
Subdivision D
section 102AAS: sets out the object of Subdivision D which provides the mechanisms for the accruals system of taxation of certain non-resident trust estates.
section 102AAT: identifies an attributable taxpayer to whom certain income of a non-resident trust estate will be attributed.
section 102AAU: sets out rules for the computation of the attributable income of a non-resident trust estate.
section 102AAV: specifies that the Income Tax (International Agreements) Act 1953 is to be disregarded in calculating the attributable income of a non-resident trust estate.
section 102AAW: stipulates that certain provisions of the Principal Act are to be disregarded in calculating the attributable income of a non-resident trust estate.
section 102AAX: sets out the requirement that, in calculating the attributable income of a trust estate, income and expenses are to be expressed in Australian currency.
section 102AAY: provides for the modified application of certain provisions of the Principal Act that deal with the valuation of trading stock when calculating the attributable income of a trust estate.
section 102AAZ: provides for the modified application of the provisions of the Principal Act that deal with the grant of deductions for depreciation and certain other capital allowances when calculating the attributable income of a trust estate.
section 102AAZA: deals with the modifications to be made to the transfer pricing provisions of the Principal Act when calculating the attributable income of a non-resident trust estate.
section 102AAZB: sets out the modifications to be made in applying the capital gains provisions of the Principal Act in computing the attributable income of a non-resident trust estate.
section 102AAZC: denies a deduction for losses incurred by a trust estate in income years prior to 1990-91 in computing the attributable income of the trust estate.
section 102AAZD: includes in the assessable income of an attributable taxpayer certain income of a non-resident trust estate - the accruals system of taxation.
section 102AAZE: specifies that the accruals system of taxation does not apply to small amounts derived by a listed country trust estate.
section 102AAZF: ensures that only resident persons are liable to be assessed as a result of the attribution of the income of certain non-resident trust estates under the accruals system of taxation.
section 102AAZG: relates to the keeping of records in relation to the operation of Division 6AAA.

Subdivision A - Preliminary

Section 102AAA: Object of Division

Section 102AAA provides that the object of Division 6AAA is to provide the rules relating to:

·
the payment by resident taxpayers of interest on distributions that are made by certain non-resident trust estates (paragraph (a));
·
the winding up of certain non-resident trust estates that were in existence on 12 April 1989 (paragraph (b)); and
·
the accruals system of taxation of certain non-resident trust estates (paragraph (c)).

These rules are contained respectively in:

·
Subdivision B - section 102AAM;
·
Subdivision C - sections 102AAN to 102AAR; and
·
Subdivision D - sections 102AAS to 102AAZG.

Section 102AAB: Interpretation

Section 102AAB defines the following terms, each of which is to have the given meaning unless the contrary intention appears.

"1 July 1990 net worth" is defined in relation to a trust estate to mean the amount by which the market value of the assets of the trust estate exceeded the liabilities of the trust estate at the beginning of 1 July 1990.
"accounts" is to have the same meaning as in Part X - see notes on section 317.
"actual transfer", in relation to a transfer of property or services to a trust estate, means a transfer actually made by an entity to the trust estate. Transfers that, by subsection 102AAK(1), (2), (5), (6), (8) (10) or (11) are deemed to have been made by an entity other than the entity that actually made the transfer of property or services, are excluded from the definition of "actual transfer".
"approved form" means the form approved in writing by the Commissioner for the purposes of the provision in which this term appears. The term "approved form" is used in subsections 102AAZD(3) and 102AAZD(7).
"arm's length amount" is defined to mean, in relation to an actual transfer of property or services to a non-resident trust, 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 in relation to the transfer.
"associate" is to have the same meaning as in Part X (see notes on section 318).
"attributable income", when used in relation to a trust estate, is to have the meaning given by section 102AAU - see notes on that section.
"attributable taxpayer" is to have the meaning given by section 102AAT - see notes on that section.
"attribution account payment" is to have the same meaning as in Part X - see notes on section 365.
"attribution debit" is to have the same meaning as in Part X - see notes on section 372.
"Australian entity" is to have the same meaning as in Part X - see notes on section 336.
"Australian trust" is to have the same meaning as in Part X - see notes on section 338.
"basic statutory interest rate" is defined to mean, in relation to a year of income, the interest rate applicable for the purposes of section 10 of the Taxation (Interest on Overpayments) Act 1983 for that year of income. If more than one rate were to apply in a year of income, each of the rates is taken to be a basic statutory interest rate. The term is relevant to the definition of the term "weighted statutory interest rate" which is explained later in the notes on this section.
"CFC" is to have the same meaning as in Part X - see notes on section 340.
"controlled foreign trust" is to have the same meaning as in Part X - see notes on section 342.
"corporate unit trust", in relation to a year of income, means a unit trust that is a corporate unit trust as defined in Division 6B of Part III of the Principal Act. Corporate unit trusts, which are generally formed as part of a company reorganisation, are treated as though they are companies for tax purposes.
"de facto marriage" is defined to mean a relationship between two persons who, although not legally married to each other, live with each other on a bona fide basis as husband and wife.
"depreciation provision" is to have the same meaning as in Part X - see notes on section 317.
"designated concession income" is to have the same meaning as in Part X - see notes on section 317.
"discretionary trust estate" means a trust estate in respect of which:

·
a person (who may include the trustee) has a power of appointment or other discretion, and the exercise or the failure to exercise the power or discretion has the effect of determining, to any extent, the persons who may benefit under the trust and/or how beneficiaries are to benefit under the trust (paragraph (a)); or
·
one or more of the beneficiaries under the trust have a contingent or defeasible interest in some or all of the corpus or income of the trust estate (paragraph (b)); or
·
the trustee of another trust estate that satisfies both of the conditions in paragraph (a) benefits, or is capable of benefiting (paragraph (c)).

"eligible designated concession income" is to have the same meaning as in Part X - see notes on section 317.
"entity" is defined to mean:

·
a company (paragraph (a));
·
a partnership (paragraph (b));
·
a person in the capacity of a trustee (paragraph (c)); or
·
any other person (paragraph (d)).

"exempt income", in relation to a trust estate, is to have the same meaning as in subsection 95(1) in Division 6 of Part III of the Principal Act, that is, the exempt income of the trust estate calculated as if the trustee were a taxpayer who was a resident.
"IP time" is the time of release of the Information Paper "Taxation of Foreign Source Income" - 7.30 pm by standard time in the Australian Capital Territory, on 12 April 1989.
"listed country" is to have the same meaning as in Part X - see notes on section 320.
"listed country trust estate" is to have the meaning given by section 102AAE - see notes on that section.
"net income" in relation to a corporate unit trust, a public trading trust (each of which are terms defined in this section), or any other trust estate is to have the meaning given to that expression in Division 6B, Division 6C and Division 6 respectively of the Principal Act. In each of those Divisions, net income is defined to mean the total assessable income of the trust estate calculated under the Principal Act as if the trustee were a resident, less all allowable deductions other than certain specified deductions.
"non-attributable year of income" in relation to a trust estate, means a year of income of the trust estate in which it was a non-resident and where no amount calculated by reference to the attributable income of that year is included in the assessable income of any taxpayer under subsection 102AAZD(1).
"non-discretionary trust estate" is defined by reference to the definition explained earlier of "discretionary trust estate" - any trust estate that is not a discretionary trust estate will be a non-discretionary trust estate.
"non-resident family trust" is to have the meaning given by section 102AAH - see notes on that section.
"non-resident trust estate" is defined by reference to the later definition of "resident trust estate" - any trust estate that is not a resident trust estate will be a non-resident trust estate.
"non-resident year of income", in relation to a trust estate, means a year of income in relation to which the trust estate is not a resident trust estate (also a defined term).
"pre-frankinq rebate tax" means the tax that would be payable by a taxpayer in respect of the income of a year of income if the taxpayer was not entitled to a rebate of tax under the imputation arrangements contained in Part IIIAA of the Principal Act in respect of dividends received from a resident company or on distributions from a corporate unit trust or a public trading trust. This would be the tax payable after the grant of all rebates other than the rebate under Part IIIAA of the Principal Act but before the offset of credits against the tax payable. The concept of pre-franking rebate tax is relevant to subsection 102AAM(6) which provides an upper limit to the total amount payable as income tax and interest charge on certain trust distributions.
"profits" is defined as a drafting aid to include gains whether of an income or capital nature.
"property" is defined to include money.
"public trading trust" is defined in relation to a year of income to mean a unit trust that is a public trading trust within the meaning of Division 6C of Part III of the Principal Act which treats certain public unit trusts carrying on trading businesses in the same way as companies for tax purposes.
"public unit trust" is to have the meaning given by section 102AAF - see notes on that section.
"resident trust estate" is defined, in relation to a year of income, to mean:

·
a resident trust estate within the meaning of Division 6 of Part III of the Principal Act - that is, a trust estate in respect of which a trustee was a resident at any time during the year of income, or having its central management and control in Australia at any time during the year of income (paragraph (a));
·
a corporate unit trust or a public trading trust which are also defined in this subsection by reference to the meanings of those terms respectively in Division 6B and Division 6C of Part III of the Principal Act - that is, broadly, certain public unit trusts that are treated for tax purposes in the same way as companies (paragraph (b)); and
·
an eligible entity within the meaning of Part IX of the Principal Act - that is, superannuation funds, approved deposit funds and pooled superannuation trusts (paragraph (c)).

"scheme" is defined in wide terms to include any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not legally enforceable or intended to be legally enforceable (paragraph (a)). Any scheme, plan, proposal, action, course of action or course of conduct whether there are two or more parties or only one party involved is also to be treated as a scheme (paragraph (b)).
"services" is defined in very broad terms to include 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 (subparagraph (a)(i));
· .
the provision of entertainment, recreation or instruction or the use of facilities for entertainment, recreation or instruction (subparagraph (a)(ii)); or
· .
the conferring of benefits., rights or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar exaction (subparagraph (a)(iii));

·
under a contract of insurance, including life assurance (paragraph (b)); or
·
under an arrangement for, or in relation to, the lending of money (paragraph (c)).

"spouse" is defined in relation to a person to include another person who, although not legally married to the person, lives with the person on a bona fide basis as the husband or wife of the person.
"subject to tax" is to have the same meaning as in Part X - see notes on section 324.
"tax accounting period" is to have the same meaning as in Part X - see notes on section 317.
"tax law", in relation to a listed country or an unlisted country, is to have the same meaning as in Part X - see notes on section 317.
"transfer" is defined in a broad sense to include a disposal of property whether by assignment, creation of a trust or in any other manner or the provision of property (paragraph (a)). In relation to the transfer of services, the term transfer is defined to include allow, confer, give, grant, perform or provide (paragraph (b)).
"trust estate" is used in this Division to refer to the trust estate or the trustee of the trust estate as the circumstances require.
"underlying transfer" refers to the actual transfer of property or services to a trust estate. In section 102AAK, a distinction is made between the entity that actually transferred property or services to a trust estate and an entity that is deemed under that section to have made a transfer that was actually made by another entity. The concept of an underlying transfer is used to identify the actual transfer.
"underlying transferor" means the entity that made the underlying transfer of property or services to a trust estate.
"weighted statutory interest rate" is defined in relation to a year of income. It is the basic statutory interest rate (a defined term) in relation to the income year if there is only one such rate for that year (paragraph (a)). If there are two or more basic statutory interest rates for the income year, the weighted statutory interest rate for that year is the weighted average of the interest rates for that year (paragraph (b)). In computing the weighted average rate, the interest rate that is applicable to any particular part of the year is weighted by the number of days in that year for which the rate applied.
The weighted statutory interest rate is used for the calculation of the amount to be included in the assessable income of a transferor of property or services to a trust estate under subsection 102AAZD(4).

Section 102AAC: Each listed country and unlisted country to be treated as a separate foreign country

Section 102AAC provides that, for the purposes of Division 6AAA, each listed and unlisted country is to be treated as a separate foreign country. The terms "listed country" and "unlisted country" have the same meaning as in Part X (see notes on section 320). The purpose of this section is to enable parts of a country, which may be listed separately in the proposed regulations, to be treated as separate countries. References in this Division to a country will therefore include a part of a country that is listed separately or not listed at all.

Section 102AAD: "Subject to tax" - application of subsection 324(2)

Section 102AAD will permit regulations to be made for the purposes of Division 6AAA of the Principal Act, or one or more specified provisions of this Division, in a similar way to which regulations may be made for the purposes of the provisions of Part X of the Principal Act - see notes on clauses relating to subsection 324(2). Broadly, regulations made by virtue of this section would in certain circumstances, have the effect of deeming an item of income or profits derived by a trust estate to be "subject to tax".

Section 102AAE: Listed country trust estates

By virtue of subsection 95(2) of the Principal Act, a trust estate is a resident trust estate in relation to a year of income if a trustee of the trust estate is a resident at any time during the year of income or if the central management and control of the trust is in Australia at any time during the year of income. It is not necessary for the purposes of the existing Act to determine the particular country of residence of a non-resident trust estate. However, the treatment of a non-resident trust estate under the transferor tax measures turns on whether the trust is a resident of a listed country or an unlisted country - see notes on section 102AAU. Accordingly, section 102AAE provides rules for determining whether a particular non-resident trust estate is a listed country trust estate - that is, a trust estate that is a resident of a listed country.

In broad terms, a trust estate will be a listed country trust estate in relation to a transferor's year of income if all of the income of the trust estate - other than designated concession income - is taxed on a current basis by one or more listed countries, or in Australia, in the hands of the trustee or a beneficiary.

Subsection 102AAE(1) provides that a trust estate is to be taken to be a listed country trust estate in relation to a year of income if all of the income of that trust estate is subject to tax (a defined term) in a listed country in a tax accounting period (also a defined term) of the trust estate that ends before the end of the year of income or commences during the year of income or is designated concession income in relation to any listed country (paragraph (a)).

A trust estate is also to be taken to be a listed country trust estate in relation to a year of income if, within a tax accounting period that ends before the last day of the year of income or that commences in the year of income, parts of the income and profits of the trust estate are subject to tax in different listed countries such that all of the income and profits of the trust estate are subject to tax in listed countries or is designated concession income (paragraph (b)).

Subsection 102AAE(2) provides that a particular part of an item of income or profit (the "item part") derived by the trust estate is to be treated as if it were subject to tax in a listed country in a tax accounting period ending before the end of the year of income if the item part is included - or would be so included but for an exemption provided by section 23 of the Principal Act - in the assessable income of the trust estate, and either of the following conditions is satisfied:

·
the trustee is liable to tax under section 98, 99 or 99A in respect of the share of the net income of the trust estate that is attributable to the item part (paragraph (2)(a)), or
·
an amount is included in the assessable income of another taxpayer (the 'actual taxpayer') of the trust's year of income or the following year of income under subsection 92(1) or under sections 97, 98A or 100 (subparagraph (b)(i)), and:

· .
the actual taxpayer falls within one of the categories of taxpayers specified in sub-subparagraphs (b)(ii)(A) to (E), and
· .
the whole or a part of the amount so included in the actual taxpayer's assessable income, or the whole or a part of the part or share of the net income of the trust estate, as the case may be, is attributable to the item part, either directly or through one or more interposed partnerships or trusts (subparagraphs (b) (iii) and (iv)).

Subsection (3) provides that where a part of a particular item of income or profits would be treated as subject to tax in a listed country in a particular tax accounting period if that part is a separate item of income or profits, that part is to be taken to be subject to tax in a listed country.

Section 102AAF: Public unit trusts

By virtue of sub-subparagraph 102AAT(1)(a)(i)(B), the accruals measures will not apply in relation to arm's length transfers to non-resident public unit trusts. Section 102AAF specifies the circumstances in which a unit trust will be regarded as being a "public unit trust" for the purposes of this Division.

Subsection 102AAF(1) specifies the basic criteria for determining whether a unit trust is to be regarded as a public unit trust at all times during a year of income. By paragraph (1)(a), a unit trust will be a public unit trust if, at any time during the year, any of the units in the unit trust were listed on a stock exchange in Australia or elsewhere (subparagraph (a)(i)) or were offered to the public (subparagraph (a)(ii)). By paragraph (1)(b), a unit trust will be a public unit trust if, at all times during the year, the units in the unit trust were held by 50 or more persons.

Section 102G of the Principal Act also deals with public unit trusts. Subsections 102G(2) to (8) and (10) contain the necessary safeguarding provisions to ensure that a unit trust that is intended to fall within the scope of section 102G cannot escape tax by arranging to be put beyond the tests for determining whether a unit trust is to be regarded as a public unit trust. Subsection 102AAF(2) effectively modifies subsections 102G(2) to (8) and (10) of the Principal Act so that these safeguarding provisions may also have application in determining whether a unit trust is a public unit trust for the purposes of this Division (paragraphs (2)(a) to (c)).

Subsection 102AAF(3) sets out certain considerations that have to be taken into account in determining whether a unit trust (referred to as the "first unit trust") is a public unit trust at all times during a year of income.

By paragraph (3)(a) an entity and its associate or associates are to be taken to be one person. The term "associate" is defined in section 102AAB to have the same meaning as in Part X (see notes on section 318).

Paragraph (3)(b) provides that where units in the first unit trust are held by the trustee of another trust that, disregarding this paragraph, is a public unit trust at all times during the year of income, a person who has a beneficial interest in the property of that other trust that consists of those units is taken to hold those units.

Paragraph (3)(c) deals with the case where units in the first unit trust are held by a trustee of another trust that is a public unit trust at all times during the year of income (whether as a consequence of disregarding or applying paragraph (b)). It provides that a person who has a beneficial interest in the property of that other trust consists of those units is taken to hold those units.

Section 102AAG: When entity is in a position to control a trust estate

Section 102AAG sets out the circumstances in which an entity is to be taken to be in a position to control a trust estate. The concept of control is relevant to sub-subparagraph 102AAT(1)(a)(i)(F) which has the effect that a taxpayer will not be subject to attribution in respect of a non-discretionary trust that was in existence on 12 April 1989 if the taxpayer was not in a position to control the trust at any time between 12 April 1989 and the end of the current year of income. The concept of control of a trust is also relevant in relation to sub-subparagraph (1)(a)(i)(E) and paragraph (1)(c).

An entity is to be taken to be in a position to control a trust estate if a group (defined in subsection (2)) in relation to the entity:

·
had the power, by whatever means, to obtain the beneficial enjoyment of the corpus or income of the trust estate (paragraph (1)(a)); or
·
was able to control, directly or indirectly, the application of the income or corpus of the trust estate (paragraph (1)(b)); or
·
was capable, under a scheme (a defined term) of gaining the enjoyment or control referred to in paragraph (a) or (b) (paragraph (1)(c)); or
·
was in a position such that the trustee of the trust estate was accustomed or under a formal or informal obligation, or might reasonably be expected to act in accordance with the directions, instructions or wishes of a group in relation to the entity (paragraph (1)(d)); or
·
had the ability to remove or appoint the trustee or any of the trustees of the trust estate (paragraph (1)(e)).

Whether the trustee of a trust estate was accustomed or might reasonably be expected to act in accordance with the directions, instructions or wishes of a group is to be determined having regard to all the circumstances of the case. For example, the mere presence in the trust deed of a requirement that the trustee should have no regard to such directions, instructions or wishes would not pre-empt the examination of the actual circumstances to determine whether the group controls the trustee. The way in which the trustee has acted in the past, the relationship between the group and the trustee and the amount of property or services transferred to the trust are some of the other matters that are relevant in this regard.

Subsection 102AAG(2) explains what is meant by the expression "group in relation to an entity" used in subsection (1). That expression means the entity acting alone (paragraph (2)(a)), an associate of the entity acting alone (paragraph (2)(b)), the entity and one or more associates acting together (paragraph (2)(c)) or two or more associates of the entity acting together (paragraph (2)(d)). An entity will therefore be in a position to control a trust estate if the entity and/or one or more associates of the entity satisfied one of the tests for control specified in paragraphs (1)(a) to (e).

Section 120AAH: Non-resident family trusts

Section 102AAH defines a "non-resident family trust" in relation to a natural person. By virtue of paragraph 102AAT(1)(b), a natural person will not be an attributable taxpayer in relation to a non-resident family trust if the conditions set out in that paragraph are satisfied.

Subsection 102AAH(1) provides that a trust estate will be a non-resident family trust in relation to a natural person at a particular time if it is a post-marital family trust in relation to that person, or a family relief trust in relation to that person, at that time (paragraph (1)(a)). In either case, the trust must be one that is constituted by a deed of trust or other instrument or under an order or declaration of a court (paragraph (1)(b)).

Subsection 102AAH(2) sets out the requirements that have to be met for a non-resident trust estate to qualify as a post-marital family trust in relation to a natural person at a particular time. The first set of conditions relates to the creation of the trust (paragraph (2)(a)). A trust that was created pursuant to a decree or order of dissolution or annulment of marriage that has effect in Australia, or is recognised as valid in Australia, because of the Family Law Act 1975, will satisfy the condition relating to the creation of the trust (sub-subparagraph (a)(i)(A)).

That condition will also be satisfied where the trust was created pursuant to a decree or order of judicial separation or a similar decree or order (sub-subparagraph (a)(i)(B)) or where the trust was created in consequence of the breakdown of a de facto marriage (subparagraph (a)(ii)).

The second set of conditions relates to the category or categories of persons who benefit, or are capable of benefiting, under the trust (paragraph (2)(b)). These persons are referred to as the "primary potential beneficiaries". A non-resident trust estate will qualify as a post-marital family trust in relation to a natural person at a particular time only where the persons who benefit, or are capable of benefiting, under the trust are natural persons who are:

·
non-residents at that time (subparagraph (b)(i)); and
·
within the following categories of persons:

· .
the spouse or former spouse of the natural person;
· .
a child of the natural person;
· .
a child of the former spouse of the natural person who was such a child at the time when the former spouse was a spouse of the natural person; or
· .
a child of the spouse of the natural person.

Subsection 102AAH(3) sets out the requirements that have to be met for a non-resident trust estate to qualify as a family relief trust in relation to a natural person at a particular time. The first of these requirements is that the only persons who benefit, or are capable of benefiting, under the trust are natural persons who are identified by name in the trust deed or instrument or in the court order or declaration constituting the trust (subparagraph (3)(a)(i)), are non-residents at that time (subparagraph (a)(ii)) and fall within the categories of persons referred to in subparagraph (a)(iii). These persons are referred to as "primary potential beneficiaries".

A person will be capable of benefiting from a trust estate if the trustee or any other person could appoint that person as a beneficiary of the trust, or if that person could in whatever manner, directly or indirectly through interposed entities, benefit from that trust.

Subparagraph (a)(iii) lists the following categories of relatives:

·
the spouse or former spouse of the natural person;
·
a parent of the natural person or of the natural person's spouse or former spouse;
·
a child of the natural person or of the natural person's spouse or former spouse;
·
a grandparent of the natural person;
·
a grandchild of the natural person;
·
a brother or sister of the natural person or of the natural person's spouse or former spouse; and
·
a child of a brother or sister mentioned in item (F).

Paragraph (3)(b) sets out the second of the requirements, that the trust should be one that was established for the relief of persons who are in necessitous circumstances and is operated for that purpose.

The third requirement is that the trust should satisfy one of the three conditions set out in paragraph (3)(c) at the time that it is tested (referred to as the test time) to determine whether it qualifies as a non-resident family trust. These conditions are that:

·
at the test time, the assets of the trust are not excessive taking into account the requirements or likely requirements of the primary potential beneficiaries (subparagraph (c)(i));
·
no transfers of property or services were made to the trust estate during the period commencing at the IP time (12 April 1989) and ending at the test time (subparagraph (c)(ii)); or
·
at each time of transfer of property or services to the trust estate from 12 April 1989 to the end of the test time, the assets of the trust were not excessive having regard to the requirements, or likely requirements, of the beneficiaries at the time of the transfer.

Subsection 102AAH(4) provides that subsection (1) does not prevent a trust estate from being a non-resident family trust in relation to a natural person at a particular time if one or more natural persons, who are non-residents at that time and are children of a particular primary potential beneficiary, would benefit or be capable of benefiting under the trust in the event of the death of that beneficiary.

Similarly, subsection 102AAH(5) provides that subsections (1) and (4) do not prevent a trust estate from being a non-resident family trust in relation to a natural person at a particular time if, in the event of the death of all of the primary and secondary potential beneficiaries, one or more funds, authorities or institutions referred to in paragraph 78(1)(a) (the "gift provisions") of the Principal Act would benefit or be capable of benefiting under the trust.

Subsection (6) deals with the case where some of the secondary potential beneficiaries hold reversionary interests in the trust at a time before the death of the primary potential beneficiaries. It provides that, an entity that holds an interest or a right to benefit under a trust that is dependent on the death of a natural person is to be taken to be an entity that has the type of interest referred to in subsection (4) with the result the trust would not fail to qualify as a non-resident family trust.

Subsection 102AAH(7) provides that a reference in this section to a natural person does not include a reference to a natural person in the capacity of a trustee.

Section 102AAJ: Transfer of property or services

Section 102AAJ clarifies the meaning of the expression "transfer of property or services" in relation to the application of Division 6AAA, as well as the meaning of certain other associated expressions.

Subsection 102AAJ(1) makes it clear that the expression transfer of property or services to a trust estate" applies not only to trust estates that were in existence at the time of the transfer but also to trust estates that came into existence because of the transfer.

Subsection 102AAJ(2) provides that where an entity acquires a property that did not previously exist the property is taken to have existed immediately before the acquisition and to have been transferred by the entity who created the property.

Subsection 102AAJ(3) provides that property or services that have been applied for the benefit of an entity, as well as property or services that have been applied as directed by an entity, are to be taken to have been transferred to that entity. For example, a person would be treated as having transferred money to an entity if, at the direction of that entity, that money had been paid to a third party whether or not the entity benefits from the payment to the third party.

Subsection 102AAJ(4) makes it clear that, for the purposes of subsection (3), a person who fully or partly pays a debt due by another person is to be taken to have applied money or other property for the benefit of that other person. It follows that such a payment for the benefit of a trustee of a trust estate would be a transfer of money or property for the purposes of the transferor tax measures.

Subsection 102AAJ(5) ensures that the transferor tax measures will apply in relation to transfers made before Division 6AAA commences - that is, by virtue of clause 2, the day on which the amending Act receives the Royal Assent.

Subsection 102AAJ(6) provides that a reference to a transfer of property or services made before the IP time includes a reference to a transfer made at the IP time.

Section 102AAK: Deemed transfers of property or services to trust estate

Section 102AAK deems certain transfers of property or services made to an entity other than a trust estate to have been made to a trust estate. It also deems an entity, in specified circumstances, to have transferred property or services to a trust estate where another entity has in fact effected the transfer.

Subsection 102AAK(1) deals with the case where one entity (referred to in the subsection as the "prime entity") causes another to transfer property or services to a trust estate. An example of such a transfer would be a back to back arrangement under which an entity transferred property to another on condition that the other entity would transfer property to a trust estate. In this event, the first entity would be deemed to have transferred to the trust estate the property transferred by the other entity.

Subsection 102AAK(2) deals with arrangements for the marketing of units of a unit trust whereby the trustee of a unit trust issues units in the trust to an entity (referred to as the "first entity") that acts as a manager, underwriter or dealer in relation to the market placement of the units (paragraph (2)(a)). It would ordinarily be the case that the first entity would transfer property or services (referred to as the "original property or services") to the trust estate for the purpose of acquiring those units. Where the first entity disposes of units to another entity (referred to as the second entity) and the second entity transfers property or services to the first entity for the acquisition of the units, the second entity is taken to have transferred to the trust estate the original property or services transferred to the trust estate by the first entity (paragraphs (2)(b), (c) and (d)).

Subsection 102AAK(3) provides that a reference in subsection (2) to a unit of a unit trust is a reference to an interest, however described, in any of the income or property of the trust estate.

Subsection 102AAK(4)) provides that the provisions of subsection (1) and (2) shall not affect the operation of subsection (5).

Subsection 102AAK(5) is a safeguarding provision that will operate in relation to a "scheme" (a defined term) entered into by a taxpayer whereby the taxpayer transfers property or services to an entity and that entity or any other entity transfers property or services to a trust estate. This subsection would enable the Commissioner to treat the first entity as having transferred the whole or a part of the property or services to the trust estate and would have effect whether or not the transfer of property or services effected by the taxpayer precedes the transfer of property or services to the trust estate.

Subsection 102AAK(6) deals with the case where a partnership transfers property or services to a trust estate other than where the partnership is deemed to have transferred property or services to a trust estate by virtue of subsections (8),(10) and (11). In this event, each partner of the partnership is taken to have transferred property to the trust estate at the time the transfer was made by the partnership (paragraph (6)(a)). The market value of the property or services treated as transferred by a particular partner is calculated in proportion to the partner's interest in the partnership (paragraph (6)(b)). The partner's interest is measured as the higher of the percentage interest of the partner in the profits of the partnership (subparagraph (b)(i)) or the percentage interest in the property of the partnership (subparagraph (b)(ii)) at the time of the transfer.

Subsection 102AAK(7)) ensures that, where a partnership has transferred property or services to a trust estate, the partnership is treated as having made the transfer notwithstanding that subsection (6) treats each partner as having transferred a proportion of the property or services. However, subsection 102AAT(2) has the effect that a partner will not be an attributable taxpayer in relation to a year of income in respect of which the partnership is also an attributable taxpayer. The practical effect is that a partner in a partnership will only be an attributable taxpayer in relation to a transfer made to a trust estate by the partnership if the partnership is dissolved and the trust estate continues in existence.

Subsection 102AAK(8) deals with the case where a trustee of a trust estate (the "transferor trust estate" transfers property or services to another trust estate (the "transferee trust estate") at a particular time (paragraph (8)(a)) and, at that time, the transferor trust estate was an Australian trust or a controlled foreign trust (paragraph (8)(b)). (By virtue of section 102AAB, the terms "Australian trust" and "controlled foreign trust" have the same meaning as in Part X - see notes on sections 338 and 342 respectively.) Subsection (8) does not apply in the case of a transfer deemed to have been made by a trustee by virtue of subsection (6) (that is, as a partner in a partnership) or by virtue of the application of subsection (10) or (11).

If the transferor trust estate was a discretionary trust estate at the time the transfer took place (Paragraph (8)(c)) and one or more other entities had transferred property or services to the transferor trust estate at or before that time (paragraph (8)(d)), each of those entities is to be treated as having effected the transfer that was made by the transferor trust estate. The other entities that transferred property or services to the transferor trust estate could include the trustee of the transferor trust estate acting in another capacity.

Subsection 102AAK(9) operates in a similar manner in relation to trust estates as subsection 102AAK(7) operates in relation to partnerships. That is, a trust estate that has transferred property or services to another trust estate is to be treated as having made the transfer notwithstanding that other persons are taken to have transferred a proportion of the same property or services by virtue of subsection (8). However, subsection 102AAT(2) has the effect that if, in a year of income, the trust estate is treated as the transferor, no other person is to be treated as a transferor for that year of income in relation to the same transfer of property or services.

Subsection 102AAK(10) deems an entity to have transferred property or services to a trust estate where that transfer of property or services is made as a consequence of that entity being wound up or ceasing to exist.

Paragraph (10)(a) sets out the conditions that must be met in relation to the winding up of an entity for subsection (10) to have application. In the case of a company, the conditions are that a resolution is passed for the winding up of the company, an order is made for the winding up of the company or a similar event occurs (subparagraph (a)(i)). For a partnership, the condition is that the partnership ceases to exist for the purposes of the Principal Act (subparagraph (a)(ii)). In the case of a trust estate, the conditions are that the trust estate commences to be wound up or is treated as having ceased to exist for the purposes of the Principal Act (subparagraph (a)(iii)).

Paragraph (10)(b) imposes the requirement that the transfer of property or services to a trust estate is made in consequence of the entity referred to in paragraph (a) being wound up.

Where an entity meets each of the conditions in paragraphs (a) and (b), that entity is treated as having transferred to the trust estate the property or services concerned.

Subsection (10) is relevant to the operation of subsection (11) which enables the Commissioner to treat property or services that are transferred to a trust estate by a "defunct" entity to have been transferred by other entities.

Subsection 102AAK(11) will enable the Commissioner to deem an entity to have transferred property or services to a trust estate where the entity that actually transferred the property or services (referred to as the "defunct entity") is in the process of being wound up or ceases to exist. This subsection supplements subsections (6) and (8) which "look through" an entity that transferred property or services to a trust estate to the underlying entities.

Paragraph (11)(a) sets out the first set of conditions that must be met for subsection (11) to have application. Subparagraph (a)(i) specifies that the provisions relating to defunct entities apply to a company, partnership or the trustee of a trust estate. It should also be the case that the defunct entity should have transferred property or services to a trust estate (subparagraph (a)(ii)).

Paragraph (11)(a) also stipulates certain conditions relating to the winding up of the entity that effected the transfer of property or services. In relation to a company, the condition is that the company made a transfer of property or services to a trust estate and a resolution is passed for the winding up of the company, an order is made for the winding up of the company or a similar event occurs (subparagraphs (a)(i), (ii) and (iii)). For a partnership, the condition is that the partnership made the transfer and ceases to exist for the purposes of the Principal Act (subparagraphs (a)(i), (ii) and (iv)). A partnership will cease to exist for the purposes of the Principal Act if there is any change in the constitution of the partnership. Where the transfer was made by the trustee of a trust estate, subsection (11) will apply if the trust estate commences to be wound up or is treated as having ceased to exist for the purposes of the Principal Act (subparagraphs (a)(i), (ii) and (v)). In this subsection, that company, partnership or trustee is referred to as "the defunct entity".

Paragraph (11)(b) specifies the second condition - that is, that the Commissioner is satisfied that one or more entities would benefit directly or through interposed entities as a consequence of the company, partnership or trust estate being dissolved or ceasing to exist, from a transfer of property made by that company, partnership or trust estate.

It is intended that paragraph (11)(b) would be applied where, for example, a CFC that is controlled by an Australian resident transfers assets to a discretionary trust estate for the benefit of that resident and associates of that resident and is wound up. This paragraph would enable the Commissioner to treat that resident as the transferor of property to the trust estate. Similarly, if the trustee of a non-resident trust estate that has only Australian beneficiaries transfers the trust property to another non-resident discretionary trust estate and winds up the first trust estate, this paragraph would enable the Commissioner to treat the Australian beneficiaries of the non-resident discretionary trust estate as having transferred property to that trust estate.

Subsection (11) will apply only if the Commissioner is of the opinion that it is appropriate to apply the provisions of this subsection to a particular entity that would benefit as a result of a company, partnership or trust estate being dissolved or ceasing to exist (paragraph (11)(c)).

In the examples given in the notes on paragraph (b), the Commissioner would clearly be satisfied that it is appropriate to apply the provisions of this subsection to treat the Australian residents referred to in the examples as the transferors of property to the newly created trust estates.

Where the company, partnership or trust estate that transferred property to a non-resident trust estate is wound up for bona fide commercial reasons and the property was transferred on arm's length terms, the provisions of this subsection are not to be applied to treat a person other than the entity that transferred property or services to the trust estate as a transferor.

Paragraph (11)(d) has the effect that, where the conditions specified in paragraphs (a), (b) and (c) are satisfied, the assessable income of the particular entity or entities that would benefit as a result of the company, partnership or trust estate being dissolved or ceasing to exist is to be determined as though the successor entity had transferred the whole of the property or services transferred by the company, partnership or trust estate. Where the Commissioner considers it appropriate, the successor entity is to be treated as having transferred a specified part of the property or services (paragraph (11)(e)). For example, where the defunct entity had transferred property or services to a trust estate in which there are several resident beneficiaries, and subsection (11) is applied, it is intended that each of these beneficiaries would be treated as having transferred a specified part of the property or services transferred by the defunct entity. The assessable income of the successor entity is to be computed in this manner for the year of income in which the company, partnership or trust estate was dissolved or ceased to exist and for each succeeding year of income.

Section 102AAL: Division not to apply to transfers by trustees of deceased estates

Section 102AAL generally provides that the transferor tax measures are not to apply in relation to a transfer made by the trustee of the estate of a deceased person under specific directions contained in the deceased person's will or codicil (paragraph 102AAL(a)) or in an order of a court that varied or modified the provisions contained in the will or codicil (paragraph 102AAL(b)).

This exception will not apply where the transfer was made in the exercise of a power of appointment or of a discretion by the trustee or by any other person (paragraph 102AAL(c)). For example, if the trustee was provided with a discretion as to the investment of monies of the trust estate, and chose to transfer that money to a discretionary trust estate, the trustee would be a transferor of property or services to that trust estate and this section would not operate to exclude the transfer from the transferor tax measures.

Where a trustee of the estate of a deceased person transfers property or services to another trust estate, and that transfer was caused by another entity (other than the deceased person) which is treated as the transferor under subsection 102AAK(1), the transfer of property or services will attract the transferor tax measures (paragraph 102AAL(d)). In this case, the entity that caused the transfer of the property or services will be treated as the transferor.

The exception provided by this section will also not apply to a transfer of property or services made by the trustee of the estate of a deceased person as part of a scheme that attracts the operation of subsection 102AAK(5) (paragraph 102AAL(e)).

Subdivision B - Payment of Interest by Taxpayer on Distributions from Certain Non-resident Trust Estates

Section 102AAM: Payment of interest by taxpayer on distributions from certain non-resident trust estates

The purpose of section 102AAM is to set out the circumstances in which additional tax, in the nature of an interest charge, is to be imposed on certain distributions received by a resident beneficiary from a non-resident trust estate and to provide rules for calculating the amount of the interest charge. The additional tax in the nature of the interest charge is to be formally imposed by a separate Act.

Subsection 102AAM(1) is designed to identify those distributions from a non-resident trust estate that will attract the interest charge.

The interest charge will apply in relation to an amount that is included in the assessable income of a taxpayer of the 1990-91 year of income or a subsequent year of income (referred to as the "current year of income" under section 99B of the Principal Act (paragraph 102AAM(1)(a)). In broad terms, section 99B includes in the assessable income of a beneficiary of a trust estate who was a resident at any time in a year of income certain amounts, being property of a trust estate, that are paid to, or applied for the benefit of, that beneficiary in the year of income but had not previously been subject to tax in Australia either in the hands of the trustee or of the beneficiary. The effect of this paragraph and the amendment of section 99B by clause 16 will be that the interest charge will generally apply only in relation to distributions of accumulated trust income by a non-resident trust estate to a resident beneficiary where the accumulated income had not previously been subject to the transferor tax measures.

Paragraph (1)(b) identifies that part of a distribution of income and profits of a trust estate that is to be taken into account in computing the interest charge.

The interest charge will apply only in relation to a distribution made by the trust estate from the income and profits of a year of income (referred to as the "non-resident trust's year of income") in which the trust estate was a non-resident trust estate.

Where the trust estate was a listed country trust estate (defined in section 102AAE) in the non-resident trust's year of income, only distributions from the eligible designated concession income (defined in section 317) of the trust estate of that year of income will be subject to the interest charge (subparagraph (b)(i)).

Where the trust estate was not a listed country trust estate in the non-resident trust's year of income, a distribution made from so much of the income and profits of the trust estate of that year of income as has not been subject to tax in any listed country in a tax accounting period (a defined term) ending before the end of the non-resident trust's year of income or commencing during the non-resident trust's year of income will be subject to the interest charge (subparagraph (b)(ii)).

Where the conditions in paragraphs (a) and (b) are satisfied, with the result that the distribution will be subject to the interest charge, the distributed amount is referred to as "the distributed amount of the non-resident trust's year of income" (paragraph (1)(c)) and the taxpayer who receives the distribution is referred to as the "original taxpayer" in relation to that distribution (paragraph (1)(d)).

The interest charge is payable by taxpayers who are required to include in assessable income and pay tax, if any, in respect of the distribution from the non-resident trust estate. Subsections 102AAM(2), (3) and (4) identify these taxpayers and deal with the calculation of the amount in respect of which the interest charge is payable in each case.

Subsection 102AAM(2) deals with the calculation of the amount in respect of which the interest charge is payable where the original taxpayer is:

·
a company or a natural person (other than a company or a natural person in the capacity of a trustee) (paragraph (2)(a)); or
·
a corporate unit trust or a public trading trust (each of which is a defined term) (paragraphs (2)(b) and (c)); or
·
an eligible entity within the meaning of Part IX of the Principal Act (broadly, superannuation funds, approved deposit funds and pooled superannuation trusts) (paragraph (2)(d)).

The taxpayer will be liable to pay interest in respect of the distributed amount of the non-resident trust's year of income (see notes on paragraphs 102AAM(1)(c) and 102AAM(1)(d)) calculated on an amount arrived at using the formula:

((Distributed amount) * (Applicable rate of tax)) - FTC

.

The "distributed amount" is the amount included in the assessable income of the taxpayer of the year of income under section 99B in respect of which interest is to be paid. Under section 6AC of the Principal Act, this amount would be the share of the distribution made by the trust estate that is included in the taxpayer's assessable income grossed up for any foreign tax in respect of that share. Section 6AB of the Principal Act deems a beneficiary to have been personally liable for and to have paid the income tax paid by the trustee on the trust income that is included in the assessable income of the beneficiary.

The "applicable rate of tax" is the rate of tax referred to in subsection 102AAM(10) - see notes on that subsection.

The "FTC" is so much of the foreign tax credit to which the taxpayer is entitled under Division 18 as is attributable to the amount included in the taxpayer's assessable income in respect of the taxpayer's share of the distribution made by the non-resident trust.

Example 1 - Unlisted country trust estate

During the year of income 1992-93, X, a resident individual, receives a distribution of $10,000 from a non-resident trust estate that was not a listed country trust estate. Under section 99B, the entire amount is to be included in X's assessable income as the distribution was made out of $20,000 of foreign income derived by the trust in its 1990-91 income year. None of that income was subject to tax in a listed country. In that income year the trust derived foreign income of $20,000 and paid foreign tax of $5,000.

The amount on which interest is payable is the distributed amount ($10,000) grossed up by so much of the foreign tax as relates to the distributed amount ($3,333) multiplied by the applicable rate of tax (47 per cent - see notes on subsection (10)) less the foreign tax credit applicable to the distribution ($3,333), that is:

($13,333 * 47%) - $3,333 = $2934

Note: The FTC is computed 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)/($15,000) * $5,000

$ 3,333

Example 2 - Listed country trust estate

During the year of income 1992-93, X Co, a resident company, receives a distribution of $10,000 from a non-resident trust estate that was a listed country trust estate. Under section 99B, the entire amount is included in X Co's assessable income as the distribution was made out of $50,000 of foreign income derived by the trust estate in its 1990-91 income year. Of the income of $50,000, $20,000 represents eligible designated concession income on which $2,000 was paid as foreign tax. Foreign tax of $9,000 was paid in respect of the balance of the trust estate's income ($30,000). Accordingly, the after-tax eligible designated concession income of $18,000 represents 46.15 per cent of the total after-tax income of $39,000.

In this example, subsection 102AAM(7) (see later notes) will deem the distribution to have been made proportionately out of the after-tax eligible designated concession income and other income of the trust. The amount in respect of which the interest charge is payable is calculated using the formula:

(A + B) * C - D

where:

A is the distributed amount - $4615;
B is the foreign tax attributable to the distributed amount - $512;
C is the applicable rate of tax - 39 per cent;
D is the foreign tax credit applicable to the distributed amount - $512.

($4,615 + $512) * 39% - $512

Subsection 102AAM(3) deals with the calculation of the amount on which the interest charge is payable where a distribution is received from a non-resident trust estate by the trustee of a resident trust estate who is liable to be assessed under section 98, 99 or 99A in respect of a part of the net income of the resident trust estate. This subsection would apply where the whole or a part of the net income of the resident trust estate is attributable to a distribution received by the trust estate from a non-resident trust estate in the circumstances referred to in subsection 102AAM(1).

The amount in respect of which the interest calculated under subsection 102AAM(5) is payable is that part of the net income of the resident trust estate on which the trustee is liable to be assessed under section 98, 99 or 99A that is attributable to the distribution received from the non-resident trust estate.

Example

XY Trust is a resident trust estate. For the income year 1993-94 it has net income of $60,000 which includes a distribution of $10,000 received from a non-resident trust estate that is not a listed country trust estate out of income for the income year 1990-91. The income of the non-resident trust for its 1990-91 income year was $20,000 on which foreign tax of $5,000 was paid. None of that income was subject to tax in a listed country. The trustee of the resident trust is liable to tax on one half of the net income of the trust estate under section 99 and, on behalf of a beneficiary, one quarter under section 98. The amount on which interest is payable by the trustee is:

Income assessed under section 99

·
that part of the distributed amount that is assessable under section 99 (50 per cent of $10,000) grossed up by so much of the foreign tax as relates to that part ($1,666) multiplied by the applicable rate of tax (47 per cent) less the foreign tax credit applicable to that part of the distribution ($1,666), that is:

($6,666 * 47%) - $1,666 = $1467

Note: The foreign tax attributable to the income assessed under section 99 will be -

50% of ($10,000)/($15,000) * $5,000 = $1,666

Income assessed under section 98

·
that part of the distributed amount that is assessable under section 98 (25 per cent of $10,000) grossed up by so much of the foreign tax as relates to that part ($834) multiplied by the applicable rate of tax (47 per cent) less the foreign tax credit applicable to that part of the distribution ($834), that is:

($3,334 * 47%) - $834 = $732

Subsection 102AAM(4) deals with the case where a distribution to which this section applies is received by the trustee of a trust estate or by a partnership (paragraph (4)(a)) and a share of the net income of the trust estate or partnership is included in the assessable income of a beneficiary of the trust estate or a partner in the partnership with the effect that tax on the whole or a part of the distribution is payable by the beneficiary or partner (referred to in subsection (4) as the "actual taxpayer") (subparagraph (b)(i)).

The subsection will apply if the beneficiary or partner who is liable to pay tax in respect of the distribution is:

·
a company or a natural person (other than a company or a natural person in the capacity of a trustee) (sub-subparagraph (b)(ii)(A));
·
the trustee of a superannuation fund, an approved deposit fund or a pooled superannuation trust (sub-subparagraph (b)(ii)(B));
·
the trustee of a corporate unit trust sub-subparagraph (b)(ii)(C));
·
the trustee of a public trading trust (sub-subparagraph (b)(ii)(D));
·
the trustee of the trust estate that receives the distribution or of a trust estate that is the beneficiary of the trust estate that receives the distribution, being a trustee who is liable to be assessed and to pay tax under section 98, 99 or 99A (sub-subparagraph (b)(ii)(E)).

For subsection 102AAM(4) to apply in relation to a taxpayer referred to in sub-subparagraphs (A) to (E) above, that taxpayer's assessable income must include the whole or a part of the distribution received by the trust estate or partnership. This amount may have been received either directly or through interposed trusts or partnerships (subparagraphs (4)(b)(iii) and (iv)).

In tracing the distribution as it flows through interposed partnerships and trusts, it is to be assumed that the distribution retains its character.

Where these conditions are satisfied, the actual taxpayer is to be liable to pay interest to the Commissioner under subsection (5) on so much of the taxpayer's share of the net income of the trust estate or partnership as represents the distributed amount grossed up by so much of the foreign tax as relates to that amount multiplied by the applicable rate of tax less the foreign tax credit applicable to that amount.

Subsection 102AAM(5) specifies the period in respect of which the interest payable by a taxpayer is calculated (paragraph (a)) and the rate of interest to be applied (paragraph (b)). The period in respect of which interest is payable is to commence at the latest of:

·
the first day of the first year of income of the taxpayer that begins after the end of the trust estate's year of income in which the trust estate derived the income or profits that is being distributed (subparagraph (a)(i));
·
1 July 1990 or, if the taxpayer has a substituted accounting period, the first day of the taxpayer's 1990-91 income year (subparagraph (a)(ii)); and
·
if the taxpayer is a natural person (other than a natural person in the capacity of a trustee), who first commenced to be a resident of Australia on or after 1 July 1990, the first day of a year of income that follows a year of income in which the taxpayer ceased to be a non-resident and first became a resident (subparagraph (a)(iii)).

The period will end on the last day of the income year in which the assessable income of the taxpayer includes an amount in respect of the distribution from the non-resident trust estate.

Example

The net income of a non-resident discretionary trust estate for the 1987-88 income year was $10,000. The trustee distributes this income on 1 August 1995 to X, a resident beneficiary who first became a resident of Australia on 1 October 1992. Interest will be payable in respect of the period commencing on the latest of:

·
1 July 1988 (subparagraph (a)(i));
·
1 July 1990 (subparagraph (a)(ii)); and
·
1 July 1993 (subparagraph (a)(iii)),

and ending on 30 June 1996 - that is, the 3 year period from 1 July 1993 to 30 June 1996.

Paragraph (5)(b) specifies the rate at which interest is to be paid. The rate of interest is to be the rate that is applicable, or the rates that are applicable for different periods, as provided in section 10 of the Taxation (Interest on Overpayments) Act 1983 - currently 14.026 per cent per annum.

Subsection 102AAM(6) places a limit on the interest charge payable by a taxpayer in respect of the amount of a distribution received from a non-resident trust estate. The interest charge is not to exceed the difference between the amount of the distribution that is included in the assessable income of the taxpayer and the amount of income tax (before the deduction of any franking rebate) that is payable on the distribution. In other words, the sum of the tax payable and the interest charge in respect of a distribution is not to exceed the amount of the distribution. Where the distribution was made by the non-resident trust estate out of the accumulated income of a number of income years, the interest charge is to be computed by reference to each such income year. However, the upper limit of the interest charge in respect of the distribution is to be computed having regard to the total of the interest charges so calculated and the income tax payable in respect of the amount of the distribution that is included in assessable income.

Subsection 102AAM(7) provides an ordering rule to determine the income and profits out of which a particular distribution is taken to be made by that trust estate.

Paragraph (7)(a) specifies that distributions of income and profits of the trust estate are taken to be made first from the income and profits of the earliest year of income in which the trust estate was a non-resident trust estate and then from the income and profits of successive subsequent years of income.

Paragraph (7)(b) deals with the case where a distribution is made by a listed country trust estate that had eligible designated concession income and other income in a year of income. That distribution is taken to be made proportionately from the after-tax eligible designated concession income and other income.

Paragraph (7)(c) deals with the case where a distribution is made by an unlisted country trust estate that has income that has been subject to a tax in a listed country and other income in a year of income. That distribution is taken to be made proportionately from each of the two categories of income.

Subsection 102AAM(8) treats an amount of income or profits of a non-resident trust estate that has been paid to a beneficiary as well as an amount of that income or profits that has been applied for the benefit of a beneficiary as distributed to the beneficiary for the purposes of subsection (7).

Subsection 102AAM(9) provides that interest is not payable under this section for a year of income if the amount of that interest would be less than 50 cents.

Subsection 102AAM(10) provides a definition of the expression "applicable rate of tax" that is used in the formulae in subsections 102AAM(2), (3) and (4). The applicable rate of tax for a company is the general rate of tax imposed on the taxable income of a company for the year of income in which the relevant distribution was received (paragraph (a)). This rate of tax would apply irrespective of the actual rate of tax applicable to a particular company.

In the case of a taxpayer other than a company, the applicable rate of tax is the maximum rate specified in Column 2 of the table in Part I of Schedule 7 of the Income Tax Rates Act 1986 - that is, the maximum marginal rate - that applies for the income year of the taxpayer in which the distribution is received. This maximum rate would apply irrespective of the actual marginal rate of tax applicable to a particular taxpayer.

Subsection 102AAM(11) provides a definition of the expression "assessment year of income" that is used in subsections (5) and (10). The expression "assessment year of income" in relation to a distribution made by a non-resident trust estate to a resident taxpayer means the year of income of the taxpayer in which an amount in respect of that distribution is included in that taxpayer's assessable income.

Where the taxpayer who is required to pay tax on the amount of a distribution is the taxpayer who received the distribution (as in subsections 102AAM(2) and 102AAM(3)), the year of income in which the distribution is received (the current year of income) will be the same as that in which the taxpayer is required to include the amount of the distribution, or the relevant part of the distribution on which tax is payable, in assessable income (the assessment year of income).

In any other case (as in subsection (4)), where the taxpayer who is required to pay tax on the distribution is a person other than the taxpayer who received the distribution, the assessment year of income would be the year of income in which the taxpayer who is required to pay tax on the distribution includes the share of the distribution in assessable income. Ordinarily, this would be the same year of income as that in which the distribution was received. However, where substituted accounting periods are used, it could be a later year of income .

Subsection 102AAM(12) requires the Commissioner to make an assessment of the interest payable by a taxpayer under this section.

Subsection 102AAM(13) permits the Commissioner to incorporate a notice of assessment under subsection (12) in a notice of any other assessment made on the taxpayer under the Principal Act.

Subsection 102AAM(14) specifies the sections of the Principal Act for the purposes of which the terms "income tax" or "tax" are to include interest referred to in this section. The expressions 'income tax" or "tax", when used elsewhere, would not include interest payable under this section. In broad terms, interest referred to in this section is treated as tax or income tax in the provisions of the Principal Act that deal with the issue of notices of assessment, amendment of assessments, refunds of amounts overpaid and the collection and recovery of income tax.

Subdivision C - Winding-up of Non-resident Trust Estates in Existence on 12 April 1989

Section 102AAN: Winding-up of non-resident trust estates - tax rebates

The transferor trust measures are to apply in relation to transfers made to a non-resident discretionary trust estate before 12 April 1989 unless the transferor was not in a position, at any time after that date, to control the trust estate. As an incentive to wind up such trust estates, section 102AAN provides for the grant of a rebate of tax that will have the effect that the tax applicable to certain distributions made by non-resident discretionary trust estates after 12 April 1989 and before 30 June 1991 will not exceed 10 per cent of the taxable amount of the distributions, with no credit being allowed for foreign taxes.

Subsection 102AAN(1) sets out the circumstances in which a taxpayer is to be entitled, under this section, to a rebate of tax in respect of a distribution from a non-resident trust estate, the whole or a part of which is included in the assessable income of the taxpayer.

Paragraph (1)(a) specifies the first three of the seven conditions that are to be met for the section to have application. That first condition is that a distribution from a non-resident trust estate (referred to as the "section 99B amount") is included in the assessable income of a taxpayer under section 99B of the Principal Act for the 1988-89, 1989-90 or 1990-91 income year, each year being referred to as the "taxpayer's year of income", (subparagraphs (a)(i) to (a)(iii)).

As mentioned earlier, the residence of a trust estate is determined in relation to a year of income rather than in relation to a point in time. Accordingly, the test for determining whether a trust estate was a non-resident trust estate at 12 April 1989 is whether the trust estate would have been a non-resident trust estate for the period 1 July 1988 to 12 April 1989 if that period is treated as a year of income (sub-subparagraph (a)(iv)(A)). Read with the definition of "resident trust estate" in subsection 95(2), this requirement is that no trustee of the trust estate was a resident at any time during that period and that the central control and management of the trust estate was not in Australia at any time during that period.

Sub-subparagraph (a)(iv)(B) sets out the second condition that the trust estate was in existence and was a discretionary trust estate on 12 April 1989. The third condition, set out in subparagraph (a)(v), is that the amount that is included in the assessable income of the taxpayer is in relation to an amount paid to or applied for the benefit of the taxpayer after 12 April 1989.

The fourth condition is that one or more Australian entities (a defined term) transferred property or services to the trust estate before 12 April 1989 (paragraph (1)(b)). The fifth condition is that at least one of the transferors was an Australian entity at the time of transfer of the property or services; or, in the case of an entity who is a natural person (other than a person in the capacity of trustee), on 30 June 1991; or, in the case of any other entity, on 12 April 1989 (paragraph (1)(c)).

Paragraph (1)(d) lays down the sixth condition that the trust estate be completely wound up before 30 June 1991.

The last condition - specified in paragraph (1)(e) - is that neither the transferors, nor any associate of the transferors, have transferred property or services (not being property or services relating to the provision of personal services in connection with the winding-up) to the trust estate after 12 April 1989. Where any such transfer is made, a distribution from that trust would not qualify for the rebate.

Where the conditions specified in paragraphs (a) to (e) are satisfied in relation to a taxpayer, paragraph (1)(f) provides that the taxpayer is the "original taxpayer" in relation to the section 99B amount in relation to the "taxpayer's year of income" (see notes on paragraph (a)). The concept of "original taxpayer" is used in subsections (2), (3) and (4) to distinguish an entity that received a section 99B amount from another entity that is required to include the whole or a part of that amount in its assessable income - for example, as a partner in a partnership that received that amount or as the beneficiary of a trust estate that received that amount

By virtue of paragraph (1)(g), the rebatable section 99B amount will generally be the amount included in the taxpayer's assessable income under section 99B. However, in a case where, after 12 April 1989, property or services have been transferred to the trust estate, so much of the section 99B amount as relates to the assessable income derived by the trust estate from those properties or services will not be rebatable. Such a transfer could only have been made by an entity other than the transferor or transferors or their associates as the condition specified in paragraph (e) would not be met in any other case. The assessable income derived by the trust estate from those properties or services is computed, applying subsection 95(1), as if the trustee were a taxpayer in respect of that income and were a resident.

Subsection 102AAN(2) deals with the case where the "original taxpayer" in relation to a section 99B amount in relation to the taxpayer's year of income is a company or a natural person (other than a company or a natural person in the capacity of a trustee), a corporate unit trust or a public trading trust, or the trustee of an eligible entity within the meaning of Part IX (broadly, a superannuation fund, an approved deposit fund or a pooled superannuation trust) (paragraphs (2)(a) to (d)). In these circumstances, the section 99B amount is included in the assessable income of the original taxpayer who is liable to tax on the taxable income computed by reference to that assessable income.

Paragraph (2)(e) provides for a rebate of tax, for the year of income in which a rebatable section 99B amount is included in the original taxpayer's assessable income, of an amount that would produce the effect that the rate of tax on the rebatable section 99B amount does not exceed 10 per cent. For the purposes of calculating the rebate, the rate of tax applicable to the rebatable section 99B amount is to be computed taking that amount as the top segment of the taxpayer's taxable income for the relevant year of income.

Example

In the income year 1989-90, taxpayer X (an individual) had a taxable income of $60,000 of which $10,000 was a rebatable section 99B amount. The rebate available under paragraph (e) would be computed as follows:

      $
Tax on $60,000 20957
Tax on $50,000 16157
Tax on $10,000 (rebatable section 99B amount) 4800
10 per cent of rebatable section 99B amount 1000
Rebate 3800

Paragraph (2)(f) provides that a reference to foreign income in subsection 160AF(1) of the Principal Act - which, broadly, provides for the allowance of a credit for foreign tax paid on foreign income - does not include a reference to a rebatable section 99B amount. The effect of paragraph (f) is that no credit will be available under section 160AF for any foreign tax paid in respect of the rebatable section 99B amount. The amount would also not be treated as foreign income in computing the upper limit of credit for foreign tax under paragraph 160AF(1)(d).

Subsection 102AAN(3) deals with the case where the original taxpayer in relation to the rebatable section 99B amount for a year of income of the taxpayer is the trustee of a trust estate who is liable to be assessed and to pay tax under section 98, 99 or 99A on a part of, or share in, the net income of the trust estate (paragraph (3)(a)). Section 98 provides that the trustee is to be assessed and to pay tax on the share of the net income of the trust estate to which a beneficiary is presently entitled if that beneficiary is under a legal disability and in certain other specified circumstances. Sections 99 and 99A provide that the trustee is to be assessed and to pay tax in respect of that part of the net income of the trust estate to which no beneficiary is presently entitled.

The subsection will apply to the trustee referred to in paragraph (a) if the whole or a part of the net income of the trust estate on which the trustee is to be assessed and to pay tax consists of the whole or a part of a rebatable section 99B amount (paragraph (3)(b)).

Paragraph (3)(c) provides for a rebate of tax, for the year of income in which a rebatable section 99B amount is included in the amount assessed to the trustee, of an amount that would produce the effect that the rate of tax on the rebatable section 99B amount does not exceed 10 per cent. Where the trustee is assessed under section 99, the rebatable section 99B amount is to be treated as the top segment of the taxable income. Where the trustee is assessed and liable to pay tax under section 98 in respect of beneficiaries who are presently entitled to a share of the net income of the trust estate, the amount of the rebate is to be computed separately in respect of each assessment on the trustee on behalf of a beneficiary. Tax payable by a trustee who is assessed under section 99A for the income year commencing on 1 July 1989 is at a flat rate of 48 per cent. Accordingly, the rebate in such cases will be 38 per cent of the rebatable section 99B amount.

Paragraph (3)(d) has a corresponding effect to paragraph (2)(f) - that is, it will deny credits for foreign tax paid in respect of the rebatable section 99B amount and disregard the rebatable section 99B amount for the purpose of determining the upper limit of foreign tax credit in respect of other foreign income.

Subsection 102AAN(4) deals with the case where a partnership or the trustee of a trust estate receives a rebatable section 99B amount and the whole or a part of that amount forms part of the net income of the partnership or trust estate a share of which is included in the assessable income of a year of income of a company or a natural person (other than a company or natural person in the capacity of a trustee), a corporate unit trust or a public trading trust, or of the trustee of an eligible entity within the meaning of Part IX of the Principal Act (broadly, a superannuation fund, an approved deposit fund or a pooled superannuation trust) (paragraphs (4)(a) and (b)). Subsection (4) will also apply where the trustee of another trust estate is liable to be assessed and to pay tax under section 98, 99 or 99A of the Principal Act in respect of a part of, or a share in, the net income of that other trust estate which is attributable to the rebatable section 99B amount that was derived by the first trust estate (sub-subparagraph (b)(ii)(E) and subparagraph (b)(iv)).

In subsection (4), the entity that first derived the rebatable section 99B amount is referred to as the "original taxpayer" and the entity that is liable to pay tax in respect of the whole or a part of that amount is referred to as the "actual taxpayer".

Paragraph (4)(c) provides for a rebate of tax, for the year of income in which the whole or a part of the rebatable section 99B amount referred to in subsection (1) is included in the assessable income of the actual taxpayer, of an amount that would have the effect that the rate of tax on that amount does not exceed 10 per cent. The rate of tax applicable to the section 99B amount is to be computed taking that amount as the top segment of the taxpayer's taxable income of the relevant year of income.

Example

In the 1989-90 income year, the net income of the partnership of X and Y was $120,000 which included a rebatable section 99B amount of $20,000. X's share of the net income of the partnership was 50 per cent - that is, $60,000. X's share of the rebatable section 99B amount was $10,000. X did not receive any other income during the year. The rebate available to X under paragraph (c) would be computed as follows:

  $
Tax on $60,000 20957
Tax on $50,000 16157
Tax on $10,000 (rebatable section 99B amount) 4800
10 per cent of rebatable section 99B amount 1000
Rebate 3800

Paragraph (4)(d) has a corresponding effect to paragraph (2)(f) - that is, it will deny credits for the actual taxpayer for foreign tax paid in respect of the rebatable section 99B amount and disregard the rebatable section 99B amount for the purpose of determining the upper limit of foreign tax credit in respect of other foreign income derived by the actual taxpayer.

Section 102AAP: Winding-up of non-resident discretionary trusts - adjustment of tax treatment of beneficiaries

Section 102AAP deals with the case where a trust estate is completely wound up before 30 June 1991 and the trustee exercises a discretion in the course of that winding-up and after the IP time in favour of a beneficiary who, under section 101 of the Principal Act, is taken to be presently entitled to the amount (the "distributed amount") so paid or applied to the beneficiary's benefit. Where the conditions set out in paragraphs 102AAN(1)(a) to (e) would have been satisfied in relation to the distributed amount and to that trust estate if neither section 97 nor 98 had applied in relation to the beneficiary's present entitlement to that distributed amount, section 102AAP has the effect that neither section 97 nor 98 applies and the distributed amount is taken to have been included in the assessable income of the beneficiary of a year of income under section 99B. Thus, section 102AAP extends the section 102AAN rebate to distributed amounts made under such circumstances.

Section 102AAQ: Winding-up of non-resident trust estates - modified accruals system of taxation

Section 102AAQ has the effect that, where the conditions set out in subparagraph 102AAN(1)(a)(iv) and paragraphs 102AAN(1)(b) to (e) are satisfied in relation to a trust estate, an entity is not to be taken to be an attributable taxpayer in relation to that trust estate for the year of income commencing on 1 July 1990 and for the next succeeding year of income - accordingly, no part of the net income of that trust estate will be attributed to any resident taxpayer under Subdivision D.

Section 102AAR: When trust estate is taken to be completely wound up

By virtue of paragraph 102AAN(1)(d), the rebate under section 102AAN is available only if the trust estate is completely wound up before 30 June 1991. Section 102AAR makes it clear that a trust estate will not be treated as completely wound up at a particular time unless all of its liabilities are discharged before that time (paragraph (a)) and all of the remaining assets of the trust estate are distributed to the beneficiaries before that time (paragraph (b)).

Subdivision D - Accruals System of Taxation of Certain Non-resident Trust Estates

Section 102AAS: Object of Subdivision

Section 102AAS establishes that the object of Subdivision D is to set out rules relating to:

·
the determination of which entity is an attributable taxpayer - section 102AAT (paragraph (a));
·
the calculation of the attributable income of a trust estate - sections 102AAU to 102AAZC (paragraph (b));
·
the inclusion of an amount of attributable income of a non-resident trust estate in the assessable income of a resident taxpayer - sections 102AAZD to 102AAZF (paragraph (c)); and
·
the keeping of records - section 102AAZG (paragraph (d)).

Section 102AAT: Accruals system of taxation - attributable taxpayer

The purpose of section 102AAT is to determine whether a particular entity is an attributable taxpayer in relation to a non-resident trust estate for an income year of the entity (referred to in section 102AAT as the "entity's current year of income"). If the entity is an attributable taxpayer for the entity's current year of income in relation to a non-resident trust estate, the attributable income of that non-resident trust estate will be included in the assessable income of that entity.

Subparagraph (1)(a)(i) lists a set of conditions each of which has to be satisfied, together with the conditions in paragraphs (b) and (c), to make an entity that transferred property or services to a discretionary trust estate an attributable taxpayer for a year of income of the entity. The conditions specified by subparagraph (a)(i) are that:

·
the trust estate was a discretionary trust estate at any time during the entity's current year of income (sub-subparagraph (i)(A));
·
the trust estate was not a public unit trust at all times during the entity's current year of income (sub-subparagraph (i)(B));
·
the entity had transferred property or services to the trust estate before or during the entity's current year of income (sub-subparagraph (i)(C));
·
if the underlying transfer (a defined term) was made in the course of carrying on a business, the transfer was not made on terms identical with or similar to those that relate to transactions with ordinary clients or customers (sub-subparagraph (i)(D));
·
if the underlying transfer was made under an arm's length transaction otherwise than in the course of carrying on a business, the transferor was in a position to control the trust estate (see notes on section 102AAG) at any time after the transfer and before the end of the entity's current year of income (sub-subparagraph (i)(E));
·
if the transfer was made on or before 12 April 1989, the transferor was in a position to control the trust estate (see notes on section 102AAG at any time after that date and before the end of the entity's current year of income (sub-subparagraph (i)(F)).

Subparagraph (a)(ii) lists a set of conditions each of which has to be satisfied, together with the conditions in paragraphs (b) and (c), to make an entity that transferred property or services to a non-discretionary trust estate an attributable taxpayer for a year of income of the entity. The conditions specified by subparagraph (a)(ii) are that:

·
the trust estate was a non-discretionary trust estate or a public unit trust at all times during the transferor's year of income when the trust was in existence (sub-subparagraph (ii)(A));
·
the transfer of property or services was made after 12 April 1989 and before or during the transferor's current year of income (sub-subparagraph (ii)(B));
·
the underlying transfer was made for no consideration or for a consideration that is less than the arm's length amount (sub-subparagraph (ii)(C));
·
the sole purpose of the underlying transfer was not the arm's length acquisition of units in a public unit trust (sub-subparagraph (ii)(D)).

By virtue of paragraph (1)(b), a natural person (other than a person in the capacity of a trustee) who satisfies each of the conditions in either subparagraph (a)(i) (in relation to a discretionary trust estate) or (a)(ii) (in relation to a non-discretionary trust estate) will not be an attributable taxpayer if the trust estate to which the transfer was made was a non-resident family trust (defined in section 102AAH) in relation to that person at all times that the trust estate was in existence from the beginning of the taxpayer's 1990-91 income year until the end of the taxpayer's current year of income (subparagraph (b)(ii)).

A natural person who satisfies each of the conditions in either of subparagraphs (a)(i) and (a)(ii) and who first commenced to be a resident of Australia after 12 April 1989 will also not be an attributable taxpayer if the transfer was made before that person commenced to be a resident and the trust estate was a non-resident family trust at all times after the commencement of the first year of income of that person after that person became a resident, up to the end of that person's current year of income (subparagraph (b)(i)).

A natural person who satisfies each of the conditions in either of subparagraphs (a)(i) and (a)(ii) and who first commenced to be a resident of Australia at a time after 12 April 1989 (the "first residence time") will also not be an attributable taxpayer if the transfer was made before the first residence time and that person was not in a position to control the trust estate at any time during the period commencing at the beginning of the first year of income of that person after the first residence time and ending at the end of that person's current year of income (paragraph (1)(c)).

The definition of "net income" of a partnership in section 90 provides, in part, that the expression means the assessable income of the partnership, calculated as if the partnership were a taxpayer who was a resident. Accordingly, where subsection (1) applies to a partnership, that partnership would be an attributable taxpayer. Similarly, subsection 95(1) defines "net income" in relation to a trust estate, in part, as the total assessable income of the trust estate calculated under the Principal Act as if the trustee were a taxpayer in respect of that income and were a resident. Thus, where subsection (1) applies to a trust estate, whether resident or non-resident, that trust estate would be the attributable taxpayer.

Proposed subsections 102AAK(6) and 102AAK(7) (see earlier notes) provide that, where property or services are transferred by a partnership, the partnership, as well as the partners of that partnership at the time the transfer was made, are taken to have transferred the property or services. Proposed subsections 102AAK(8) and 102AAK(9) have the effect that, where property or services are transferred by a trustee of a trust estate, the trustee as well as any transferor to the trust are taken to have transferred that property or those services. Subsection 102AAT(2) will have the effect that, where a partnership or a trust estate is an attributable taxpayer for the current year of income of the partnership or trust estate in relation to a particular transfer of property or services, the partners of that partnership (paragraph (2)(c)) and the transferors of that trust estate (paragraph (2)(d)) will not be attributable taxpayers for that year of income in relation to that transfer.

Subsection 102AAT(3) will enable the Commissioner to treat a natural person as an attributable taxpayer for a year of income where it had previously been accepted that that person had not been an attributable taxpayer for that year of income because the transfer of property or services made by that person had been treated as a transfer made to a non-resident family trust which, by virtue of section 102AAH, is a trust under which only certain categories of persons are capable of benefiting (paragraphs (3)(a) and (b)). Where a trust estate was treated as a non-resident family trust in relation to a year of income but it is subsequently found that the trust estate should not have been treated as a non-resident family trust (for example, where the trustee subsequently distributes trust income to a person not included in the categories specified in section 102AAH) (paragraph (3)(c)), subsection (3) will enable the making of an assessment for that year of income treating the transferor of property or services to that trust estate as an attributable taxpayer.

For the purposes of this subsection, a trust estate that was a non-resident family trust for a year of income would not be treated as having failed to satisfy the conditions required to make it a non-resident family trust in that year, merely because a person who was capable of benefiting from that trust became a resident after the end of that year. Moreover, the provisions of subsection (3) would apply only where the non-resident family trust ceases to qualify as such a trust during the lifetime of the person who transferred property or services to that trust.

The time limits that apply to the amendment of assessments by virtue of section 170 of the Principal Act will not apply to an assessment that is made to give effect to the provisions of subsection (3) (paragraph (e)).

Subsection 102AAT(4) will enable the Commissioner to treat an entity as an attributable taxpayer for a year of income in relation to a trust estate where it had previously been accepted that the entity did not control the trust and therefore was not an attributable taxpayer for that year of income (see notes on sub-subparagraphs 102AAT(1)(a)(i)(E) and (F) and paragraph 102AAT(1)(c)) but the entity is in a position, at a subsequent time, to control the trust estate (paragraphs (4)(a), (b) and (c)).

Subsection 102AAT(4) will enable the making of an assessment for the earlier year of income treating the entity as an attributable taxpayer for that year (paragraph (4)(d)). The time limits that apply to the amendment of assessments by virtue of section 170 of the Principal Act will not apply to an assessment that is made to give effect to the provisions of subsection (4) (paragraph (4)(e)).

Section 102AAU: Attributable income of a trust estate

Section 102AAU deals with the computation of the attributable income of a year of income of a non-resident trust estate (as defined in section 102AAB)

By paragraph (1)(a), the attributable income of a non-resident trust estate that is not a listed country trust estate (defined in section 102AAE) in a year of income will be its net income (defined in section 102AAB) for that year of income less so much of that net income as is represented by amounts specified in paragraphs (c) and (d).

Paragraph (1)(b) provides that the attributable income of a non-resident trust estate that is a listed country trust estate (defined in section 102AAE) in relation to a year of income is its net income computed having regard only to its eligible designated concession income (a defined term) less so much of that net income as is represented by amounts specified in paragraphs (c) and (d). The net income of the trust estate is to be computed on the basis that its eligible designated concession income is its assessable income less allowable deductions that are attributable to that income.

To the extent that the net income of a non-resident trust estate includes amounts of a kind specified in paragraph (1)(c), those amounts are to be deducted from the net income for the purpose of calculating the attributable income of the trust estate. The amounts so specified are:

·
amounts that are or have been included in the assessable income of a beneficiary under section 97 of the Principal Act - that is, generally, amounts in respect of which a resident beneficiary is presently entitled (sub-subparagraph (c)(i)(A);
·
amounts in respect of which the trustee is or has been assessed and is liable to pay Australian tax under section 98 (generally where there is a resident beneficiary who is under a legal disability) or section 99 or 99A (where there is accumulating Australian sourced income) (sub-subparagraph (c)(i)(B));
·
amounts paid to beneficiaries who are residents of a listed country if those amounts are paid during the year of income or within one month after the end of the year of income, provided that those amounts are subject to tax (a defined term) in a listed country in a tax accounting period ending before the end of the year of income or commencing in the year of income (subparagraph (c)(ii));
·
franked dividends - broadly, dividends paid by Australian companies, corporate unit trusts and public trading trusts out of income that has been subject to Australian tax (subparagraph (c)(iii));
·
amounts which are included in the assessable income of the trustee of the trust estate under section 160AQT - that is, broadly, the company tax by which a dividend is grossed-up for dividend imputation purposes (subparagraph (c)(iv));
·
amounts received by the trustee from another trust estate to the extent that the amount had been attributed to a transferor under section 102AAZD (subparagraph (c)(v));
·
the amount of a dividend received from a CFC that has been included in the assessable income of a resident taxpayer under section 458 (see notes on that section) (subparagraph (c)(vi));
·
an amount received by the trustee that is referable to the income or profits of a CFC that have been included in the assessable income of any resident taxpayer under the accruals tax measures (subparagraph (c)(vii)). These amounts are represented by attribution debits (see notes on section 372) that are made in the attribution accounts of the entities that make attribution account payments (see notes on section 365); and
·
an amount of income or profits of the trust estate that is subject to tax in any listed country in a tax accounting period ending before the end of, or commencing during, the year of income and is not eligible designated concession income in relation to any listed country (subparagraph (c)(viii)).

By virtue of paragraph (1)(d), the net income will also be reduced by so much of any foreign or Australian tax paid by the trustee or a beneficiary as is referable to the amount included in the income of the trust estate under paragraphs (a) or (b) after deducting any tax attributable to an amount referred to in paragraph (c).

In general, foreign or Australian tax would be treated as referable to the amount included in the attributable income of the trust under paragraph (a) or paragraph (b) if the tax is payable solely on the income so included and not on any other income. A pro rata share of the foreign or Australian tax payable in respect of all of the income of the trust and not in respect of specific parts of that income would also be treated as referable to the income included in the attributable income of the trust estate under paragraph (a) or (b). This deduction is allowed because the attributable taxpayer will not be entitled to a foreign tax credit in respect of the attributed income.

The foreign or Australian tax treated as referable to the income included in the attributable income of the trust estate under paragraphs (a) or (b) is to be reduced by any part of that tax that is referable to any amount deducted under paragraph (c).

Subsection 102AAU(2) provides that the attributable income of a resident trust estate is 0. This paragraph makes it clear that there can be no attribution of income from a resident trust estate.

Subsection 102AAU(3) sets out the circumstances in which a beneficiary is to be treated as a resident of a listed country for the purposes of sub-subparagraph (1)(c)(ii)(A). A beneficiary is to be treated as a resident of a listed country if the beneficiary is a resident of that country under that country's tax law notwithstanding that the beneficiary may also be a resident of an unlisted country under the tax law of the unlisted country.

Subsection 102AAU(4) expands the concept of residence in a listed country used in subsection 102AAU(3). Where a listed country taxes the income of a beneficiary on a worldwide basis irrespective of where the income is sourced, and uses for this purpose a criterion other than residence, the listed country is to be treated as taxing the beneficiary on the basis that the beneficiary is a resident of that listed country.

Section 101 of the Principal Act deals with the case where a trustee has the discretion to pay or apply the income of a trust estate to or for the benefit of specified beneficiaries and exercises that discretion to pay an amount of the income to a beneficiary or to apply an amount of the income for the benefit of that beneficiary. That section treats that beneficiary as presently entitled to that amount. Subsection 102AAU(5) treats an amount to which a beneficiary is taken to be presently entitled under section 101 to have been paid to that beneficiary.

Subsection 102AAU(6) will have application to a non-resident trust estate that is a listed country trust estate that derives eligible designated concession income (a defined term) as well as other income in a year of income. Subsection (1) has the effect that the attributable income of such a trust estate is so much of its net income as constitutes eligible designated concession income of the trust estate for that year of income reduced by the amounts set out in paragraphs (1)(c) and (1)(d) of that subsection. In making the reductions referred to in subparagraphs (c)(i) and (ii), it is necessary to determine the amount of the reduction that would relate to the eligible designated concession income. Subsection (6) provides the rule to determine this amount.

The effect of the formula in subsection (6) is that the reductions referred to in subparagraphs (1)(c)(i) and (ii) are to be taken to be related to designated concession income and other income in the proportion that each of these categories of income bears to the net income of the trust estate.

Section 102AAV: Double tax agreements to be disregarded

Section 102AAV provides that, in calculating the attributable income of a non-resident trust estate, the Income Tax (International Agreements) Act 1953 is to be disregarded, except for the purposes of the references in the Principal Act to that Act. Detailed notes on the effect of the corresponding provision in relation to a CFC are provided in relation to section 388.

Section 102AAW: Certain provisions to be disregarded in calculating attributable income

Section 102AAW provides that existing sections 20, 38 to 43 and 128D and new sections 23AI, 456, 457, 458 and 459 are to be disregarded in the calculation of the attributable income of a trust estate. The practical effect of a similar provision in relation to CFCs is discussed in the notes on section 389.

Section 102AAX: Income and expenses to be expressed in Australian currency

Section 102AAX provides rules for the conversion to Australian currency of amounts of income and expenses expressed in a foreign currency. The rules for the conversion to Australian currency embodied in section 20 of the Principal Act will not apply for the calculation of the attributable income of a non-resident trust estate - see notes on section 102AAW.

The rules for the conversion, as provided in subsections 102AAX(1) and (2), are similar to those that apply to the conversion into Australian currency of the income and expenses of a CFC - see notes on section 391.

Where the trustee of the trust estate wishes to use the end of year of income basis (sub-subparagraph (2)(a)(i)(B)), for conversion of currency, subsection 102AAX(3) provides for an election to be made.

Subsection 102AAX(4) specifies the requirements for an election made under subsection 102AAX(3). An election must be in writing and lodged with the Commissioner within 30 days after the end of the year of income concerned. The Commissioner may, however, extend the time in which the election may be made.

Subsection 102AAX(5) makes it clear that, where an election is made under subsection 102AAX(3) for a year of income, the end of year basis will apply for that year and for all future years.

Section 102AAY: Modified application of trading stock provisions

Section 102AAY modifies the application of Subdivision B of Division 2 of Part III of the Principal Act for the calculation of the attributable income of a non-resident trust estate. The modification is dealt with in detail in the notes on section 397, a corresponding provision for the calculation of the attributable income of a CFC.

Section 102AAZ: Modified application of depreciation provisions

Section 102AAZ provides for the ascertainment of the amount to be allowed as a deduction from, or included in, the assessable income of a trust estate as a result of the application of a "depreciation provision" (a defined term - see notes on section 102AAB) for the purposes of calculating the attributable income of the trust estate of an attributable year of income.

Subsection 102AAZ(1) provides that subsection 102AAZ(2) is to govern the application of a "depreciation provision" in relation to the calculation of the attributable income of a non-resident trust estate where the trust estate has held property in a previous "non-attributable year of income" (a defined term - see notes on section 102AAB) in respect of which there was no need for the "depreciation provision" to be applied.

Subsection 102AAZ(2) authorises the Commissioner to determine an appropriate amount to be allowed as a deduction from, or included in, the assessable income of a trust estate to take account of the holding of the property referred to in subsection (1). The amount so determined is to be in substitution for any amount that would otherwise be so included or allowable.

Subsection 102AAZ(3) provides that, in applying subsection (2), the Commissioner must treat the property as if it had always been held for the purpose of producing assessable income. Where the trustee has used a property partly for producing exempt income and partly producing assessable income during the year of income, the existing discretion under section 61 of the Principal Act would allow the Commissioner to determine the amount that is an allowable deduction.

Section 102AAZA: Modified application of Division 13 of Part III

An explanation of Division 13 of Part III (the "transfer pricing provisions") and its modified application in relation to, and as a consequence of, the accruals tax measures in relation to a CFC is contained in the notes on section 400. The following notes explain the corresponding modifications in relation to trusts.

Paragraph 102AAZA(a) ensures that if the trust estate is a non-resident trust estate in relation to the year of income, the trustee is taken to be a non-resident within the meaning of section 136AC, notwithstanding any assumption about the trustee's residence made in subsection 95(1) or 102D(1) or section 102M or 272 of the Principal Act.

Paragraph 102AAZA(b) extends the operation of section 136AF to empower an adjustment to another taxpayer's taxable income where Division 13 has been applied to adjust the attributable income of a trust estate. The paragraph ensures that, where Division 13 has been applied to a trust estate to increase its attributable income, a corresponding adjustment may be made to decrease the taxable income of another taxpayer.

Section 102AAZB: Modified application of Part IIIA

Section 102AAZB modifies the operation of Part IIIA, which governs the taxation of capital gains made on the disposal of assets, to ensure that a disposal is not deemed to have been made by a trust estate simply because the trust estate is deemed to be a resident of Australia for the purposes of calculating attributable income.

Paragraph 102AAZB(a) provides that, for the purposes of calculating the attributable income of a trust estate, subsections 160M(13) and (14), 160Z(6) and paragraph 160Z(9)(c) are to be disregarded. Subsections 160M(13) and (14) provide that, where a trust estate or unit trust becomes a resident of Australia, every asset of the trust (other than taxable Australian assets and assets acquired prior to 20 September 1985) shall be deemed to have been acquired by the trust at the time of becoming a resident. The consideration for the deemed acquisition is taken to be the market value of the asset at the time of the change of residence. Paragraph 102AAZB(a) makes it clear that the assumption that the trust estate was a resident for the whole of the year of income is not to be construed as deeming a change of residence at the beginning of the year of income.

Subsection 160Z(6) and paragraph 160Z(9)(c), which provide that no capital gain or loss is deemed to arise on the disposal of an asset used solely for the purpose of producing exempt income, are also to be disregarded so that the gain or loss, as the case may be, may be taken into account in the calculation of the attributable income of a trust estate.

Paragraph 102AAZB(b) provides that, in calculating the attributable income of a trust estate, Part IIIA applies as if the trust estate were a resident trust estate, or a resident unit trust, as the case may be. The paragraph preserves the rule that the attributable income of a trust estate is to be calculated generally on the basis of the rules that apply under the Principal Act for the calculation of the taxable income of a resident taxpayer.

Section 102AAZC: Modified application of loss provisions - pre 1990-91 losses

The effect of subsection 102AAZC(1) is that, in calculating the attributable income of a non-resident trust estate for the year of income commencing on 1 July 1990 and for subsequent years of income, no deduction will be available under the carry forward loss provisions of section 79E, 79F, 80, 80AAA or 80AA in respect of losses of income years commencing before 1 July 1990.

Subsection 102AAZC(2) provides that, in calculating the attributable income of a trust estate of a year of income, no account shall be taken under section 160AFD of any overall foreign loss incurred in a year of income earlier than the year of income commencing on 1 July 1990.

Section 102AAZD: Assessable income of attributable taxpayer to include attributable income of trust estate to which taxpayer has transferred property or services

Section 102AAZD is the operative provision of the transferor tax measures. Broadly, if the conditions specified in paragraphs 102AAZD(1)(a), (b) and (c) are satisfied in relation to a taxpayer, the taxpayer's assessable income will include an amount calculated in accordance with paragraph (d) or (e).

The first condition - specified in paragraph (1)(a) - is that, in relation to the 1990-91 year of income or a subsequent year of income (referred to as the taxpayer's current year of income), an entity is an attributable taxpayer (defined in section 102AAT - see earlier notes) in relation to a particular trust estate. The second condition (paragraph (1)(b)) is that any part of the income year of the trust estate in which it is a non-resident trust estate falls within the taxpayer's current year of income. The third condition (paragraph (1)(c)) is that the taxpayer be a resident at any time in the taxpayer's current year of income.

The net income of a trust estate is computed, under subsection 95(1) of the Principal Act, as though the trustee were a taxpayer in respect of that income and were a resident. Section 90 of the Principal Act provides that the net income of a partnership is calculated as if the partnership were a taxpayer who was a resident. Accordingly, any partnership or trust estate that is an attributable taxpayer would satisfy the condition specified in paragraph (c). Similarly, as the attributable income of a CFC is calculated as though the CFC is a resident, a CFC would satisfy the requirement specified in paragraph (c).

The attributable income of a taxpayer who is a resident throughout the taxpayer's current year of income is calculated in accordance with paragraph (1)(d). In such a case, the assessable income of the taxpayer of that year of income includes the full amount of the notional attributable income (defined in subsection (2)) of the trust estate for the taxpayer's current year of income. A partnership or trust estate that is an attributable taxpayer would be treated as a resident for the whole of the income year in calculating the amount of the attributable income of a trust estate that is to be attributed to it.

Where a taxpayer is a resident for only part of the taxpayer's current year of income, the assessable income of the taxpayer includes that proportion of the notional attributable income of the trust estate that the days in the period during which the taxpayer is a resident bear to the number of days in the year of income (paragraph (1)(e)).

Example 1

X is a resident of Australia for 200 days out of the 365 days in the taxpayer's current year of income 1 July 1990 to 30 June 1991. X is an attributable taxpayer in relation to YZ trust that was a non-resident trust with the same year of income. The notional attributable income of the trust estate was $40,000.

The amount X is required to include in assessable income for the 1990-91 income year is:

(200)/(365) * $40,000 = $21,917

Subsection 102AAZD(2) deals with the computation of the notional attributable income of the trust estate for the taxpayer's current year of income. Where the year of income of the trust estate is the same as the taxpayer's current year of income, the notional attributable income is the attributable income of the trust estate of that year of income (paragraph (2)(a)). Where the taxpayer's current year of income is different from that of the trust estate, the trust estate's attributable income of the two years of income which overlap the taxpayer's year of income is apportioned on the basis of the number of days that fall within the taxpayer's current year of income (paragraph (2)(b)).

Example 2

The taxpayer's current year of income is 1 July 1990 to 30 June 1991. The trust estate's years of income are 1 January 1990 to 31 December 1990 and 1 January 1991 to 31 December 1991. The attributable income of the trust estate is $30,000 for 1990 and $40,000 for 1991.

The amount calculated in accordance with subparagraph (b)(i) for the trust estate's 1990 income year is:

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

For the trust estate's 1991 income year, the amount is:

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

As required by subparagraph (b)(ii), these amounts are added to determine the notional attributable income for the taxpayer's 1990-91 income year ($34,958).

By virtue of subsection 102AAZD(1), the assessable income of each person who is a transferor in relation to a non-resident trust estate will include so much of the notional attributable income of the trust estate as relates to the period that the transferor was a resident of Australia. This would have the effect that more than one person may be subject to tax in respect of the same income but, in practice, should ensure that a resident who chooses to transfer property or services to a non-resident trust estate in circumstances that will attract the transferor measures will ensure that there are no other transferors in relation to the same trust estate.

However, to ensure that this result does not operate harshly against a taxpayer whose transfer of property or services to a non-resident trust estate was not motivated by tax avoidance, subsection 102AAZD(3) will provide relief in cases where the attributable income of a trust estate is included in the assessable income of a taxpayer of the taxpayer's current year of income under subsection (1) (paragraph (3)(a)) but two or more transferors have transferred property or services to the trust estate before the end of the taxpayer's current year of income (paragraph (3)(b)).

This relief is to be available only if the taxpayer provides the Commissioner with the information required in a form approved by the Commissioner (paragraph (3)(c)) and is to be granted by way of a reduction of the amount of the notional attributable income of the trust estate that is included in the assessable income of the taxpayer.

In determining the amount of the reduction, the Commissioner is to have regard to the extent to which the attributable income of the trust estate is referable to property or services transferred by the taxpayer to the trust estate (including property or services deemed to have been transferred by the taxpayer under section 102AAK) (paragraph (3)(d)) and to any other matters that the Commissioner considers relevant (paragraph (3)(e)).

Subsection 102AAZD(4) deals with the case of an attributable taxpayer in relation to a trust estate who does not have access to the information necessary to calculate the attributable income. If, in these circumstances, the taxpayer could not reasonably be expected to be able to obtain the information necessary to compute the attributable income of the trust estate (paragraph (4)(b)), subsection 102AAZD(1) does not apply (paragraph (4)(c)) and the taxpayer's assessable income instead includes an amount under paragraph (4)(d).

Subparagraph (d)(i) provides the formula to be used in respect of each transfer of property or services to the trust estate made by the taxpayer after 12 April 1989. The formula is:

(Adjusted value of the transfer) * ((Weighted statutory interest rate) + 5%)

The expression "adjusted value of the transfer" is defined in subsection (5). The expression "weighted statutory interest rate" is defined in section 102AAB - see notes on that section.

Where there is more than one transfer of property or services by the taxpayer to the trust estate after 12 April 1989, the formula is applied separately to each transfer and the results are aggregated.

Subparagraph (d)(ii) provides the formula to be used to determine the amount to be included in the assessable income of a transferor in respect of any transfers made to the trust estate before 12 April 1989. The formula is:

(Adjusted net worth of the trust estate) * ((Weighted statutory interest rate) + 5%)

The expression "adjusted net worth of the trust estate" is defined in subsection (6). The weighted statutory interest rate is computed as for the formula in subparagraph (d)(i).

The "adjusted value of a transfer" of property or services for the purposes of subparagraph (4)(d)(i) is determined in accordance with subsection 102AAZD(5). Where the transfer occurred during the taxpayer's current year of income (that is, the year of income for which the assessable income is being computed), the adjusted value of the transfer is the same proportion of the market value of the property or services transferred that the number of days in the year of income after the day on which the transfer was made bears to the total number of days in that year of income (paragraph (5)(a)). For example, if property with a market value of $10,000 is transferred on 31 May 1991, the adjusted value of the transfer for the year of income ending on 30 June 1991 will be

$10,000 * (30)/(365)

, i.e., $821.

Where the transfer of property or services occurred before the taxpayer's current year of income (i.e., the year of income the assessable income of which is being computed), the adjusted value of the transfer of property or services transferred is, by virtue of paragraph (5)(b), the total of:

·
the market value of the property or services immediately before the transfer (subparagraph (b)(i)); and
·
the aggregate of the amounts that would have been included in the assessable income of the transferor. in respect of that transfer in years of income preceding the taxpayer's current year of income had this method been used in each of those years (subparagraph (b)(ii)).

The "adjusted net worth of a trust estate" for the purposes of subparagraph (4)(d)(ii) is determined in accordance with subsection 102AAZD(6). For the income year commencing on 1 July 1990, it is the 1 July 1990 net worth (a defined term) of the trust estate. For a subsequent year of income, it is the sum of the 1 July 1990 net worth of the trust estate and the amounts that would have been included in the assessable income of the transferor, in respect of the transfers made to the trust estate before 12 April 1989, in years of income preceding the taxpayer's current year of income, had this method been used in each of those years.

Subsection 102AAZD(7) enables the Commissioner to provide relief similar to that provided under subsection (3) - see notes on that subsection - in respect of transfers of property, where two or more persons have transferred property to a non-resident trust estate on or before 12 April 1989.

Where, under subsection (4), a taxpayer could not reasonably be expected to be able to obtain the information required to determine the attributable income of a trust estate to which the taxpayer has transferred property on or before 12 April 1989, the assessable income of the taxpayer is to include an amount ascertained by applying the rate of interest specified in subsection (4) to the adjusted net worth of the trust estate.

Where two or more taxpayers had transferred property or services to the same trust estate on or before 12 April 1989, the assessable income of each taxpayer would have to include an amount computed in this manner. Subsection (7) provides relief in these cases if the taxpayer provides the Commissioner with all of the information required in a form approved by the Commissioner. This relief is to be granted by way of a reduction of the amount of the notional attributable income of the trust estate that is to be included in the assessable income of the taxpayer (paragraphs (a), (b) and (c)).

In determining the amount of the reduction, the Commissioner is to have regard to the extent to which the market value, as at the beginning of the taxpayer's current year of income, of the assets of the trust estate is, in the opinion of the Commissioner, attributable to property or services transferred or deemed to have been transferred by the taxpayer to the trust estate on or before 12 April 1989 (paragraph (7)(d)) and to any other matters that the Commissioner considers relevant (paragraph (7)(e)).

Section 102AAZE: Accruals system of taxation does not apply to small amounts

The purpose of section 102AAZE is to provide a de minimis exemption from the transferor tax measures in relation to a trust estate that is a listed country trust estate (a defined term) in relation to a year of income.

The de minimis exemption is provided by reference to the total of the attributable incomes (see notes on section 102AAU) of all trust estates (including trust estates that are not listed country trust estates) in relation to which the taxpayer is an attributable taxpayer (see notes on section 102AAT). If the total of the attributable incomes is equal to or less than the lesser of:

·
$20,000; or
·
10% of the total of the net incomes of those trust estates,

the attributable income of listed country trust estates will not be included in the assessable income of a resident taxpayer. The de minimis exemption does not apply to the attributable income of a trust estate that is not a listed country trust estate.

Section 102AAZF: Only resident partners, beneficiaries etc. liable to be assessed as a result of attribution

Section 102AAZF provides that, where the assessable income of an attributable taxpayer includes attributable income of a trust estate to which the taxpayer has transferred property or services under section 102AAZD, proposed section 460, which applies for the purposes of Part X, is to apply to the section 102AAZD amount in a way corresponding to that in which section 460 applies to amounts referred to in sections 456, 457, 458 or 459. For the purposes of the application of section 460 to section 102AAZD, the expression "Part X Australian resident" used in sections 336, 338 and 460 is to mean a "resident" as defined in section 6 of the Principal Act.

The application of section 460 to a section 102AAZD attributable taxpayer will ensure that a person who is not a resident of Australia at all times during a year of income will not be liable to Australian tax for that year of income on income attributable to the transfer of property or services by that person to the trust estate. Where the person is an Australian resident for only part of a year of income, any income that is to be included in the assessable income of that person for that year of income in respect of the attributable income of a non-resident trust estate is to be calculated by reference to the period in that year of income during which that person was a resident.

Section 102AAZF will not operate to reduce the amount of income attributed to an entity the assessable income of which is computed on the assumption that it is a resident of Australia. Section 102AAZF will not therefore affect the calculation of the assessable income of a trust estate or of a partnership or of the attributable income of a CFC.

Section 102AAZG: Keeping of records

Section 102AAZG contains the record keeping requirements for those taxpayers affected by the transferor tax measures. If the conditions specified in paragraphs 102AAZG(1)(a) and (b) are satisfied, the attributable taxpayer must maintain the records referred to in paragraphs (c), (d) and (e).

The records to which section 102AAZG will apply are also subject to subsections 262A(4) and (5) of the Principal Act which generally require records to be kept for five years after the completion of the transactions or acts to which they relate.

A pre-condition to the application of the record keeping requirements to a particular person is that, in relation to a year of income, the person is an attributable taxpayer in relation to a non-resident trust estate. The circumstances in which a person will be an attributable taxpayer in relation to a non-resident trust estate are specified in section 102AAT.

If, in relation to the 1990-91 year of income or a subsequent year (paragraph (1)(a)), a person is an attributable taxpayer in relation to a particular trust estate (paragraph (1)(b)), that person will be subject to the record keeping requirements specified in paragraphs (1)(c), (d) and (e). The records need not necessarily be kept in Australia but they must be kept by the attributable taxpayer.

The first category of records required to be kept (paragraph (1)(c)) is records containing particulars of the acts, transactions and other circumstances that resulted in the person being an attributable taxpayer in relation to the trust estate. Records of all matters relevant to the application of section 102AAT must be kept for each trust estate for which the person is an attributable taxpayer in the year of income.

Paragraph (1)(d) generally requires records to be kept showing the basis of the calculation of the attributable income of the trust estate for each year of income of the trust estate which falls wholly or partly within the year of income of the attributable taxpayer. However, where subsection 102AAZD(4) applies - that is, where the attributable taxpayer could not reasonably be expected to obtain the information necessary to calculate the attributable income of the trust estate - the attributable taxpayer is not subject to the record keeping requirements of paragraph (1)(d) in relation to the year of income and in relation to that trust estate.

Records that show the basis of calculation of the amount included in the assessable income of an attributable taxpayer by section 102AAZD are, by paragraph (1)(e), also required to be kept. This paragraph also requires records showing the basis of calculations to be kept where such calculations reveal that no amount is to be included in assessable income.

The sanction for an attributable taxpayer who fails to keep the records required by paragraphs (1)(c), (d) or (e) is provided by subsection 102AAZG(2). Consistent with the penalty that applies for a contravention of the general record keeping requirements of section 262A of the Principal Act, subsection (2) provides for a fine not exceeding $3,000 to be imposed on conviction for a contravention of the record keeping requirements imposed by subsection (1).

Subsection 102AAZG(3) obliges a person who is required by the section to keep records, to keep those records:

·
by paragraph (3)(a) - in the English language or, if not in written form (for example, in a electronic medium such as a magnetic tape or computer disc), in a form which is readily accessible and convertible into writing in English; and
·
by paragraph (3)(b) - so as to enable the person's liability to be readily ascertainable.

Subsection 102AAZG(4) provides a number of circumstances that may operate to release a person wholly or in part from the record keeping requirements. The first of these circumstances (paragraph (4)(a)) is where the person did not know that he or she was an attributable taxpayer and had no reasonable grounds to suspect that he or she was an attributable taxpayer. Where, on an objective test of the person's circumstances, there are reasonable grounds to suspect that the person may be an attributable taxpayer, the person cannot obtain the benefit of the exemption provided by this paragraph.

A person who did not know that he or she was an attributable taxpayer and, having made all reasonable efforts to ascertain where he or she was an attributable taxpayer, reasonably concluded that he or she was not an attributable taxpayer, would be exempted by paragraph (4)(b) from the record keeping requirements. The extent of the enquires that a person must undertake to satisfy the "reasonable efforts" requirement will vary according to the person's own circumstances, the nature and extent of property or services transferred to the trust, the manner of transfer, whether value was given for the transfer and the taxpayer's association with the trust.

The exemption from the record keeping requirements provided by paragraph (4)(c) may apply only where neither paragraph (a) nor (b) applies. An attributable taxpayer who is otherwise subject to the record keeping requirements may be wholly or partly exempted in relation to particular information where the attributable taxpayer did not know or have the information and had made all reasonable efforts to obtain the information. Once again, what constitutes "reasonable efforts" will vary according to the taxpayer's circumstances. For instance, a taxpayer who had actual or effective control of the entity which kept the information would be expected to use that controlling position, and any other avenues of influence available in the record keeping period, in a genuine attempt to obtain the information required. However, there will be circumstances in which the attributable taxpayer's influence with the actual record keeper is so small that the taxpayer is unable to obtain access to the information.

The attributable taxpayer who claims the benefit of any of the exemptions provided by subsection (4) will carry the onus of proving that, as applicable, reasonable grounds existed or reasonable efforts had been made by the person. For this purpose, it would generally be necessary for the person to keep records of the steps taken to ascertain whether he or she was an attributable taxpayer or the steps taken to obtain the information.

Subsections 102AAZG(5) to (7) relate to record keeping requirements where a partnership has transferred property or services to a trust.

By subsection 102AAZG(5) the partnership is treated for certain purposes as if it were a person. This will enable subsections 102AAZG(1) to (4), the record retention requirements of subsection 262A(4) and (5) of the Principal Act and certain prosecution provisions of the Taxation Administration Act 1953 to be applied in relation to the partnership.

Where subsection 102AAZG(5) has the effect that an offence is committed by a partnership, subsection 102AAZG(6) treats each of the partners as having committed the offence.

In a prosecution of a partner for an offence by virtue of subsection 102AAZG(6) it is defence under subsection 102AAZG(7) if the partner proves that he or she did not aid, abet, counsel or procure the act or omission by which the offence was taken to have been committed (paragraph (7)(a)) and was not in any way knowingly concerned in the commission of the offence (paragraph (7)(b)).

Clause 19: Loans etc. to shareholders and associates deemed to be dividends

This clause amends section 108 of the Principal Act by inserting new subsections (2A) and (2B). Section 108 deems certain payments made by a private company to an associated person by way of an advance or loan, or the payment or credit by the private company of an amount on behalf of or for the individual benefit of an associated person, to be a dividend paid by the company where the Commissioner is of the opinion that those payments represent a distribution of the profits of the company. Clause 52 of this Bill extends the operation of section 108 to certain dividends paid by CFCs.

New subsection 108(2A) will exclude amounts to which section 47A of the amended Act applies from the application of section 108. The exclusion is expressed to apply to an amount that would otherwise be deemed to be a dividend under section 108 where:

·
a company has profits immediately before a distribution time for a distribution benefit in relation to the company (paragraph (a));
·
the distribution time occurred after 3 June 1990 (paragraph (b));
·
the company making the distribution (referred to as the first company) is a CFC at the distribution time (paragraph (c)); and
·
the first company is a resident of an unlisted country at the distribution time (paragraph (d)).

New subsection (2B) provides that, where an expression is used in both subsection (2A) and section 47A (see clause 9), it is to have the meaning given in section 47A.

Clauses 20 to 26

Introductory Note

Clauses 20 to 26 amend Division 8 of the Principal Act which provides a legislative basis for the taxation of income derived by a life assurance company. In addition to the exemption provided under proposed section 23AH (see notes on clause 8), the amendments will exempt from taxation the profits of a foreign branch of an Australian life assurance company to the extent to which those profits relate to the provision of life assurance for the benefit of unrelated policy holders who are not residents of Australia.

Clause 20: Interpretation

Clause 20 will amend section 110 of the Principal Act as a part of the legislative arrangement to exempt from tax the foreign branch income of an Australian life assurance company which relates to the provision of life assurance for the benefit of unrelated policy holders who are not residents of Australia. Section 110 contains the definitions and interpretive provisions of Division 8.

For the purposes of Division 8, a life assurance policy is categorised as an "AD/RLA policy", a "CS policy", an "NCS policy", or an "RA policy". The definition of each of these terms in section 110 is being amended by paragraphs (a) to (e) of clause 20 to exclude an "eligible non-resident policy", the definition of which will be inserted in subsection 110(1) by paragraph (f) of clause 20.

An eligible non-resident policy is defined to mean a life assurance policy that is issued by a life assurance company in the course of a business carried on through a permanent establishment (as defined in subsection 6(1) of the Principal Act) of the company in a foreign country (paragraph (a)), and which is vested in an entity not being an associate of the company or a Part X Australian resident (paragraph (b)). The terms "associate" and "Part X Australian resident" are to have the same meaning as in new Part X being inserted by clause 49.

Clause 21: Deductions to be allowable for expenditure incurred in gaining superannuation premiums

Section 111A of the Principal Act provides that superannuation premiums are to be treated as assessable income for the purpose of determining deductions allowable to a life assurance company in respect of the derivation of that premium income. This has the effect of allowing a deduction for expenses incurred in deriving superannuation premiums that are exempt income of a life assurance company by virtue of section 111 of the Principal Act. Clause 21 will add new subsection 111A(2) to ensure that no deduction is allowable for expenses incurred in deriving superannuation premiums that are exempt by virtue of new section 23AH (that is, broadly, listed country branch income - see notes on clause 8) or by virtue of the amendments of section 112A by clause 23 (that is, superannuation premiums in respect of eligible non-resident policies).

Clause 22: Deductions to be allowable for expenditure incurred in gaining the investment component of certain premiums

Section 111AA of the Principal Act provides that the investment component of certain life assurance premiums is to be treated as assessable income for the purposes of determining deductions allowable in respect of the derivation of that premium income. This has the effect of allowing a deduction for expenses incurred in deriving the investment component of those premiums notwithstanding that those premiums may be exempt income by virtue of section 111 of the Principal Act. Clause 22 will amend subsection 111AA(1) to add new paragraphs (d) and (e) which will ensure that no deduction is allowable for expenses incurred in deriving premium income that is exempt by virtue of the amendments of section 112A by clause 23 (that is, premiums in respect of eligible non-resident policies) or by virtue of new section 23AH (that is, broadly, listed country branch income - see notes on clause 8).

Clause 23: Exemption of income attributable to certain policies etc.

Subsection 112A(1) of the Principal Act exempts from tax that portion of the income derived from the assets of an insurance fund of a life assurance company that is referable to exempt policies. Paragraph (a) of clause 23 will amend subsection 112A(1) to also exempt from tax income that is referable to an "eligible non-resident policy" - see notes on paragraph (f) of clause 20.

Subsection 112A(2) provides for the making of an election that has the effect of ignoring non-Australian policies for the purpose of calculating the amount of the income of a life assurance company that is exempt by virtue of subsection 112A(1). Paragraph (b) of clause 23 will amend subsection 112A(2) to ensure that eligible non-resident policies cannot be excluded from the ratio determination.

Clause 24: Repeal of section 112B

Section 112B of the Principal Act has the effect that the profits of a foreign branch of an Australian life assurance company are taxed only when remitted to Australia. Life assurance premium income of a foreign branch of an Australian life assurance company is exempt under section 111 and profits generated by that income will now generally be exempt from tax by the operation of new section 23AH (see clause 8) or the amendments of section 112A by clause 23. As a consequence, clause 24 will repeal section 112B.

Clause 25: Notional Part IIIA disposals of fund assets

Section 116CB of the Principal Act provides for the apportionment of capital gains and losses on disposal of assets of a life assurance company between classes of assessable income. Gains and losses are apportioned between classes of assessable income in accordance with the formula in subsection 116CB(2) - that is, broadly, on a calculated liabilities basis. Excluded from the formula are those calculated liabilities that are referable to exempt policies. Clause 25 will amend section 116CB to also exclude calculated liabilities that are referable to eligible non-resident policies as a consequence of the amendment of section 112A by clause 23.

Clause 26: Amount of assessable income in particular class

Section 116CE of the Principal Act allocates the assessable income of a life assurance company to the four different classes of assessable income that apply for the purposes of Division 8. The assessable income is allocated between classes of assessable income on a calculated liabilities basis. Excluded from the formula in subsection 116CE(5) are those calculated liabilities that are referable to exempt policies. Clause 26 will amend section 116CE to also exclude calculated liabilities that are referable to eligible non-resident policies as a consequence of the amendment of section 112A by clause 23.

Clause 27: Consequential adjustments to assessable income and allowable deductions

Division 13 of Part III of the Principal Act contains measures to counter arrangements that result in avoidance of Australian tax through what is commonly referred to as "transfer pricing" or "profit shifting" arrangements. Broadly, the Division enables adjustments to be made to increase a taxpayer's assessable income or reduce the allowable deductions where transactions have taken place that were not at arm's length. Where such an adjustment is made, the Commissioner of Taxation is authorised by section 136AF to make consequential adjustments to increase the allowable deductions or decrease the assessable income of any taxpayer to reflect the first adjustments.

Clause 27 will insert subsection 136AF(1A) to make it clear that the Commissioner is authorised to make consequential adjustments under subsection 136AF(1) where there has been a notional application of section 136AD (the operative provision of Division 13) in the calculation of either the attributable income of a non-resident trust estate under section 102AAU (in accordance with the modifications to the application of section 136AD in section 102AAZA) (paragraph (a)) or the attributable income of a CFC under Division 7 of Part X (paragraph (b)).

Clauses 28 to 35

Clauses 28 to 35 will make a number of amendments to Division 18 of Part III of the Principal Act which contains rules for the allowance of credits under the foreign tax credit system ("the FTCS"). The following notes give a broad outline of the FTCS and summarise the changes to the FTCS that are to be made as a consequence of the introduction of an accruals system of taxing foreign source income.

The foreign tax credit system

Credit for foreign tax

Under the FTCS, foreign sourced income derived by an Australian resident (apart from certain salary and wages) is subject to Australian tax. Credit, up to the amount of the Australian income tax referable to the foreign income that is included in the assessable income of the resident, is allowed against the Australian tax payable for analogous foreign tax that is paid by the Australian resident (sections 6AB and 160AF of the Principal Act).

The amount of foreign sourced income to be subject to Australian tax is, in most cases, the gross amount of that income. Where the amount of foreign sourced income actually received has been reduced by the payment of foreign tax (for example, a withholding tax imposed on a dividend) the net amount received is grossed up by the amount of that tax (section 6AC of the Principal Act). The foreign sourced income is also grossed up for any underlying tax on dividends where a credit is available for that tax (see later notes).

If a particular item of foreign income is not subject to Australian tax, no credit is allowed for any foreign tax that has been paid on that foreign income (section 160AF of the Principal Act).

In computing the foreign tax credit limit, the foreign income is divided into three classes of income certain interest income, offshore banking income and all other income (subsection 160AF(7) of the Principal Act). The foreign tax credit limit is computed separately for each of these classes of income.

Inter-corporate dividends

An Australian resident company (Australian company) that receives a dividend from a related foreign company is allowed a credit, subject to the limit on credit for foreign taxes, for foreign withholding tax or other income tax paid on the dividend as well as for underlying foreign tax paid by the foreign company on the profits out of which the dividend is paid (paragraph 6AB(2)(c), section 160AF and section 160AFC of the Principal Act). By subsection 160AFB(2), an Australian company will be related to any foreign company in a chain of companies if:

·
each company in the chain has at least a 10 per cent voting interest in the company immediately below it in the chain; and
·
the Australian company has an aggregate direct or indirect voting interest of at least 5 per cent in the foreign company.

Ordering of dividend receipts

A dividend received by an Australian company from a related foreign company is treated as paid out of a pool of the foreign company's accumulated profits of the first accounting year commencing after 30 June 1987 and subsequent accounting years (subsection 160AFC(6) of the Principal Act). To the extent that a dividend is paid out of this pool of profits, it is treated as subject to the average rate of foreign tax applicable to the amount of accumulated profits remaining in the pool immediately before the declaration of the dividend. Dividends in excess of the pool of accumulated profits are treated as paid out of the profits of earlier accounting periods on a last-in-first-out basis.

Foreign taxes for which credit is allowed

To be entitled to a credit for foreign tax, the taxpayer must have been personally liable for, and must have paid, that tax. The taxpayer is, in certain circumstances, deemed to have paid foreign tax that was paid by other persons on the foreign income that is included in the taxpayer's assessable income.

The foreign tax deemed paid by a resident includes, in the case of a resident company, the tax deemed paid by the company on a dividend received from a related foreign company (subsection 6AB(2) and section 160AFC of the Principal Act).

Impact on the FTCS of the introduction of the accruals tax system and the exemption of certain dividends

The proposed introduction of the accruals tax system and the exemption from income tax of certain categories of foreign income derived by resident companies (see notes on proposed sections 23AH and 23AJ) have necessitated changes to the FTCS, as follows:

·
Where the income of a resident company includes the whole or a part of the attributable income of a controlled foreign company (CFC) which is related to the resident company, the resident company is to be allowed a credit for the taxes paid by the CFC in respect of that income on the same basis as credit is allowed under the existing law for taxes paid in respect of dividends received by a resident company from a related company. The credit for these taxes is to be allowed under sections 160AF and proposed section 160AFCA.
·
Where a CFC that is resident of an unlisted country changes its residence to a listed country or to Australia, new section 457 will provide that amounts calculated in accordance with that section are to be included in the assessable income of certain resident taxpayers who have interests in that CFC. A credit for the taxes that were paid on those amounts is to be provided under new section 160AFCB.
·
A dividend paid by a CFC resident in an unlisted country to a CFC resident in another country (referred to as the section 458 amount) is to be included in the assessable income of certain resident taxpayers who have interests in those entities, subject to certain exceptions. Proposed section 160AFCC will operate, in appropriate cases, to enable such a dividend to qualify for foreign tax credit under existing section 160AF.
·
The classes of income by reference to which credits for foreign tax are separately computed under the FTCS are to be replaced with the following three classes of income - passive income, offshore banking income and other income. The amendments proposed by clauses 29 and 30 will give effect to this change.
·
Foreign tax credits will not be allowable in respect of foreign taxes paid on categories of foreign income that are to be exempt from income tax, such as the profits of a permanent establishment in a listed country of a resident company and non-portfolio dividends derived by a resident company from a company resident in a listed country (proposed sections 23AH and 23AJ). Subsection 160AF(1) will operate to deny credits for foreign tax in respect of the new categories of income that will be exempt from tax.
·
Where a non-portfolio dividend received by a resident company from a related foreign company is paid by that company in part out of its exempting profits (see notes on section 378) and in part out of its other profits, the underlying tax for which the resident company is to obtain a credit is to be computed having regard to the fact that a part of the dividend is exempt from tax. Proposed subsection 160AFC(5A) will achieve this effect.
·
A company that is a resident of a listed country may pay a non-portfolio dividend in part out of the profits of the company that have previously been attributed to certain resident entities that held interests in that company and in part out of its other profits. Proposed subsection 160AFC(5A) will also provide that the underlying tax for which a resident entity is to obtain a credit will be computed by reference to the profits previously attributed to that entity and the taxes paid on those profits.
·
Credit is to be allowed to a resident taxpayer for certain foreign taxes paid in respect of income payments which are exempted from tax on the basis that the income payment was made from the income of a non-resident entity that has been attributed to the taxpayer under the accruals tax measures (proposed section 23AI). This will be an exception to the general rule (applicable pursuant to subsection 160AF(1)) that a foreign tax credit is allowable only in respect of taxes paid on foreign income that is included in the assessable income of a resident taxpayer. Proposed section 160AFCD will achieve this effect.
·
A taxpayer will have an excess foreign tax credit for a year of income if the amount of the foreign tax paid in respect of a class of foreign income that is included in the taxpayer's assessable income exceeds the Australian tax payable by that taxpayer on that foreign income. Under the present law, an excess foreign tax credit for a year of income is not able to be carried forward to a later year of income. However, an excess credit of an Australian resident member of a wholly owned company group in respect of a particular class of foreign income for a year of income is able to be transferred to another Australian resident member of that group for credit to the extent that a credit would be available to that other member of the group in relation to that year of income.
The Bill will enable a resident taxpayer to carry forward an excess foreign tax credit that arises in a year of income in relation to a class of income for five years of income immediately following that year of income. Further, an Australian company that is a member of a wholly owned company group will be permitted to transfer an excess credit (including a carried-forward credit) in respect of a particular class of income to another Australian company in that group to utilise that credit in the same income year (clause 35).

Clause 28: Interpretation

Clause 28 will amend section 160AE of the Principal Act which contains the general definitions and interpretative provisions of Division 18 of Part III of that Act.

Paragraph (a) will delete the existing definition of "underlying tax". The term "underlying tax" is defined in existing subsection 160AE(1) of the Principal Act in relation to a dividend to mean tax payable by the company on the profits out of which the dividend is paid. The term "profits" is defined in existing subsection 160AE(1) to mean, in effect, pre-tax profits. In its place a new definition of underlying tax will be inserted which provides that underlying tax means foreign tax payable on the taxable profits of a company. The definition of "taxable profits" is to be inserted by paragraph (c).

The new definition is consequential upon the proposed replacement of the definition of "profits" with a new definition of "distributable profits". The new definition also makes it clear that the term refers to foreign tax payable on the taxable profits of a company and not to Australian tax. Where it is intended in a particular case that Australian tax paid by a foreign company is to be treated as part of underlying tax, the relevant provision contains a statement to this effect.

Paragraph (b) will omit the existing definition of "profits" as a consequence of the insertion of a new definition of "distributable profits".

Paragraph (c) inserts a number of definitions of terms that are to be used in Division 18 as a consequence of amendments to be made by this Bill. Unless the contrary intention appears, the following terms are to have the same meaning as in Part X which is being inserted by clause 49 (see notes on section 317 of Part X):

·
"attributable income";
·
"attributed tax account debit";
·
"attribution account entity";
·
"attribution account payment";
·
"attribution percentage";
·
"attribution surplus";
·
"CFC";
·
"distributable profits";
·
"exempting profits";
·
"exempting profits percentage";
·
"exempting receipt";
·
"listed country";
·
"non-portfolio dividend";
·
"notional allowable deduction";
·
"resident of a listed country";
·
"resident of an unlisted country";
·
"statutory accounting period"; and
·
"unlisted country".

The following terms are to have the given meaning unless the contrary intention appears:

"CFC-type foreign tax" is defined to mean foreign tax in respect of amounts which correspond to those that are to be included in the assessable income of certain resident entities under section 456 in respect of their interests in CFCs. An example of a CFC-type foreign tax is the income tax levied in the United States on the income that is included in a taxpayer's assessable income under Subpart F of the Internal Revenue Code.
"modified passive income" is to have the meaning given by subsection 160AEA(2) - see notes on clause 29.
"non-exempting profits" is defined to mean distributable profits other than exempting profits. A non-portfolio dividend received by a resident company from a related foreign company that is a resident of an unlisted country will be exempt from Australian company tax to the extent that it is treated as paid out of the exempting profits of the foreign company (section 23AJ). The resident company will not be entitled to any foreign tax credit in relation to that exempt part of the dividend. It will, therefore, be necessary to compute the foreign tax credit in respect of the dividend by reference to the distributable profits (other than exempting profits) out of which the dividend is paid. The expression "non-exempting profits" refers to these profits and is used in the new subsection 160AFC(5A) that relates to the computation of the underlying tax in respect of a dividend that is paid out of distributable profits which include exempting profits.
"passive income" is to have the meaning given by subsection 160AEA(1) - see notes on clause 29.
"taxable profits" is defined to mean, in relation to a company, the income and profits or gains (being profits or gains whether of an income or capital nature) of the company on which foreign tax is payable. This definition relates to the definition of "underlying tax", being foreign tax payable on the taxable profits of a company.

Subsection 160AE(2) of the Principal Act treats an amount that is included in the assessable income of a taxpayer that consists of profits of a capital nature derived from sources in a foreign country as foreign income derived from that country (if foreign tax is payable on those profits), in order to enable the taxpayer to qualify for credit for that foreign tax. The amendment made by paragraph (d) of this clause will merely clarify that subsection 160AE(2) applies to gains of a capital nature. This amendment will not alter the practical application of subsection 160AE(2) and aligns it with the definition of "taxable profits".

Paragraph (e) of this clause will amend subsection 160AE(2) of the Principal Act to also clarify that the foreign profits or gains of a capital nature to which it applies are deemed by the subsection to be foreign income for the purposes of the foreign tax credit provisions of Division 18 but not for the purposes of the foreign loss quarantining provisions of existing section 160AFD. This amendment is consistent with the purpose of subsection 160AE(2) as stated in the preceding notes and the interaction of Part IIIA of the Principal Act (Capital Gains and Losses) with the foreign loss quarantining provisions of section 160AFD. It too will not alter the practical application of subsection 160AE(2).

Paragraph (f) of this clause will add new subsections 160AE(7) and (8) in the Principal Act.

Subsection 160AE(7) will have the effect that, for the purposes of Division 18, each listed country and each unlisted country (defined in section 320) is to be treated as a separate foreign country. Division 18 provides for the grant of credits in respect of "foreign tax", an expression defined by subsection 6AB(2) to mean, in part, tax imposed by a law of a foreign country. New section 320 would enable a part of a country to be treated as a listed country. Subsection (7) will enable a part of a country to be treated as a separate foreign country.

New subsection 160AE(8) will have the effect that, for the purposes of Division 18, underlying tax will be taken to be related to the distributable profits of a company to the extent that the taxable profits of the company on which the underlying tax is payable are attributable to those distributable profits.

This definition relates to the proposed amendments to be made to section 160AFC by clause 32, which provide for the computation of the underlying tax in respect of a dividend by reference to the underlying tax that relates to the distributable profits out of which the dividend has been paid.

The effect of this amendment will be to include in underlying tax foreign income tax paid in respect of income and profits or gains (being profits or gains whether of an income or capital nature) that are included in the tax base by reference to which the taxable income of the company is computed.

Clause 29: Insertion of section 160AEA

Clause 29 will insert new section 160AEA into the Principal Act.

Section 160AEA: Passive income

Section 160AEA contains the definitions of "passive income", "modified passive income" and associated interpretative provisions. The concept of passive income is relevant to the computation of the foreign tax credit, allowable under section 160AF, on a class of income basis. Under subsection 160AF(7), read with the amendment proposed in clause 30, the foreign tax credit allowable to a taxpayer will be computed separately for each of three classes of income - passive income, offshore banking income and other income. The concept of "modified passive income" is relevant to the operation of the quarantining provisions of new section 79D and to the computation of a foreign loss under the new section 160AFD (see notes on clauses 10 and 34).

Subsection 160AEA(1) defines passive income, in relation to a taxpayer in relation to a year of income, to mean:

·
dividends, within the meaning of section 6 of the Principal Act, paid to the taxpayer;
·
unit trust dividends (within the meaning of Division 6B or 6C) paid to the taxpayer;
·
a distribution paid to the taxpayer, where the distribution is taken to be a dividend because of section 47 of the Principal Act - that is, broadly, a distribution by a liquidator in the course of winding up a company;
·
an amount that is taken to be a dividend under new section 47A (see notes on clause 9) or section 108;
·
interest income (within the meaning of subsection 160AE(3) of the Principal Act);
·
annuities;
·
rental income;
·
royalties (within the meaning of subsection 6(1) of the Principal Act);
·
consideration received by the taxpayer for the assignment, in whole or in part, of any copyright, patent, design, trademark or other like property or right;
·
profits or gains of a capital nature that accrued to the taxpayer, to the extent that they are included in the taxpayer's assessable income;
·
passive commodity gains (as defined in subsection (3)); and
·
amounts included in the taxpayer's assessable income under proposed sections 102AAZD (attributable income of a non-resident trust estate), 456 (income of a CFC that is attributed to the taxpayer), 457 (certain amounts that are included in assessable income on the change of residence of a CFC), or 458 and 459 (dividends paid by a CFC to another CFC, or to a partnership, controlled foreign trust or Australian trust that are included in the taxpayer's assessable income).

The term "passive income" does not include offshore banking income, which is a separate class of income for the purposes of the FTCS.

Subsection 160AEA(2) sets out the meaning of the term "modified passive income" of a year of income in relation to a taxpayer which is relevant to the definition of the classes of assessable foreign income for sections 79D, 79E, 80 and 160AFD and Subdivision D of Division 7 of Part X. The amount of modified passive income of a year of income is computed by excluding from passive income interest income that accrued to the taxpayer in the year of income.

Subsection (3) defines certain terms that are used in this section.

"commodity" is defined to mean anything capable of delivery under an agreement for its delivery, but not including an instrument creating or evidencing a chose in action.
"passive commodity gain" is defined to mean a gain realised from disposing of a passive commodity investment.
"passive commodity investment" means either a forward or futures contract in respect of a commodity or a right or option in respect of such a contract, except where the taxpayer is in the business of producing or processing the commodity or using the commodity as a raw material in the process and the contract, right or option relates to the carrying on of that business.
"rent" is defined to have the same meaning as in Part X - see notes on section 317.
"rental income" is defined to mean income derived by way of rent.

Clause 30: Credits in respect of foreign tax

Clause 30 will amend section 160AF of the Principal Act with effect from the year of income commencing on 1 July 1990 (including the substituted accounting period in lieu of that financial year) to specify the new classes of income by reference to which the foreign tax credit allowable to a taxpayer is computed.

Existing subsection 160AF(7) of the Principal Act provides that the foreign tax credit allowable to a taxpayer is to be computed separately for each of three classes of income - interest income (paragraph (a)), offshore banking income (paragraph (b)) and other income (paragraph (c)). This clause will amend subsection 160AF(7) by substituting, for paragraph (a), a new paragraph with the effect that, from the 1990-91 year of income, the foreign tax credit allowable to the taxpayer will be computed separately for passive income, offshore banking income and other income. With effect from that year, interest income (as defined in subsection 160AE(3)) will cease to be a separate class of income for the purpose of computing foreign tax credits.

Clause 31: Certain dividends deemed to be interest income

Existing subsection 160AF(7) of the Principal Act operates to quarantine foreign interest income of the type described in subsection 160AE(3) of the Principal Act from other foreign income for the purpose of allowing foreign tax credits. Interest income subject to this quarantining measure is assessed separately with a separate foreign tax credit limit applying to it. Further, for the purpose of sections 79D and 160AFD of the Principal Act, interest income is not to be reduced by deductions or a previous year's loss of another class of income.

Section 160AFA of the Principal Act is an associated measure that deems certain foreign dividends to be interest income. It is intended to ensure that the interest quarantining measure is not circumvented by remitting what is effectively foreign interest income to Australia in the form of dividends. The section operates by identifying the interest pool of the foreign company and then determining whether and to what extent a dividend has been paid from that interest pool. This requires reference to the "total profits".

Clause 31 will, as a consequence of the change from the concept of total profits to the concept of total distributable profits (see notes on clause 28), delete the references in subsection 160AFA(1A) and paragraph (2)(b) to "total profits derived during" that accounting period, and substitute references to "distributable profits in relation to" that accounting period.

The modified section 160AFA will, in future, only be applicable to the quarantining measures under sections 79D and 160AFD since, for credit purposes, interest and dividends are now included in the same class.

Clause 32: Foreign underlying tax

An Australian resident company that receives a dividend from a related foreign company is entitled to credit for foreign withholding or other taxes paid on that dividend as well as for foreign underlying tax paid by the company that paid the dividend on the profits of the company out of which the dividends are paid. Credit for underlying tax is available for unlimited tiers of related foreign companies subject to certain minimum shareholding requirements.

Section 160AFC of the Principal Act provides the rules for the computation of the foreign underlying tax attributable to the dividend. The principal amendments that will be made to that section by clause 32 are consequential on:

·
the grant of an exemption from income tax to a resident company for that part of a non-portfolio dividend that is paid by a company resident in an unlisted country as is deemed to be paid out of the exempting profits (defined in section 378 that is being inserted by clause 49); and
·
the identification of that part of a dividend paid by a company that is a resident of a listed country out of so much of its distributable profits as is referable to any attribution surplus in that company in relation to a taxpayer, so that a credit could be allowed for foreign taxes on that part of the dividend.

Clause 32 will also make certain amendments consequential on the introduction of a definition of "distributable profits" in subsection 160AE(1) - see notes on clause 28.

The amendments made by paragraphs (a), (b) and (c) of the clause are consequential upon the insertion of a definition of "distributable profits" in subsection 160AE(1) by clause 28. The proposed replacement of the definition of component "C" in the underlying tax determination formula in subsection 160AFC(2) and component "D" in the formula in subsection 160AFC(4) are consequential upon "distributable profits" being defined as after-tax profits. The operation of the amended formulae in subsections 160AFC(2) and (4) is illustrated in the example given in the notes that follow on new subsection 160AFC(5A).

New subsection 160AFC(5A) being inserted by paragraph (d) of clause 32, will deal with the computation of credits for underlying tax in two sets of circumstances.

The first deals with the computation of credits for underlying tax in relation to a non-portfolio dividend paid by a company that is a resident of an unlisted country and that has exempting profits (see notes on section 378) as well as other profits immediately before the dividend was paid. In this case, the underlying tax credit is to be computed by reference to a separate pool of profits that relates to profits other than exempting profits and the taxes that are attributable to that pool of profits.

The second set of circumstances refers to a dividend paid by a company that is a resident of a listed country and in relation to which the resident taxpayer for whom the underlying tax credit is being calculated has an attribution surplus (see notes on section 370) immediately before the dividend was paid. In this case, the underlying tax credit is to be computed by reference to a pool of distributable profits of the listed country company that are referable to the attribution surplus and to the taxes attributable to that surplus.

Dividend paid by an unlisted country company

Section 23AJ, being inserted in the Principal Act by clause 8, will operate to exempt from tax a non-portfolio dividend received by a resident company from a related foreign company resident in an unlisted country to the extent that the dividend is an exempting receipt of the resident company. The exempting receipts of a resident company are described in section 380. The exempting profits percentage of a non-portfolio dividend paid to the Australian company by a company that is a resident of an unlisted country will be an exempting receipt of the Australian company. The expression "exempting profits percentage" is defined in proposed section 379 to mean, broadly, that part of the dividend that represents profits of a permanent establishment in a listed country that have been subject to tax in that country and are not eligible designated concession income, non-portfolio dividends received from a listed country company, income taxed by assessment in Australia, or dividends franked in accordance with Part IIIAA. One effect of subsection (5A) will be to ensure that credit is not available in respect of underlying tax that relates to that part of a dividend that is exempt because of section 23AJ.

Subsection 160AFC(5A) will also apply to the computation of the underlying tax in respect of a dividend paid by a related foreign company to another related foreign company for the purpose of determining the deemed underlying tax credit to which a resident company that ultimately receives a dividend is entitled.

The effect of this subsection is to compute the credit for underlying tax allowable to the company that receives a dividend from an unlisted country company by reference to a separate pool of distributable profits of the paying company that comprises profits that are not exempting profits and the taxes related to that pool. To the extent that the dividend represents a distribution of exempting receipts, it is not included in the assessable income of the company that received the dividend and credit is not allowed for the taxes paid on those exempting receipts.

Subsection (5A) will achieve this effect by providing that the expressions "dividend", "underlying tax" and "distributable profits" used in subsections 160AFC(2) and 160AFC(4) are to mean, respectively:

·
so much of the dividend that is not an exempting receipt (paragraph (5A)(c));
·
that part of the foreign tax that relates to so much of the distributable profits as are not exempting profits (subparagraph (5A)(d)(ii); and
·
that part of the distributable profits that is not exempting profits (subparagraph (5A)(e)(ii)).

Example

A resident company, Ausco, owns all of the shares of a foreign company, Forco, resident in an unlisted country. Forco commences operations on 1 July 1990. For the year ended 30 June 1991 Forco derives income and pays foreign taxes as follows:

Profits of a permanent establishment in a listed country that are subject to tax in the listed country and are not eligible designated concession income $1000
Tax paid in the listed country $ 300
Profits derived from operations in the unlisted country $5000
Tax paid in the unlisted country on all its profits

($1000 + $5000)

- the unlisted country does not provide a credit for foreign taxes
$ 600
Forco pays a dividend of $5100 to Ausco on 1 October 1991.

Where there are only two companies in the dividend series - that is, the resident company and a foreign, company - the tax deemed to have been paid by the resident company in respect of a dividend received from the foreign company is to be computed in accordance with amended subsection 160AFC(2) using the formula

(A*B)/(C)

where:

A is the amount of the dividend which, by paragraph (5A)(c), is to be taken to mean that part of the dividend that is not exempt from income tax under section 23AJ;
B is the amount of the underlying tax which, by subparagraph (5A)(d)(ii), is to be taken to mean the amount of the underlying tax that relates to the non-exempt part of the dividend; and
C is the amount of the distributable profits out of which the dividend was paid which, by subparagraph (5A)(e)(ii), will not include so much of those profits as comprises distributable exempting profits.

Thus, in the example the components of the formula

(A*B)/(C)

are as follows:

A = $4500, being the amount of the dividend ($5100) less the exempting profits ($1000) net of the tax of $400 ($300 listed country tax and $100 unlisted country tax) that is applicable to those exempting profits;
B = $500, being the sum of the taxes paid solely in respect of the non-exempt profits (nil) and the proportion of taxes paid on the total profits that relates to the non-exempt profits

(((5000)/(6000)) * $600)

; and
C = $4500, being the amount of the distributable profits ($5100) less so much of those profits as comprises distributable exempting profits ($600).

Ausco is therefore deemed to have paid underlying tax of $500, being:

($4500 * $500)/($4500)

In this example, the result for C is the same as the result for A because there are no distributable profits of other years.

Where there are more than two companies in the dividend series, the following formula would be used to calculate the underlying tax for which credit could be claimed:

(A(B + C))/(D)

where:

A is that part of the dividend that is not an exempting receipt;
B is the amount of the underlying tax attributable to the profits (other than exempting profits) out of which the dividend was paid;
C is the amount of the underlying tax deemed to have been paid by the paying company on that part of the distributable profits (other than exempting profits) out of which the dividend was paid by any other application or applications of this subsection in relation to the dividend series;
D is the distributable profits out of which the dividend is paid less so much of the distributable profits as constitute exempting profits.

Dividend paid by a listed country company

The new subsection (5A) also deals with the computation of the underlying tax credit in relation to a dividend paid by a company that is a resident of a listed country and in relation to which the resident taxpayer for whom the underlying tax credit is being calculated has an attribution surplus immediately before the dividend was paid.

In broad terms, a resident taxpayer will have an attribution surplus in relation to a listed country company if:

·
any part of the attributable income of the company was included in the assessable income of the taxpayer under section 456 (for example, if that company had eligible designated concession income);
·
that company received directly, or through interposed entities, an attribution account payment (for example, a dividend) from another company any part of the attributable income of which was included in the assessable income of the taxpayer under section 456;
·
that company received, directly or through interposed entities any part of a dividend paid by a CFC that was a resident of an unlisted country which was included in the assessable income of the taxpayer under section 458; or
·
that company was previously a resident of an unlisted country and changed its residency status so as to become a resident of a listed country, and certain amounts were included in the assessable income of the taxpayer under section 457.

In the case of a dividend paid by a listed country company, it is necessary to compute the credit for underlying tax in relation to a dividend paid by the company only where the resident taxpayer for whom the underlying tax credit is being computed had an attribution surplus in relation to that company immediately before the dividend was paid. In other cases, the non-portfolio dividend paid by the listed country company would either be exempt from income tax under section 23AJ if paid to a resident company or be an exempting receipt if paid to an unlisted country company and there would be no credit for underlying tax in respect of that dividend.

The underlying tax in respect of a non-portfolio dividend paid by a listed country company, in relation to which the resident taxpayer for whom the underlying tax credit is being computed had an attribution surplus immediately before the dividend was paid, is computed under subsection (5A) by reference to a pool of distributable profits that is referable to the attribution surplus.

Subsection (5A) will achieve this effect by providing that the expressions "dividend", "underlying tax" and "distributable profits" used in subsections 160AFC(2) and 160AFC(4), when used in relation to a dividend paid by a listed country company, are to mean respectively:

·
so much of the dividend that is not an exempting receipt (paragraph (5A)(c));
·
that part of the foreign tax that relates to so much of the distributable profits as are attributable to the attribution surplus for the listed country company in relation to the resident taxpayer for whom the underlying tax is being computed (subparagraph (5A)(d)(i));
·
that part of the distributable profits as is attributable to the attribution surplus for the listed country company in relation to the resident taxpayer for whom the underlying tax is being computed (subparagraph (5A)(e)(i)).

Paragraph (e) of clause 32 will make amendments to subsections 160AFC(6) and 160AFC(7) (which, broadly, specify the order in which dividends are to be taken to have been paid) that are consequential upon the insertion of a definition of "distributable profits" in section 160AE.

Paragraph (f) of clause 32 will omit the existing definition of "accounting period" that is given by subsections 160AFC(10) and (11) and substitute a new definition of "accounting period". This term will be defined in new subsection 160AFC(10) to effectively mean the accounting period of the foreign company by reference to the distributable profits of which that foreign company distributes dividends. The new concept of an accounting period will align the period by reference to which a company is taken to have paid a dividend with the accounting period of the company by reference to which that company paid the dividend.

Clause 33: Insertion of sections 160AFCA, 160AFCB, 160AFCC and 160AFCD

Clause 33 will insert new sections 160AFCA, 160AFCB, 160AFCC and 160AFCD in the Principal Act. The new sections deal with the provision of foreign tax credits in respect of:

·
attributable income of a CFC that is included in a company's assessable income under section 456 (section 160AFCA);
·
certain amounts that are included in a company's assessable income under section 457 in respect of a change of residency status of a CFC from being a resident of an unlisted country to being a resident of a listed country or Australia (section 160AFCB);
·
an amount included in a company's assessable income under section 458 in respect of a non-portfolio dividend paid by a CFC in an unlisted country to another CFC (section 160AFCC); and
·
an attribution account payment (see notes on section 365 of Part X) that is exempt under section 23AI by virtue of having been paid out of previously attributed income (section 160AFCD).

Section 160AFCA: Foreign tax in respect of amounts assessable under section 456

Section 160AFCA deals with the provision of foreign tax credits to a resident company whose assessable income includes its share of the attributable income of a CFC that is a related company at the end of a statutory accounting period of the CFC. It will operate to enable such income to qualify for a foreign tax credit under section 160AF.

The section will have effect if a share (the company's attribution percentage) of a CFC's attributable income is included in a resident company's assessable income of a year of income under section 456 of Part X (paragraph 160AFCA(a)). The amount that is included in the company's assessable income is referred to in section 160AFCA as the "section 456 amount". It is also a requirement that the CFC be related to the resident company at the end of the CFC's statutory accounting period, as defined in section 319 of Part X (paragraph 160AFCA(b)). The existing rules in section 160AFB of the Principal Act (outlined in the introductory note) for determining whether a foreign company is related to an Australian company will apply for the purpose of paragraph (b).

The amendments to subsection 6AB(1) of the Principal Act to be made by clause 5, will provide that, for the purposes of computing the amount of the foreign tax credit allowable to the company in respect of the section 456 amount, that amount is to be treated as foreign income. New paragraph 160AEA(1)(n) will treat that amount as passive income (see notes on subsection 160AEA(1) to be inserted in the Principal Act by clause 29 and the amendment of subsection 160AF(7) of that Act by clause 30).

To be entitled to a credit for foreign tax pursuant to subsection 160AF(1) a taxpayer must have been personally liable for and have paid that tax. Where paragraphs (a) and (b) are satisfied the section provides that the resident company will be treated as having been personally liable for, and to have paid, an amount of foreign tax equal to the company's attribution percentage of the notional allowable deductions under section 393 which, in other words, is that part of the tax (Australian and foreign) paid by the CFC as is referable to the attributable income of the CFC. Credit will therefore not be allowable in respect of tax paid by the CFC on amounts that are not included in the calculation of the attributable income.

Example

A resident company owns 80 per cent of the shares of a CFC resident in an unlisted country. During the statutory accounting period of the CFC ending 30 June 1991, the CFC derives income and pays taxes as follows:

Profits of a UK permanent establishment (no part of this is attributable) $1,000
UK tax on these profits $ 300
Income derived in the unlisted country (assume entire amount is attributable) $5,000
Tax paid in the unlisted country on the profits of the permanent establishment as well as on other income $ 600

The taxes deemed to have been paid by the resident company in respect of the attributable income of the CFC will be calculated as follows:

·
attribution percentage is 80 per cent
·
tax paid by the CFC in relation to attributable income is:

($5,000)/($6,000) * $600 = $500

·
tax deemed to have been paid by the resident company is:

80 per cent of $500 = $400

.

Subsection 6AB(3A), to be inserted in the Principal Act by clause 5, will provide that, except as provided by section 160AFCA, the taxpayer is not to be taken for the purposes of Division 18 to have paid any foreign tax in respect of the section 456 amount.

Section 160AFCB: Foreign tax in respect of amounts assessable under section 457

Section 160AFCB deals with the provision of foreign tax credits to a resident company whose assessable income includes an amount that is attributed to that company under section 457 in respect of a change of residence by a CFC from an unlisted country to a listed country or to Australia (paragraph (a)). It will operate to enable that amount to qualify for a foreign tax credit under section 160AF.

The amount that is included in the resident company's assessable income is referred to in section 160AFCB as the "section 457 amount". It is also a requirement that the CFC be related to the resident company at the time when the change of residence status occurred (referred to as the "residence-change time") (paragraph (b)). The existing rules in section 160AFB of the Principal Act for determining whether a foreign company is related to an Australian company will apply for the purpose of paragraph (b).

The amendments to subsection 6AB(1) of the Principal Act to be made by clause 5, will provide that, for the purposes of computing the foreign tax credit allowable to the company in respect of the section 457 amount, the amount is to be treated as foreign income. New paragraph 160AEA(1)(n) will treat the amount as passive income (see notes on subsection 160AEA(1) to be inserted in the Principal Act by clause 29 and the amendment of subsection 160AF(7) of that Act by clause 30).

To be entitled to a credit for foreign tax pursuant to subsection 160AF(1), a taxpayer must have been personally liable for and have paid that tax. Paragraph (c) provides that the resident company will be treated as having been personally liable for, and to have paid, an amount of foreign tax in respect of the section 457 amount equal to the total of the foreign tax and Australian tax paid by the CFC on that amount.

Paragraph (d) deals with the case where the section 457 amount was attributable in whole or in part to a non-portfolio dividend received by the CFC from a foreign company that, at the time the dividend was paid, was related to a resident company to which the section 457 amount was attributed. In this case, the resident company will be taken to have paid a proportion of the foreign tax that the CFC would have been taken to have paid under section 160AFC in respect of that dividend had it been a resident company. That proportion would depend on the attribution percentage of the resident company in relation to the CFC at the residence-change time.

In broad terms, an Australian company that receives a dividend from a related foreign company is treated, under sections 6AB and 160AFC, as having paid foreign company tax paid by the related foreign company on that portion of the profits of the company out of which the dividend is paid. A foreign company that pays a dividend to a related Australian company, and which has itself received a dividend from another related company, is deemed to have paid, in addition to its own underlying tax, a portion of the underlying tax paid by the second related foreign company on the profits out of which it paid the dividend to the first foreign company. The underlying tax is traced through a chain of related foreign companies.

Paragraph (d) will have the effect that the CFC will be deemed to have paid underlying tax in relation to a dividend paid to the CFC by a foreign company if the CFC and the foreign company that paid the dividend are both related to the resident company. The resident company to which the section 457 amount is being attributed will be treated as having been personally liable for and as having paid that part of that underlying tax as in equal to its attribution percentage of that tax.

Only taxes that relate to the section 457 amount could be taken into account under this section for the purposes of calculating the foreign tax credit that would be allowable.

Subsection 6AB(3A), to be inserted in the Principal Act by clause 5, will provide that, except as provided by section 160AFCB, the taxpayer is not to be taken for the purposes of Division 18 to have paid any foreign tax in respect of the section 457 amount.

Section 160AFCC: Foreign tax in respect of amounts assessable under section 458

Section 160AFCC sets out the rules relating to the computation of foreign taxes for which foreign tax credits will be allowable to a resident company whose assessable income includes, under section 458 of Part X, a dividend paid by a CFC resident in an unlisted country to a CFC in another country.

By paragraphs (a) and (b), the provisions of the section will apply if the assessable income of a resident company includes an amount in respect of a dividend paid by a CFC resident in one unlisted country to a CFC resident in another country (paragraph 160AFCC(a)). The amount that is included in the company's assessable income is referred to in section 160AFCC as the "section 458 amount". It is also a requirement that both CFCs were related to the resident company at the time the dividend was paid (paragraph 160AFCC(b)).

The amendment to subsection 6AB(1) of the Principal Act, to be made by clause 5, will deem the section 458 amount to be foreign income derived by the resident company and thus eligible for foreign tax credit under section 160AF of the Principal Act. By virtue of new paragraph 160AEA(1)(n) (being inserted in the Principal Act by clause 29), the section 458 amount will also be treated as passive income for the purposes of the computation of the foreign tax credit separately on each of the three classes of income under subsection 160AF(7) and new subsection 160AEA(1) of the Principal Act.

Paragraphs (c) and (d) contain the formulae for the computation of the foreign taxes that the resident company will be deemed to have been personally liable for and to have paid in respect of the section 458 amount.

A part of the direct tax (generally, dividend withholding tax) paid on the dividend is deemed to have been paid by the resident company (paragraph 160AFCC(c)). That part is computed using the formula:

(Section 458 amount) * (Foreign tax)/(Dividend)

The direct tax referred to in paragraph (c) will not include tax paid by the recipient CFC in a country in which it is treated as resident, domiciled or having its place of central control and management.

The resident company is also to be deemed to have paid underlying tax in relation to that dividend of an amount equal to that which the CFC that received the dividend would have been taken to have paid under section 160AFC had that CFC been a resident company at the time the dividend was paid (paragraph 160AFCC(d)). However, in computing the amount of underlying tax, only dividend flows between foreign companies that would have been related to the taxpayer at the time the dividends were paid are to be taken into account. Paragraph (d) also provides that section 160AFC is to be applied as though both foreign and Australian taxes paid by the CFC that paid the dividend qualified as underlying taxes under that section.

Under the proposed subsection 160AFC(5A) (see notes on clause 32) the underlying tax that could qualify for a foreign tax credit under section 160AFC would not include any underlying tax that is attributable to the exempting profits percentage of a dividend.

The term "exempting profits percentage" is defined in proposed section 379 to mean, broadly, that part of the dividend that represents profits of a permanent establishment in a listed country that have been subject to tax in that country and is not eligible designated concession income; non-portfolio dividends received from a listed country company; income taxed by assessment in Australia; or dividends franked in accordance with Part IIIAA.

The balance of the dividend would include that part of the dividend, if any, that was paid out of income that has been attributed to resident taxpayers under proposed section 456 and the part of the dividend that comprises the section 458 amount. The underlying tax calculated under section 160AFC would relate to both parts of the dividend.

As only the section 458 amount is subjected to tax on the payment of the dividend, the underlying tax calculated under section 160AFC has to be reduced to the part referable to the section 458 amount. Paragraph (d) therefore provides that the credit for underlying tax computed by applying section 160AFC is to be adjusted in the proportion:

(Section 458 amount)/(Dividend - (Exempting profits percentage))

Subsection 6AB(3A), to be inserted in the Principal Act by clause 5, will provide that, except as provided by proposed section 160AFCC, the taxpayer is not to be taken for the purposes of Division 18 to have paid any foreign tax in respect of the section 458 amount.

Section 160AFCD: Foreign tax in respect of amounts exempt under section 23AI

Section 160AFCD deals with situations where an attribution account payment (see notes on section 365 of Part X) made to a taxpayer by an attribution account entity (see notes on section 363 of Part X) is exempt from tax in Australia in whole or in part under new section 23AI (see notes on clause 8) because the attribution account payment is treated as paid out of the attributable income of a CFC that has previously been included in the assessable income of the taxpayer. This section provides that the tax on the attribution account payments (for example, a withholding tax on a dividend) are to be creditable taxes, notwithstanding that the attribution account payments are exempt from tax. In the case of a resident company that receives a dividend from a related foreign company, a credit would also be allowed for underlying taxes in respect of the dividends.

Paragraph (a) provides that the amount of the attribution account payment that is exempt under proposed section 23AI (referred to in section 160AFCC as the "section 23AI exempt part') is to be treated as if it were foreign income that is included in the assessable income of a taxpayer for the purposes of paragraph 160AF(1)(a), which provides that a credit is allowable under section 160AF only if the foreign income is included in the taxpayer's assessable income.

Paragraph (a) also provides that the section 23AI exempt part is not treated as foreign income for the purposes of paragraph 160AF(1)(d). The section 23AI exempt part would not, therefore, have the effect of increasing the foreign tax credit limit calculated by reference to the Australian tax on the foreign source income of a taxpayer.

Paragraph (b) provides a formula for the computation of the amount of foreign tax that the taxpayer is to be deemed to have paid in respect of the section 23AI exempt part.

The formula for the computation of the foreign tax for which a credit will be available is:

(EP * DT) + (AEP * UT) - AT

The amount determined under the

(EP * DT)

component of the formula will be that proportion of the direct tax on the attribution account payment that relates to the section 23AI exempt part of the payment. For example, if a taxpayer received an attribution account payment of $1000 of which $500 was exempt under section 23AI and on which withholding tax of $100 was paid, the taxpayer would be entitled to a credit of $50 (50 per cent of $100). Only the

(EP * DT)

component of the formula will apply to the computation of the foreign tax credit in the case of a taxpayer other than a resident company that receives an attribution account payment, being a dividend, from a related foreign company.

A resident company that receives from a related foreign company a dividend that includes a section 23AI exempt part will be deemed to have paid, and to have been personally liable for (in addition to the foreign tax computed using the component

(EP * DT)

) foreign tax computed under the component

(AEP * UT) - AT

. The

(AEP * UT)

component refers to the underlying tax computed under section 160AFC in respect of the dividend other than that part of the dividend that is exempt from tax under proposed section 23AJ (see notes on clause 8).

The formula component "UT" refers to the underlying tax that the resident company that received the dividend is taken to have paid in respect of the dividend received by it. The amount of this tax is computed under section 160AFC. However, the underlying tax in respect of the dividend is to include only foreign tax other than any CFC-type foreign tax imposed by a law of a listed country. Clause 28 will insert, in subsection 160AE(1) of the Principal Act, a definition of "CFC-type foreign tax". That term refers to a foreign tax that corresponds to the tax on income that is included in assessable income under section 456. It would refer, for example, to the income tax levied under the US Subpart F provisions of the Internal Revenue Code and to corresponding measures in the UK, Canada, France, the Federal Republic of Germany, Japan and New Zealand.

The last component "AT" relates to the foreign tax for which credit was allowed to a company under section 160AFCA when the attributable income out of which the dividend was paid was attributed to the company or under sections 160AFCB or 160AFCC when certain amounts are included in the assessable income of the company under sections 457 and 458. This amount is to be deducted from the underlying tax credit that would otherwise be allowable so that a credit would not be allowed twice for the same foreign tax. The definition of the formula component "AT" also ensures that the amount of the attributed tax that is taken into account in applying the formula cannot exceed the amount in the formula component

(AEP * UT)

. The effect of this restriction is that the amount of the tax referred to in

(EP * DT)

will not be reduced.

The component "AT" of the formula is defined as the amount of any attributed tax account debit arising for the attribution account entity in relation to the taxpayer when the attribution account payment was made. Division 5 of Part X, being inserted by clause 49, deals with the calculation of the amount of this component.

Subsection 6AB(3A), to be inserted in the Principal Act by clause 5, will provide that, except as provided by section 160AFCD, the taxpayer is not to be taken for the purposes of the Division to have paid and have been personally liable for, in respect of the proposed section 23AI exempt part, any foreign tax.

Clause 34: Losses of previous years

Under the existing foreign tax credit system, section 160AFD of the Principal Act has the effect that a foreign loss incurred by a taxpayer in a year of income, in respect of a class of income from a "foreign source", can be used to reduce income of the same class from the same foreign source that was derived:

·
in the case of a loss incurred in a year of income prior to the 1989-90 year of income, in any of the subsequent 7 years of income; or
·
in the case of any other loss, in any subsequent year of income.

The Bill will repeal the existing section 160AFD and replace it with a new section 160AFD. Broadly the new section will:

·
remove the per source/per country basis for quarantining of losses - that is, the section will alter the method of quarantining so that a foreign loss incurred by a taxpayer in a year of income, in respect of a class of income, can be used to reduce any foreign income of the same class that is derived in a subsequent year of income;
·
alter the classes of income to add the modified passive class of income (generally, passive income other than interest) - that is, the classes of income for foreign loss quarantining purposes will be interest income, modified passive income, income from offshore banking and other income;
·
ensure that any amount that is not assessable income is disregarded in the calculation of the foreign loss or in determining the amount of a loss which may reduce assessable income;
·
make it clear that the quarantining measures of section 79D and the loss provisions of section 160AFD have no application to gains and losses arising under Part IIIA of the Principal Act; and
·
introduce anti-loss trafficking rules.

Subsection 160AFD(1) reduces a taxpayer's "assessable foreign income" of a "class of assessable foreign income" (see notes on subsection (8)) by the amount determined in accordance with the formula "total loss" less "recouped loss". The subsection only applies where the loss in question was incurred prior to the 1989-90 year of income. The "total loss" is the sum of the overall foreign losses incurred by the taxpayer in the previous seven years of income and the "recouped loss" is that part of the total loss as has already been used to reduce assessable foreign income. It is implicit in the formula that the assessable foreign income of the taxpayer may only be reduced to nil. That is, where the amount calculated in accordance with the formula in subsection (1) exceeds the assessable foreign income of the class, the amount of reduction is limited to the amount of the income.

Subsection 160AFD(2) corresponds to subsection (1) except that it applies where the overall foreign loss in respect of a class of assessable foreign income is incurred in the 1989-90 or subsequent year of income. In such cases the loss may reduce the assessable foreign income of that class in any subsequent year of income - that is, there is no seven year restriction on the carrying forward of that loss.

Subsection 160AFD(3) corresponds to existing subsection 160AFD(2), and applies where a taxpayer has incurred overall foreign losses in respect of a class of assessable foreign income in two or more pre-1990 years of income, or two or more post-1989 years of income. The principles to be applied in taking the various losses of a class into account are that pre-1990 losses are taken into account before post-1989 losses (paragraph (a)) and two or more losses of the same class are to be taken into account in the order in which they were incurred (paragraph (b)). Thus, losses subject to a seven year restriction are to be taken into account before unrestricted losses.

Subsection 160AFD(4) corresponds to existing subsection 160AFD(3). It sets out the manner in which the amount of the credit for foreign taxes paid in respect of income derived by the taxpayer from a particular activity in a year of income will be computed where the assessable income from the same activity has been reduced, by virtue of the operation of subsection (1) or (2), by the amount of the foreign loss. It requires the amount of the foreign tax for credit purposes to be calculated on the foreign income as so reduced.

Subsection 160AFD(5) corresponds to existing subsection 160AFD(4) and makes it clear that the provisions relating to the deduction of foreign losses will have effect whether or not the country or countries in which the losses were incurred permits the taxpayer's income of one year to be reduced by losses incurred in previous years.

Subsection 160AFD(6) is an anti-avoidance measure that is consequential upon the removal of the source of income basis for the quarantining of losses. It corresponds to the anti-loss trafficking provisions of the Principal Act that apply in relation to domestic losses. Broadly, the subsection operates to prevent an overall foreign loss in respect of a class of assessable foreign income that was incurred by a taxpayer company in a year of income from reducing the assessable foreign income of that class in a later year of income in a case where, had the loss been incurred under section 80, the loss would have been denied by the operation of section 80A or 80DA. Section 80A places restrictions on the allowance of a deduction to a company of a loss of a previous year by requiring that shares carrying more than 50 per cent of all voting, dividend and capital rights be beneficially owned at all times during the subsequent (recoupment) year by the same person or persons who individually or collectively held shares carrying the same rights in the year in which the loss was incurred. By section 80E, section 80A will not apply if the company carries on at all times in the year of recoupment the same business as it carried on immediately before the change of ownership. Section 80DA prevents a company from claiming a deduction for a past year loss where the continuity of ownership test in section 80A is satisfied but the benefits of the allowance of the loss would be conferred, wholly or mainly, on a person or persons who were not shareholders of the company during the year in which the loss was incurred.

Subsection 160AFD(7) provides for the calculation of an overall foreign loss for each class of assessable foreign income. In doing so, it is necessary to ignore the operation of section 79D of the Principal Act. The loss is then calculated as the excess of the deductions (called "foreign income deductions") relating to that class of assessable foreign income over the assessable foreign income of that class. Where there is no assessable foreign income, the loss is the amount of the foreign income deductions. Unlike existing subsection 160AFD(6) the operation of paragraph 23(q) of the Principal Act, relevant in the existing section 160AFD to the calculation of a loss incurred prior to the commencement of the foreign tax credit system, is not disregarded. This is no longer necessary since the losses incurred prior to the 1990-91 year of income will be calculated under the existing section 160AFD and transposed to the new provision in accordance with the transitional provisions contained in clause 53 of this Bill (see notes on that clause).

Subsection 160AFD(8) identifies the "classes of assessable foreign income" to be taken into account in determining the loss reduction to be made under subsection (1) or (2). These classes are:

·
assessable foreign income that is interest income (paragraph 160AFD(8)(a)). By virtue of existing subsection 160AE(3) of the Principal Act, interest income will be, broadly, interest or a payment in the nature of interest in respect of:

· .
money lent, advanced or deposited;
· .
credit given; or
· .
any other form of debt or liability;

but will not include interest from a transaction directly related to the active conduct of a trade or business; interest from banking; or certain related party transactions where the amount of interest is below specified levels;
·
assessable income foreign income that is modified passive income (paragraph (8)(b)). The term "modified passive income" is defined in subsection 160AEA(2) - see notes on that subsection;
·
assessable foreign income that is offshore banking income (paragraph (8)(c)). The term "offshore banking income" is defined in existing subsection 160AE(4) to mean, broadly, income from offshore banking transfers within the meaning of Division 11A of Part III of the Principal Act; and
·
all other assessable foreign income (paragraph (8)(d)).

Subsection 160AFD(9) defines the terms used in section 160AFD as follows:

"assessable foreign income" is defined in relation to a taxpayer's year of income to comprise two kinds of amounts derived by the taxpayer. First, by paragraph (a) the term will encompass amounts that are foreign income, within the meaning of section 6AB of the Principal Act (see notes on clause 5). This will not generally include capital amounts, the extended meaning of foreign income given by subsection 160AE(2) having no relevance to section 160AFD (see notes on clause 28). By paragraph (b) the term will also encompass a capital gain or profit from a source in a foreign country to the extent that the profit or gain is included in the taxpayer's assessable income for the year of income. However, that part of the profit or gain that is taken into account under Part IIIA of the Principal Act will not be assessable foreign income. This makes it clear that in the quarantining and carry forward of foreign losses no regard is had of amounts that have been included in assessable income because of the operation of the capital gains provisions of Part IIIA of the Principal Act.
"foreign income deduction" is defined in relation to a class of assessable foreign income to mean a deduction that is allowed or allowable from a taxpayer's assessable income of any year of income, whether or not assessable income is actually derived in any year of income. Where the deduction relates only in part to a particular class of assessable foreign income, the deduction is to be apportioned.
"post-1989 year of income" means the 1989-90 or a subsequent year of income; and
"pre-1990 year of income" means a year of income earlier than the 1989-90 year of income, and includes substituted accounting periods adopted in lieu of those financial years.

Clause 35: Carry-forward and transfer of excess credits

Where the assessable income of a taxpayer of a year of income includes foreign income and the taxpayer has paid foreign tax in respect of that income, a credit is allowable for the lesser of:

·
the amount of the foreign tax; and
·
the amount of Australian tax payable in respect of the foreign income.

A taxpayer will therefore have an excess credit in relation to a class of income for a year of income where the amount of foreign tax paid, or deemed to have been paid, by the taxpayer on foreign income of that class exceeds the Australian tax payable by the taxpayer in respect of foreign income of the same class for that year.

The existing provisions of the Principal Act do not provide for the carry-forward of excess foreign tax credits but do provide, under section 160AFE, for the transfer of excess credits between Australian resident companies within a company group where there is 100 per cent common ownership. An excess credit of a member of a company group in respect of a particular class of income for a year of income is only creditable against income of the same class of the same year of income of another member of that group.

Clause 35 will amend section 160AFE to allow a resident taxpayer to carry forward an excess foreign tax credit that arises in a year of income in relation to a class of income for five years of income immediately following that year of income. The proposed carry-forward of excess credits will be available to all resident taxpayers. The excess credits have to be utilised in the order in which they arose.

A resident company that is a member of a company group where there is 100 per cent common ownership is to be permitted to transfer an excess credit in respect of a particular class of income for a year of income to another resident company in the same group that has a credit shortfall in respect of the same class of income. The credit that may be transferred in a year of income will include any carried-forward excess credit from previous years within the time limit for the carry-forward of credits.

As part of the mechanism for transfers, the transferor company (the "credit company") and the company receiving the transfer (the "income company") will be required to give written notice to the Commissioner of Taxation stating that the whole or a specified part of the excess credit should be transferred to the income company in the year of income. The income company will be able to utilise the excess credit transferred by the credit company only in the year of income in respect of which the transfer was made.

Paragraph (a) of clause 35 will omit subsection 160AFE(1) of the Principal Act (which provides that section 160AFE applies only to the transfer of excess credits of a member of a wholly owned company group to another member) and insert new subsections 160AFE(1) to (1E) to provide for the new scheme of carry forward and offset of excess credits.

New subsection 160AFE(1) sets out the conditions that have to be satisfied before a taxpayer may utilise excess credits and provides rules setting out the order in which those excess credits are to be utilised.

The subsection will apply to enable an excess credit generated in an earlier income year in relation to a class of income to be utilised by a taxpayer in a year of income if there is an initial credit shortfall for the same class of income for that year and some or all of that excess credit is available for use in that year. An initial credit shortfall for a class of income for a year will arise if the foreign tax paid on income of that class is less than the Australian tax payable on income of that class. The balance of an earlier year excess credit that is available for use in a year of income after deducting any part of that credit that is transferred to a group company in that year of income is referred to in section 160AFE as the post-transfer excess credit balance.

A taxpayer will be able to utilise excess credits in the order set out in paragraphs (c) to (g) - that is, broadly, on a first-in-first-out basis - to increase the taxpayer's foreign tax credit entitlement in a year of income in relation to the class of income, but only up to the amount of the initial credit shortfall for that year.

Where a company, being a member of a wholly-owned group of companies, has an excess credit transferred to it for a year of income, paragraph (1)(h) will enable that company to utilise that credit for that year of income to the extent that, after offsetting any other excess credit of its own available from the preceding five years, there remains a credit shortfall for that year for the relevant class of income.

Subsection 160AF(7) of the Principal Act will have the effect that, where a taxpayer has derived foreign income of two or more classes of income, the foreign tax credits will be computed separately for each class of income.

Subsection 160AFE(1A) provides that, where for a year of income a taxpayer has income only of one of the classes of income set out in subsection 160AF(7) of the Principal Act, that subsection is to be applied to that income as though that income were a particular class of income referred to in that subsection. In the absence of this provision, subsection 160AF(7) would apply to a taxpayer only if the taxpayer derived income of two or more classes in that year. This amendment enables the quarantining of credits on a class of income basis even where a taxpayer had only one class of income in a year of income. The taxpayer would not be able, for example, to carry forward an excess credit of that year to supplement foreign taxes on income of a different class of a subsequent year.

Subsection 160AFE(1B) sets out the meaning of the terms "initial excess credit" and "initial credit shortfall" for the purposes of the application of this section. It provides that, in relation to a class of income of a taxpayer in relation to a year of income, the initial excess credit amount will be the amount by which the amount ascertained under paragraph 160AF(1)(c) (the foreign tax paid in respect of the foreign income) exceeds the amount ascertained under paragraph 160AF(1)(d) (the Australian tax payable in respect of the foreign income). An initial credit shortfall will occur where the foreign tax ascertained under paragraph 160AF(1)(c) is less than the Australian tax payable in respect of that class of foreign income.

Subsection 160AFE(1C) will apply where a taxpayer has an initial excess credit for a class of income of a year of income. It provides the basis for determining the "opening excess credit balance", "post-transfer excess credit balance" and "closing excess credit balance" for a class of income of the taxpayer in relation to a year of income (referred to in the subsection as the "original year of income") in which there is an initial excess credit for a class of income.

Paragraph (1C)(a) determines the "opening excess credit balance" that arose in the original year of income for a class of income and that is available to be utilised in a later year of income (referred to as the "current year of income"). The current year of income must be one of the five years of income immediately following the original year of income.

If the current year of income is the first year of income after the original year of income, the amount of the excess credit that arose in the original year of income and that could be utilised in the current year (the opening excess credit balance) will be the initial excess credit reduced, in the case of a company, by so much of it as is transferred by the company under subsection (1D) for utilisation by another member of the wholly owned group of companies for the original year of income.

If the current year of income is a later year of income, the opening excess credit balance will be the closing excess credit balance (as defined in paragraph (1C)(c)) of the previous year.

Paragraph (1C)(b) determines the "post-transfer excess credit balance" for a class of income of the taxpayer in relation to the original year of income that is available for a later year of income (the "current year of income"). The post-transfer excess credit balance will be the opening excess credit balance (see notes on proposed paragraph (1C)(a) above) reduced by so much of it as is transferred by the taxpayer under proposed subsection (1D) in the current year of income. The taxpayer could use these excess credit balances to increase the foreign tax credits for the year of income. Any balance of the excess credits could be carried forward to the succeeding year within the five year limit for carry forward of credits.

Paragraph (1C)(c) determines the "closing excess credit balance" for a class of income of a taxpayer in relation to the original year of income that is available for a later year of income (the "current year of income"). The closing excess credit balance will be the post-transfer excess credit balance for the current year of income (see notes on paragraph (1C)(b) above) reduced by so much of it as is taken to have been utilised in the current year of income under proposed subsection 160AFE(1) (see earlier notes).

Subsection 160AFE(1D) deals with the transfer of an excess credit during the current year of income from one resident company (referred to as the "credit company") to another resident company (referred to as the "income company") and sets out, in paragraphs (a), (b) and (c), the conditions that must be satisfied before an excess credit may be transferred.

Paragraph (a) requires that the credit company must have either an initial excess credit in relation to a class of income for the current year of income (see notes on proposed paragraph (1B)(c)) or an opening excess credit balance (see notes on proposed paragraph 160AFE(1C)(a)) for a class of income that is available for utilisation in the current year of income.

Paragraph (b) provides that section 160AF of the Principal Act must apply in relation to the same class of income of the income company which is a group company in relation to the credit company. This will ensure that the credit is able to be transferred only in relation to the same class of income that the income company has derived.

Paragraph (c) provides that the credit company and the income company must give notice in writing, stating that the whole or a specified part of the initial excess credit (see notes on proposed paragraph (1B)(c)) or the opening excess credit balance (see notes on proposed paragraph (1C)(a)) should be transferred to the income company for utilisation in the current year of income. The notice should be signed by the public officers of each company and furnished on or before the date of lodgement of the return of income for the current year of income of the income company, or within such further time as the Commissioner allows.

Where paragraphs (a), (b) and (c) are complied with, the notice of transfer will give effect to the transfer concerned.

Subsection 160AFE(1E) will provide that the transfer of excess credits can operate only in relation to two classes of income - passive income and all other income other than offshore banking income. In effect, this subsection will preclude any transfer of excess credits relating to offshore banking income.

Paragraph (b) of clause 35 will delete existing subsections 160AFE(7) and (8). These subsections define an "excess credit" in relation to a class of income and provide that excess credits may be transferred to a group company only in relation to interest income and all other income (other than offshore banking income) respectively. As this rule will be replaced by the rule in subsection (1E), subsections 160AFE(7) and (8) are to be repealed.

The operation of the amendments of section 160AFE is illustrated in the following examples.

Example 1

Taxpayer, an Australian resident, derived foreign passive income and paid foreign taxes on the income as follows:

Income Year Foreign Income Foreign Tax Paid Australian Tax Payable Excess Credit (Shortfall)
1 100 50 30 20
2 100 35 40 (5)
3 200 100 80 20
4 100 30 35 (5)
5 100 45 30 15
6 100 45 30 15

In year 1 there is an excess credit of $20. In year 2 there is a credit shortfall of $5. Taxpayer could carry forward the excess credit from year 1 to be offset against the credit shortfall of year 2, leaving a balance of $15 which will be able to be carried forward and offset up to the end of year 6 (being an excess credit that arose in year 1).

In year 3, there is an excess credit of $20 which will be available for utilisation until the end of year 8.

In year 4, there is a credit shortfall of $5. The excess credit balance from year 1 could be used to make up this shortfall, leaving a balance of $10. This balance would remain unutilised in years 5 and 6, as there is an excess credit in each year. Consequently, the $10 excess credit would lapse at the end of year 6.

The initial excess credit balances from years 3, 5 and 6 would remain available for utilisation until the end of years 8, 10 and 11 respectively.

Example 2

This example illustrates the meanings of certain expressions that are used in section 160AFE.

An Australian resident company (Ausco) derived only foreign passive income in the year of income 1990-91 and subsequent years and paid foreign taxes on the income as follows:

Income year Foreign income Foreign tax paid Australian tax payable Credit transferred to group company   $ $ $ $
1 500 300 195 -
2 500 200 195 20
3 500 180 195 35
4 500 250 195
5 500 200 195
6 500 200 195

·
The "original foreign tax upper limit" for income year 1 is the amount of foreign tax that is taken into account, under paragraph 160AF(1)(c), in determining the foreign tax credit that is available to the taxpayer in year 1 - $300 in the example.
·
The "Australian tax upper limit" for income year 1 is the amount of Australian tax that is taken, under paragraph 160AF(1)(d), to be payable by the taxpayer in respect of the foreign income of year 1 - $195 in the example.
·
The "initial excess credit" in relation to year 1 is the excess of the original foreign tax upper limit for year 1 over the Australian tax upper limit - that is, $105 in the example.
·
The "initial credit shortfall" for year 3 is the excess of the Australian tax upper limit for year 3 over the original foreign tax upper limit - that is, $15 in the example.
·
The "opening excess credit balance" for year 1 that is available for year 2 is the initial excess credit for year 1 ($105) reduced by any amount of that credit which is transferred by the taxpayer, being a company, to a group company for year 1 (nil). This amount could be utilised by the taxpayer in year 2 to make up any initial credit shortfall for year 2. Since the taxpayer is a company, the excess credit could be transferred to a group company.
·
The "post transfer excess credit balance" for year 1 that could be used in year 2 is the opening excess credit balance of year 1 that is available for utilisation in year 2 ($105), reduced by any transfer made in year 2 to a group company ($20) - that is, $85 in the example. This represents the part of the excess credits that could be utilised in year 2 to increase the taxpayer's own foreign tax credits. Any balance of the excess credits could be carried forward to year 3.
·
The "opening excess credit balance" for year 1 that is available for year 3 is the closing excess credit balance for year 2 in relation to the excess credits of year 1. The closing excess credit balance for year 2 is the opening excess credit balance of year 1 that was available for utilisation in year 2 ($105), reduced by:

·
any amount of that credit that was used by the taxpayer to increase the foreign tax credit for year 2 (nil), and
·
any amount transferred by the taxpayer to a group company for year 2 ($20).

That is, $85 in the example.
This amount could be used by the taxpayer to increase foreign tax credits in year 3. A taxpayer that is a company could transfer this amount in year 3 to a group company.
·
The post transfer excess credit balance for year 1 that could be used for year 3 is the closing excess credit balance for year 2 ($85) reduced by any transfer made to a group company for year 3 ($35) - that is $50 in the example. This amount would be available to the company to increase its own foreign tax credits in year 3 (up to $15). Any balance of the credits that could not be utilised could be carried forward to year 4 - that is, $35 in the example.

Clause 36: Penalty for false or misleading statements

Section 160AS of the Principal Act imposes additional tax on a company where that company makes a statement to a taxation officer that is false or misleading in a material particular or that, by the omission of some matter, is rendered misleading and, as a consequence, the company's franking deficit tax is less than it should have been. The amendment of section 160AS by clause 36 will ensure that a statement in a document or copy of a document produced to the Commissioner of Taxation in response to a request under paragraph 264A(1)(d) or (e) (see notes on clause 48) will not be a statement to which section 160AS applies.

Clauses 37 to 43: Amendment of provisions relating to capital gains and losses

Introductory Note

Part IIIA of the Principal Act deals with the ascertainment of a net gain to be included in a taxpayer's assessable income. Broadly, that Part applies to residents for asset disposals, or deemed disposals, where the asset was acquired, or is deemed to have been acquired, after 19 September 1985. In respect of non-residents that Part applies only to the disposal of a taxable Australian asset acquired, or deemed to have been acquired, after that date. However, Part IIIA does not apply to the disposal of an asset which has been used exclusively to produce exempt income. It also does not apply to the disposal of an assets where provision has been made in Part IIIA (called a "roll-over provision") for the deferral of any gain that would otherwise arise on that disposal. The gain on disposal of an asset is usually calculated as the difference between the consideration and the cost of the asset, indexed for inflation. In some circumstances the cost of the asset is deemed to have been reduced. Consequent upon other amendments to be made by this Bill, clauses 37 to 43 will amend the operation of Part IIIA to:

·
unlike the existing provisions deeming migrants to have acquired their assets for market value on the date they became residents of Australia, provide that a CFC, or in certain circumstances a trust, that becomes a resident will have capital gains and losses calculated from the time the asset was originally acquired (clause 37);
·
ensure that assets which generate the categories of income to be made exempt by this Bill will not be excluded from the operation of Part IIIA (clause 38);
·
provide an adjustment to the consideration received on the disposal of an asset by a taxpayer where any part of the consideration has effectively been included in assessable income of that taxpayer as a deemed dividend (clause 39);
·
ensure that the receipt of certain trust distributions that are to be excluded from assessable income by this Bill do not result in an adjustment to the cost base of an asset (clause 40); and
·
modify the roll-over provisions of Part IIIA to ensure that the cost base of certain assets (not being taxable Australian assets) transferred by a CFC to a resident is adopted in the calculation of the profit or loss on subsequent disposals of such assets by the resident (clauses 41 to 43).

Clause 37: What constitutes a disposal or acquisition

Clause 37 will amend section 160M of the Principal Act. Section 160M is part of Division 2 of Part IIIA which establishes the asset disposals to which Part IIIA applies. Section 160M sets out rules for determining whether a disposal or acquisition of an asset has occurred, including circumstances in which a disposal or acquisition is to be deemed to have occurred.

Subsection 160M(12) applies where a non-resident taxpayer becomes a resident, one consequence being that Part IIIA will then apply to all asset disposals and not only to disposals of taxable Australian assets. To prevent the application of Part IIIA to gains or losses that had accrued on assets (other than taxable Australian assets) prior to the time when the taxpayer became a resident, subsection 160M(12) provides, broadly, that such assets are to be deemed, for purposes of Part IIIA, to have been acquired by the taxpayer at the relevant time for a consideration equal to their market value at that time.

Clause 37 will amend section 160M by inserting four new subsections - 160M(12A), (12B), (13A) and (14A).

Subsection 160M(12A), to be inserted by paragraph (a) of Clause 37, will provide that subsection 160M(12) is not to apply where a CFC ceases to be a resident of an unlisted country or a listed country and becomes a resident of Australia. This reflects the position that, in the calculation of its attributable income, the CFC would have been treated as if it were a resident, and Part IIIA would have applied to its assets other than taxable Australian assets. Were subsection 160M(12) to apply in these circumstances, it would have the effect of excluding from the application of Part IIIA gains or losses that had accrued on such assets owned by a company while it was a CFC.

New subsection 160M(12B), also to be inserted by paragraph (a), defines the terms "CFC", "resident of a listed country" and "resident of an unlisted country" that are used in subsection 160M(12A) as having the same meaning as in Part X - see notes on that Part.

Subsection 160M(13) provides, in part, that the assets (other than taxable Australian assets) of a non-resident trust estate that becomes a resident trust estate are to be deemed, for the purposes of Part IIIA, to have been acquired by the trust estate immediately before the time the trust estate became a resident trust estate for a consideration equal to their market value at that time. Subsection 160M(14) is the corresponding provision that deals with a non-resident unit trust that becomes a resident unit trust.

Paragraphs (b) and (c) of clause 37 insert subsections (13A) and (14A) which will provide, respectively, that subsections 160M(13) and 160M(14) are not to apply where a non-resident trust estate or a non-resident unit trust that was a CFT within the meaning of section 342 because of paragraph 342(a) (that is, a trust estate for which there is an eligible transferor - see notes on section 342) becomes a resident trust estate or a resident unit trust.

Clause 38: Capital gains and capital losses

Clause 38 will amend section 160Z, which is one of the provisions of Division 3 of Part IIIA of the Principal Act. Division 3 provides the rules for the determination of a capital gain or a capital loss for the purposes of the capital gains provisions of Part IIIA of the Principal Act. Subsection 160Z(6) gives effect to the general rule that any capital gain arising from the disposal of an asset that was used solely for the purpose of producing exempt income is not to be taken into account in the calculation of the amount to be included in assessable income under Part IIIA. Correspondingly, paragraph 160Z(9)(c) provides that a capital loss incurred by a taxpayer on the disposal of an asset that was used solely for the purpose of producing exempt income is not to be taken to have been incurred by the taxpayer.

Paragraph (a) of clause 38 will modify subsection 160Z(6) and paragraph 160Z(9)(c) by substituting the term "eligible exempt income" for the term "exempt income".

The term "eligible exempt income" is defined in subsection 160Z(10) (to be inserted by paragraph (b) of clause 38) to mean exempt income other than income that is exempt under the new section 23AH (certain foreign branch income), 23AI (amounts paid out of previously attributed CFC income) or 23AJ (certain non-portfolio dividends from foreign companies) or paragraph 99B(2)(d) or (e) (previously attributed trust income). Comparably taxed gains arising on the disposal of certain assets used in a listed country branch of an Australian company will be disregarded for the purpose of Part IIIA under the new section 23AH. Gains or losses on the disposal of assets used to produce income that is assessable on attribution and exempt on distribution, in order to avoid double taxation, will be subject to the capital gains provisions of Part IIIA. So too will gains or losses arising on the disposal of shares held by Australian companies in foreign companies, even where dividends which are received from those companies are exempt under new section 23AJ.

Clause 39: Adjustment where section 47A applies to rolled-over assets

As a result of certain provisions of Part IIIA of the Principal Act (called "roll-over provisions"), that Part does not apply to certain disposals of assets that would otherwise be taken into account in determining the net gain or loss under that Part. Broadly, the effect of the roll over of an asset is that the accrued gain (or loss) is not taken to be realised and is deferred until there is a subsequent disposal of the asset.

However section 47A, to be inserted into the Principal Act by this Bill, will deem certain transfers of property or services to be a dividend which may be included in assessable income (see notes on clause 9). In applying section 47A no regard is to be had as to whether or not the asset has been rolled over in accordance with Part IIIA. As a result, it is possible that the accrued gain on an asset may be deferred for Part IIIA purposes at the same time that a part of the value of the asset is included in assessable income as a deemed dividend.

For example, a CFC may elect under the section 160ZZOA roll-over provision that Part IIIA not apply to the disposal of a taxable Australian asset to its parent. If the asset was transferred for no consideration, as it generally must be under section 160ZZOA, the whole or a part of the market value of the asset may be deemed to be a dividend under section 47A and included in the transferee's assessable income under section 44 of the Principal Act. Alternatively, in the case of the disposal of an asset (other than a taxable Australian asset) by a CFC to a resident the asset may be rolled over under the notional application of a roll-over provision in the calculation of the attributable income of the CFC (see notes on Subdivision C of Division 7 of Part X). Again, if transferred for consideration less than the market value of the asset, section 47A may apply and result in an amount being included in the assessable income of the transferee.

In either case, in the absence of a provision to the contrary, double taxation could arise on a subsequent disposal of the asset. Section 160ZFA (to be inserted by clause 39) addresses this potential double taxation.

The effect of this section will be that, in these circumstances, the consideration that is taken for the purposes of the application of Part IIIA to have been received by a person on the disposal of an asset is to be reduced.

Paragraphs (a) to (d) set out the conditions that are necessary for the application of this section. By paragraph (a), either of two requirements must be met. The first is that, because of the miscellaneous roll-over provisions contained in Division 17, roll-over relief granted by Part IIIA applies in respect of the disposal of an asset by a person (called the "transferor") to another person (called the "transferee") (subparagraph (a)(i)). Broadly, this means that roll-over relief under Division 17 has applied to the disposal of a taxable Australian asset by the non-resident company to another company, whether resident of Australia or not.

Alternatively, it must be the case that, in the calculation of the attributable income of a CFC in respect of a person (called the "transferor") Division 17, as it is modified for the purposes of that calculation, must have applied to a disposal of an asset by the CFC to another person (called the "transferee") (paragraph (a)(ii)). In effect, the disposal of the asset cannot be a disposal of a taxable Australian asset since such assets are excluded from the calculation of the attributable income of a CFC (see notes on section 408).

The second condition is that section 47A should have the effect, in relation to the transfer of the asset, that the transferor is taken to have paid a dividend to the transferee (paragraph (b)).

The third condition, specified in paragraph (c), is that the whole or a part of that dividend or an amount in respect of that dividend, should have been included in the assessable income of the transferee because:

·
the amount deemed to be a dividend under section 47A is included in the assessable income of the transferee under section 44 of the Principal Act (subparagraph (c)(i)); or
·
the amount deemed to be a dividend is included in the assessable income of any taxpayer under section 458 - dividends paid to a CFC which has a non-portfolio interest in the transferor - or section 459 - dividends paid to a CFC which does not have a non-portfolio interest in the transferor (subparagraph (c)(ii)).

The last requirement is that the transferee should, subsequently, dispose of that asset (paragraph (d)). Generally, this means that the disposal of an asset by a CFC to another CFC will fall within subparagraph (c)(ii), while a disposal to a resident will fall within subparagraph (c)(i).

Where these conditions are satisfied, the consideration that would otherwise be taken into account in respect of the disposal of the asset by the transferee is to be reduced. The amount of the reduction is to be the lesser of the amounts specified in paragraphs (e) and (f).

Paragraph (e) provides that the reduction in the consideration is to be the amount that was deemed to be a dividend under section 47A.

Paragraph (f), provides a limit to the amount of the reduction that would otherwise arise by virtue of paragraph (e).

Subparagraph (f)(i) applies where the roll-over provision of Division 17 was "actually" applied in the calculation of the taxable income of a company - that is, where subparagraph (a)(i) applies. In this case, the reduction of the consideration is limited to the amount of the capital gain that would have been included in the calculation of the net gain (or loss) of the transferor on the assumption that the roll-over provision had not applied.

Subparagraph (f)(ii) provides an equivalent treatment where the roll-over provision applied for the calculation of the attributable income of the CFC - that is, where subparagraph (a)(ii) applies. In that case, the amount of the reduction is limited to the gain that would have accrued in the calculation of the attributable income of the CFC in respect of the transferee.

Reducing the consideration to be taken into account by the lesser of the amounts in paragraphs (e) and (f) will ensure that the reduction is limited to the amount of the deemed dividend under section 47A that was assessed and that also represents the accrued capital gain up to the time of the roll over.

Clause 40: Return of capital on investment in trust

This clause will amend section 160ZM of the Principal Act by inserting new subsection (1A). Section 160ZM provides that, for the purposes of Part IIIA, where the trustee of a trust pays an amount to a taxpayer in respect of an interest or units in the trust that is not assessable income of the taxpayer, the payment is to be treated in effect as a return of capital and the cost base of the interest or units reduced by the amount of the payment.

By new subsection 160ZM(1A), new section 23AI (exemption of amounts paid out of previously attributed income) and new paragraphs 99B(2)(d) and (e) (previously attributed trust income), to be inserted in the Principal Act by clauses 8 and 16 - see notes on these clauses - are to be disregarded in determining whether an amount is assessable income of the taxpayer for the purposes of subsection 160ZM(1). That is, income that is assessable on attribution and only exempt by the abovementioned provisions in order to avoid double taxation will not be applied to reduce the cost base of the interest or units concerned under section 160ZM.

Clause 41: Transfer of asset from company or trust to spouse upon breakdown of marriage

This clause will amend section 160ZZMA of the Principal Act, which forms part of the roll-over provisions of Division 17 of Part IIIA, by inserting new subsections (3A) and (3B). Broadly, section 160ZZMA applies where a company or the trustee of a trust estate disposes of an asset to a person's spouse or former spouse in accordance with an order made, or a maintenance agreement approved, by a court under the Family Law Act 1975 or a corresponding law of a foreign country.

In these circumstances Part IIIA will not apply in respect of the disposal and:

·
an asset acquired by the transferor prior to 20 September 1985 will be deemed to have been acquired by the spouse or former spouse before that date; and
·
an asset acquired by the transferor after 19 September 1985 will be deemed to have been acquired by the spouse or former spouse at an amount equal to what would have been the indexed cost base to the transferor.

As a consequence of the introduction of an accruals basis for the taxation of income and profits of controlled foreign companies (CFCs) and certain non-resident trust estates, it will be necessary for certain taxpayers to calculate the "attributable income" of those entities. In doing so, section 160ZZMA may notionally be applied to determine whether, in calculating that attributable income, any asset disposals qualify for roll-over relief. The new subsections (3A) and (3B) are consequential upon that notional application of section 160ZZMA in calculating attributable income.

Where the disposal to the spouse of a person was by a company, subsection 160ZZMA(3A) may apply if certain conditions are satisfied. First, by paragraph (3A)(a), a person (not necessarily the spouse or former spouse acquiring the asset) must be required to calculate the attributable income of a company under Division 7 of Part X. Broadly, this means that the company must have been a CFC at the end of its accounting period and that there was at least one "attributable taxpayer" at that time - see notes on section 381

Secondly, paragraph (3A)(b) stipulates that section 160ZZMA must have notionally applied to the calculation of the attributable income of the CFC. Section 160ZZMA will only be taken to have notionally applied where:

·
the CFC was the first taxpayer mentioned in subsection 160ZZMA(1) - that is, the CFC disposed of an asset to a person's spouse or former spouse (subparagraph (b)(i)); and
·
the disposal by the CFC to the spouse or former spouse was not a disposal of a taxable Australian asset (subparagraph (b)(ii)).

In determining whether disposal was a disposal of a taxable Australian asset for subparagraph (b)(ii), the residency assumption in Division 7 of Part X is to be ignored. This will mean that the determination of whether an asset is a taxable Australian asset will be made on the basis that the CFC is a non-resident (see further notes on subsection 405(3)).

Where these conditions are satisfied, section 160ZZMA will have effect for the disposal of an asset by the spouse in the same way as it would have if Part IIIA were modified in accordance with Division 7 of Part X. Where the disposal of the asset to another person was further subject to a roll-over provision on disposal by the spouse or former spouse, Part IIIA would, subject to the modifications made by Division 7, have effect for the disposal by that other person.

The effect of the subsection will be that the application of Part IIIA to the spouse on a subsequent disposal, and the method of determining the capital gain or loss on that subsequent disposal, will be determined with regard to the provisions of Division 7 of Part X. For example, in the calculation of the attributable income of a CFC assets (other than taxable Australian assets) owned by the CFC on 30 June 1990, including assets acquired prior to 20 September 1985, will be deemed to have been acquired on 30 June 1990 (see notes on section 411). Where, in the calculation of the attributable income of the CFC, section 160ZZMA notionally applied to an asset actually acquired by the CFC prior to 20 September 1985, the asset will not be taken to have been acquired by the spouse or former spouse before that date. Thus existing paragraph 160ZZMA(2)(a), which operates to preserve the pre-CGT status of assets, will have no application to such assets. Further, in calculating the capital gain or loss on the subsequent disposal of such an asset, the consideration taken to have been paid for the asset by the spouse or former spouse would be the same amount that would be used to calculate the gain or loss if the CFC (and not the spouse or former spouse) had disposed of the asset. That is, either the market value or the cost base as at 30 June would be used, whichever produces the smaller gain or loss (see notes on section 412).

Where the disposal to the spouse or former spouse of a person was by the trustee of a trust estate subsection 160ZZMA(3B) may apply if certain conditions are satisfied. First, by paragraph (3B)(a), a taxpayer (not necessarily the spouse acquiring the asset) must be required to calculate the attributable income of a trust estate under section 102AAU of Division 6AAA. This means that, broadly, the trust estate must be one for which there is at least one "attributable taxpayer" - see notes on clause 18.

Secondly, paragraph (3B)(b) stipulates that section 160ZZMA must have notionally applied to the calculation of the attributable income of the trust estate. The section will only be taken to have notionally applied where:

·
the trustee of a trust estate was the first taxpayer mentioned in subsection 160ZZMA(1) - that is, the trustee disposed of an asset to a person's spouse or former spouse (subparagraph (b)(i)); and
·
the disposal by the trustee to the spouse or former spouse was not a disposal of a taxable Australian asset (subparagraph (b)(ii)).

In calculating the attributable income of a trust estate, the trust is assumed to be a resident taxpayer (see notes on section 102AAU). This assumption is similar to that made for the calculation of the net income of a trust estate for existing Division 6 of Part III of the Principal Act. Further, for the purpose of applying Part IIIA in the calculation of the attributable income, the trust is assumed to be a resident trust or resident unit trust, as the case may be, within the meaning of Part IIIA (see notes on paragraph 102AAZB). As for subsection (3A) in determining whether a disposal is a disposal of a taxable Australian asset, assumptions of residency are ignored.

Where these conditions are satisfied, section 160ZZMA will have effect for the disposal of an asset in the same way as it would for the calculation of the attributable income of the trust estate. That is, an asset acquired by the trustee of the trust estate before 20 September 1985 will be deemed to have been acquired by the spouse or former spouse before that date. Any other asset will be deemed to have been acquired at the indexed cost base to the trustee. Where the disposal of the asset was in turn subject to a roll-over provision the subsequent disposal by another person would be similarly affected.

Clause 42: Transfer of asset between companies in the same group

This clause will amend section 160ZZO of the Principal Act, which forms part of the roll-over provisions of Division 17 of Part IIIA, by inserting new subsection (2D). Broadly, the section applies where:

·
a company that is a resident of Australia disposes of an asset to another resident company in the same wholly owned group; or
·
a company (whether a resident of Australia or not) disposes of a taxable Australian asset to another company in the same wholly owned group; and

the transferor takes as consideration for the transfer shares or securities in the transferee equal to the value of the asset transferred.

In these circumstances, if both the transferor and the transferee elect that the section apply, Part IIIA will not apply in respect of the disposal and:

·
an asset acquired by the transferor prior to 20 September 1985 will be deemed to have been acquired by the transferee company before that date; and
·
an asset acquired by the transferor after 19 September 1985 will be deemed to have been acquired by the transferee at an amount equal to what would have been the indexed cost base to the transferor.

As a consequence of the introduction of an accruals basis for the taxation of income of controlled foreign companies and certain non-resident trust estates, it will be necessary for certain taxpayers to calculate the "attributable income" of those entities. In doing so, section 160ZZO may notionally be applied to determine that attributable income. These amendments are consequential upon the notional application of section 160ZZO for that calculation (see notes on section 419).

Subsection 160ZZO(2D) will only apply if certain conditions are satisfied. First, by paragraph (2D)(a), a person (not necessarily the company acquiring the asset) must be required to calculate the attributable income of a company under Division 7 of Part X. This means that the transferor company must have been a CFC at the end of its accounting period and that there was at least one "attributable taxpayer" at that time - see notes on section 381.

Secondly, paragraph (2D)(b) stipulates that section 160ZZO must have notionally applied to the calculation of the attributable income of the CFC. Section 160ZZO will only be taken to have notionally applied where:

·
the CFC was the transferor mentioned in subsection 160ZZO - that is, the CFC disposed of an asset to the taxpayer (subparagraph (b)(i)); and
·
the disposal by the CFC to the taxpayer was not a disposal of a taxable Australian asset (subparagraph (b)(ii)).

In determining whether disposal was a disposal of a taxable Australian asset for subparagraph (b)(ii), the residency assumption in Division 7 of Part X is to be ignored. This will mean that the determination of whether an asset is a taxable Australian asset will be made on the basis that the CFC is a non-resident (see further notes on subsection 405(3)).

Where these conditions are satisfied, section 160ZZO will have effect for the disposal of an asset by the taxpayer in the same way as it would have if Part IIIA were modified in accordance with Division 7 of Part X. This will mean that the application of Part IIIA to the transferee company on a subsequent disposal, and the method of determining the capital gain or loss on that subsequent disposal, will be determined with regard to the provisions of Division 7 of Part X. For example, in the calculation of the attributable income of a CFC assets owned by the CFC on 30 June 1990, including assets acquired prior to 20 September 1985, will be deemed to have been acquired on 30 June 1990 (section 411). Where section 160ZZO notionally applied to such an asset for the calculation of the attributable income of the CFC the asset will be taken to have been acquired by the transferee company on 30 June 1990. Further, in calculating the capital gain or loss on disposal of such an asset, the consideration taken to have been paid for the asset would be the same as the amount used to calculate the gain or loss of the CFC (and not the resident company) had disposed of the asset. That is, either the market value or cost base as at 30 June would be used, whichever produces the smaller gain or loss (see notes on section 412).

Where the disposal of the asset was also subject to a roll-over provision, the computation of the capital gain or loss on the subsequent disposal by another person would also be subject to the modifications made by Division 7. For example, section 160ZZO (as it applies in accordance with section 419) could have applied in the calculation of the attributable income of a CFC in relation to the disposal of an asset actually acquired prior to 20 September 1985, allowing that asset to be rolled over to a resident taxpayer. As previously noted, if the resident then disposed of the asset, the asset would be taken to have been acquired on 30 June 1990. If instead, the resident company disposed of the asset to its parent, being another resident company, roll-over relief under section 160ZZOA would be available (see notes on clause 42 for an explanation of section 160ZZOA). When the parent then disposed of the asset . Subsection 160ZZO would have the effect of deeming the asset to have been acquired after 19 September and section 160ZZOA will apply to the parent on that basis.

Where the asset was disposed of to another CFC, subsection (2D) will also have effect in the calculation of the attributable income of that CFC, subject to the modifications made by Subdivision C of Division 7 of Part X.

Clause 43: Transfer of asset from subsidiary to holding company

This clause will amend section 160ZZOA of the Principal Act, which forms part of the roll-over provisions of Division 17 of Part IIIA, by inserting new subsection (2A). Broadly, the section applies in similar circumstances to that in which section 160ZZO applies (see notes on clause 42). However, in place of the requirement that the consideration for the disposal be shares or securities in the transferee, it is a requirement that the transfer be for no consideration other than the acceptance of a liability of the transferor in respect of the asset. Further, the section only applies where the transferee is a parent of the transferor.

The effect of the roll-over is similar to that in section 160ZZO - that is, no capital gain or loss accrues to the company in respect of the disposal and the application of Part IIIA to the company acquiring the asset is modified. As is the case for section 160ZZO, section 160ZZOA will apply for the calculation of the attributable income of a CFC.

This amendment is consequential upon the notional application of section 160ZZOA for those calculations (see notes on section 420). The amendment is in identical terms to section 160ZZO(2D) and the effect is analogous - refer to notes on clause 42.

Clause 44: Commissioner may collect tax from person owing money to taxpayer

This clause expands the definition of "tax" in section 218 of the Principal Act to include interest payable under proposed section 102AAM. Section 218 authorises the Commissioner of Taxation to collect tax that is owing by a taxpayer from a person who, broadly, owes money to the taxpayer or has authority to pay money to the taxpayer. The amendment will empower the Commissioner to collect interest due under proposed section 102AAM (see notes on clause 18) in the same manner.

Clause 45: Assessment where no administration

This clause will amend section 220 of the Principal Act. Section 220 facilitates the recovery of tax owing by a deceased taxpayer where probate has not been granted and letters of administration have not been taken out within 6 months of death, and tax has not been assessed or paid on income or capital gains derived by the taxpayer up to the date of death. Section 220 authorises the Commissioner of Taxation to make an assessment of the amount of tax payable in respect of income derived by that taxpayer up to the date of death.

Clause 45 will amend paragraph 220(1)(a) to extend the application of section 220 to situations where interest payable under section 102AAM (see notes on clause 18) on distributions from certain non-resident trust estates has not been assessed or paid.

Clause 46: Penalty for false or misleading statements

Section 223 of the Principal Act provides for the imposition of additional tax where a taxpayer makes a statement for the purposes of the Principal Act or the regulations that is false or misleading in a material particular or which, by the omission of some matter, is rendered misleading.

New paragraph 223(8)(e) will ensure that a statement in a document or copy of a document produced to the Commissioner of Taxation in response to a request under paragraph 264A(1)(d) or (e) (see notes on clause 48) will not be a statement to which section 223 applies, as is the case under the existing law in relation to a document produced pursuant to paragraph 264(1)(b) of the Principal Act.

New paragraph 223(8)(f) will ensure that a document produced by a taxpayer under the active income test substantiation requirements of subparagraph 451(2)(c)(ii) or paragraph 453(1)(e) does not constitute a statement made to a taxation officer for the purposes of section 223.

Clause 47: Interpretation

Clause 47 will amend subsection 251R(7) of the Principal Act to provide that a reference to "tax" in section 102AAN will not include Medicare levy payable under Part VIIB of the Principal Act. The rebate of tax provided to a taxpayer under section 102AAN will not, therefore, affect the Medicare levy payable by that taxpayer.

Clause 48: Offshore information notices

Clause 48 will insert an additional provision - new section 264A - in the Principal Act under which information or documents may be requested by the Commissioner of Taxation where there is reason to believe that they are held outside Australia and are relevant to the assessment of a taxpayer. A request under new section 264A is referred to in the section as an "offshore information notice".

Failure by the taxpayer to provide the Commissioner with information and documents requested in an offshore information notice, in the time specified in the notice, could have the effect that that information or those documents will not be admissible as evidence in proceedings before a court or the Administrative Appeals Tribunal in which the taxpayer disputes the assessment.

Subsection 264A(1) provides that, where the Commissioner has reason to believe that information or documents relevant to the assessment of a taxpayer are outside Australia, an offshore information notice may be served on the taxpayer, requiring the taxpayer to give or produce the information and documents to the Commissioner.

A request under section 264A will include information and documents available within Australia provided that they are relevant to the assessment of the taxpayer and the Commissioner has reason to believe that they are available outside Australia. Paragraphs 264A(1)(a) and (b) specify the circumstances in which the Commissioner may serve an offshore information notice on a taxpayer. In the case of information, the Commissioner must have reason to believe that the information is relevant to the assessment of the taxpayer (paragraph (1)(a)), and that the information is:

·
within the knowledge of a person outside Australia (subparagraph (a)(i));
·
recorded in a document outside Australia (subparagraph (a)(ii)); or
·
kept by means of a mechanical, electronic or other device outside Australia (subparagraph (a)(iii)).

In the case of documents, the documents must be relevant to the assessment of the taxpayer and be outside Australia whether or not copies are in Australia (paragraph (1)(b)).

Where the circumstances in paragraph 264A(1)(a) or (b) are met, the Commissioner may request the taxpayer:

·
to give the relevant information to the Commissioner (paragraph (1)(c));
·
to produce the relevant documents to the Commissioner (paragraph (1)(d)); or
·
to make copies of the relevant documents or of copies of those documents and produce the copies made to the Commissioner (paragraph (1)(e)).

The offshore information notice must be served on the taxpayer by notice in writing. The taxpayer must give or produce the information or documents to the Commissioner within the period and in the manner specified in the offshore information notice. Information given should be in a form capable of being interpreted by the Commissioner.

Subsection 264A(2) provides that a 90 day period for compliance with an offshore information notice will apply from the date of service of the notice. The period for compliance may be extended by the Commissioner, upon receipt in the compliance period, of a written application by the taxpayer for an extension of time (subsection 264A(3)). Where a decision on the application is not notified to the taxpayer before the end of the period specified in the offshore information notice, that period is taken to have been extended to the end of the day (called the "decision day") on which the Commissioner's decision is notified to the taxpayer. Where the period for compliance is extended, it must end after the decision day (subsection 264A(4)). In all cases where an extension is granted on application, the period specified in the notice is, for the purposes of subsection 264A(1), the period as extended (subsection 264A(5)). Other than where the compliance period is taken to have been extended (see also paragraph (6)(e)), only a single extension of time for compliance with an offshore information notice can be granted, on application, by the Commissioner.

Subsection 264A(6) allows the Commissioner to vary a request in an offshore information notice which has been served on a taxpayer by issuing another notice (called the "subsequent notice" in subsection (6)) which is expressed to be a variation of the earlier notice. The subsequent notice must be issued in the compliance period specified in the earlier notice. Where a subsequent notice is served on a taxpayer, the request or each of the requests set out in the subsequent notice will be taken, for the purposes of subsections 264A(10), (11) and (14), to have been set out in the earlier notice (paragraph (6)(d)) and the period provided for compliance with the earlier notice will be taken to have been extended to the end of the period specified in the subsequent notice (paragraph (6)(e)).

Subsection 264A(7) permits the Commissioner, by notice in writing, to vary a notice for the purpose only of reducing its scope (paragraph (7)(a)) or to correct a clerical error or obvious mistake (paragraph (7)(b)).

Subsection 264A(8) authorises the Commissioner to withdraw an offshore information notice. Where an offshore information notice is withdrawn there is nothing to prevent the subsequent service on a taxpayer of another offshore information notice requesting the same or similar documents or information as that requested in the withdrawn notice (subsection 264A(9)).

Subsection 264A(10) provides for the imposition of an evidentiary sanction on a taxpayer who refuses or fails to fully comply with the request or requests set out in the offshore information notice.

Paragraph (10)(a) deals with the case where the request or requests in an offshore information notice relates or relate to only one issue concerning the assessment of the taxpayer. Where information requested is relevant to only one issue of the assessment of the taxpayer and the taxpayer fails to provide any information requested in respect of that issue, subparagraph (10)(a)(i) will make such information inadmissible in proceedings disputing the taxpayer's assessment. Similarly, subparagraph (10)(a)(ii) will make inadmissible any document, documents or secondary evidence of such document or documents in respect of an issue in the assessment of the taxpayer. Information or documents otherwise inadmissible because of non-compliance with an offshore information request may be admitted into evidence with the consent of the Commissioner.

Paragraph 264A(10)(b) applies where a taxpayer refuses or fails to comply with a request or requests in an offshore information notice and the information or documents are relevant to two or more issues concerning the assessment of the taxpayer. The information or documents to the extent they are relevant to an issue will be inadmissible in respect of that issue in proceedings disputing the taxpayer's assessment. Where a request encompasses information or documents which relate to separate and distinct aspects of a taxpayer's income tax assessment, the sanction is to apply only in respect of those documents or information that have some bearing on the issue in question.

For example, where a notice was issued requesting documents and information relating to two separate issues - the first being the transfer price of trading stock and the second being the depreciation of equipment used overseas - and all the information on the first issue was provided but some of the information on the second was withheld, the sanction would not to apply to stop admission into evidence of information on the first issue during litigation. The sanction would, however, apply to prevent admission into evidence by the taxpayer of any information relating to the second issue unless the Commissioner consents to the admission.

In exercising the consent power, subsection 264A(11) requires that the Commissioner have regard to whether there is reason to believe that the admission into evidence of part of the information or documents requested would be misleading in the absence of the remaining information or documents requested but not given or produced. However, foreign secrecy laws and an obligation arising under any such law as it relates to information or documents are not to be taken into account in the exercise of the Commissioner's consent power (subsection 264A(12)).

Where the refusal of the Commissioner to give consent under subsection 264A(10) would, for the purposes of the Constitution, have the effect of making a penalty or tax incontestable, the Commissioner must give consent (subsection 264A(13)).

Where the Commissioner has formed the view, before proceedings disputing the taxpayer's assessment, that the taxpayer has not complied with the offshore information notice and that it is unlikely that consent under subsection 264A(10) would be given, the Commissioner must serve a notice on the taxpayer setting out those views (subsection 264A(14)). However, failure to give such notice will not affect the validity of a decision under subsection 264A(10) (subsection 264A(15)).

Subsection 264A(16) provides that, where a taxpayer for whatever reason is unable to comply with a request in an offshore information notice, that inability will, for the purposes of subsection 264A(10), be treated as a refusal or failure by the taxpayer to comply with the request.

A reference to proceedings disputing the taxpayer's assessment in section 264A is a reference to proceedings arising out of, or relating to, an objection against the assessment before a court or the Administrative Appeals Tribunal (subsection 264A(17)).

Subsection 264A(18) provides that an offshore information notice may be set out in the same document as a notice issued under section 264. That section permits the Commissioner, by notice in writing, to require any person to furnish information and to produce books, documents and other papers in the person's custody or under the person's control which relate to that or any other person's assessment. To the extent that the person served with a section 264 notice is capable of complying with the notice but fails to comply, that person may be guilty of an offence under section 8C of Taxation Administration Act 1953 (the "Administration Act").

A notice issued under section 264A, on the other hand, can be served only on the taxpayer in respect of whose assessment the information or documents are relevant and in respect of information or documents which the Commissioner has reason to believe are within the knowledge of the taxpayer or another person, or kept or recorded exclusively or otherwise outside Australia (see notes on subsection 264A(1)). The only "penalty" for refusal or failure to comply with an offshore information notice is the evidentiary sanction imposed under subsection 264A(10) (see also notes on subsection 264A(22)).

However, where information or documents are the subject of a notice issued under section 264 and a notice issued under section 264A, the taxpayer may be liable for the evidentiary sanction and a penalty where an offence is proved under section 264 and the taxpayer has refused or failed to comply with the offshore information notice issued under section 264A.

Subsection 264A(19) requires that the offshore information notice alerts the taxpayer of the evidentiary sanction imposed under subsection 264A(10) for refusal or failure to comply with the notice. However, the failure of an offshore information notice to so alert the taxpayer does not, by virtue of subsection 264A(20), affect the validity of the notice.

A request for information or documents made under section 264A is not to be taken to be a requirement under any other provision of the Principal Act or the Administration Act. Subsection 264A(21) rules out any possibility that the "request" may in substance be held to be a "requirement" for the purposes of the Principal Act or the Administration Act. A refusal or failure to comply with a request or requests in an offshore information notice is not an offence - subsection 264A(22) - and, the only "penalty" that can be imposed on a taxpayer for refusing or failing to comply with an offshore information notice is the evidentiary sanction.

Subsection 264A(23) ensures that the express references in section 264A to documents do not imply that references to documents in any other provision of the Principal Act or the Administration Act do not have the meaning given by section 25 of the Acts Interpretation Act 1901.

Subsection 264A(24) has the effect that section 264 and section 264A are to operate independently of each other.

Clause 49: Attribution of income in respect of controlled foreign companies

Introductory note

Clause 49 inserts Part X after section 315 of the Principal Act. The new Part contains a legislative regime for attributing certain income of controlled foreign companies (CFCs) to Australian residents.

Income of a CFC will be attributed to a resident holder of an interest (in most cases a shareholder) only where that person, together with associates holds an interest, directly or indirectly, of 10 per cent or more in the CFC or has de facto control of the CFC. The proportion of the income of a CFC to be attributed is generally to be determined by reference to that person's direct and indirect interests - the indirect interests being determined by the simple multiplication of the resident's first and lower-tier interests.

The new Part contains provisions to:

·
determine whether a company is a CFC;
·
determine whether a company is predominantly engaged in active business and therefore eligible for the active income exemption;
·
calculate the attributable income of a CFC;
·
determine whether a person is an attributable taxpayer in relation to a CFC;
·
calculate the proportion of a CFC's attributable income that is to be included in the assessable income of an attributable taxpayer;
·
determine the proportion of certain dividends paid by the CFC, or of certain profits of a CFC that changed its country of residence, that is to be included in the assessable income of an attributable taxpayer; and
·
impose certain record keeping requirements on a person who is an attributable taxpayer in relation to a CFC.

In broad terms, the income of a CFC that is resident in an unlisted country (generally, a country with a tax system not comparable to Australia's) will be attributable only if the CFC does not pass the active income test. Only the tainted income and certain trust income will be attributable. In calculating the attributable income of the CFC certain income derived by such a CFC in a listed country (generally, one with a tax system comparable to Australia's) will be excluded.

The attributable income of a CFC resident in a listed country will include, broadly, only income from an unlisted country not taxed in a listed country, certain trust amounts and, subject to the active income test, tainted income that benefited from a designated concession.

Structure of the Part

The eleven Divisions that constitute Part X are briefly described in the following notes.

Division 1 - Interpretation - defines the terms and expressions used in the Part and clarifies its scope.

Division 2 - Types of Entity - defines and distinguishes between the various types of entity that are relevant for the purposes of this Part - Australian entities (Subdivision A), controlled foreign entities (Subdivision B) and eligible transferors in relation to trusts (Subdivision C). In order to determine which entities are eligible transferors, Subdivision C provides explanations of references to transfers of property or services to a trust, including deemed transfers, the circumstances in which such a transfer is an eligible business transaction, and when an entity is an eligible transferor, and when an entity holds a direct control interest in a company.

Division 3 - Control Interest, etc. - specifies rules for ascertaining the extent of a taxpayer's control interests in a CFC, for establishing whether a taxpayer is an attributable taxpayer in relation to a CFC, and for ascertaining the proportion of a CFC's attributable income that is to be included in a taxpayer's assessable income.

Division 4 - Attribution Accounts - sets out the basis upon which attribution accounts are to be maintained by attributable taxpayers in relation to CFCs and interposed partnerships and trusts, and defines a number of terms used in the Division. These accounts will record amounts of attributable income included in the attributable taxpayer's assessable income to enable identification and exemption of subsequent distributions by the CFC to the attributable taxpayer out of such attributable income.

Division 5 - Attributed Tax Accounts - contains rules relating to attributed tax accounts to be maintained by an attributable taxpayer in respect of foreign tax that the attributable taxpayer is taken to have paid in respect of income attributed to that taxpayer. These accounts will record foreign tax for which credit has been allowed when attributable income was included in a taxpayer's assessable income or where amounts were attributed under new section 456, 457 or 458.

Division 6 - Exempting Receipts etc. - identifies the exempting receipts of a company resident in an unlisted country - broadly, income that is taxed by assessment in Australia or at a comparable rate - which are not to be included in attributable income and specifies rules for the computation of the exempting profits of, and exempting profits percentage of a dividend paid by, a company resident in an unlisted country. This percentage is relevant for the purposes of the exemption from tax of certain dividends and for the computation of foreign taxes for which credits will be allowable to a resident company. This Division also identifies the exempting receipts of an Australian company - broadly, the exempting profits percentage of a non-portfolio dividend paid by a company that is a resident of an unlisted country, as well as a non-portfolio dividend that is paid by a company that is a resident of a listed country to the extent that it is not paid out of income previously attributed to the recipient.

Division 7 - Calculation of Attributable Income of CFC - deals with the calculation of the attributable income of CFCs and comprises three subdivisions:

·
Subdivision A - Basic Principles - which provides for the basic application of Australian tax law in the computation of a CFC's attributable income as if the CFC were a resident of Australia;
·
Subdivision B - General Modifications of Australian Tax Law - under which the Income Tax (International Agreements) Act 1953 and certain provisions of the Principal Act are, with specified exceptions, to be disregarded in the calculation of attributable income, and the application of certain other provisions of the Principal Act is to be modified;
·
Subdivision C - Modifications Relating to Australian Capital Gains Tax - under which certain modifications are to be made to the provisions of Part IIIA of the Principal Act that deals with the taxation of capital gains - for example, one of the modifications is the rule that provides that the net capital gain of a CFC will be computed by reference to all of its assets (other than taxable Australian assets) held by the CFC on 30 June 1990 and determines the cost base of these assets; and
·
Subdivision D - Modifications Relating to Losses - which provides for the calculation of any deductible loss of a CFC of a year of income.

Division 8 - Active Income Test - specifies rules relating to the active income exemption where a CFC is predominantly engaged in active business and has a permanent establishment in its country of residence. A major requirement of the test is to have a tainted income ratio of less than 5 per cent and most of the Division explains how to calculate that ratio and defines the components of tainted income. It also contains a Subdivision dealing with record keeping and substantiation requirements for passing the active income test.

Division 9 - Attribution of Attributable Income and Other Amounts - provides for the inclusion of an attributable taxpayer's attribution percentage of a CFC's attributable income in that taxpayer's assessable income for a year of income. An attributable taxpayer's attribution percentage of certain profits of a CFC is also to be included in the taxpayer's assessable income of a year of income where that CFC changes its residence from an unlisted country to a listed country or to Australia. A formula is provided for the computation of the amount to be included in the taxpayer's assessable income in respect of non-portfolio dividends paid by a CFC resident in an unlisted country to another CFC, where the taxpayer is an attributable taxpayer in relation to both CFCs. Similar arrangements operate where a dividend is paid to a controlled foreign trust, or to a partnership or an Australian trust in which a CFC or a CFT is a partner or beneficiary, where the taxpayer is an attributable taxpayer in relation to the CFC that paid the dividend and to the CFT or CFC that received the dividend directly or through interposed entities.

Division 10 - Post-attribution Asset Disposals - deals with the case where a resident taxpayer disposes of an asset, being an interest in a CFC, after an appropriate part of the income of the CFC has been attributed to the taxpayer but before the whole of that attributed income has been distributed by the CFC. It provides for an adjustment to the proceeds of the disposal that are taken into account in computing the capital gain or loss on the disposal. Similar adjustments are to be made for disposals by a taxpayer of interests in other attribution account entities and for the disposals of interests in an entity where income has been attributed to the taxpayer from lower tier entities.

Division 11 - Keeping of Records - by which a person who is an attributable taxpayer in relation to a CFC will be required to keep certain records. These include documents relevant to the calculation of the taxpayer's attributable interest and attribution percentage, and the calculation of the amount included in assessable income. Generally, the records must be maintained for five years.

PART X - ATTRIBUTION OF INCOME IN RESPECT OF CONTROLLED FOREIGN COMPANIES

Division 1 - Preliminary

Section 316: Object of Part

Section 316 establishes that the object of new Part X is to provide for certain amounts to be included in a taxpayer's assessable income under Division 9 of Part X (subsection (1)). The amounts to be included are:

·
under section 456, amounts in respect of the attributable income of a CFC (paragraph (a));
·
under section 457, amounts in respect of certain changes of residence by a CFC (paragraph (b)); and
·
under sections 458 and 459, amounts in respect of certain dividends paid by a CFC (paragraph (c)).

In order to achieve that object and for other purposes of the Principal Act, Part X contains rules relating to the matters listed in subsection 316(2):

·
interpretation (Division 1) (paragraph (a));
·
types of entities (Division 2) (paragraph (b));
·
control interests, attribution interests, attributable taxpayers and attribution percentages (Division 3) (paragraph (c));
·
attribution accounts (Division 4) (paragraph (d));
·
attributed tax accounts (Division 5) (paragraph (e));
·
exempting receipts etc. (Division 6) (paragraph (f));
·
the calculation of attributable income of a CFC (Division 7) (paragraph (g));
·
the active income test (Division 8) (paragraph (h));
·
post-attribution asset disposals (Division 10) (paragraph (j)); and
·
the keeping of records (Division 11) (paragraph (k)).

Section 317: Interpretation

Section 317 contains definitions of terms that have general use in Part X. Each defined term is to have the given meaning unless the contrary intention appears.

"accounting period" is defined in relation to a company to mean an accounting period used by the company for the purpose of distributing dividends, as reflected in the company's accounts.
"accounting records" is defined to include various kinds of accounting records such as invoices, receipts, orders for payment of money, bills of exchange, cheques and promissory notes, vouchers and other documents of prime entry including working papers, and any other documents as are necessary to explain the methods and calculations by which accounts are made up.
"accounts" is defined to mean ledgers, journals, profit and loss accounts and balance sheets and includes statements, reports and notes attached to, or intended to be read with, any such records.
"active income test" has the meaning given by section 432. This definition directs attention to the Division containing the substantive provisions of the active income test. The income of a CFC that may be attributed to the CFC's shareholders depends on whether the CFC passes the active income test in relation to the statutory accounting period.
"adjusted tainted income" is to have the meaning given by section 386 - see notes on that section.
"AFI" or "Australian financial institution" is defined for the purpose of the definition of "AFI subsidiary" in section 326 which in turn is principally for the purpose of Subdivision F of Division 8. That Subdivision contains special rules that characterise certain types of income of an AFI subsidiary for the purpose of the active income test.
The following Australian entities fall within this definition:

·
banks;
·
State banks;
·
registered financial corporations; and
·
life assurance companies.

"AFI subsidiary" or "Australian financial institution subsidiary" has the meaning given by section 326 - see notes on that section.
"aircraft" is defined for the purpose of the active income test and is used in the definition of "tainted rental income" set out below. A machine or apparatus treated as an aircraft is defined in relation to its support in the atmosphere. An air cushion vehicle is, however, expressly excluded from being an aircraft but is treated as a ship see later notes on definition of ship.
"associate" is to have the meaning given by section 318 - see notes on that section.
"associate-inclusive control interest" is to have the meaning given by section 349 - see notes on that section.
"attributable income" is to have the meaning given by Division 7 of this Part - see notes on that Division.
"attributable taxpayer" is to have the meaning given by section 361 - see notes on that section.
"attributed tax account credit" is to have the meaning given by section 375 - see notes on that section.
"attributed tax account debit" is to have the meaning given by section 376 - see notes on that section.
"attributed tax account surplus" is to have the meaning given by section 374 - see notes on that section.
"attribution account entity" is to have the meaning given by section 363 - see notes on that section.
"attribution account payment" is to have the meaning given by section 365 - see notes on that section.
"attribution credit" is to have the meaning given by section 371 - see notes on that section.
"attribution debit" is to have the meaning given by section 372 - see notes on that section.
"attribution percentage" is to have the meaning given by section 362 - see notes on that section.
"attribution tracing interest" is a term that is relevant for the purpose of tracing, through interposed entities, a resident's indirect interest in a controlled foreign company. It is to have the meaning given by section 358 in relation to a CFC (a defined term), section 359 in relation to a CFP (another defined term) and section 360 in relation to a CFT (also a defined term).
"Australian 1% entity" is defined in relation to a company or trust to mean an Australian entity (a defined term) whose associate-inclusive control interest (also a defined term) in the company or trust is at least one per cent. This definition is relevant to the definitions of:

·
controlled foreign company (CFC) (section 340);
·
controlled foreign trust (CFT) (section 342); and
·
attributable taxpayer (section 361).

"Australian entity" is to have the meaning given by section 336 - see notes on that section.
"Australian partnership" is to have the meaning given by section 337 - see notes on that section.
"Australian tax" is defined to mean "income tax" or "withholding tax" within the meaning of subsection 6(1) of the Principal Act. Broadly, the term "income tax" includes taxes levied on income or gains in accordance with the Principal Act, but does not extend to include a tax which represents an "additional" tax levied as a penalty. "Withholding tax" means income tax payable in accordance with section 128B which requires tax to be withheld from certain dividends and interest paid to non-residents.
"Australian trust" is to have the meaning given by section 338 - see notes on that section.
"CFC" is an abbreviation of "controlled foreign company" and is to have the meaning given by section 340 - see notes on that section.
"CFE" is an abbreviation of "controlled foreign entity" and is to have the meaning given by section 339 - see notes on that section.
"CFP" is an abbreviation of "controlled foreign partnership" and is to have the meaning given by section 341 - see notes on that section.
"CFT" is an abbreviation of "controlled foreign trust" and is to have the meaning given by section 342 - see notes on that section.
"CGT roll-over provisions" is a term used in sections 390, 421 and 438. The term is defined to mean section 160ZZF and Divisions 5A, 7A and 17 of Part IIIA.
"commodity" is defined as a tangible thing that is capable of delivery under an agreement for its delivery. The term is relevant for the active income test in relation to the component of passive income called "net tainted commodity gains".
"commodity investment" is defined for the purpose of the active income test to be a forward or futures contract in respect of a "commodity" (see notes on that definition) or a right or option in respect of such a contract. Gains and losses from disposing of commodity investments are relevant to ascertaining the "net tainted commodity gains" in section 443.
"company" is to have the meaning given by subsection 6(1) of the Principal Act except that it is not to include a company in the capacity of a trustee. This definition makes it clear that references to a company in Part X will not include trustee companies.
"company title interest" is relevant to the definition of "lease". A company title interest means a right to occupy land or a building by virtue of holding shares (for example, shares in a home unit company).
"control tracing interest" is a term that is relevant for the purpose of tracing, through interposed entities, a resident's indirect control interest in a foreign company. It is to have the meaning given by section 353 in relation to a CFC (a defined term), section 354 in relation to a CFP (another defined term) and section 355 in relation to a CFT (also a defined term).
"currency exchange gain" in relation to a statutory accounting period means a currency gain realised by a company in the statutory accounting period to the extent to which it is attributable to currency exchange rate fluctuations. The purpose of this definition is to separate a gain that is due to exchange rate fluctuations from the gain or loss on an underlying transaction. For example, a company could incur an overall loss on a transaction for the sale of goods but nevertheless realise a currency exchange gain from the movement in currency exchange rates between the sale and settlement of the sales transaction. Currency exchange gains and losses for the statutory accounting period are relevant to ascertaining the "net tainted currency exchange gain", if any, in accordance with section 444.
"currency exchange loss" is defined in terms corresponding to the definition of "currency exchange gain".
"de facto marriage" is a term used in section 102AAH of Division 6AAA and section 328 of Part X in the definition of a "non-resident family trust". A "de facto marriage" refers to a relationship involving two persons who are not legally married but live together on a domestic basis as husband and wife.
"depreciation provision" is a term used in section 398 which is relevant to the calculation of the attributable income of a CFC - see notes on Division 7 of this Part. The definition makes it clear that a reference to a depreciation provision includes not only a reference to the general depreciation provisions of sections 54 to 62, the normal depreciation provisions of the Principal Act, but also to the special capital depreciation provisions of Division 10, 10AAA, 10AA, 10A, 10C and 10D of Part III of the Principal Act.
"designated concession income", in relation to a particular listed country (a defined term), is defined to mean income or profits (also a defined term) of a kind that are specified in the Income Tax Regulations on which no tax is payable (paragraph (a)) or a reduced amount of tax is payable (paragraph (b)) in the listed country, because of a feature of a kind specified in the regulations (for example, a concessional rate of tax that may apply to income derived by an entity from a particular activity or operation conducted in the country).
The features specified in the regulations may be either country-specific (in the sense that they are features which may have been identified in the tax system of a particular listed country) or features that are present in the tax systems of several countries.
Paragraph (a) of the definition covers a situation where no tax is payable on certain income or profits under the tax law of a particular listed country because the income or profits:

·
are specifically exempt from tax under that law; or
·
do not otherwise fall within the tax base of that listed country (for example, the tax law may not tax capital gains). The concept of "tax base" is discussed in the notes on section 324.

Paragraph (b) covers a situation where tax is payable on certain income or profits under a tax law of a particular listed country but the income or profits are subject to a concessionary rate of tax or some other form of tax benefit.
The concepts of designated concession income and "eligible designated concession income" are used primarily as a means of determining the amount of concessionally taxed income to be included in the attributable income of:

·
a CFC that is resident in a listed country (see notes on section 385); and
·
a non-resident trust estate that falls within the definition of "listed country trust estate" (see notes on paragraph 102AAU(1)(b)).

They are also used in determining which income of a branch of an Australian company in a listed country is assessable (see notes on clause 8).
"direct attribution account interest" is to have the meaning given by section 366 - see notes on that section.
"direct attribution interest" is to have the meaning given by section 356 - see notes on that section.
"direct control interest" in relation to a company is to have the meaning given by section 350 and in relation to a trust (a defined term) is to have the meaning given by section 351 - see notes on those sections.
"discretionary trust" is, broadly, a trust estate in respect of which the rights to income or corpus are not fixed. A trust estate that satisfies any one of the tests in paragraphs (a), (b) or (c) will be a discretionary trust.
Under paragraph (a) a trust estate will be a discretionary trust if a person, including a trustee, is empowered by whatever means to exercise a power of appointment or other discretion (subparagraph (a)(i)) which either in its use, or failure to use, results in determining those persons who may benefit under the trust estate and/or how beneficiaries are to benefit under the trust estate (subparagraph (a)(ii)).
The test described at paragraph (b), relates to a beneficiary's overriding right to income or corpus of a trust estate. A trust estate will be a discretionary trust where one or more of the beneficiaries in the trust estate have a contingent or defeasible interest in some or all of the corpus or income of the trust estate.
The third test, set out in paragraph (c), refers to a beneficiary of a trust estate who is a beneficiary in the capacity of a trustee. A trust will be a discretionary trust if a beneficiary of that trust is the trustee of another trust estate where both of the conditions specified in paragraph (a) are satisfied. The same result will occur where the trustee of the other trust estate is cap able of benefiting from the first trust estate whether by the exercise of a power of appointment or otherwise.
"disposal" is defined to extend the ordinary meaning of the term, when used in connection with assets, to include redemption.
"distributable profits" is defined in relation to a company to mean the amount of the profits, whether of an income or capital nature, that are available for distribution by the company as dividends. The amount of the distributable profits is to be determined on the basis of the accounts (a defined term) of the company and any other matters relevant to the determination. Requirements in the constituent documents of the company, or in any resolution passed or decision made by the company which would restrict the amount of the profits available for distribution as dividends (other than a requirement providing for an "eligible provision or reserve" - also a defined term) are to be disregarded for the purpose of determining the distributable profits.
The question of whether the profits of a company are distributable profits is to be determined by reference to whether the profits are, by their nature, distributable by the company. The actual financial ability of the company to distribute those profits is not material to this issue. For example, where a company has, at a particular time profits that by their nature are distributable profits, the fact that at that time the company does not have the resources to make a distribution would not affect the amount treated as distributable profits.
The expression "distributable profits" relates to the calculation of the underlying tax which a resident company that received a dividend from a related foreign company is taken to have paid in respect of that dividend by virtue of section 160AFC of the Principal Act. It is also relevant to the determination of the exempting profits percentage (see notes on section 379) of a dividend paid by a company that is a resident of an unlisted country and to the determination of certain amounts that are to be attributed to resident taxpayers under section 457.
"double tax agreement", in relation to a foreign country, means:

·
if only one agreement is in force under the Income Tax (International Agreements) Act 1953 - that agreement (paragraph (a)); or
·
if there is more than one agreement in force - the agreement that is expressed to be for the purposes listed in subparagraphs (b)(i) to (v) - that is, the comprehensive agreement (paragraph (b)).

This term is relevant for the purposes of subsection 320(4) which has the effect that a part of a foreign country that is excluded from the operation of a double tax agreement is to be taken to be a separate foreign country. In the case of France, for example, Australia has concluded both a comprehensive agreement and an airline profits agreement each of which has a different definition of "France". This term is also relevant for the purposes of the definition of Part X Australian resident.
"eligible designated concession income" is, broadly, that income of a CFC resident in a listed country or a listed country trust estate that may be subject to attribution. It includes designated concession income (also a defined term), derived by an entity in an income period, that is not subject to tax (see notes on section 324) in another listed country in a tax accounting period (a defined term) ending before the end of, or commencing during, the income period (paragraph (a)). It also includes designated concession income in relation to a particular listed country that is subject to tax in another listed country but is also designated concession income in relation to that other listed country (paragraph (b)). Thus, if a CFC's designated concession income is subject to tax in any other listed country, and that income is not designated concession income in that other listed country, it will not be attributable income.
The "income period" is to be ascertained from the provision in which the term eligible designated concession income is used. It will generally be:

·
in the case of a CFC - the statutory accounting period (see notes on section 319);
·
in any other case - the year of income.

"eligible finance share" is to have the meaning given by section 327 - see notes on that section.
"eligible finance share dividend" means a dividend paid in respect of an eligible finance share - see notes on section 327.

"eligible provision or reserve" means:

·
a provision or reserve that is required to be maintained by law (paragraph (a));
·
a provision for any liability in respect of foreign or Australian tax (paragraph (b));
·
a reserve maintained to qualify for foreign tax relief (paragraph (c));
·
a provision or reserve for depreciation, bad or doubtful debts or leave payments (paragraph (d)); or
·
any other provision or reserve that may be prescribed by regulations (paragraph (e)).

The concept of an eligible provision or reserve is relevant to the calculation of the "distributable profits" out of which a foreign company is taken to pay a dividend.
"eligible transferor" is to have the meaning given by section 347 (in relation to discretionary trusts) and by section 348 (in relation to non-discretionary trusts) - see notes on those sections.
"entitled to acquire" is to have the meaning given by section 322 - see notes on that section.
"entity" means a company, a partnership, a person in the capacity of a trustee or any other person. The definition lists the various types of entity according to the character in which they will be dealt with in Part X. For example, a company in the capacity of a trustee will be dealt with as a trustee rather than as a company and a government body that falls within the definition of company in subsection 6(1) of the Principal Act (as modified by the definition of company in this section) will be treated as such. Paragraph (d) will include individuals and, by virtue of paragraph 22(1)(a) of the Acts Interpretation Act 1901, bodies politic. Bodies politic will be relevant (as will the other entities) for determining whether a company, partnership or trust is a CFC, CFP of CFT - see notes on sections 340, 341 and 342 respectively.
"exempting profits" is to have the meaning given by section 378 - see notes on that section.
"exempting profits percentage" is to have the meaning given by section 379 - see notes on that section.
"exempting receipt" is to have the meaning given by section 377 in relation to a company that is a resident of an unlisted country or by section 380 in relation to a company that is a Part X Australian resident.
"factoring income" is income from carrying on a business of factoring debts. The term is relevant to the definition of "tainted interest income".
"financial intermediary business" means a banking business or a business whose income is principally derived from the lending of money. The definition is relevant to the classification of certain income of "AFI subsidiaries".
"general insurance company" is defined, for the purpose of determining passive income under section 446, to mean a company solely or principally conducting insurance business (as defined in the Insurance Act 1973). It does not include a "life assurance company".
"goods" is defined for the purpose of the definition of "tainted sales income" in section 447, to include:

·
ships, aircraft and other vehicles;
·
animals;
·
minerals, trees and crops; and
·
gas and electricity.

"grossed-up amount" is to have the meaning given by section 373 - see notes on that section.
"gross tainted turnover" is defined for the purpose of the active income test, in particular for the calculation of the tainted income ratio in section 433, and has the meaning given by section 435 - see notes on that section.
"gross turnover" is defined for the purpose of the active income test, in particular for the calculation of the tainted income ratio in section 433, and has the meaning given by section 434 - see notes on that section.
"group" is defined to include both a number of entities (the members of which are not in any way associated with each other nor acting together) and one entity alone. This definition will make it clear that, for the purposes of Part X, a single entity can constitute a group and that the term group is not confined to entities acting together. The definition is relevant to the definitions of controlled foreign company (CFC) in section 340 and controlled foreign trust (CFT) in section 342.
"income interest in a partnership" means an interest in the profits of the partnership and will include a legal or beneficial interest in partnership profits.
"income interest in a trust" means an interest in the income of the trust and will include a legal or beneficial interest in trust income. It will not include a mere expectancy of a benefit under a discretionary trust.
"indirect attribution account interest" is to have the meaning given by section 369 - see notes on that section .
"indirect attribution interest" is to have the meaning given by section 357 - see notes on that section.
"indirect control interest" is to have the meaning given by section 352 - see notes on that section.
"IP time" means 7.30 pm, by standard time in the Australian Capital Territory, on 12 April 1989. It is the term used to denote the time of release of the Information Paper "Taxation of Foreign Source Income". It is relevant to the definition of eligible transferor in relation to a discretionary trust (section 347) and eligible transferor in relation to a non-discretionary trust (section 348).
"law" is defined in terms that will include national, state, provincial, local or municipal law. The term is used in the definition of "tax law".
"lease" is defined to include a sublease, and in relation to a "company title interest" in land (for example, a share in a home unit company), an agreement similar to a lease or sublease. The term "lease" is relevant to the definition of "tainted rental income".
"leased" is defined to include a letting on hire but does not include a hire-purchase agreement. The definition would apply to a relevant transaction regardless of whether or not the agreement for the letting on hire was described as a lease. Although the term is not defined in relation to any particular section, the purpose of the definition is to ensure that the term "lease" h as a wider meaning than otherwise. In this regard, section 18A of the Acts Interpretation Act 1901 provides that, where a word or phrase is given a particular meaning, other parts of speech and grammatical forms of that word or phrase have corresponding meanings.
"life assurance company" is to have the meaning given by section 110 of the Principal Act - that is, a company solely or principally conducting life assurance business or an SGIO. The definition is relevant to the definition of an "AFI" and to the determination of passive income in section 446.
"life assurance policy" is to have the meaning given by section 110 of the Principal Act and is relevant to the determination of the passive income of a "life assurance company" and to the definition of "tainted services income" in section 448.
"life assurance premiums" means premiums in respect of life assurance policies. Such premiums may be "tainted services income" in accordance with section 448.
"listed country" is to have the meaning given by section 320 - see notes on that section.
"member of a non-portfolio company group" is to have the meaning given by section 334 - see notes on that section.
"net tainted commodity gains" is to have the meaning given by section 443 - see the notes on that section. These gains are defined for the purpose of including them as passive income in the active income test. The terms "tainted commodity gain", "tainted commodity loss" and "tainted commodity investment" are defined below.
"net tainted currency exchange gains" is to have the meaning given by section 444 - see the notes on that section. These gains are defined for the purpose of including them as passive income in the active income test.
"non-attributable income period" is relevant to the calculation of the attributable income of a CFC (see notes on Division 7 of this Part) and, in particular, to section 398. It applies only in relation to the application of a particular provision of the Principal Act. A particular statutory accounting period will be a non-attributable income period for a particular attributable taxpayer in respect of the particular provision if, under Division 7:

·
there was no requirement to calculate attributable income in relation to the taxpayer for the period; or
·
there was a requirement to calculate a attributable income but the particular provision was not applied in that calculation.

"non-discretionary trust" is defined by reference to the previous definition of "discretionary trust" - any trust that is not a discretionary trust will be a non-discretionary trust. A trust will only be a non-discretionary trust if neither the trustee nor any other person has a discretion as to the appointment of beneficiaries or the allocation of the trust's income or corpus and only if the beneficiaries do not include a trustee of a trust in which there is such a discretion. The distinction between discretionary and non-discretionary trust is necessary for determining eligible transferors.
"non-portfolio dividend" means a dividend paid by a non-resident company to a company which has a 10 per cent or greater voting interest in the company paying the dividend. A voting interest is taken to have the same meaning as in section 160AFB of the Principal Act. Broadly, it means the beneficial ownership of shares in a company that carry an unfettered right to vote 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.
"non-resident family trust" is to have the meaning given by section 328 - see notes on that section.
"non-share forward contract" is defined for the purpose of section 450 which deals with asset disposals and currency transactions of AFI subsidiaries. It means a forward contract that is not in respect of shares or a share price index.
"non-share futures contract" has a corresponding meaning to "non-share forward contract" described above.
"notional allowable deduction" is to have the meaning given by subsection 382(2) - see notes on that subsection .
"notional assessable income" is to have the meaning given by subsection 382(2) - see notes on that subsection.
"notional exempt income" is to have the meaning given by subsection 382(2) - see notes on that subsection.
"Part X Australian resident" means a resident as defined in section 6 of the Principal Act but does not include an entity that satisfies that definition in circumstances where:

·
there is a double tax agreement between Australia and another country (paragraph (a));
·
there is a "tie-breaker" provision in the agreement to resolve cases of dual residence (paragraph (b)); and
·
the "tie-breaker" provision has the effect of deeming the entity to be a resident solely of the other country (paragraph (c)).

The modification of the section 6 definition of resident for the purposes of Part X means that an entity that is a resident of Australia within the meaning of section 6 may not be treated as an Australian resident for the purposes of Part X if the entity is treated as a resident of another country for the purposes of a double tax agreement. Such an entity, and any entity that is not a resident of Australia within the meaning of section 6:

·
in the case of an entity that is a company, may be a CFC;
·
may not be an attributable taxpayer; and
·
may not be taken into account as an Australian resident for the purposes of determining whether another entity is a controlled foreign entity.

"passive income" is to have the meaning given by section 446 - see notes on that section. Passive income is included in "gross tainted turnover" (section 435) which is the numerator of the "tainted income ratio" (section 433) used in the active income test. The term is also used, with some modification, for the purposes of Division 18 of the Principal Act in relation to foreign tax credits.
"premium income" is used in the definition of tainted services income in section 448 and is to mean life assurance, insurance and reinsurance premiums.
"profits" is defined to include gains of either an income or capital nature.
"property management services" is a term used in the definition of "tainted rental income" and is relevant to the active income test. "Property management services" includes cleaning, secretarial and catering services.
"provide" is defined in relation to the term "services" and includes allow, confer, give, grant or perform.
"public unit trust" is to have the meaning given by section 329 - see notes on that section.
"recognised accounts" is defined in relation to the active income test. The term means the accounts referred to in paragraph 432(1)(c) or 437(1)(b) that are prepared by a company or a partnership of which a company is a partner during a statutory accounting period. The basis on which those accounts are to be prepared is set out in those paragraphs.

"rent" means any payment or consideration paid or given by a lessee under a lease and includes consideration in the nature of a rental payment. A rental payment may be paid or given in relation to a lease of either real or personal property and need not be paid or given by a lessee. A payment for the provision of hotel or motel style accommodation on account of services provided to individuals, whether or not in the capacity of employees, would not constitute a rental payment. Certain rents constitute "tainted rental income" for the purpose of the active income test.
"residency assumption" is a term used in Division 7 of this Part. In that Division, the CFC is assumed by paragraph 383(a) to be a resident of Australia, but in some circumstances this assumption needs to be disregarded. The term describes that assumption.
"retention period" is defined, for the purposes of the record keeping requirements imposed by Division 11 of this Part, to mean the period of 5 years commencing at the end of the statutory accounting period.
"sale" is defined in relation to goods and includes an exchange or hire-purchase. The term "purchase", in relation to goods, has a corresponding meaning. The term is relevant to the definition of "tainted sales income" which is one of the components of the "gross tainted turnover" that are relevant for the active income test.
"services" is defined broadly for the purpose of the active income test and includes any benefit, right, privilege or facility. Rights in relation to real or personal property, or an interest in real or personal property, are also within the scope of the definition. The meaning of "services" is expanded by reference to specific arrangements and contracts discussed below.
Subparagraph (a)(i) will include as services an arrangement for, or in relation to, the performance of work, either with or without the provision of property. For example, an arrangement for the repair of a motor vehicle is a service but where a loan car is also provided by the repairer to replace the motor vehicle which is temporarily out of commission both the repair and loan facility would constitute a service. The work referred to in this subparagraph need not be manual work, it could be work of a professional nature.
An arrangement for, or in relation to, the provision of facilities for entertainment, recreation or instruction or for the use of such facilities will be regarded as services under subparagraph (a)(ii).
An arrangement conferring rights, benefits or privileges of any kind for which remuneration is payable in the form of a royalty, tribute, levy or similar exaction will be services in terms of subparagraph (a)(iii).
The definition of services also includes under paragraph (b) contracts of insurance and so premiums from the provision of insurance cover would be services income.
Paragraph (c) includes an arrangement for, or in relation to, the lending of money. A guarantee of a loan and a commitment to lend would be examples of this category.
"ship" means a vessel or boat of any description including an air-cushion vehicle (for example, a hovercraft) and a floating structure (for example, a floating oil rig or floating hotel). The term ship is used in the definition of "tainted rental income".
"statutory accounting period" is to have the meaning given by section 319 - see notes on that section.
"subject to tax" is to have the meaning given by section 324 - see notes on that section.
"tainted asset" is defined for the purpose of the active income test and particularly for passive income. In broad terms, under paragraph (a) tainted asset means shares, loans, forward and futures contracts, swaps, other securities, life assurance policies, interests in trusts and partnerships, and rights or options to any of these. "Commodity investments" will not be tainted assets because they are separately dealt with for active income test purposes.
Paragraph (b) refers to an asset that was held by the company solely or principally for deriving "tainted rental income". This will include as tainted assets most properties that are used to derive rents unless the lessor is involved in labour-intensive property management services.
In testing whether an asset was held solely or principally for deriving tainted rental income regard will be had to the purpose for which the asset was held throughout the period in which it was held by the company. Where that purpose changed during the period the principal purpose will be determined on a time basis.
Paragraph (c) treats as a tainted asset any other asset, not dealt with in the earlier paragraphs of this definition, unless it is trading stock or an asset used solely in carrying on a business. In determining whether an asset was used solely in carrying on a business regard will be had to the whole of the period in which the asset was owned or held by the company.
For example, a motor vehicle that was used for private purposes for a time before becoming a business asset would fail to satisfy the test of use solely in carrying on a business, even though in the particular statutory accounting period in question it may have been used exclusively for business purposes.
"tainted commodity gain" is defined for the purpose of the active income test. A gain realised by the company in the statutory accounting period from disposing of "tainted commodity investments" will be a tainted commodity gain. The phrase "disposing of" used in this definition encompasses both where the commodity investments are brought to account as trading stock of the company and where gains are made from buying and selling commodity investments. "Net tainted commodity gains" are ascertained in accordance with section 443.
"tainted commodity investment" is defined in relation to specified contracts entered into by a company. Paragraph (a) provides that a forward or futures contract in respect of a "commodity" will be a tainted commodity investment.
Paragraph (b) includes a right or option in respect of a contract referred to in paragraph (a).
Under paragraph (c), a "commodity investment" of a company that carries on a business of producing or processing the commodity, or a business in which the commodity is used as a raw material in a production process, will not be a tainted commodity investment to the extent that the contract, right or option relates to the carrying on of that business. For example, a futures contract in wool acquired by a grazing company as a hedging device against fluctuations in wool prices would not be a tainted commodity investment.
The exception provided by paragraph (d) is in respect of certain hedging contracts entered into by commodity traders. A hedge that was entered into to cover a position under another contract in the same commodity would be a tainted commodity investment except where the condition in subparagraph (d)(ii) is satisfied.
Subparagraph (d)(ii) requires that the company not be in receipt of "tainted sales income" from a transaction under that other contract. This means that the exception will not apply if the sale of the actual commodity did or would give rise to tainted sales income within the meaning of section 447 (for example, if the commodity was purchased from an associated Australian resident).
"tainted commodity loss" has a corresponding meaning to "tainted commodity gain" - see notes on that definition.
"tainted currency exchange gain" is defined for the purpose of the active income test. A "currency exchange gain" realised by the company in its statutory accounting period will be a tainted currency exchange gain except where the gain related to an "active income transaction" within the meaning of section 439. "Net tainted currency exchange gains" are ascertained in accordance with section 444.
"tainted currency exchange loss" has a corresponding meaning to "tainted currency exchange gain" - see notes on that definition.
"tainted income ratio" has the meaning given by section 433 - see notes on that section.
"tainted interest income" is defined for the purpose of its inclusion in passive income (section 446). Subject to the exception noted below, tainted interest income is defined in paragraph (a) to mean interest or a payment in the nature of interest.
The defined term also includes under paragraph (b) amounts that would be assessable income under Division 16E of Part III of the Principal Act if the company was a resident. In broad terms, Division 16E taxes on an accruals basis income derived from discounted and other deferred interest securities. Also included, by paragraph (c), is "factoring income".
Tainted interest income does not include interest that is offshore banking income within the meaning of Division 18 of Part III of the Principal Act.
"tainted rental income" is defined in relation to income derived by a company by way of "rent" in respect of any one of a series of defined leases.
Paragraph (a) refers to a lease to which an associate of the company was a party at the time the income was derived.
Paragraph (b) is in terms similar to paragraph (a). It will apply to a lease where no party is an associate but the rent was paid or given either directly or indirectly by an associate of the company.
Under paragraph (c), rent in respect of a lease of land will be tainted rental income except where, at all times during the period when the income accrued, the land is situated in the particular country of which the company was a resident. The reference in this paragraph to "lease of land" will include all fixtures that are leased with the land, and because of paragraph (a), effectively deals only with leases to non-associates. The general effect of paragraph (c) is that income derived by a company by way of rent in respect of land situated in a country other than the company's country of residence will be tainted rent al income.
Paragraph (d) has the effect that income derived by a company by way of rent in respect of land situated in the company's country of residence will be tainted rental income unless a substantial part of the income is attributable to the provision of labour-intensive "property management services" in connection with the land by directors or employees of the company.
Paragraph (e) includes in the definition of tainted rental income rent in respect of a lease of a "ship", or an "aircraft", except where the provision of a crew, management services or maintenance services accounts for a substantial part of the rental income.
Income from the leasing of containers or plant and equipment used on ships is similarly classified as tainted rental income by paragraph (f).
"tainted royalty income" is defined for the purpose of determining passive income in section 446 and is to mean all but certain specified royalties. The exception is for royalties received from unrelated persons in the course of a business carried on by the company in which the company produces or substantially develops or improves the property, information, etc. in respect of which the royalty is paid. The exception would not apply to any royalty received on property, etc. which was acquired by the company and licensed for use by others without any other input from the company.
"tainted sales income" has the meaning given by section 447 - see notes on that section. Tainted sales income is included in "gross tainted turnover" (section 435) which is the numerator of the "tainted income ratio" (section 433) used in the active income test.
"tainted services income" has the meaning given by section 448 - see the notes on that section. Tainted services income is included in "gross tainted turnover" (section 435) as for tainted sales income, described above.
"tax accounting period" refers to the accounting period used for the purposes of determining whether tax is imposed or levied under the tax law of a listed country. The term "tax base", which is used in the definition of this term, is discussed in the notes on section 324. The term is relevant to the definitions of "eligible designated concession income" and "subject to tax", and also subsections 23AH(1), 102AAE(1) and (2), 102AAU(1), 377(1) and 385(2).
"tax detriment" is to have the meaning given by section 330 - see notes on that section.
"tax law" is defined in relation to a foreign country to mean a law that imposes foreign tax (as defined in section 6AB of the Principal Act). In the case of a country that imposes foreign tax at a State and/or municipal level in addition to the federal level, tax law means the law of that country that imposes federal foreign tax (paragraph (a)). In any other case, it is whichever law that imposes foreign tax (paragraph (b)). An example of a state foreign tax would be a foreign tax collected in Switzerland that is a cantonal tax on income. The definition of "tax law" may be affected by the operation of section 323 - see notes on that section.
The term is relevant to the definitions of "subject to tax" and "tax accounting period", used in sections 23AH, 325, 332, 333, 377 and 385.
"trust" means an entity in the capacity of a trustee, a trust or a trust estate. This definition is a drafting measure that will allow "trust" to be used in place of trust, trust estate (as defined in Division 6 of Part III of the Principal Act) or trustee. The term includes an entity that is taken to be a trustee because of section 268 of the Principal Act to ensure that superannuation funds that are not actually constituted as trusts will be dealt with as trusts.
"unlisted country" is to have the meaning given by section 320 - see notes on that section.

Section 318: Associates

This section details the relationships which will result in any entity (defined in section 317) being an associate of another entity. The definition of associate is relevant to the following sections in Part X.

·
section 317 - Interpretation
·
section 340 - Controlled foreign company (CFC);
·
section 347 - Eligible transferor in relation to a discretionary trust;
·
section 349 - Associate-inclusive control interest in a company or trust;
·
section 350 - Direct control interest in a company;
·
section 353 - Control tracing interest in a company;
·
section 361 - Attributable taxpayer in relation to a CFC or a CFT;
·
section 447 - Tainted sales income;
·
section 448 - Tainted services income; and
·
section 450 - AFI subsidiaries - asset disposals and currency transactions.

Section 318 specifies who is an associate of:

·
a natural person (subsection 318(1));
·
a company (subsection 318(2));
·
a trustee (subsection 318(3)); and
·
a partnership (subsection 318(4)).

In broad terms, the associates are those entities that, by reason of family or business connections, might appropriately be regarded as being associates of a particular entity.

The entities who will be associates of a natural person who is not acting in the capacity of trustee are specified in subsection 318(1). The associates of a natural person are as follows:

·
a relative (as defined in subsection 6(1) of the Principal Act) of the natural person (paragraph (1)(a));
·
a partner of the natural person or the partnership in which the natural person is one of the partners (paragraph (1)(b));
·
where the partner of a natural person is also a natural person (not acting in the capacity of trustee) that partner's spouse or child (paragraph (1)(c));
·
a trustee of a trust where the natural person (or an entity that is an associate of the natural person because of paragraph (1)(a), (b), (c) or (e)) benefits under the trust (see notes on paragraph 318(6)(a)) (paragraph (1)(d));
·
a company that is sufficiently influenced (see notes on paragraph 318(6)(b)) by:

· .
the natural person (sub-subparagraph (1)(e)(i)(A));
· .
an entity that is an associate of the natural person because of paragraph (1)(a), (b), (c) or (d) - for example, a company that is sufficiently influenced by the natural person's spouse (sub-subparagraph (1)(e)(i)(B));
· .
a company that is an associate of the natural person because of the application of sub-subparagraph (1)(e)(i)(A), (B) or (D) or subparagraph (1)(e)(ii) (sub-subparagraph (1)(e)(i)(C)); or
· .
two or more entities that are associates of the natural person under sub-subparagraphs (1)(e)(i)(A), (B) or (C) (sub-subparagraph (1)(e)(i)(D)); and

·
a company in which a majority voting interest (see notes on paragraph 318(6)(c)) is held by:

· .
the natural person (sub-subparagraph (1)(e)(ii)(A));
· .
entities that are associates of the natural person because of subparagraph (1)(e)(i) or paragraphs (1)(a), (b), (c) or (d) (sub-subparagraph (1)(e)(ii)(B)); or
· .
both the natural person and entities that are associates of the natural person because of paragraph (1)(a), (b), (c) or (d) or subparagraph (1)(e)(i) (sub-subparagraph (1)(e)(ii)(C)).

Subsection 318(2) specifies who will be an associate of a company (other than a company in the capacity of trustee). These are as follows:

·
a partner of the company or a partnership in which the company is a partner (paragraph (2)(a));
·
where the partner of a company is a natural person - that person's spouse or child (paragraph (2)(b));
·
where the company, or an entity that is an associate of the company because of paragraph (2)(a), (b), (d), (e) or (f), benefits under a trust (see notes on paragraph 318(6)(a)) - the trustee of the trust (paragraph (2)(c));
·
another entity that, acting alone or with another entity or entities, sufficiently influences the company (subparagraph (2)(d)(i));
·
an entity that, either alone or together with associates, holds a majority voting interest in the company (subparagraph (2)(d)(ii));
·
a second company that is sufficiently influenced by:

· .
the company (sub-subparagraph (2)(e)(i)(A));
· .
an entity that is an associate of the company because of paragraph (2)(a), (b), (c), (d) or (f) (sub-subparagraph (2)(e)(i)(B));
· .
a third company that is an associate of the company because of sub-subparagraph (2)(e)(i)(A), (B) or (D) or subparagraph (2)(e)(ii) (sub-subparagraph (2)(e)(i)(C)); or
· .
two or more entities that are associates of the company because of sub-subparagraph (2)(e)(i)(A), (B) or (C) (sub-subparagraph (2) (e)(i)(D));

·
a second company in which a majority voting interest is held by:

· .
the company (sub-subparagraph (2)(e)(ii)(A));
· .
entities that are associates of the company because of subparagraph (2)(e)(i) and paragraphs (2)(a), (b), (c), (d) and (f) (sub-subparagraph (2)(e)(ii)(B)); or
· .
both the company and entities that are associates of the company because of subparagraph (2)(e)(i) and paragraphs (2)(a), (b), (c), (d) and (f) (sub-subparagraph (2)(e)(ii)(C)); and

·
an associate of an entity that is an associate of the company because of paragraph (2)(d) (paragraph (2)(f)).

Subsection 318(3) specifies the following entities as associates of a trustee:

·
any entity that " benefits under the trust " (see notes on subsection 318(6)) (paragraph (3)(a));
·
any entity that, because of subsection (1) or (3), would be an associate of a natural person who benefits under the trust (paragraph (3)(b)); and
·
any entity that, because of subsection (2) or (3), would be an associate of a company that either benefits under the trust or is an associate of a natural person who benefits under the trust (paragraph (3)(c)).

Subsection 318(4) specifies the following entities as associates of a partnership:

·
a partner in the partnership (paragraph (4)(a));
·
any entity that, because of subsection (1) or (3), would be an associate of a natural person who is a partner in the partnership (paragraph (4)(b)); and
·
any entity that, because of subsection (2) or (3), would be an associate of a company that is a partner in the partnership (paragraph (4)(c)).

Subsection 318(5) provides a different treatment for determining the associates of trustees of public unit trusts (see notes on section 329) that would, apart from this subsection, be treated as trustees of trust estates under subsection (3).

In cases where an entity is being tested to determine whether it is an associate of another entity and one of those entities is a trustee of a public unit trust (referred to in this subsection as a "public unit trust entity"), the trustee of the public unit trust is to be treated as if it were a company (paragraph 318(5)(a)).

The associate test in relation to a company may rely on the concepts of "sufficient influence" (see notes on paragraph 318(6)(b)) or "majority voting interest" (see notes on paragraph 318(6)(c)). As a consequence of a trustee of a public unit trust being treated as a company because of paragraph (5)(a), these concepts are defined in terms relevant to public unit trusts in paragraphs 318(5)(b) and (c).

Paragraph 318(5)(b) describes when a public unit trust entity is sufficiently influenced by another entity or entities. This will be where the public unit trust entity is under an obligation or accustomed to acting in accordance with the directions of that other entity or other entities. The direction may also include wishes or instructions and may be communicated directly or indirectly by using a third party, that is, an interposed entity. The influence described may have been imposed or it may be reasonable to expect it to be imposed.

The concept of a "majority voting interest" in relation to a public unit trust entity is to be determined by reference to either the income or corpus of the trust. Paragraph 318(5)(c) provides that where an entity or other entities are entitled to, or are entitled to acquire, 50 per cent or more of the income (subparagraph 318(5)(c)(i)) or corpus (subparagraph 318(5)(c)(ii)) of the trust, then the entity or other entities are taken to hold a majority voting interest.

Subsection 318(6) clarifies the expressions "benefit under a trust", "sufficiently influenced" and "majority voting interest" that are used in section 318.

Paragraph 318(6)(a) makes it clear that an entity will be taken to benefit under a trust if the entity actually benefits under the trust or is capable of benefiting - for example, a beneficiary in a discretionary trust will be taken to benefit under the trust even though the trustee's discretion is not exercised in the beneficiary's favour. An entity will be taken to benefit under a trust if the entity benefits directly or through an interposed company, partnership or trust.

Paragraph 318(6)(b) clarifies the expression "sufficiently influenced" that is used in section 318 in relation to a company. Where any entity or entities have influence, because of obligation or custom, over a company or its directors to direct the actions of the company either directly or through interposed entities, that company will be sufficiently influenced by that entity or those entities.

The influence by an entity or entities may take the form of instructions, wishes or directions conveyed either directly or indirectly to the company or its directors.

Paragraph 318(6)(c) defines the term majority voting interest. The ability to cast, or to control the casting of, more than 50 percent of votes that may be exercised at a general meeting of the company will constitute a majority voting interest.

Subsection 318(7) specifies those circumstances in which a person will be a spouse of a person for the purpose of section 318 - that is, for the purposes of paragraphs (1)(c) and (2)(b) and, because the definition of "relative" in subsection 6(1) of the Principal Act includes a spouse, also for the purposes of paragraph (1)(a).

A de facto spouse is to be treated as a spouse for the purposes of section 318. A person who is legally married but is living separately and apart from the person's spouse on a permanent basis will not be treated as a spouse.

Section 319: Statutory accounting period of a company

Section 319 defines the term statutory accounting period of a company which is a central concept of Part X. For example, the calculation of attributable income and the active income exemption are both determined in relation to a statutory accounting period of a CFC, and the test for control is applied at the end of a company's statutory accounting period. However, for a number of reasons, it may not be possible to identify a single 12 month period as the accounting period of a company - for example, a company may have different accounting periods for different purposes, may draw up accounts on other than a 12 month basis or may not draw up accounts at all. Further, there would be significant scope for avoidance if a company were able to change accounting periods from year to year.

As a starting point, subsection 319(1) establishes the statutory accounting period of a company as each period of 12 months ending on 30 June. This may not correspond with the actual accounting period of the company. For a company that would not be a CFC irrespective of the date on which the test for control was applied, no purpose is served by aligning the statutory accounting period with an actual accounting period that is used by the company. However, for other companies, the application of the active income test and the calculation of attributable income would be simpler if the accounting period that applied for the purposes of Part X was the same as the accounting period used by the company for the purposes of drawing up its accounts.

Accordingly, subsection 319 (2) will permit a company to elect in writing to adopt a new statutory accounting period - that is, a period of 12 months ending on a date other than 30 June or a previously adopted substituted accounting period. An election may only operate prospectively.

Subsection 319(3) provides rules under which a company may change its statutory accounting period. Paragraph (3)(a) applies where an election under this section has not previously been made. The company may elect to end its new statutory accounting period on a day (the "new day") that corresponds with the end of an accounting period of 12 months that the company regularly uses for the purposes of a tax law of any country or for reporting to its shareholders.

If the company has previously elected to adopt a new statutory accounting period then, in addition to the available statutory accounting periods mentioned in paragraph (3)(a), it may alternatively elect to adopt 30 June as the "new day" for ending its statutory accounting period (paragraph (3)(b)).

Under subsection 319(4), the immediate effect of the election is that the first statutory accounting period after the changeover to a new statutory accounting period (paragraph (4)(a)), will be less than 12 months in duration. Paragraph (4)(b) provides f or subsequent statutory accounting periods to be the successive periods of 12 months. For example, if a company that had a statutory accounting period ending on 30 June 1992 changed to a statutory accounting period ending on 30 September, it would have statutory accounting periods of:

·
1 July 1991 to 30 June 1992;
·
1 July 1992 to 30 September 1992;
·
1 October 1992 to 30 September 1993, and
·
subsequent 12 month statutory accounting periods ending on 30 September.

Subsection 319(5) provides for the situation where, in the first 12 months of its existence, a company elects to adopt a statutory accounting period ending other than on 30 June. Such a company would not qualify under the subparagraph (3)(a)(ii) criteria of having regularly used a particular accounting period for tax purposes of any country or for reporting to its shareholders. Paragraph (5)(a) directs that reference to regular use in subparagraph (3)(a)(ii) should be read, for the new company, as a proposal to use the new statutory accounting period.

The first statutory accounting period of the new company runs from its incorporation or establishment to the end of the "new day" (subparagraph (5)(b)(i)). Subsequent statutory accounting periods are periods of 12 months ending on the "new day" (subparagraph (5)(b)(ii)).

The operation of this section in the period until 30 June 1991 is subject to certain transitional arrangements (see notes on clause 54).

Section 320: Listed countries and unlisted countries

Subsection 320(1) defines the terms "listed country" and "unlisted country" which are central concepts of the accruals basis of taxing foreign source income.

"listed country" is defined to mean a foreign country, or a part of a foreign country, that is declared by the regulations to be a listed country for the purposes of Part X. The term "foreign country" is defined in section 22 of the Acts Interpretation Act 1901 to mean "any country (whether or not an independent sovereign state) outside Australia and the external Territories".
"unlisted country" means a foreign country, no part of which is a listed country (paragraph (a)). Where a part of a foreign country is declared by the regulations to be a listed country, and the remaining part of that foreign country is not specified in the regulations as a listed country, that remaining part will be an unlisted country (paragraph (b)).

The provisions of subsections 320(2), (3) and (4) will modify the term "foreign country" as used in the definitions of listed country and unlisted country.

Subsection 320(2) will, subject to subsections 320(3) and (4), treat a colony, overseas territory or protectorate of a foreign country to be a country separate to that foreign country. This will ensure that a colony, overseas territory or protectorate of a listed country will not automatically be given the status of a listed country. To be given the status of a listed country, unless subsection 320(3) applies, it will have to be listed separately in the regulations.

Subsection 320(3) will deem two foreign countries to be the same foreign country if they both have a common income tax system, provided that subsection (4) does not apply. The term "common" is to be taken to mean identical in all respects - that is, both in terms of its provisions and rates of tax. It is not necessary that both foreign countries be subject to the same legislation - different legislation could apply in each country but the provisions (tax base) and the rates of tax must be the same. Thus, the subsection would not apply in a situation where the tax base is the same but the rates of tax are different. Subsection 320(3) effectively cancels the operation of subsection (2) in a case where a colony, overseas territory or protectorate of a foreign country is subject to the same tax system as the foreign country.

Subsection 320(4) will have the effect that where a part of a foreign country with which Australia has a double tax agreement (see notes on section 317) is excluded from the operation of the double tax agreement, the excluded part will be deemed to be a separate foreign country. To be given the status of a listed country, the excluded part must be listed separately in the regulations as a listed country. In the event that a colony, overseas territory or protectorate is regarded as the same country as a listed country by the operation of subsection (3), but that colony, overseas territory or protectorate is excluded from the operation of Australia's double tax agreement with that listed country, the colony, overseas territory or protectorate will be regarded as a separate foreign country. It would be a listed country only if it were separately listed in the regulations as such.

Section 321: Each listed country and each unlisted country will be treated as a separate foreign country

By section 321, each listed country and unlisted country will be treated as a separate foreign country for the purposes of applying the provisions of section 6AB of the Principal Act to Part X. Broadly, section 6AB defines "foreign income" and "foreign tax" for the purposes of the Principal Act to mean, respectively, income derived from sources in a foreign country and tax imposed by a law of a foreign country. Section 321 will have the effect that, in applying the provisions of section 6AB of the Principal Act to Part X, the term "foreign country" is given the modified meaning as provided by section 320.

Section 322: Meaning of "entitled to acquire"

An entity's direct control interest in a company or trust includes not only interests that the entity actually holds but also interests that the entity is entitled to acquire - see notes on sections 350 (companies) and 351 (trusts). Section 322 defines what is meant by the expression "entitled to acquire". For the purposes of Part X, an entity is to be taken to be entitled to acquire anything that it is absolutely or contingently entitled to acquire, whether because of any constituent document of a company, the exercise of any right or option or for any other reason.

Section 323: State foreign taxes may be treated as federal foreign taxes

Section 323 permits regulations to be made to provide that a specified State foreign tax may be treated as if it were an additional federal foreign tax. For example, it is proposed that regulations made for the purposes of Part X of the Principal Act will provide that a cantonal tax on income referred to in paragraph 1(b) of Article 2 of the comprehensive double tax agreement between Australia and Switzerland is to be treated as if it were an additional federal foreign tax of Switzerland. Thus, in relation to Switzerland, the definition of "tax law" (defined in section 317) will, in effect, be expanded to include a law of a canton which imposes a foreign tax that is, in addition to a Swiss law that imposes a federal foreign tax. The expression "foreign tax" is defined in subsection 6AB(2) of the Principal Act to mean, broadly, a tax imposed by a law of a foreign country.

Section 324: When income or profits subject to tax in a listed country

Section 324 specifies when income or profits will be taken to be "subject to tax" in a listed country for the purposes of Part X. Where a particular item of income of profit is derived by an entity, it is to be taken to be subject to tax in a listed country in a particular tax accounting period if foreign tax (other than a withholding-type tax) is payable under a tax law on that item because it is included in the tax base of that law for the tax accounting period (paragraph (1)(a)).

In relation to a listed country, a particular item of income or profits will be subject to tax in circumstances where tax is not actually paid on that item because of a provision of a law of that listed country, but tax is deemed to have been paid by virtue of regulations made for the purposes of section 160AFF of the Principal Act (sub-subparagraph (1)(b)(i)(A)) or by virtue of a provision (generally referred to as a tax sparing provision) of a double tax agreement between Australia and the listed country (sub-subparagraph (1)(b)(i)(B)).

In relation to a tax law of a particular listed country, the concept of tax base relates to those items of income or profits on which tax is imposed or levied. Thus, the concept of tax base does not comprehend receipts which are:

·
specifically exempt from tax; or
·
implicitly exempt from tax - for example, the provisions of the tax law may impose tax on income only with the effect that capital gains are excluded from the tax base.

An item of income or profit will not be taken to be subject to tax by reason only of having been subject to a withholding-type tax. A withholding tax is a tax that is deducted from income at source by the payer of the income - that is, the payee receives the income net of tax and the tax is remitted by the payer to the taxing authority. Such a system is to be contrasted to the procedure (commonly called tax by assessment) where such income is included in the taxable income or profits (the base on which tax is imposed or levied) of the party to whom the income is paid or remitted and taxed as part of that taxable income or profits.

In relation to a particular item of income or profits, foreign tax will be payable if tax is imposed or levied because the tax law of a listed country declares that tax shall be paid upon that receipt by virtue of the fact that it is derived by an entity in a particular tax accounting period, notwithstanding that:

·
the actual amount of tax may be assessed by, or paid to, the relevant tax authorities in a subsequent tax accounting period; or
·
deductions that are allowable under the tax law of the listed country from the income or profits have the effect that no tax is required to be paid.

Section 324 does not specify in which particular tax accounting period a particular receipt derived by an entity must be subject to tax. If relevant, the appropriate tax accounting period will be specified in the provision in which the expression "subject to tax" is used. For example, in proposed section 23AH, the relevant period is the taxpayer's year of income with the effect that the "subject to tax" test must be satisfied in a tax accounting period that ends before the end of, or commences in, that year.

In relation to a tax law of a listed country which includes a concept that is similar to the concept of "net income" in Divisions 5 and 6 of the Principal Act, a particular item of income or profits is not to be taken to be subject to tax in a listed country solely because of the fact that the item of income or profits is included in the net income of a partnership or trust located in the country. For example, if a tax law of a listed country requires income or profits to be taken into account for the purposes of calculating the income of the partnership or trust estate but then excludes it from the tax base in relation to a particular partner or beneficiary, then the excluded amount of income or profits is not to be regarded as being subject to tax.

The concept of subject to tax (whether used separately or as part of a definition) is applicable to a number of provisions of the proposed measures. Depending on whether that test is satisfied, certain consequences follow - the most notable being whether:

·
foreign branch income of Australian companies is exempt from tax (section 23AH);
·
certain distributions to a taxpayer from a listed country trust estate are subject to an interest charge (paragraph 102AAM(1)(b) and subsection 102AAM(7).
·
certain income of a listed country trust estate or a CFC resident in a listed country is to be treated as attributable income (subsections 102AAU(1) and 385(2))

Subsection 324(2) permits regulations to be made for the purposes of Part X, or one or more provisions of that Part, which have the effect of deeming a particular item of income or profits to be "subject to tax". Regulations will be made, for example, to insert a concept of "roll-over relief" for capital gains purposes in the "subject to tax" test. Broadly, the gain will be taken to be subject to tax for the purposes of section 324 in circumstances where the gain would have been subject to tax if roll-over provisions of a kind specified in the regulations were not contained in the tax law of a particular listed country.

Section 325: When dividends etc. taxed in a listed country at normal company tax rate

Section 325 specifies the circumstances in which a dividend or other amount of a particular kind is to be taken to have been taxed in a listed country at the normal rate of company tax applicable in that country. For the dividend income or other amount to be taken to be taxed in a listed country at the normal rate of company tax, it must be taxed at the same rate of tax that is applicable to a company's other income or at a higher rate (paragraph (a)). In addition, there should be no entitlement to a credit, rebate or tax concession under the tax law of the listed country in respect of that dividend except for credit for foreign tax paid under the tax law of another listed or unlisted country (paragraph (b)).

A dividend or other amount will be treated as having been taxed in a listed country at the normal rate of company tax of that country if the dividend income or other amount is included in the tax base of that country by reference to which the normal rate of tax is applied but is offset by a current year or carried forward loss.

Whether the tax law of a listed country imposes tax on dividend income at the normal corporate rate of tax is relevant to the assessability under section 458 or section 459 of certain non-portfolio dividends paid by a CFC. Where a non-portfolio dividend has been subject to tax in a listed country at or above its normal corporate tax rate, no part of that dividend will be attributed to any resident under section 458 or section 459.

Clause 57 will provide for the inclusion in the assessable income of attributable taxpayers of a CFC that is a resident of a listed country, certain amounts of a trust distribution made to that CFC directly or through interposed entities. Where the amount of the trust distribution to the CFC has been subject to tax in a listed country at or above its normal company tax rate, no part of that amount will be attributed to any resident under clause 57.

Section 323 permits regulations to be made to provide that a specified state foreign tax may be treated as if it were an additional federal foreign tax. Where regulations treat a specified state foreign tax of a country as an additional federal foreign tax, the normal company rate of tax of that country will be determined having regard to the total of the normal federal company tax rate and the normal state company tax rate. Moreover, paragraph (b) will have the effect that neither the federal tax law nor the state tax law of that country should provide for any credit, rebate or other tax concession in respect of the dividend other than for foreign tax payable under a tax law of a different country.

Section 326: AFI subsidiary

Section 326 sets out the circumstances in which a company will be treated as an AFI subsidiary for the purpose of the active income test (see notes on Subdivision F of Division 8). The modifications of the active income test by Subdivision F are intended to apply only to non-resident financial institutions that are themselves controlled, directly or indirectly, by a small number of Australian financial institutions.

A company may qualify as an AFI subsidiary at a particular time under either or both of the tests given in subsection 326(1). That subsection needs to be read in conjunction with subsection 326(2) which extends the meaning of AFI as defined in section 317.

Paragraph (1)(a) requires that there is a group of five or fewer AFIs (or subsidiaries of AFIs) the sum of whose direct and indirect control interests in the company is not less than 50 per cent. The AFIs may be associated, but need not necessarily be associated. Direct and indirect control interests are measured in accordance with sections 350 and 352, respectively, as for the control test.

By paragraph (1)(b) a company will be an AFI subsidiary at a particular time if there is one AFI (or subsidiary of an AFI) that holds at least 40 per cent of all the direct and indirect control interests in the company at that time and control of the company does not rest with a group of entities that does not include the AFI.

For the purposes of section 326, an AFI (defined in section 317) is taken to include any wholly owned subsidiary of an AFI, by subsection 326(2). Subsections 326(3) to (5) determine whether a company is a wholly owned subsidiary of an AFI in the same manner as in the group loss transfer provisions. Effectively, subsection (2) extends the meaning of AFI to encompass an Australian subsidiary of an AFI that may not itself be an AFI.

Subsections 326(3) and (4) define a 100 per cent subsidiary, for the purposes of subsection (2), in much the same way as a subsidiary company is defined for the purpose of the group loss provisions of section 80G of the Principal Act. The only difference is that, for the purposes of section 326, the tests are applied at a particular time.

Subsection 326(3) specifies the circumstances in which a company is to be taken to be a 100 per cent subsidiary of another company (termed the "holding company") for the purposes of section 326 at a particular time. Under subparagraph (3)(a)(i) this relationship is established if all the shares in the subsidiary company were beneficially owned by the holding company at that time. Subparagraph (a)(ii) establishes the relationship if all the shares in the subsidiary company were beneficially owned at that time by a company that is, or by two or more companies each of which is, a 100 per cent subsidiary of the holding company. By subparagraph (a)(iii) the necessary relationship will also exist if all the shares in the subsidiary company were owned at that time by the holding company and by a company that is, or two or more companies each of which is, a 100 per cent subsidiary of the holding company.

Paragraph (3)(b) imposes the further requirement that at the particular time there was no agreement, arrangement or understanding in force by virtue of which any person was in a position, or would become in a position after that time, to affect rights of the holding company, or of another subsidiary of the holding company in relation to the particular subsidiary company. This is a safeguard against the possibility of any collateral arrangement being used to circumvent the intended operation of the provisions.

Subsection 326(4) extends the operation of subsection (3) by establishing a 100 per cent subsidiary relationship between companies which are part of a chain of 100 per cent subsidiaries of a holding company. Thus, in a corporate structure under which all of the shares in a subsidiary are owned by one or more wholly-owned companies that are interposed between a holding company and the end subsidiary company, the subsidiary relationship will be found between each of those companies.

Subsection 326(5) qualifies subsection (3). It specifies for the purposes of paragraph (3)(b) the circumstances in which a person is to be regarded as being in a position at a particular time to affect the rights of one company in relation to another company. A person will be in that position if he or she has at the particular time a right, power, or option to acquire any of the rights of the first company in its subsidiary or to prevent that company from exercising rights in the subsidiary for its own benefit.

Section 327: Eligible finance shares

The purpose of section 327 is to specify the conditions under which shares issued to an "AFI" or "AFI subsidiary" under certain share finance arrangements will be excluded from the measurement of a direct control interest in a company under subsection 350(5) and a direct attribution interest in a CFC or CFT under subsection 356(2). The term will also be used to determine whether certain dividends are deductible in the calculation of the attributable income of a CFC (see notes on section 394).

A share will be an eligible finance share if the share satisfies each of the following four conditions:

·
the shareholder is an AFI or AFI subsidiary (paragraph (a));
·
the share was issued to the shareholder by the company in the ordinary course of the shareholder's business (paragraph (b));
·
the shareholder is not an associate of the company (paragraph (c)); and
·
having regard to:

· .
the manner in which the amount of dividends in respect of the share are to be calculated;
· .
the conditions applicable to the payment of dividends; and
· .
any other relevant matters,

the payment of dividends may reasonably be regarded as equivalent to the payment of interest on a loan where the interest accrues at intervals not exceeding 12 months and is paid not later than 12 months after it accrues (paragraph (d)).

Section 328: Non-resident family trusts

The definition of "non-resident family trust" is required for the exclusion from the calculation of an entity's attribution interest those interests that relate to certain eligible transferors in relation to non-resident family trusts (see notes on subsection 356(6).

Section 328 defines a "non-resident family trust" in relation to a natural person. Subsection 328(1) provides that a trust will be a non-resident family trust in relation to a natural person at a particular time if it is a post-marital trust in relation to that person (subparagraph (a)(i)) or a family relief trust in relation to a natural person at that time (subparagraph (a)(ii)). In either case, the trust must be one that is constituted by a deed of trust or other instrument or under an order or declaration of a court (paragraph (b)).

Subsection (2) sets out the requirements that have to be met for a non-resident trust to qualify at a post-marital family trust in relation to a natural person at a particular time. The first set of conditions relates to the creation of the trust (paragraph (a)). A trust that was created pursuant to a decree or order of dissolution or annulment of marriage that has effect in Australia, or is recognised as valid in Australia, because of the Family Law Act 1975, will satisfy the condition relating to the creation of the trust (sub-subparagraph (a)(i)(A)).

That condition will also be satisfied where the trust was created pursuant to a decree or order of judicial separation or a similar decree or order (subparagraph 328(2)(a)(i)(B)) or where the trust was created as a consequence of the break-down of a de facto marriage (see notes on definition in section 317) (subparagraph 328(2)(a)(ii)).

The second set of conditions relates to the category or categories of persons who benefit, or are capable of benefiting, under the trust (paragraph (b)). These persons are referred to as the "primary potential beneficiaries". A non-resident trust estate will qualify as a post-marital family trust in relation to a natural person at a particular time only where the persons who benefit, or are capable of benefiting, under the trust are natural persons who are:

·
not Part X residents at that time (subparagraph (1)(b) (i)); and
·
within the following categories of persons:

· .
the spouse or former spouse of the natural person;
· .
a child of the natural person;
· .
a child of the former spouse of the natural person who was such a child at the time when the former spouse was the spouse of the natural person, or
· .
a child of the spouse of the natural person.

Subsection (3) sets out the requirements that have to be met for a non-resident trust to qualify as a family relief trust in relation to a natural person at a particular time. The first of these requirements is that the only persons who benefit, or are capable of benefiting, under the trust are natural persons who are identified by name in the trust deed or instrument or in the court order or declaration constituting the trust (subparagraph (a)(i)), are not Part X Australian residents at that time (subparagraph (a)(ii)) and fall within the categories of persons referred to a "primary potential beneficiaries".

Subparagraph 328(3)(a)(iii) lists the categories of relatives relevant for assessing whether a non-resident person may benefit from a family relief trust:

·
the spouse or former spouse of the natural person;
·
a parent of the natural person or of the natural person's spouse or former spouse;
·
a child of the natural person or of the natural person's spouse or former spouse;
·
a grandparent of the natural person;
·
a grandchild of the natural person;
·
a brother or sister of the natural person or of the natural person's spouse or former spouse; and
·
a child of a brother or sister mentioned in sub-subparagraph 328(3)(a)(iii)(F) (the previous dot point).

Paragraph (b) sets out the second of the requirements. That is, that the trust should have been established for the relief of persons who are in necessitous circumstances and is operated for that purpose.

The third requirement is that the trust should satisfy one of the three conditions set out in paragraph (c) at the time it is tested (referred to as the test time) to determine whether it qualifies as a non-resident family trust. These conditions are:

·
at the test time, the assets of the trust are not excessive taking into account the requirements or likely requirements of the primary beneficiaries (subparagraph (c)(i));
·
no transfers of property or services were made to the trust during the period commencing at the IP time (12 April 1989) and ending at the test time (subparagraph (c)(ii)); or
·
at each time of transfer or services to the trust estate from 12 April 1989 to the end of the test time, the assets of the trust were not excessive having regard to the requirements, or likely requirements, of the beneficiaries at the time of the transfer (subparagraph (c)(iii)).

Subsection 328(4) provides that subsection (1) does not prevent a trust estate from being a non-resident family trust in relation to a natural person at a particular time if one or more natural persons, who are not Part X Australian residents at that time and are children of a particular primary potential beneficiary (referred to as "secondary potential beneficiaries" in subsection (5)), would benefit or be capable of benefiting under the trust in the event of the death of that beneficiary.

Similarly, subsection (5) provides that subsections (1) and (4) do not prevent a trust from being a non-resident family trust in relation to a natural person at a particular time if, in the event of the death of all of the primary and secondary potential beneficiaries, one or more funds, authorities or institutions referred to in paragraph 78(1)(a) (the gift provisions) of the Principal Act would benefit or be capable of benefiting under the trust.

Subsection (6) deals with the case where some of the secondary potential beneficiaries hold reversionary interests in the trust at a time before the death of the primary potential beneficiaries. The subsection provides that an entity that holds an interest or a right to benefit under a trust that is dependent on the death of a natural person is to be taken to be an entity that has the type of interest referred to in subsection (4) with the result that the trust would not fail to qualify as a non-resident family trust.

Subsection (7) provides that a reference in this section to a natural person does not include a reference to a natural person in the capacity of a trustee.

Section 329: Public unit trusts

The definition of a public unit trust for the purposes of Part X relies upon the definition contained in Division 6AAA of Part III which is to be inserted in the Principal Act by clause 18 of this Bill (see notes on section 102AAF).

By section 329, a unit trust is a public unit trust at a particular time if, at all times during the 12 month period ending at that particular time, the unit trust satisfies the conditions described in section 102AAF of Division 6AAA of Part III. The 12 month period ending at the particular time is to be the "year of income" referred to in section 102AAF.

Section 330: Tax detriment

Section 330 introduces the concept of a "tax detriment" that arises for a partner of a partnership or for a trustee or beneficiary of a trust estate. In broad terms, a tax detriment refers to the increase in the assessable income or a reduction in allowable deductions that arises to a taxpayer as a consequence of an amount being included in the assessable income of the partnership or of a trust estate in computing the net income of the partnership or trust estate.

Subsection 330(1) deals with a tax detriment that arises to a partner in a partnership. Each of the following is treated as a tax detriment to a partner of a partnership:

·
an increase in the amount included under section 92 of the Principal Act in the assessable income of the partner as the partner's share of the net income of the partnership;
·
a reduction in the amount allowable under section 92 as a deduction to the partner as the partner s share of a partnership loss; or
·
a combination of such a reduction to nil and such an increase.

A tax detriment could arise, for example, to the partner of an Australian partnership (defined in section 337 as a partnership in which there is at least one resident partner) if a part of the attributable income of a CFC (defined in section 340) is included in the assessable income of the partnership under section 456. This would lead to an increase in the net income of the partnership, a reduction of the partnership loss, or to a combination of such reduction of a loss to nil and such an increase in net income from a nil amount.

Subsection 330(2) deals with a beneficiary who is presently entitled to a share of the income of a trust estate and is not. under a legal disability. It treats as a tax detriment an increase in the amount that is included (under sections 97, 98A or 100 of the Principal Act) in the assessable income of the beneficiary as the beneficiary's share of the net income of the trust estate.

Subsection 330(3) deals with the case where a trustee of a trust estate is assessable under section 98 in respect of a beneficiary's share of the net income of a trust estate or under section 99 or 99A of the Principal Act in respect of the whole or a part of the net income to which no beneficiary is presently entitled. An increase in the amount assessable on the trustee is treated as a tax detriment.

Subsection 330(4) deals with the determination of the amount of the tax detriment. The amount of the tax detriment is equal to the amount of the increase, referred to in subsections (1), (2) or (3) in the assessable income of a taxpayer, or the amount of a reduction referred to in subsection (1) in the assessable income of a partner.

Section 331: Company deemed to be treated as a resident of a listed country or an unlisted country for the purposes of the tax law of that country

Section 331 extends the meaning of resident as set out in sections 332 and 333 to include a company in respect of which the tax law of a country imposes tax liability on the worldwide income of the company because of some form of attachment to the country other than the criterion of residence - for example, by reason of domicile, incorporation, place of effective management, or a criterion of a similar nature.

Section 332: Companies that are residents of listed countries

Section 332, as modified by section 331, sets out the residency rules for the purpose of determining whether a company is a resident of a listed country.

Subsection 332(1) provides that, for the purposes of Part X, a company is to be taken to be a resident of a listed country at a particular time if, and only if, the company is a resident of a particular listed country at that time. This subsection is to be contrasted to subsection 333(1) which may deem a company to be a resident of an unlisted country notwithstanding that the company may not be a resident of a particular unlisted country within the meaning of subsection 333(2). Subsection 332(1) does not specify at which particular time a company must be a resident of a listed country. The particular time will, however, be specified in the provision in which the concept is used.

Subsection 332(2) sets out the two conditions, both of which must be satisfied at the same time, for a company to be treated as a resident of a particular listed country at that time. Those conditions are:

·
the company must not be a Part X Australian resident (a defined term - see notes on section 317) (paragraph (a));
·
the company must be treated as a resident of a listed country for the purposes of the tax law of the listed country (paragraph (b)).

A company may be a resident of two or more particular listed countries. In a situation where a company is a resident of a listed country and is also treated as a resident of an unlisted country under the unlisted country's tax laws, the company will be a resident of a listed country for the purposes of Part X.

Section 333: Companies that are residents of unlisted countries

Section 333, as modified by section 331, contains the residency rules for the purpose of determining whether a company is a resident of an unlisted country.

Subsection 333(1) has the effect that a company will be a resident of an unlisted country at a particular time if the company is not an Australian resident nor a resident of a listed country at that time.

Paragraph (1)(a) provides that where a company is a resident of a particular unlisted country according to subsection (2), the more general expression "resident of an unlisted country" may also be applied to that company.

Paragraph (1)(b) deals with a situation where a company is deemed to be a resident of an unlisted country notwithstanding that it may not be a resident of a particular unlisted country within the meaning of subsection 333(2). Again, the particular time for applying the residency tests is to be identified by reference to the provision in which the concept is used.

Subsection 333(2) sets out the rules by which a company may ascertain which particular unlisted country it is a resident of at a particular time. This is especially important for the active income test (see notes on section 432). Briefly, where a particular country of residence cannot be identified the CFC will fail the active income test by reason of being unable to satisfy the condition in paragraph 432(1)(c) that the CFC carry on business in its country of residence through a permanent establishment.

Subsection 333(2) provides that a company is a resident of a particular unlisted country at a particular time if, at that time, the company is neither a Part X Australian resident (paragraph (2)(a)) nor a resident of a listed country (paragraph (2)(b)) and, further, the company satisfies any one of the four sets of conditions in paragraph (2)(c). These sets of conditions attempt to assign a single (or particular) country of residence to a non-resident company that is not a resident of a listed country.

In the circumstance where only one unlisted country treats a company as a resident under its tax laws, the company will be a resident of that unlisted country (subparagraph (c)(i)).

Where a company is treated as a resident under the tax laws of two or more unlisted countries and the company is incorporated in one of those unlisted countries, the company will be a resident of the particular unlisted country in which it is incorporated (subparagraph (c)(ii)).

Where a company is not treated as a resident for the purposes of the tax law of any unlisted country, it will be a resident of the unlisted country (if any) in which its management and control is solely or principally located (subparagraph (c)(iii)).

Where a company is not treated as a resident for the purposes of the tax law of any listed country nor has its management and control solely or principally located in an unlisted county, it will be a resident of the country in which it is incorporated (subparagraph (c)(iv)).

Section 334: Member of a non-portfolio company group

By section 334 a company will be a member of a non-portfolio company group if it is a member of a group of companies for the purposes of section 160AFB. Accordingly, where an Australian company holds at least 10 per cent of the voting interest in a non-resident company, the two companies will be members of a non-portfolio group. If the non-resident company holds a voting interest of at least 10 per cent in another non-resident company, each of the three companies will be a member of a non-portfolio group. This relationship could extend down a chain of non-resident companies provided each company holds a voting interest of at least 10 per cent in the company immediately below it. The question whether an Australian company holds at least 10 per cent of the voting interest in a non-resident company is to be determined by the application of section 160AFB of the Principal Act.

The concept of a non-portfolio company group is relevant to section 458 which deals with the inclusion in the assessable income of a resident taxpayer of certain dividends paid by a CFC that is a resident of an unlisted country to a CFC that is a resident of a listed country.

The concept of a non-portfolio company group is also relevant to section 372 in determining the amount of an attribution debit resulting from an attribution account payment.

Section 335: References extend to pre-commencement matters and things

Section 335 makes it clear that a reference in Part X does not only apply to matters and things occurring or existing at the time of commencement of the Part (that is, by clause 2, the day on which this Bill, as an Act, receives the Royal Assent). Therefore, a reference in the Part may be construed as referring to matters and things occurring before the date of the Royal Assent. However, this general rule is subject to any specific provision that limits a matter or thing occurring before, or after, a certain time from being taken into consideration.

Division 2 - Types of Entity

This Division defines the types of entities that are relevant for Part X. Subdivision A defines Australian entities, Subdivision B defines controlled foreign entities and Subdivision C defines eligible transferors (which are either Australian entities or controlled foreign entities) in relation to discretionary and non-discretionary trusts. The types of entities referred to in this Division fall into two categories - Australian entities and controlled foreign entities. The distinction is necessary for the purposes of Part X. Broadly, Australian entities are those entities whose interests in foreign companies are relevant for determining whether control of the foreign company exists and to whom income of a CFC may be attributed. Controlled foreign entities are those entities through which underlying interests may be traced to determine whether a foreign company is a CFC and, if so, the percentage of that CFC's income that may be attributed to an Australian entity.

Subdivision A - Australian Entities

Section 336: Australian entity

Income of a CFC may only be attributed to Australian entities (see notes on subsection 361(1)). Further, only associate-inclusive control interests (defined in section 349) of Australian entities may be taken into account in determining whether a foreign company is a CFC (see notes on section 340). The concept of Australian entity is also relevant to:

·
section 317 - the definition of "Australian 1% entity";
·
section 337 - the definition of "Australian partnership";
·
section 347 - eligible transferor in relation to a discretionary trust; and
·
section 348 - eligible transferor in relation to a non-discretionary trust.

In Part X, it is necessary to determine whether an entity is an Australian entity at a particular time. An entity other than a partnership or trust (generally, a company or an individual) will be an Australian entity if the entity is a resident of Australia (paragraph 336(c)). For this purpose, the existing definition of "resident of Australia" in subsection 6(1) of the Principal Act - which is capable of application in relation to a point in time - will apply.

However, the Principal Act does not have a concept of residence in relation to a partnership and the residence of a trust estate is determined in relation to a year of income. By virtue of paragraph 336(a), a partnership will be an Australian entity if it satisfies the definition of "Australian partnership" in section 337 and, by virtue of paragraph 336(b), a trust will be an Australian entity if it satisfies the definition of "Australian trust" in section 338.

Section 337: Australian partnership

Section 337 has the effect that a partnership will be an Australian partnership - and therefore an Australian entity (see notes on section 336) - at a particular time if, at that time, at least one of the partners is either:

·
a resident of Australia (as defined in subsection 6(1) of the Principal Act); or
·
a trustee of a trust estate that is an Australian trust (see notes on section 338).

Accordingly, a partnership with at least one Australian entity partner at the end of a statutory accounting period (see notes on section 319) of a foreign company will be treated as a single Australian entity for the purpose of determining whether the foreign company is a CFC (see notes on section 340).

If the foreign company is a CFC, the partnership's share of the attributable income of the CFC will be included in the partnership's net income.

Section 338: Australian trust

By subsection 95(2) of the Principal Act, a trust estate is a resident trust estate in relation to a year of income if, at any time during the year of income, a trustee of the trust estate was a resident or the central management and control of the trust estate was in Australia. By section 338, a trust estate will be an "Australian trust" in relation to a particular time if, at any time in the 12 month period before that particular time, any trustee of the trust was a resident of Australia (subparagraph (a)(i)) or the central management and control of the trust was in Australia (subparagraph (a)(ii)). A trust will also be an Australian trust at a particular time if that time falls within a year of income in respect of which the trust is either a corporate unit trust or a public trading trust (paragraph (b)). Corporate unit trusts and public trading trusts - which, broadly, are unit trusts the units in which are widely held and listed for quotation on a stock exchange - are treated for other purposes of the Principal Act as though they were companies.

Subdivision B - Controlled Foreign Entities (CFEs)

Indirect control interests in a company or trust (see notes on section 352) and indirect attribution interests in a CFC or CFT (see notes on section 357) can only be traced through an interposed entity that is a CFE. Subdivision B lists and defines the three categories of CFEs.

Section 339: Controlled foreign entity (CFE)

Section 339 lists the three categories of CFE - controlled foreign company (CFC) (paragraph (a)), controlled foreign partnership (CFP) (paragraph (b)) and controlled foreign trust (CFT) (paragraph (c)) . These terms are defined in sections 340, 341 and 342 respectively .

Section 340: Controlled foreign company (CFC)

The definition of a CFC is central to the operation of Part X. The test for determining whether a company is a CFC is applied at a particular time. That time will be either:

·
for the purpose of determining whether the income of that company is to be attributed to Australian residents - at the end of the company's statutory accounting period (defined in section 319);
·
for the purpose of tracing indirect interests of an Australian resident in another company - at the end of the statutory accounting period of that other company; or
·
for the purpose of determining whether a dividend paid by a foreign company to another entity - for example, a dividend paid from an unlisted country company to a listed country company at the time that the dividend is paid.

A company will be a CFC at a particular time if, at that time:

·
the particular company is a company other than in the capacity of trustee (see notes on the definition of "company" in section 317);
·
the company is a resident of a listed country (see notes on section 332) or of an unlisted country (see notes on section 333) - that is, it is a foreign company; and
·
the company satisfies one of the statutory tests for control described in paragraphs 340(a), (b) and (c).

The test for control in paragraph (a) will be satisfied if there is a group (defined in section 317 to include a single person) of five or fewer Australian 1% entities (defined in section 317) the sum of whose associate-inclusive control interests in the company is at least 50 per cent. The term "associate-inclusive control interest" is defined in section 349 to mean the sum of the direct and indirect control interests held in the company by the Australian 1% entity and the direct and indirect control interests held in the company by associates of the Australian 1% entity. Section 349 contains rules to prevent double counting in calculating the associate-inclusive control interest of an Australian 1% entity and in calculating the sum of the associate-inclusive control interests of Australian 1% entities that are included in the same group.

The test for control in paragraph (b) is based on an assumption that a single Australian entity whose associate-inclusive control interest in a foreign company is 40 per cent or more will, in fact, control the company (subparagraph (b)(i)). Such a person is referred to in paragraph (b) as the "assumed controller". However, the assumed controller will not be taken to control the company if the company is controlled by an entity (or collectively by a number of entities) other than (or not including) the assumed controller or any of its associates. For example, if one Australian entity held 45 per cent of all the interests in a foreign company and a single unassociated foreign entity held the other 55 per cent of the interests in the company, the test for control under paragraph (b) would generally not be satisfied.

The test for control in paragraph (c) will be satisfied if, irrespective of the extent of any interests in a foreign company, a group of five or fewer Australian entities nevertheless controls the company. Whether a group of five or fewer Australian entities controls a foreign company will be a question of fact to be answered according to the circumstances of each case. By virtue of subparagraph 361(1)(b)(i), income of a company that satisfies the test at paragraph (c) (and therefore is a CFC) will be attributed to Australian 1% entities who are included in a group of five or fewer Australian entities that controls the company.

When testing whether a particular Australian entity's interests in a foreign company results in that company being a CFC, the three tests set out in section 340 are to be applied sequentially. That is, the circumstances should be examined to test whether the conditions set out in paragraph (a) are met. If CFC status results because of the application of paragraph (a) no further testing is required. If further testing is required then the conditions described in paragraph (b) should be examined, and only if CFC status has not been established at that point then paragraph (c) should be applied.

This is relevant, for example, in determining whether an Australian entity is an attributable taxpayer under section 361 - see notes on paragraph 361(1)(b).

Section 341: Controlled foreign partnership (CFP)

A controlled foreign partnership (CFP) is a controlled foreign entity (CFE) through which indirect control interests in a company or trust (see notes on section 352) or indirect attribution interests in a CFC (see notes on section 357) may be traced. An entity will be a CFP at a particular time if, at that time:

·
the partnership is not an Australian partnership (see notes on section 337) at that time (paragraph (a)); and
·
at least one of the partners is a CFE at that time (paragraph (b)).

Section 342: Controlled foreign trust (CFT)

A controlled foreign trust (CFT) is also a CFE through which the indirect control interests in a company or trust (section 352) or indirect attribution interests in a CFC (section 357) may be traced. A trust will not be a CFT if it is an Australian trust within the meaning of section 338. Other trusts will be CFTs if they fall within one of the categories in paragraphs (a) and (b).

By paragraph (a), a trust will be a CFT if there is an eligible transferor in respect of the trust - that is, broadly, if an Australian entity or a CFE transferred value to the trust:

·
in the case of a discretionary trust, at any time (see notes on section 347); or
·
in the case of a non-discretionary trust, after 12 April 1989 for non-arm's length consideration (see notes on section 348).

An eligible transferor in relation to a CFT is taken, by virtue of subsection 351(3), to have a direct control interest of 100 per cent in the CFT.

By paragraph (b), a trust will be a CFT if there is a group of five or fewer Australian 1% entities (defined in section 317) with associate-inclusive control interests (defined in section 349) in the trust totalling 50 per cent or more. There will be no tracing through discretionary trusts that do not have an eligible transferor.

Subdivision C - Eligible Transferors in relation to Trusts

This Subdivision determines whether a transfer of property or services by an entity to either a non-discretionary or a discretionary trust will result in that entity being treated as an eligible transferor in relation to that trust. Eligible transferors in relation to non-discretionary trusts, including public unit trusts, (section 348) and discretionary trusts (section 347) are determined by different criteria. The concept of an eligible transferor in relation to a trust, as detailed in this Subdivision, is primarily relevant to determining whether a trust is a controlled foreign trust (CFT) (see notes on section 342) for the purpose of determining whether a foreign company is a CFC.

Section 343: Interpretation

For the purposes of Subdivision C, the following terms have the specified meaning, unless a contrary intention appears:

"actual transfer" means transfers of property or services excluding deemed transfers as described under section 345 (see notes on that section).
"property" has its ordinary meaning but also includes money.
"scheme" is to have the same meaning as in section 102AAB of Division 6AAA of Part III (to be inserted by clause 18).
"services" is to have the same meaning as in section 102AAB of Division 6AAA of Part III (to be inserted by clause 18).
"transfer" is to have the same meaning as in section 102AAB of Division 6AAA of Part III (to be inserted by clause 18).
"underlying transfer" refers to the actual transfer of property or services to a trust. In section 345 a distinction is made between the entity that actually transferred property or services to a trust and the entity that is deemed to have made the transfer under a particular subsection, being a transfer that was actually made by the other entity. The concept of underlying transfer is used to identify the actual transfer.

Section 344: References to transfer of property or services

Throughout this Subdivision references are made to the transfer of property or services to a trust. Section 344 specifies particular transfers of property or services that are either specifically included in or excluded from the coverage of Subdivision C. The section ensures that the range of transfers of property or services to a trust that are dealt with in Part X is essentially the same as in Division 6AAA of Part III (see clause 18, sections 102AAJ and 102AAL).

Subsection 344(1) includes a transfer of property or services that creates a trust within the meaning of transfers of property or services. That is, the Subdivision does not apply only to transfers made to trusts already in existence when the transfer is made.

Subsection 344(2) provides that where an entity acquires a property that did not previously exist, the property is taken to have existed immediately before the acquisition and to have been acquired from the entity who created the property.

By the operation of subsection 344(3) a reference to a transfer of property or services to an entity will include property or services applied for the benefit of the entity or at the direction of the entity. Subsection 344(4) details a specific example of the application of property or services for the benefit of an entity. The subsection refers to the use of property or services to discharge a debt of the entity either entirely or in part. This specific example does not limit the application of the preceding subsection.

In relation to the timing of transfers made by an entity, subsection 344(5) states that transfers referred to within this Subdivision will include those that occurred prior to the commencement of this Subdivision (that is, by clause 2, the date on which the Bill receives the Royal Assent).

In general, it is intended that deceased estates will not be eligible transferors. Subsection 344(6) gives effect to that intention and places restrictions on its application. If a transfer of property or services to a trust is made by a trustee of a deceased person's estate as a result of the terms of the deceased person's will or codicil (paragraph 344(6)(a)) or by an order of a court varying that will (paragraph 344(6)(b)), the transfer will not have the effect of making the trustee an eligible transferor.

However, this exclusion is subject to certain exceptions. If an element of discretion exists on the part of the trustee of a deceased estate, such as a power of appointment, then a transfer that results from the exercise of that discretion may cause the trustee to be an eligible transferor (paragraph 344(6)(c)). Paragraphs 344(6)(d) and (e) bring back into consideration transfers that according to subsections 345(1) or (5) are taken to have been made by an entity other than the trustee of the deceased person's estate.

Section 345: Deemed transfers of property or services

Section 345 deems certain entities, other than those that actually transfer property or services to a trust, to have made the transfer and therefore makes those entities possible eligible transferors. Again, this section largely reflects the operation of the new Division 6AAA of Part III (see clause 18, section 102AAK).

Subsection 345(1) addresses the circumstance where an entity causes another entity to transfer property or services to a trust. The transfer is taken to have been made by the forcing entity rather than by the actual transferor. An example of this type of arrangement would be a company that directs a wholly owned subsidiary to provide services to a trust or to transfer money to the trust.

Subsection 345(2) deals with arrangements for the marketing of units in a unit trust whereby the trustee of a unit trust issues units in the trust to an entity (referred to as the "first entity") that acts as manager, underwriter or dealer in relation to the market placement of the units (paragraph (2)(a)). It would ordinarily be the case that the first entity would transfer property or services (referred to as the "original property or services") to the trust estate for the purpose of acquiring those units. Where the first entity disposes of units to another entity (referred to as the second entity) and the second entity transfers property or services to the first entity for the acquisition of the units, the second entity is taken to have transferred to the trust the original property or services transferred to the trust by the first entity (paragraphs 345(2)(b), (c) and (d).

Subsection 345(3) provides that a reference in subsection (2) to a unit in a unit trust is a reference to an interest, however described, in any of the income or property of the trust.

Subsection 345(4) provides that the circumstances outlined in subsections (1) and (2) are not to restrict the operation of subsection (5) which is directed at schemes to hide an eligible transferor. Subsections (1) and (2) may apply in circumstances arising out of ordinary business practice.

Subsection 345(5) authorises the Commissioner of Taxation to deem a transfer to be made by an entity engaged in a scheme (a defined term) to conceal the real transferor. This provision addresses arrangements whereby an entity interposes another entity to act as a transferor in an attempt to circumvent the eligible transferor provisions either for purposes of Division 6AAA of Part III or Part X. Subsection 345(5) states that the first entity must actually transfer property or services to another entity (paragraph (5)(a)) which effects a transfer of property or services to a trust (paragraph (5)(b)). The Commissioner may treat the first entity as having made the transfer to the trust at the time that the actual transfer to the trust by the other entity took place.

The difficulties that could arise where a partnership transferred property or services to a trust and then at a later time ceased to exist for the purposes of the Principal Act are resolved by subsection 345(6). The subsection applies to transfers to a trust by a partnership other than where a partnership is deemed to have transferred property or services to a trust under subsection (8), (10) or (11).

This subsection states that when a partnership transfers property or services to a trust (paragraph (6)(a)) and that partnership ceases to exist for the purpose of the Principal Act (paragraph (6)(b)), all partners at the time the partnership ceases to exist will have transferred the property or services to the trust at the time that the actual transfer was actually made by the partnership. This deeming provision will affect Australian entities and CFEs (see sections 336 and 339) that are partners in a partnership. By looking through the partnership at the time that it ceases to exist, Australian entities and CFEs that are partners at that time may be eligible transferors according to the general application of this Subdivision.

Subsection 345(6) does not affect the application of the provisions of this Subdivision to the transfer made by the partnership (subsection 345(7)).

Subsection 345(8) addresses the problem of determining an eligible transferor where a discretionary trust that has transferred property or services to another trust during its existence commences to be wound up, or ceases to exist, for the purposes of the Principal Act. This subsection does not apply where a discretionary trust is deemed to have transferred property or services to another trust by the application of subsections (6), (10), or (11) or by a previous application of this subsection.

The operation of subsection (8) in relation to trusts corresponds to the operation of subsection (6) in relation to partnerships. The section will operate where a discretionary trust (the "transferor trust") that had transferred property or services to another trust (the "transferee trust") (paragraph (8)(a)) commences to be wound up or ceases to exist for the purposes of the Principal Act (paragraph (8)(b)). In these circumstances, any entities that had transferred property or services to the transferor trust before it made the transfer (paragraph (8)(c)) will be taken to have made that transfer. Australian entities and CFEs which fall into this category may become eligible transferors under this Subdivision.

Subsection 345(9) stipulates that the specific rules in relation to discretionary trusts in subsection (8) do not impact upon the application of Subdivision C to the transfer made by the discretionary trust.

Subsection 345(10) deems an entity to have transferred property or services to a trust where that transfer of property or services is made as a consequence of that entity being wound up or ceasing to exist.

Paragraph 345(10)(a) sets out the conditions that must be met in relation to the winding up of an entity for subsection (10) to have application. In the case of a company, the conditions are that a resolution is passed for the winding-up of the company, an order is made for the winding-up of the company or a similar event occurs (subparagraph 345(10)(a)(i)). For a partnership, the condition is that the partnership ceases to exist for the purposes of the Principal Act (subparagraph 345(10)(a)(ii)). In the case of a trust estate, the conditions are that the trust estate commences to be wound-up or is treated as having ceased to exist for the purposes of the Principal Act (subparagraph 345(10)(a)(iii)).

Subparagraph 345(10)(b) imposes the requirement that the transfer of property or services to a trust is made in consequence of the entity referred to in paragraph (a) being wound up.

Where an entity meets each of the conditions in paragraphs (a) and (b), that entity is treated as having transferred to the trust the property or services concerned.

Subsection (10) is relevant to the operation of subsection (11) which enables the Commissioner to treat property or services that are transferred to a trust by a "defunct" entity to have been transferred by other entities.

Subsection 345(11) deals with what are called defunct entities - that is, partnerships, companies and trusts that are either being wound up or cease to exist. This provision is relevant where an entity that has previously been deemed to be a transferor (for example, by the operation of subsection (6) or (8)) is a defunct entity within the meaning of paragraph (11)(a). Subsection (11) provides a possible tracing mechanism to a surviving eligible transferor.

A defunct entity must be a company, a partnership or a trust (subparagraph (a)(i)) that has transferred property or services to a trust, including where the transfer is a deemed transfer because of a separate application of this subsection (subparagraph (a)(ii)).

By subparagraph (a)(iii) a company will be a defunct entity if it is being wound up because of a resolution of the company itself or by an order. A partnership will be a defunct entity if the partnership ceases to exist for the purposes of the Principal Act (subparagraph (a)(iv)). By subparagraph (a)(v), a trust will be a defunct entity if the trust commences to be wound up or ceases to exist for the purposes of the Principal Act.

Where the Commissioner is satisfied that another entity has benefited or can benefit from any transfer made as a consequence of the defunct entity being wound up or ceasing to exist (paragraph (11)(b)), the Commissioner is authorised to treat the benefiting entity ("successor entity") to have transferred the property and services that the defunct entity originally transferred to the trust (paragraph (11)(c)).

Section 346: Circumstances in which a transfer of property or services is an eligible business transaction

By section 346, an underlying transfer will be an eligible business transaction where, at (or close to) the time of the transfer, similar or identical property or services were provided by the transferor as part of its ordinary arm's length business and subject to similar or identical terms and conditions as applied to the underlying transfer.

Section 347: Eligible transfer in relation to a discretionary trust

As mentioned previously, the rules to determine whether an entity is an eligible transferor vary according to whether the trust is a discretionary trust or a non-discretionary trust (including a public unit trust).

Section 347 describes the two sets of circumstances that will cause an entity that is an Australian entity or a CFC to be considered an eligible transferor in relation to a discretionary trust (not being a public unit trust) at some relevant time.

Paragraph (1)(a) relates to transfers of property or services at a time (referred to as the "transfer time") at or after the IP time (see section 317) and before the test time (subparagraph (1)(a)(i)). Where an underlying transfer to a discretionary trust is made at or after the IP time in the course of business and it is not an eligible business transaction (subparagraph (1)(a)(ii)) then the transferor entity will be an eligible transferor at the test time if it was an Australian entity or a CFE. In a case where the arm's length transaction was not in the ordinary course of business and the transferor entity was in a position to control the trust (see notes on subsection (2)) at any time during the period between the transfer time and the test time (subparagraph (a)(iii)), the transferor entity will be an eligible transferor in relation to the discretionary trust, provided that the transferor is an Australian entity or a CFE at the test time.

Paragraph (1)(b) describes the second circumstance which will cause an entity that is an Australian entity or CFE at the test time to be an eligible transferor. Where a transfer of property or services occurred before the IP time (subparagraph 347(1)(b)(i)), the transfer (being an underlying transfer) is not an eligible business transaction (see notes on section 346) (subparagraph (1)(b)(ii)) and the transferor entity was in a position to control the trust at any time after the IP time and before the test time (subparagraph (1)(b)(iii)), the transferor entity will be an eligible transferor in relation to the discretionary trust.

Subsection 347(2) contains a series of tests, only one of which needs to be satisfied to establish that a person is "in a position to control the trust".

Central to all five tests is the concept of "a group in relation to the entity" which is described in the notes on subsection 347(3) below and refers to the entity alone, its associates acting alone or some combination of these entities acting together. A group must be able to do any one of the following for control of a trust to exist:

·
obtain, through some power, the beneficial enjoyment of the corpus or income of the trust (paragraph (2)(a));
·
directly or indirectly control the application of the income or corpus of the trust (paragraph (2)(b));
·
gain the enjoyment or control of the income or corpus of the trust under a scheme (paragraph (2)(c));
·
direct the trustee of the trust, who follows the wishes of the group, or might be expected to follow the wishes of the group, because of custom or some obligation (paragraph (2)(d)); or
·
remove or appoint the trustee (or any trustee if there is more than one) of the trust (paragraph (2)(e)).

In this subsection, a group in relation to an entity may refer to the entity itself acting alone (paragraph (3)(a)) or one of the entity's associates acting alone (paragraph (3)(b)). It also includes an entity acting together with one or more associates (paragraph (3)(c)) or two or more associates of the transferor entity acting together (paragraph (3)(d)).

Section 348: Eligible transferor in relation to a non-discretionary trust or a public unit trust

Subsection 348(1) details the circumstances in which an entity that transfers property or services to a non-discretionary trust (see section 317) will be an eligible transferor at a particular time. Four conditions must be satisfied for this to occur:

·
the transfer must occur at or after the IP time (see section 317) and before the time at which it is being tested (paragraph 348(1)(a));
·
the underlying transfer must have been made for less than arm's length consideration (paragraph (1)(b));
·
in cases where the trust concerned is a public unit trust at the test time, the sole purpose of the underlying transfer was not the acquisition of units in the trust at arm's length (paragraph 348(1)(c)); and
·
the entity must be an Australian entity or a CFE at the time at which it is being tested.

Subsection 348(2) defines an arm's length amount in relation to a transfer of property or services for the purposes of subsection (1) as the amount that the trustee of the trust would expect to pay to obtain the property or services, as the case may be, from the transferor if both parties were engaged in an arm's length transaction.

Division 3 - Control Interests, Attribution Interests, Attributable Taxpayers and Attribution Percentages

Division 3 provides the rules that will enable the calculation of:

·
control interests (for the purpose of determining whether a company or trust is a CFC or a CFT);
·
attribution interests (for the purpose of determining whether an entity is an attributable taxpayer in relation to a CFC); and
·
attribution percentages (for the purpose of determining the proportion of a CFC's attributable income that is to be included in the assessable income of an attributable taxpayer).

Subdivision A - Control Interests

Section 349: Associate-inclusive control interest in a company or trust

The associate-inclusive control interest in a company or trust is relevant to the definition of Australian 1% entity (section 317), controlled foreign company (paragraph 340(a) and subparagraph 340(b)(i)), controlled foreign trust (section 342) and attributable taxpayer (paragraph 361(a)).

Subject to other provisions in section 349 which, generally, operate to prevent double counting of interests, subsection 349(1) provides that the associate-inclusive control interest that an entity holds in a company or trust is the aggregate of the direct and indirect interests in the company or trust that are held by the entity and associates (defined in section 318) of the entity.

Subsections 349(2) to 349(6) address the double counting problems that arise in relation to the calculation of the associate-inclusive control interest that an entity holds in a company or trust or the aggregate of the associate-inclusive control interests that a group of five or fewer Australian 1% entities holds in a company or trust.

Subsection 349(2) addresses the double counting problems that arise in relation to the inclusion of direct and indirect control interests held by associates of an entity in the calculation of the associate-inclusive control interest that the entity holds in the company or trust.

The associate-inclusive control interest that an entity holds in a company or trust is not to include an indirect control interest under paragraph (1)(b) to the extent that it represents a direct control interest in the company or trust that is held by an associate (subparagraph (2)(a)(i)) or an indirect control interest in the company or trust that is held by an associate (subparagraph (2)(a)(ii)). Because indirect control interests can only be traced through CFEs (see notes on subsection 352(2)), the potential for double counting can only arise when an associate of an entity is a CFE. For example, in a case where an entity holds 25 per cent of the interests in an associate which is a CFC and which, in turn, holds 60 per cent (directly or indirectly) of the interests in another foreign company, the associate-inclusive control interest that the entity holds in that other foreign company would include only the interests of 60 per cent that the associate holds (directly or indirectly) - the indirect interests of the entity (15 per cent) that would otherwise be counted under paragraph (1)(b) are to be disregarded by virtue of paragraph (2)(a).

Similarly, paragraph (2)(b) will ensure that the associate-inclusive control interest of an entity does not include indirect control interests of an associate of the entity under paragraph (1)(d) to the extent that those indirect interests are taken into account as direct control interests of the entity or another associate (subparagraph (b)(i)) or as indirect control interests of the entity or another associate (subparagraph (b)(ii)).

Subsection 349(3) addresses the double counting problem that may arise where a direct control interest and an entitlement to acquire (see notes on section 322) that interest were both counted in the calculation of the associate-inclusive control interest that an entity holds in a company. This may arise, for example, where an entity holds an option over shares held by an associate. The subsection addresses the problem by requiring that only the direct control interest or the entitlement to acquire that interest, but not both, be taken into account. However, the effect will generally be that, whether the interest or the entitlement to acquire the interest is taken into account, the result will be the same. Subsection (6) provides rules that will apply in the event that this is not the case in some situations.

An entity will be deemed to have a direct control interest in a company or trust equal to 100 per cent if, in the case of a company, the entity is one of a group of five or fewer entities that controls the company (subsection 350(6)) or, in the case of a trust, if the entity is an eligible transferor in relation to the trust (subsection 351(3)). An entity will be deemed to have a control tracing interest of 100 per cent in:

·
a company that, broadly, is controlled by the entity (subsection 353(2));
·
a trust in respect of which the entity is an eligible transferor (subsection 355(1));
·
a non-discretionary trust in which the entity holds 50 per cent or more of the interests (subsection 355(4)); and
·
a partnership in which the entity is a partner.

Subsection 349(4) deals with the problem of double counting that arises as a consequence of deeming entities to have direct control interests or control tracing interests equal to 100 per cent in the above circumstances.

The deeming of an entity to hold direct control interests or control tracing interests equal to 100 per cent in the above circumstances could give rise to double counting of interests in determining:

·
whether the aggregate of the associate-inclusive control interests that a group of entities holds in a company is 50 per cent or more - that is, whether a company is a CFC by virtue of paragraph 340(a) (paragraph (4)(a));
·
whether a single Australian entity has an associate-inclusive control interest of at least 40 per cent - that is, whether a company is a CFC by virtue of paragraph 340(b) (paragraph (4)(b));
·
whether the aggregate of the associate-inclusive control interests that a group of entities holds in a trust is 50 per cent or more - that is, whether a trust is a CFT by virtue of paragraph 342(b) (paragraph (4)(c));
·
whether the associate-inclusive control interest that an Australian entity holds in a CFC is 10 per cent or more - that is, whether the Australian entity is an attributable taxpayer by virtue of paragraph 361(1)(a) (paragraph (4)(d)); and
·
whether the associate-inclusive control interest that an Australian entity holds in a company is 1 per cent or more - that is, whether the Australian entity falls within the definition of "Australian 1% entity" in section 317 (paragraph (4)(e)).

In a case where one of the above matters is being determined and there would be two or more entities with direct control interests or control tracing interests equal to 100 per cent, paragraph (4)(f) provides that only one of those entities is to be taken to hold a direct control interest or a control tracing interest, as the case may be, equal to 100 per cent.

Where, in determining one of the above matters, an entity with direct control interests or control tracing interests equal to 100 per cent is taken into account, paragraph (4)(g) provides that the interests of other entities are to be disregarded.

Example

Australian residents X and Y hold direct interests of 70 per cent and 30 per cent respectively in a CFC which holds a direct interest of 40 per cent in another foreign company. X will be taken, by virtue of paragraph 353(2)(a), to hold a control tracing interest of 100 per cent in the CFC and to therefore have an indirect interest of 40 per cent in the other foreign company. Y's indirect interest in the other foreign company will be 12 per cent (30 per cent of 40 per cent).

In determining the aggregate of the associate-inclusive control interests that X and Y, as a group, have in the foreign company for the purpose of determining whether the foreign company is a CFC, Y's interest is to be disregarded and the aggregate will be 40 per cent.

If the foreign company is a CFC, it will be necessary to determine whether Y is an attributable taxpayer. X's 100 per cent control tracing interest is not taken into account in that determination and paragraph (4)(g) therefore has no application. Y will be an attributable taxpayer with an attributable interest of 12 per cent.

In determining the aggregate of the associate-inclusive control interests of entities in a group, it is necessary to add the direct and indirect control interests of each entity in the group and the direct and indirect interests of associates (defined in section 318) of each entity in the group. The situation could arise where an entity is an associate of more than one entity in a group. In such a case, paragraph (5)(a) will operate to ensure that the associate's interests are counted only once.

Paragraph (5)(b) deals with the case where one entity in a group has an entitlement to acquire a direct control interest of another entity in the same group - for example, where an entity in a group has an option to acquire shares held by another entity in the same group. In such a case, only the interest or the entitlement is to be counted, but not both.

Where an interest and an entitlement to acquire that interest would both be taken into account in calculating:

·
the associate-inclusive control interest of an entity; or
·
the aggregate of the associate-inclusive control interests of a group of entities,

subsection (3) (in the former case) and (5) (in the latter case) provide that only the interest or the entitlement is to be counted but neither the interest nor the entitlement is given any preference. Similarly, paragraph (4)(f) provides that only one entity with a direct control interest or a control tracing interest in another entity equal to 100 per cent is to be taken into account in determining one of the matters specified in paragraphs (4)(a) to (e).

Subsection (6) provides that the decision as to which one of two things or two or more entities is to be taken into account or chosen is to be made by the Commissioner of Taxation. Generally, there will be no need for the Commissioner to make such a decision as the result will be the same whichever interest or entity is chosen. However, in the event that it is necessary for the Commissioner to make a decision, that decision would be made, in the absence of special circumstances, with a view to producing the result that a company will be a CFC, a trust a CFT or a particular entity an attributable taxpayer.

Section 350: Direct control interest in a company

The determination of an entity's direct control interest in a company is relevant to the calculation of an Australian entity's associate-inclusive control interest in a company (see notes on section 349).

Subsection 350(1) reflects the variety of interests that contribute to control of a company. In general, interests are categorised into rights to vote on particular issues, rights to capital and rights to distributions.

The interests that are relevant in the determination of a direct control interest in a company are outlined in paragraphs (1)(a) to (d). An entity will hold a direct control interest in a company at the measurement time equal to the percentage of the following specified interests that the entity either holds, or is entitled to acquire (see notes on section 322), at that time:

·
the total paid-up share capital of the company (this would not include share premiums) (paragraph (1)(a));
·
the total rights to vote, or participate in any decision making, in relation to the making of distributions of capital or profits (subparagraph (1)(b)(i)), the changing of the constituent document (subparagraph (1)(b)(ii)) or varying the share capital of the company (subparagraph (1)(b)(iii)). Where an entity's percentage of voting rights varies under these subparagraphs, the highest is to be chosen (subsection 350(2));
·
the total rights to distributions of capital or profits of the company on winding-up (paragraph (1)(c)); or
·
the total rights to distributions of capital or profits of the company in cases other than on winding-up (paragraph (1)(d)).

Where an entity holds, or is entitled to acquire, an interest in two or more of the specified forms, and there is a difference in the percentages derived under the different paragraphs, then the highest percentage is taken to be the entity's interest in the company (subsection 350(2)).

Subsection 350(3) enables an entity's rights to a distribution of profits or capital on a winding-up of the company to be measured as a percentage of the total rights to profits or capital of the company at any particular time in the statutory accounting period (the "test time"). Although paragraph (1)(c) requires these rights to be measured as a percentage of the total rights, it may be that, at the test time, the rights, as a percentage of the rights to capital or profits, cannot be determined. This would be the case where, for example, some shareholders are entitled to a fixed return of capital or profits. Subsection (3) enables the rights to be measured at the test time by reference to the rights existing at the end of the accounting period when, following the taking of company accounts, capital and income rights can be measured as a percentage of the total capital or income rights.

Paragraph (3)(a) specifies that the subsection may be applied in relation to the capital of the company at the end of its accounting period or the profits of the company for the accounting period.

An assumption is to be made under paragraph (3)(b) that the rights to distributions of capital or profits of the company at the test time were the same at all other times during the accounting period.

Paragraph (3)(c) requires the percentage of an entity's rights to distributions of capital or profits to be measured at the end of the accounting period and on the basis of the assumption in paragraph (b).

Subsection 350(4) is in similar terms to subsection (3), except that it enables rights to distributions of capital or profits otherwise than on winding-up to be measured in percentage terms for the purposes of paragraphs (1)(d).

Subsection 350(5) provides that eligible finance shares are to be ignored for the purpose of applying subsection (1) to the company. The effect of this is to exclude from the measurement of direct control interests in a company eligible finance shares (see notes on section 327) issued by the company under what are, generally, preference share financing arrangements with Australian financial intermediaries or their subsidiaries. If these shares were not excluded, a company could become a CFC, simply because it chose to raise finance through an issue of shares rather than through another form of borrowing.

Where finance shares are issued to a non-resident for the purpose of achieving the effect that a foreign company is not a CFC (that is, by diluting the control interest of resident shareholders) reliance will be placed on the general anti-avoidance provisions of Part IVA of the Principal Act to defeat the avoidance scheme.

In the case of a foreign company that is controlled by five or fewer Australian residents (see notes on paragraph 340(c)) subsection 350(6) provides that each Australian entity in the group of five or fewer holds a direct control interest in the company of 100 per cent. Where this is the case that entity is not to be treated as having an interest of the kind specified in subsection (1) (subsection (7)).

Section 351: Direct control interest in a trust

This measurement is relevant for the determination of an entity's associate-inclusive control interest in a trust (see notes on section 349), which is in turn relevant to the determination of whether a trust is a CFT (see notes on section 342).

Subsection 351(1) is relevant where the entity is a beneficiary in the trust. A beneficiary entity will hold a direct control interest in the trust equal to the percentage of income of the trust (paragraph (1)(a)) or of the corpus of the trust (paragraph (1)(b)) to which the beneficiary is entitled, or is entitled to acquire. Where the percentage rights to income and corpus are different, the higher amount is to be the entity's direct control interest in the trust.

Subsection 351(2) enables a beneficiary's interest in the income or corpus of a trust to be measured as a percentage of the total entitlements to income or corpus of the trust at any particular time (the "test time"). Although subsection (1) requires the interest to be measured as a percentage of the total income or corpus entitlements, it may be that, at the test time, the interest, as a percentage of the income or corpus entitlements, cannot be determined. For example, a beneficiary may be entitled to all of the income from a specified item of trust property. Usually that income right may be expressed as a percentage of the total income rights only at the end of the year when accounts of the trust are taken and the total income of the trust for the year is known. This subsection enables the beneficiary's income rights (paragraph (2)(a)) or rights to corpus (paragraph (2)(b)) to be measured in percentage terms at the test time by reference to the rights at the end of the year.

Paragraphs (2)(c) requires the beneficiary to ascertain whether it is necessary to determine the percentage of the entitlements to income of the trust for the year (subparagraph (c)(i)) or the percentage of the entitlements to corpus of the trust at the end of the year (subparagraph (c)(ii)).

An assumption is to be made under paragraph (2)(d) that the share of income or corpus of the trust to which the beneficiary is entitled, or is entitled to acquire, at the test time was the same at all other times in the year of income.

Paragraph (2)(e) requires the percentage of the beneficiary's rights to income or corpus to be measured at the end of the year of income and on the basis of the assumption in paragraph (d).

Where an eligible transferor has been identified under section 347 or 348 in relation to a trust, the direct control interest of the transferor in the trust will be 100 per cent (subsection 351(3)). Where two or more eligible transferors exist in relation to a trust, each will have a direct control interest of 100 per cent in the trust. In cases where an entity is given a percentage interest as a beneficiary under subsection (1) and as an eligible transferor under subsection (3), subsection (3) will prevail (subsection 351(4)).

Section 352: Indirect control interest in a company or trust

This provision is another calculation for the purposes determining, under section 349, the associate-inclusive control interest of an Australian entity in a company or trust (subsection 352(1)).

The indirect control interest an entity holds in a company or trust is calculated by tracing through interposed entities that are CFEs (see notes on section 339) (subsection 352(2)). That is, an Australian entity will not hold an indirect control interest in a foreign company or a trust if its indirect interest is held through a company that is not a CFC, a partnership that is not a CFP or a trust that is not a CFT.

Subsections 352(3), (4) and (5) describe the formulae to be applied where one, two or three or more entities (being CFEs) are interposed between an entity (referred to as the bottom entity) and the company or trust in which the indirect interests are being measured. The interests held in or by interposed CFEs for the purpose of this section are determined by sections 353, 354 or 355 depending on the nature of the CFE. These interests are referred to as control tracing interests. Regardless of the number of interposed entities between the bottom entity and the relevant company or trust, the bottom entity's indirect control interest is derived by multiplying the bottom entity's control tracing interest in the first interposed CFE by that CFE's control tracing interest in any further CFE, ceasing where a CFE's control tracing interest in the relevant trust or company is included in the calculation.

Subsection 352(6) requires that, for an entity to be regarded as interposed between two other entities, the three entities be connected by control tracing interests. For example, if A held a control tracing interest in B which in turn holds a control tracing interest in C, B is interposed between A and C.

Section 353: Control tracing interest in a company

This provision is relevant to section 352. Broadly, an entity's control tracing interest in a company at a particular time is the direct control interest (see section 350) held by that entity in the company (subsection 353(1)).

For the purpose of determining whether a company is controlled, majority or control interests will give rise to a control tracing interest of 100 per cent. By subsection 353(2), an entity will have a control tracing interest in a company equal to 100 per cent if:

·
the entity, either alone or with associates, holds a direct control interest of 50 per cent or more in the company (paragraph (2)(a));
·
the entity, either alone or with associates, holds a direct control interest of 40 per cent or more in the company and others do not control the company (paragraph (2)(b)); or
·
the entity, either alone or with associates, controls the company (paragraph (2)(c)).

Section 354: Control tracing interest in a CFP

This provision is relevant to the determination of an entity's indirect control interest in a company or trust in section 352. A controlled foreign partnership (CFP), as determined by section 341, may be one of the interposed entities referred to in section 352. Each partner in a CFP will hold a 100 per cent control tracing interest in the CFP by the operation of this section.

Section 355: Control tracing interest in a CFT

This provision is relevant to determining an indirect control interest in a company or a trust (see notes on section 352).

By subsection 355(1), an eligible transferor in relation to a CFT (see sections 347 and 348) will have a control tracing interest in the CFT of 100 per cent.

Subsection 355(2) has the effect that, subject to subsection (4), a beneficiary in a CFT who does not have a control tracing interest of 100 per cent by the operation of subsection (1) will have a control tracing interest equal to the beneficiary's direct control interest in the CFT (see notes on section 351).

Subsection 355(3) has the same effect in relation to the calculation of a control tracing interest in a CFT as subsection 351(2) has in relation to the calculation of a direct control interest in a trust - see notes on that subsection.

Where the percentage interest determined under subsection (2) is 50 per cent or more, the control tracing interest in the CFT is deemed to be 100 per cent by the operation of subsection 355(4).

Subsection 355(5) has the effect that subsections (2) and (4) will have no application in the case of an entity that has a control tracing interest of 100 per cent by the operation of subsection (1).

Subdivision B - Attribution Interests

The attribution interests calculated in this Subdivision are relevant to the calculation of an attribution percentage of an attributable taxpayer (see notes on section 362) in relation to a CFC (or, for the purposes of section 458 or 459, a CFT). Generally, the calculation of these attribution interests follows the scheme in Subdivision A of this Division for the calculation of control interests.

Section 356: Direct attribution interest in a CFC or CFT

Section 356 contains rules for determining an entity's direct attribution interest in a CFC (subsections (1), (2), (3) and (4)) or a CFT (subsections (5) to (8)). Generally, an entity's direct attribution interest in a CFC or a CFT is the same as its direct control interest in the company or trust (see notes on sections 350 and 351).

By subsection 356(1) the direct attribution interest that an entity holds in a CFC is measured as the greatest of the percentages that the entity holds, or is entitled to acquire, in the following:

·
the total paid-up share capital (this would not include share premiums) in the CFC (paragraph (1)(a));
·
the total rights to vote, or to participate in any decision making, in relation to the distributions of capital or profits (subparagraph (1)(b)(i)), the changing of the constituent document (subparagraph (1)(b)(ii)) or the varying of the share capital of the CFC (subparagraph 1)(b)(iii));
·
the total rights to distributions of capital or profit of the CFC on winding-up (paragraph (1)(c)); or
·
the total rights to distributions of capital or profit of the CFC in cases other than on winding-up (paragraph (1)(d)).

Subsections 356(2), (3) and (4) have the same effect in relation to the calculation of a direct attribution interest in a CFC as subsections 350(3), (4) and (5), respectively, have in relation to the calculation of a direct control interest in a company - see notes on those subsections.

Subsection 356(5) has the effect that an eligible transferor in relation to a CFT will have an attribution tracing interest in the CFT of 100 per cent.

Subsection 356(6) provides that subsection (5) will not be applicable where the eligible transferor is a natural person, not acting in the capacity of trustee (paragraph 356(6)(a)), and the relevant CFT is a non-resident family trust (paragraph 356(6)(b)) (see notes on section 328).

A beneficiary in a CFT has a direct attribution interest equal to the percentage of the income (paragraph 356(7)(a)) or corpus (paragraph 356(7)(b)) of the trust to which the beneficiary is entitled. Where percentages that the beneficiary is entitled to, or entitled to acquire in relation to income or corpus are different, the higher percentage is adopted.

Where a beneficiary is also an eligible transferor in relation to a CFT, the attribution interest calculated by subsection (7) is to be ignored (subsection 356(8)).

Section 357: Indirect attribution interest in a CFC or CFT

The second component to the attribution percentage held by an entity in relation to a CFC or CFT is the indirect attribution interest of the entity. As with direct attribution interests, indirect attribution interests are calculated in the same way as indirect control interests in section 352.

By virtue of subsection 357(2) an indirect attribution tracing interest may only be traced through CFEs (see notes on section 339).

The indirect attribution interest is calculated in accordance with subsections 357(3), (4) and (5) by simply multiplying the attribution tracing interests (determined by the rules in sections 358, 359 and 360) held by an entity (the "bottom entity") and those entities interposed between the bottom entity and the relevant CFC or CFT.

Subsection 357(6) specifies when an entity will be an interposed entity. An entity (the "second entity") will only be interposed between two other entities if one of those entities holds an attribution tracing interest in the second entity and it, in turn, holds an attribution tracing interest in the other entity.

Section 358: Attribution tracing interest in a CFC

By section 358, an entity's attribution tracing interest in a CFC is equal to the direct attribution interest that the entity holds in the CFC (see notes on subsection 356(1)).

Section 359: Attribution tracing interest in a CFP

The attribution tracing interest held by a partner in a CFP is, by section 359, equal to the partner's entitlement to, or holding in, either the total interests in the profits (paragraph 359(a)) or property (paragraph 359(b)) of the CFP. Where the percentages under these paragraphs differ, the greater is to be adopted. Unlike control tracing interests in a CFP, each partner is not taken to have a 100 per cent attribution tracing interest in a CFP.

Section 360: Attribution tracing interest in a CFT

By subsection 360(1), the attribution tracing interest in a CFT of an entity that is an eligible transferor in relation to the CFT is 100 per cent.

Subsection 360(2) provides that subsection (1) will not be applicable where the eligible transferor is a natural person, not acting in the capacity of trustee (paragraph 360(2)(a)), and the relevant CFT is a non-resident family trust (see notes on section 328) in relation to that natural person, that is, the eligible transferor (paragraph 360(2)(b)).

The attribution tracing interest of a beneficiary in a CFT is determined in accordance with subsection 360(3) as the percentage that the entity holds, or is entitled to acquire, in the income (paragraph (3)(a)) or corpus (paragraph (3)(b)) of the CFT. Where these percentages differ, the higher percentage is taken as the attribution tracing interest.

Subsection 360(4) has the effect that subsection (3) will have no application in the case of an entity that has an attribution tracing interest of 100 per cent by the operation of subsection (1).

Subdivision C - Attributable Taxpayers and Attribution Percentages

Subdivision C determines who will be an attributable taxpayer in relation to a CFC - that is, a taxpayer to whom income of the CFC may be attributed and the percentage of the CFC's income that is to be attributed to the taxpayer. The terms are also relevant in relation to CFTs for the purpose of sections 458 and 459.

Section 361: Attributable taxpayer in relation to a CFC or a CFT

The following entities will be attributable taxpayers in relation to a CFC (subsection 361(1)):

·
an Australian entity with an associate-inclusive control interest in the CFC (see notes on section 349) of at least 10 per cent (paragraph (1)(a)); or
·
an Australian entity with an associate-inclusive control interest of at least 1 per cent in a company that is a CFC only because of paragraph 340(c) - that is where the Australian entity is a member of a group of five or fewer Australian entities that either alone or together with associates controls the CFC (paragraph (1)(b)).

An Australian entity that has an associate inclusive control interest of at least 10 per cent in a CFT at a particular time (for example, when a dividend is paid to the CFT by a CFC and section 458 applies) will be an attributable taxpayer in relation to the CFT (subsection 361(2)). This is relevant to Australian entities that are beneficiaries in CFTs that receive certain dividends from CFCs.

Section 362: Attribution percentage of an attributable taxpayer

This section is relevant to determining the amount of a CFC's income that may be attributed to an attributable taxpayer (section 361) under section 456 or 457. It is also relevant for determining, for example, the amount of certain dividends paid by a CFC to another CFC or a CFT that are to be included in the assessable income of attributable taxpayers under section 458 or 459. Subsection (1) is the basic provision that determines attribution percentages and the remaining subsections are directed at eliminating double counting.

Subsection 362(1) provides for the calculation of the attribution percentage of an attributable taxpayer in relation to a CFC or a CFT. The taxpayer's attribution percentage is the aggregate of the direct attribution interest and all indirect attribution interests that the attributable taxpayer holds in either the CFC or the CFT at the relevant time. The taxpayer's direct attribution interest is determined in accordance with section 356 and each indirect attribution interest is calculated according to section 357. The resulting attribution percentage is subject to alteration in accordance with subsections (2), (3), (4) and (5)

Subsection 362(2) addresses the situation where an attributable taxpayer's attribution interests includes an indirect attribution interest held through an interposed entity (paragraph (2)(a)) and an entitlement to acquire that interest (paragraph (2)(b)). In this situation, only one of those interests is to be counted.

Subsection 362(3) is relevant to the determination of an attributable taxpayer's attribution percentage in a CFC that is calculated by reference to an eligible transferor's attribution tracing interest in a CFT (paragraph (3)(a)). The eligible transferor could be the attributable taxpayer or an interposed CFE (for example, another CFC or a CFT) through which the taxpayer held an indirect interest in the CFC. The subsection authorises the Commissioner of Taxation to reduce the attribution percentage by such amount as the Commissioner considers reasonable if the conditions specified in paragraphs (b), (c) and (d) are satisfied.

The condition specified by paragraph (3)(b) is that the attribution percentage arrived at by including a 100 per cent attribution tracing interest held by an eligible transferor in a CFT be greater than it would otherwise have been. The condition in paragraph (3)(c) is that, at the relevant time, there are other eligible transferors in relation to the interposed CFT. Paragraph (3)(d) requires the attributable taxpayer to provide the required information to the Commissioner in accordance with a form approved by the Commissioner.

The information that the form will require the attributable taxpayer to provide will include:

·
the identities of each of the other entities that had transferred property or services to the trust;
·
the dates of those transfers and particulars of the property or services transferred; and
·
the percentage of the attributable income of the trust that is attributable to the property or services transferred by the eligible transferors.

Subsection 362(4) authorises the Commissioner to reduce an attributable taxpayer's attribution percentage in a CFT where the calculation of the attributable taxpayer's attribution percentage in relation to the CFT is determined by reference to either a direct attribution interest of the attributable taxpayer as an eligible transferor in relation to the CFT in question (subparagraph (a)(i)) or an attribution tracing interest of an eligible transferor in relation to an interposed CFT (subparagraph (a)(ii)) and with the effect that the attribution percentage is greater than would otherwise have been the case (paragraph (b)). Relief may be provided by the Commissioner if:

·
other eligible transferors exist in relation to either CFT at the relevant time (paragraph (c)); and
·
the attributable taxpayer provides the Commissioner with the required information and documents (paragraph (d)).

In some cases, the attribution percentage of an attributable taxpayer in relation to a CFC or CFT will, when combined with others in relation to the same CFC or CFT result in a combined attribution percentage of greater than 100 per cent. Subsection 362(5) provides relief in these cases by including a mechanism to reduce the aggregate attribution percentage to 100 per cent. The operation of the formula is best illustrated by an example.

In relation to the same CFC, two taxpayers, A and B, have respective attribution percentages of 60 per cent and 50 per cent. In terms of the formula in subsection (5), A has an individual percentage of 60 per cent and B has an individual percentage of 50 per cent. In application of the formula to both A and B, the total percentage is 110 per cent. Accordingly, the formula:

(Individual percentage)/(Total percentage) * 100

will have the effect of reducing A's attribution percentage to:

(60)/(110) * 100 = 54.5 per cent

, and B's attribution percentage to:

(50)/(110) * 100 = 45.5 per cent

.

Division 4 - Attribution Accounts

Introductory note

In broad terms, Part X includes in the assessable income of certain resident taxpayers their shares of the attributable income of a CFC. When that income is distributed to resident taxpayers to whom the income was attributed, the taxpayers are to be exempt from income tax on the distributions up to the amount of the income attributed to them. In order to claim this exemption, it is necessary for the taxpayer to establish a link between the amount of the income attributed to the taxpayer and the amount of a distribution. This link is to be established through attribution accounts.

In a company structure where a resident company directly owns all of the interests in a CFC, the resident company is to set up an attribution account for the CFC (referred to as an attribution account entity) when the attributable income of the CFC is included in the assessable income of the resident company. The account is to be credited (attribution credit) with the amount of the attributable income (after deducting the tax paid by the CFC in respect of that income) included in the resident company's assessable income. When the CFC subsequently distributes that income, the amount of the distribution (referred to as the attribution account payment) is debited (attribution debit) to the attribution account. The amount of the debit cannot exceed the amount standing to the credit of the account (referred to as the attribution surplus) at the time the distribution was made. The attribution surplus for the CFC represents, at a particular time, the maximum amount up to which a distribution from that CFC would be exempt from Australian tax for the resident company that maintains that attribution account. The maintenance and operation of attribution accounts will similarly apply for a resident taxpayer (other than a company) with an interest in a CFC.

In more complex structures, an Australian company could have a chain of CFCs. In this case, when the income of a CFC that has been attributed to the Australian company and included in its assessable income, flows from entity to entity up the chain of companies, the flow of income (referred to as attribution account payments) would be recorded as a series of debits and credits to attribution accounts maintained by the Australian company for the successive CFCs. The income flow would be recorded by a debit to the attribution account of the paying company (an attribution debit) and a credit to the receiving company (an attribution credit). When the dividend is ultimately received by the Australian company, the amount of the attribution debit to the attribution account of the company that paid the dividend would indicate the amount of the dividend that is to be exempt from income tax.

A resident company might own only a proportion of the interests in a CFC. In this case, a proportion of the attributable income of the CFC is to be included in the assessable income of the resident company depending on the proportion of interests (referred to as the attribution percentage ) that the resident company has in the CFC.

Where a resident company holds a proportion of the interests in a chain of CFCs, a proportion of the attributable income of each CFC is to be included in the assessable income of the resident company depending on the attribution percentage that the resident company has in each CFC. When a lower-tier CFC distributes its profits up a chain of CFCs, the system of debits and credits to attribution accounts for the CFCs traces that part of the distribution that is to be linked to the income that was included in the resident company's assessable income. This tracing is to provide the basis for the claim by the resident company for exemption from income tax in respect of the dividend ultimately received by the resident company.

A further adjustment is necessary where the CFC derives income that includes exempting receipts (see notes on section 377). In this case, the attributable income of the CFC will not include the exempting receipts. When the CFC distributes its profits, a part of that distribution would represent a distribution of its exempting profits (see notes on Division 6 - Exempting Receipts etc.) and is to be identified separately in order to exempt that part when it reaches the resident company as a dividend. A dividend paid by a CFC is treated as paid proportionately from a pool of its income comprising exempting profits and a pool of all its other income.

This system for the tracing of distributions is to apply not only to CFCs but to all foreign entities through which income payments flow to the taxpayer where the taxpayer seeks an exemption from tax of the whole or a part of the income payment.

Section 363: Attribution account entity

Section 363 defines an attribution account entity. Three types of attribution account entity are identified - a company that is not a Part X Australian resident (defined in section 317), a partnership and a trust. An attribution account entity is an entity in respect of which a resident taxpayer is to maintain an attribution account in order to trace distributions of attributed income. Section 23AI will exempt from tax certain attribution account payments made to a resident taxpayer by an attribution account entity. Certain attribution account payments made by an attribution account entity will also be excluded from the attributable income of a CFC and the attributable income of a trust estate.

Section 364: Attribution account percentage

By section 364, a taxpayer's attribution account percentage in an attribution account entity (defined in section 363) is the sum of the taxpayer's direct attribution account interest (defined in section 366) and indirect attribution account interest or interests (defined in section 369) in the entity. The concept of the taxpayer's attribution account percentage is relevant to the determination of the amounts of the credits and debits to attribution accounts (see notes on sections 371 and 372).

Section 365: Attribution account Payment

Section 365 lists the different categories of attribution account payment and specifies when the payment is to be taken to be made. It relates to section 23AI which exempts from income tax certain attribution account payments received by a resident taxpayer. The concept of an attribution account payment is also relevant to the exclusion of certain income payments from the attributable income of CFCs and trust estates (see notes on sections 402 and 102AAU). Attribution accounts trace income included in the assessable income of a resident taxpayer under sections 456, 457 and 458 as that income flows from the CFC in respect of which the income was attributed, through interposed entities, to the taxpayer.

Subsection 365(1) specifies the categories of attribution account payment.

Paragraph (1)(a) includes as an attribution account payment a dividend paid by a company to a shareholder of the company.

Paragraph (1)(b) includes as an attribution account payment an amount that is included in the assessable income of a taxpayer of a year of income as the taxpayer's interest in the net income (within the meaning of section 90 of the Principal Act) of a partnership of that year of income. This treatment would apply, for example, where a resident taxpayer holds an interest in a CFC through a partnership, and a dividend paid by the CFC is included in the net income of that partnership. In broad terms, the net income of a partnership (or of a trust estate referred to below) is the income calculated as if the partnership (or trustee) was a taxpayer who is a resident.

By paragraph (1)(c), the percentage of the net income of the trust estate of a year of income that corresponds to the share of the income of the trust of a year of income to which a particular beneficiary is presently entitled, is an attribution account payment. Subsection 97(1) of the Principal Act includes in the assessable income of a beneficiary, who is not under a legal disability and who is presently entitled to a share of the income of a trust estate, a corresponding share of the net income. Subsections 98(1) and 95A(2) of the Principal Act also deal with beneficiaries who are, or are deemed to be, presently entitled to a share of the income of a trust estate.

Paragraph (1)(d) includes as an attribution account payment the whole or part of the net income of a trust estate of a year of income that is assessable to the trustee under sections 99 or 99A of the Principal Act.

Paragraph (1)(e) includes as an attribution account payment an amount of a distribution from a trust estate that would be included, under section 99B of the Principal Act, in the assessable income of a beneficiary for a year of income if:

·
that beneficiary was a resident at any time during the year of income (subparagraph (e)(i)); and
·
the provisions of paragraph 99B(2)(c) were modified as required in subparagraph (e)(ii).

Paragraph 99B(2)(c) of the Principal Act excludes from the assessable income of a beneficiary the whole or a part of a trust distribution where that distribution was made out of income that has already been included in the assessable income of the beneficiary or was made out of income on which the trustee of the trust estate was assessed and liable to pay tax. Subparagraph (e)(ii) provides that the exclusion from assessable income is to be determined as though the test for exclusion was that the distribution made by the trust estate was made out of an amount referred to in paragraph 365(1)(c) or 365(1)(d).

The effect of the notional amendment of section 99B by subparagraph (e)(ii) is to treat as an attribution account payment a distribution made by a trust estate out of an amount that has not been treated as an attribution account payment under paragraph 365(1)(c) or 365(1)(d), to the extent that the distribution would be included in the assessable income of a resident under section 99B of the Principal Act.

Subsection 365(2) specifies the persons who are to be taken to have made, or received an attribution account payment other than a dividend and the time at which an attribution account payment is to be taken to have been made.

An attribution account payment that is the individual interest of a partner in the net income of the partnership is to be taken to be made by the partnership to the partner (paragraph (2)(a)). The share of the net income of a trust of a beneficiary who is presently entitled to a share of the income of the trust, whether that beneficiary is under a legal disability or not, and an attribution account payment referred to in paragraph 365(1)(e) are taken to be made by the trust estate to the beneficiary (paragraph (2)(b)). The net income of the trust estate that is assessable to the trustee under sections 99 or 99A of the Principal Act is notionally treated as a payment made by the trust estate to the trustee (paragraph (2)(c)). Payments referred to in paragraphs (1)(b), (c) and (d) are treated as having been made at the end of the relevant year of income of the partnership or trust estate. The payments referred to in paragraph (1)(e) are treated as having been made at the end of the year of income for which they are included in the assessable income of the recipient. A dividend paid by a company would be treated as paid to the shareholder to whom the payment is made and at the time it is paid.

Subsection 365(3) deals with the case where:

·
under paragraph 371(1)(b), an attribution credit arises for a company in relation to a taxpayer as a result of the company ceasing to be a resident of an unlisted country and becoming a Part X Australian resident (paragraph (3)(a));
·
the company makes an attribution account payment in the form of a frankable dividend that is franked in accordance with section 160AQF (paragraph (3)(b)); and
·
there was an attribution surplus (see notes on section 370) for the company in relation to the taxpayer, being a surplus referable to the attribution credit referred to in paragraph (3)(a) (paragraph (3)(c)).

Where these conditions are satisfied, the attribution account payment is taken, in relation to the taxpayer for the purposes of the exemption from income tax under section 23AI of amounts paid out of attributed income and for the purposes of Divisions 4 and 5 of this Part that deal with attribution accounts and attributed tax accounts, to be reduced to the extent that it is franked. This enables the taxpayer to preserve the benefit of the attribution account surplus when a franked dividend is paid by the company.

Section 366: Direct attribution account interest in a company

This section defines a "direct attribution account interest" in a company, a term used in section 364. In essence, this is the same as direct interests for attribution purposes in the case of a CFC (see notes on section 356), and attribution tracing interests in the cases of partnerships and trusts (see notes on section 359 and subsection 360(3) respectively).

Subsection 366(1) defines a direct attribution account interest in a company and adopts the definition of "direct attribution interest in a CFC" used in section 356.

Subsection 366(2) deals with the case where the percentages of the total rights to vote or participate in decision-making differ as between different types of decision-making. It provides that, for the purposes of paragraph (1)(b), in computing the direct attribution interest of an entity, the highest of those percentages is to be taken into account.

Subsection 366(3) deals with the ascertainment, for the purposes of subsection (1), of the percentage that an entity holds or is entitled to acquire at a particular time of the total rights to distributions of capital or profits of a company to its shareholders on winding-up. Subsection 366(3) is in similar terms to subsection 350(3) - see notes on that subsection. The same concept is used in subsection 356(2).

Subsection 366(4) provides for the ascertainment, for the purposes of subsection (1), of the percentage that an entity holds or is entitled to acquire at a particular time of the total rights to distributions of capital or profits of a company to its shareholders otherwise than on winding-up. Subsection 366(4) is in similar terms to subsection 350(4) - see notes on that subsection. The same concept is used in subsection 356(3).

Subsection 366(5) provides that eligible finance shares are to be ignored for the purpose of applying subsection (1) to a company. The effect of this requirement is explained in the notes on subsection 350(5).

Section 367: Direct attribution account interest in a partnership

Section 367 deals with the measurement of the direct attribution account interest that an entity that is a partner in a partnership holds in the partnership.

By subsection 367(1), the direct attribution account interest of a partner in a partnership is the percentage that the partner holds, or is entitled to acquire, of the total interests in the profits of the partnership or in the partnership property. Where those percentages differ, the greater of those percentages will be the direct attribution account interest.

Subsection 367(2) enables a partner's direct attribution account interest in a partnership to be measured at any particular time (the "test time" ) as a percentage of the total interests in the profits of the partnership or in the property of the partnership. For example, a partner may be entitled to a fixed amount of the profits of the partnership and a share of the balance of the profits. Usually that right may be expressed as a percentage of the partnership profits only at the end of the accounting period of the partnership when accounts of the partnership are taken and the total profits of the partnership for that period is known. This subsection enables the partner's share of the profits or property of the partnership to be measured in percentage terms at the test time by reference to the shares at the end of the accounting period.

Paragraphs (2) (a) to (c) specify that the subsection may be applied for the purpose of ascertaining the percentage of the profits or property of a partnership to which a partner is entitled, or is entitled to acquire, at a particular time in an accounting period of the partnership.

An assumption is to be made under paragraph (2)(d) that the percentage of profits or property of the partnership that the partner holds, or is entitled to acquire, at the test time was the same at all other times in the accounting period of the partnership.

Paragraph (2)(e) requires the percentage of the partner's share of the profits or the property of the partnership to be measured at the end of the accounting period and on the basis of the assumption in paragraph (d).

Section 368: Direct attribution account interest in a trust

Section 368 deals with the measurement of the direct attribution account interest that a beneficiary in a trust holds in the trust at a particular time.

By subsection 368(1), the direct attribution account interest that a beneficiary in a trust holds in the trust is the percentage of the income or the percentage of the corpus of the trust to which the beneficiary is entitled or which the beneficiary is entitled to acquire. If these percentages differ, the greater of the percentages is to be taken.

Subsection 368(2) enables a beneficiary's direct control interest in a trust to be measured at any particular time (the "test time") as a percentage of the total interests in the income or corpus of the trust. For example, a beneficiary may be entitled to all of the income from a specified item of trust property. Usually that income right may be expressed as a percentage of the total income rights only at the end of the accounting period of the trust when accounts of the trust are taken and the total income of the trust for that period is known. This subsection enables the beneficiary's income rights to be measured in percentage terms at the test time by reference to the rights at the end of the accounting period.

Paragraphs (2)(a) to (c) specify that the subsection may be applied for the purpose of ascertaining the percentage of income or corpus of a trust to which a beneficiary is entitled, or is entitled to acquire, at a particular time in an accounting period of a trust.

An assumption is to be made under paragraph (2)(d) that the share of income or corpus of the trust to which the beneficiary is entitled, or is entitled to acquire, at the test time was the same at all other times in the accounting period of the trust.

Paragraph (2)(e) requires the percentage of the beneficiary's rights to income or corpus to be measured at the end of the accounting period of the trust and on the basis of the assumption in paragraph (d).

Subsection 368(3) provides that an eligible transferor in relation to a trust holds a direct attribution account interest in the trust equal to 100 per cent (paragraph (3)(a)). This rule is subject to paragraph (3)(b) which provides that if the Commissioner of Taxation reduces the attribution percentage of a transferor under subsection 362(3), (4) or (5) because there are two or more eligible transferors in relation to that trust estate, the direct attribution account interest of that transferor is to be such lower percentage as the Commissioner considers reasonable.

By subsection 368(4) an entity that is taken to hold a direct attribution account interest in a trust at a particular time as an eligible transferor because of subsection 368(3), is not to be taken to hold a direct attribution interest in that trust at that time under subsection (1) as a beneficiary of that trust.

Section 369: Indirect attribution account interest in an entity

This section deals with the measurement of the indirect attribution account interest that an entity holds in another entity. This is essentially the same as the concept of the indirect attribution interest used in section 357.

Subsection 369(1) states the purpose of the section. The entity that holds the interest in another entity is referred to as the "bottom entity" and the entity in which the interest is held is referred to as the "top entity".

Subsection 369(2) specifies that an indirect attribution account interest is traced only through attribution account entities (see notes on section 363). These entities need not be controlled foreign entities.

Subsection 369(3) deals with the case where only one entity is interposed between the bottom entity and the top entity. The effect of this subsection is that, where an entity (A) holds an interest in another entity (D) through a third entity (B), the indirect attribution account interest that A has in D is calculated by multiplying the direct attribution account interest that A has in B by the direct attribution account interest that B has in D.

Subsection 369(4) applies where there are two entities interposed between the bottom entity and the top entity. For example, if another entity (C) was interposed between B and D, the interest of A in D is calculated by multiplying the indirect attribution account interest that A has in C (that is, A's interest in B multiplied by B's interest in C) by C's interest in D.

Subsection 369(5) has the effect that this process of multiplication is to be continued where there are further entities in the chain - that is, where there are three or more entities interposed between the bottom entity and the top entity.

Subsection 369(6) specifies the circumstances in which an entity is to be treated as interposed between two entities. An entity (referred to as the "second entity") is treated as interposed between the first and the third entities if the first entity has a direct attribution account interest in the second, and the second entity has a direct attribution interest in the third entity.

Section 370: Attribution surplus

Section 370 specifies that, at a particular time, an attribution surplus will exist for an attribution account entity if the total of the attribution credits for the entity up to that time exceed the attribution debits up to that time. These credits and debits arise for an entity in relation to a particular taxpayer. The circumstances in which attribution credits and debits arise are dealt with in sections 371 and 372 respectively.

Section 371: Attribution credit

Section 371 sets out the circumstances in which an attribution credit arises for an attribution account entity in relation to a taxpayer. Broadly, this occurs when income of a CFC is attributed to a taxpayer or when income that has been attributed to the taxpayer is distributed to another entity in a chain of entities leading to a CFC.

Subsection 371(1) provides that an attribution credit arises where:

·
an amount of attributable income of a CFC is included in the assessable income of the taxpayer under section 456 (paragraph (a));
·
an amount is included in the assessable income of the taxpayer under section 457 on a CFC ceasing to be a resident of an unlisted country and becoming a resident of a listed country or of Australia (paragraph (b)); or
·
an amount is included under section 458 in the assessable income of the taxpayer in respect of a non-portfolio dividend paid by a CFC resident in an unlisted country to a CFC resident in another country, or to a partnership, controlled foreign trust (defined in section 342) or Australian trust (defined in section 338) (paragraph (c)).

An attribution credit will also arise if an attribution account entity receives an attribution account payment from another entity and that payment gives rise to an attribution debit (see section 372) for the paying entity (paragraph (d)). This will occur, for example, where a taxpayer's assessable income includes an amount of attributable income of a CFC which distributes the profits on the basis of which its attributable income was computed to a CFC that was interposed between the taxpayer and the first CFC.

Subsection 371(2) deals with the determination of the amount of the attribution credit. Subject to the provisions of subsections (3) and (4), the amount of the attribution credit is equal to the amount included in the assessable income of the taxpayer under sections 456, 457 or 458 or to the amount of the attribution debit referred to in subsection (1).

Subsections (3) and (4) provide for a reduction of the attribution credit in the circumstances set out in those subsections.

Subsection (3) provides that where the attribution credit arises because of the inclusion in the taxpayer's assessable income under subsection 458(1) of an amount in respect of a non-portfolio dividend paid by a CFC to another CFC, and the CFC that receives the dividend has paid or will be liable to pay foreign tax on that amount, the attribution credit is to be reduced by the amount of that tax. The foreign tax taken into account for this purpose will include any foreign tax that is payable on the dividend itself to the extent that the amount of the dividend is included in the assessable income of the taxpayer. It will also include foreign tax payable by the CFC that received the dividend on its income to the extent that the tax is attributable to the amount that is included in the assessable income of the taxpayer in respect of that dividend.

Subsection (4) deals with the case where the attribution credit arises under paragraph (1)(c) in relation to a non-portfolio dividend paid by a company to another company and the company that receives the dividend has paid or will be liable to pay foreign tax on the dividend or on income that includes the dividend. In these circumstances, the attribution credit is to be reduced by an amount calculated using the formula:

(Attribution account percentage) * (Foreign tax)

where:

"Attribution account percentage" means the taxpayer's attribution account percentage for the company that received the dividend; and
"Foreign tax" means the amount of the foreign tax that is attributable to the dividend.

Subsection 371(5) specifies the timing of the attribution credit. Where the credit relates to an amount included in a taxpayer's assessable income under section 456 in respect of the attributable income of a CFC for a statutory accounting period of the CFC, the credit arises at the end of that statutory accounting period (paragraph (a)).

Where the credit relates to an amount included in the taxpayer's assessable income under section 457 and is a result of a change of residence of a CFC, the credit arises at the time of the change of residence (paragraph (b)).

Where an amount is included in a taxpayer's assessable income under section 458 in respect of a dividend, the credit arises when the dividend is paid (paragraph (c)). In the case of a credit arising from an attribution account payment, the credit arises when the payment is made (see notes on section 365) (paragraph (d)).

Subsection 371(6) deals with the case where an attribution credit would otherwise arise for an Australian partnership (defined in section 337) or an Australian trust (defined in section 338) because of the inclusion in the assessable income of that partnership or trust of an amount under section 456, 457 or 458. Subsection (6) has the effect that the credit will not arise for the partnership or trust (paragraph (a)) but for each partner of the partnership (subparagraph (b)(i)), each beneficiary of the trust (subparagraphs (b)(i) and (ii)) or to a trustee who is assessed under sections 99 or 99A (subparagraph (b)(iii)). The amount of the attribution credit to each partner, beneficiary or trustee, as the case may be, is to be the amount of the tax detriment to the partner, beneficiary or trustee as reduced by section 460 (paragraph (c)). The concept of a tax detriment is explained in the notes on section 330.

The effect of this subsection is that, where an amount is included, under section 456, 457 or 458, in the net income of a partnership which has a resident partner, the attribution credit arises to the partner and not to the partnership. Consequently, if, for example, a new partner is admitted to the partnership, the new partner will not benefit from an exemption from tax in relation to an attribution account payment made in respect of income that was attributed to the other partners under section 456, 457 or 458 in a year of income prior to that in which the partnership was reconstituted.

Similarly, in the case of an Australian trust, attribution credits will arise to beneficiaries who are presently entitled to shares in the net income of the trust estate or to the trustee who is assessed under section 99 or 99A of the Principal Act. Hence, any exemption available in respect of attribution account payments would apply only in the case of those taxpayers.

Subsection 371(7) provides that subsection (6) does not apply to an Australian trust that is a corporate unit trust, a public trading trust, or an eligible entity within the meaning of Part IX of the Principal Act in relation to the relevant year of income.

Section 372: Attribution debit

Section 372 describes the circumstances in which an attribution debit will arise for an attribution account entity in relation to a taxpayer and provides rules for the calculation of the amount of the debit. In broad terms, a debit will arise where there is a payment out of income which has been attributed to the taxpayer and subject to Australian tax through the accruals tax system. The payment, to the extent of the debit, will be excluded from assessable income by section 23AI (see notes on clause 8).

Subsection 372(1) has the effect that an attribution debit will arise where an attribution account entity (for example, a non-resident company) makes an attribution account payment (for example, a dividend) to another attribution account entity or to the taxpayer and has an attribution surplus (see notes on Division 4 - Attribution Accounts) in relation to the taxpayer immediately before the attribution payment was made. The debit would arise in the attribution account of the paying entity in relation to the taxpayer. The payment also gives rise to an attribution credit in the receiving entity (section 371), thereby transferring the credit for the attributed income from one entity to another and eventually to the taxpayer.

Subsection 372(2) specifies the amount of the debit. Where the attribution account payment is made to the taxpayer, the amount of the debit is the lesser of the attribution surplus and the amount of the payment (paragraph (a) and subparagraph (b)(i)). Where the attribution account payment is made to another attribution account entity in which the taxpayer has an interest, the debit is the lesser of the surplus or the taxpayer's attribution account percentage (section 364) for the receiving entity of the attribution account payment paragraph (a) and subparagraph (b)(ii)).

Subsection 372(3) provides that, in applying subsection (2) to determine the amount of a debit, an attribution account payment that is a non-portfolio dividend is to be reduced by the exempting profits percentage (see notes on section 379) of the payment. This reduction is to occur, where a payment is made to the taxpayer, only where the taxpayer and the paying entity are members of a non-portfolio company group (defined in section 317) when the payment was made. If the payment was made to another entity, the reduction is to occur only if the taxpayer, the entity making the payment and the entity in receipt of the payment are members of a non-portfolio company group at the time the payment was made.

Subsection 372(4) deals with the case where an attribution account payment is made to a trust estate and the attribution account for the entity making the payment is maintained by the trustee in the capacity of trustee and in relation to amounts assessed on the trustee under section 99 or 99A. In this case, the attribution debit is the lesser of the attribution surplus and the amount that would be assessed to the trustee under section 99 or 99A in respect of the payment.

Subsection 372(5) provides that the attribution debit arises when the attribution account payment is made. Subsection 365(2) specifies the time at which an attribution account payment is taken to be made.

Section 373: Grossed-up amount of an attribution debit

The "grossed-up amount of an attribution debit" is calculated in accordance with section 373. Where an attribution account entity makes an attribution account payment to a resident taxpayer, the grossed-up amount of the attribution debit is the amount of the attribution debit that arose when the payment was made (paragraph (a)). If the attribution account payment was made by an attribution account entity to another attribution account entity in relation to the taxpayer, an attribution debit would arise to the paying entity's attribution account of an amount equal to the taxpayer's attribution account percentage (defined in section 364) of the payment provided that amount is less than the attribution account surplus for the entity. In this case the grossed-up amount of the attribution debit would be equal to the amount of the attribution debit divided by that attribution account percentage (paragraph (b)).

Division 5 - Attributed Tax Accounts

The system for the maintenance of attributed tax accounts parallels that for the taxpayer's attribution accounts - see notes on Division 4. Attributed tax accounts are used for the computation of the formula component "AT" in the new section 160AFCD (introduced into the Principal Act by clause 33).

Where a taxpayer's share of the attributable income of a CFC is attributed to the taxpayer and credited (attribution credit) to the attribution account of the attribution account entity in relation to the taxpayer, the attributed tax account of that entity is also credited with the corresponding amount of foreign tax in respect of the amount of the attributed income.

When the attribution account entity makes an attribution account payment, the payment is debited (attribution debit) to the relevant attribution account, and the corresponding attributed tax account is debited with an amount representing the foreign tax attributable to the attribution debit.

As in the case of attribution accounts, the amount of the debit to an attributed tax account cannot exceed the amount standing to the credit of the account (referred to as the attributed tax account surplus) at the time the attribution payment is made. The surplus represents, at a particular time, the maximum amount of foreign tax that relates to the income already attributed to the taxpayer.

Section 374: Attributed tax account surplus

Section 374 specifies that, at a particular time, an attributed tax account surplus will exist for an attribution account entity (see notes on section 363) in relation to a taxpayer if the total of the attributed tax account credits for the entity in relation to the taxpayer up to that time exceed the total of the attributed tax account debits for the entity in relation to the taxpayer up to that time.

The circumstances in which attributed tax account credits and debits arise are dealt with in sections 375 and 376 respectively.

Section 375: Attributed tax account credit

Section 375 sets out the circumstances in which an attributed tax account credit arises for an attribution account entity in relation to a taxpayer.

Subsection 375(1) provides that an attributed tax account credit arises where:

·
a taxpayer is taken under section 160AFCA to have paid and to have been personally liable for an amount of foreign tax (but not Australian tax) on an amount included in the taxpayer's assessable income under section 456 in respect of a statutory accounting period of a CFC (paragraph (a));
·
a taxpayer is taken, under paragraph 160AFCB(c) or (d) to have paid and to have been personally liable for an amount of foreign tax (but not Australian tax) as a result of a change of residence by a CFC (paragraphs (b) and (c));
·
a taxpayer would have been taken by section 160AFCC (disregarding subparagraph 160AFCC(d)(iii)) to have paid and to have been personally liable for any foreign tax in respect of a dividend paid by a CFC (paragraph (d)); or
·
an attribution account entity receives an attribution account payment from another entity and that payment gives rise to an attributed tax account debit for the paying entity (paragraph (e)).

An attributed tax account credit arises under paragraphs (a) to (d) only for the foreign tax paid and not for Australian tax paid. This is because a credit is allowable under section 160AFC only for foreign tax paid. The formula used in section 160AFCD has the effect that the foreign tax computed under section 160AFC in relation to a resident taxpayer in respect of certain attribution account payments is to be reduced by the amount of foreign tax for which credit was granted when the income to which that payment is related was attributed to a resident taxpayer under section 456, 457 or 458 (that is, the formula component "AT").

Subsection 375(2) deals with the determination of the amount of the attributed tax account credit. The credit is to be equal to the amount of foreign tax that the taxpayer is taken to have paid under section 160AFCA, 160AFCB or 160AFCC or the amount of the attributed tax account debit referred to in paragraph (1)(e).

Subsection 375(3) specifies the timing of the attributed tax account credit. Where the credit relates to an amount included in the taxpayer's assessable income under section 456 in respect of the attributable income of a CFC for a statutory accounting period of the CFC, the credit arises at the end of that period (paragraph (a)).

Where the credit relates to an amount included in the taxpayer's assessable income under section 457 as a result of a change of residence of a CFC, the credit arises at the time of the change of residence (paragraph (b)).

Where the credit relates to an amount included in the taxpayer's assessable income under section 458 in respect of a dividend paid by a CFC, the credit arises when the dividend is paid (paragraph (c)).

Where the credit arises from an attribution account payment, it is taken to arise when the payment is made (paragraph (d)).

Section 376: Attributed tax account debit

Section 376 sets out the circumstances in which an attributed tax account debit arises for an attribution account entity in relation to a taxpayer and provides rules for the calculation of the amount of the debit.

Subsection 376(1) provides that an attributed tax account debit arises where:

·
an attribution account entity makes an attribution account payment to another attribution account entity or to the taxpayer (paragraph (a));
·
the attribution account payment gives rise to an attribution debit (see notes on section 372) for the entity in relation to the taxpayer paragraph (b)); and
·
the entity has an attributed tax account surplus in relation to the taxpayer immediately before the attribution account payment was made (paragraph (c)).

The debit would arise in the attributed tax account of the paying entity in relation to the taxpayer.

Subsection 376(2) provides rules for determining the amount of the debit. The amount of the debit is the amount calculated using the formula:

(Attribution debit)/(Attribution surplus) * (Attributed tax account surplus)

The amount of the debit will be a portion of the attributed tax account surplus that corresponds to the proportion of the attribution debit to the attribution surplus.

Subsection 376(3) provides that the attributed tax account debit arises when the attribution account payment is made (see notes on section 365(2)).

Division 6 - Exempting Receipts etc.

Section 377: Exempting receipt of an unlisted country company

Section 377 identifies certain receipts of a company that is a resident of an unlisted country that are to be treated as exempting receipts of the company in relation to a taxpayer. In broad terms, these include receipts of the company that have been included in the assessable income of the company for Australian tax purposes, or that have borne tax in a listed country other than as eligible designated concession income (see section 317). Exempting receipts also include non-portfolio dividends received by the company from a company that is a resident of a listed country, non-portfolio dividends paid to that company by another company to the extent to which those dividends are paid out of exempting receipts, and dividends from resident companies to the extent that they are franked.

The exempting receipts of an unlisted country company are computed in relation to a particular resident taxpayer.

Exempting receipts are taken into account in the computation of exempting profits and the exempting profits percentage of a dividend - that is, the percentage of a dividend paid by a company that is taken to have been paid out of exempting receipts.

The concept of the exempting profits percentage of a dividend (see notes on section 379) is relevant to section 23AJ which exempts from income tax the exempting profits percentage of a non-portfolio dividend paid by a company that is a resident of an unlisted country to a company that is a resident within the meaning of section 6 of the Principal Act. This concept is also relevant to the provisions that deal with attribution debits (see notes on subsection 372(3)).

Subsection 377(1) lists the receipts that are to be treated as exempting receipts of a company that is a resident of an unlisted country during an accounting period of the company (referred to as the qualifying period).

Paragraph (1)(a) includes in exempting receipts income or profits derived by a company in the qualifying period in carrying on business in a listed country at or through a permanent establishment in that country provided that:

·
the income or profits are not eligible designated concession income in relation to any listed country in relation to the qualifying period (subparagraph (a)(i)); and
·
the income or profits are subject to tax (see notes on section 324) in any listed country in a tax accounting period (a defined term) ending before the end of the qualifying period or commencing during the qualifying period (subparagraph (a)(ii)).

Paragraph (1)(b) treats as an exempting receipt income derived by the company in the qualifying period that is included in the assessable income of the company of a year of income for Australian tax purposes.

Paragraph (1)(c) treats as an exempting receipt a profit of a capital nature arising on the disposal of a taxable Australian asset to the extent that it is included in the assessable income of the company of a year of income under Part IIIA of the Principal Act. In the case of a non-resident company, Part IIIA includes in the assessable income of the company of a year of income the net capital gain arising on the disposal of taxable Australian assets (defined in section 160T of the Principal Act).

The other receipts of the company that are treated as exempting receipts are:

·
that part of a non-portfolio dividend paid to the company by a company that is a resident of a listed country that exceeds the grossed up amount of the attribution debit that arose for the company in relation to the taxpayer on the making of the payment (subparagraph (d)(i));
·
a non-portfolio dividend paid to the company by a company that is a resident of a listed country if no attribution debit arises for the company in relation to the taxpayer on making the payment (subparagraph (d)(ii);
·
a dividend paid to the company by a company that is a resident of Australia or by a corporate unit trust or a public trading trust to the extent that the dividend is franked in accordance with section 160AQF of the Principal Act (paragraph (1)(e));
·
the exempting profits percentage (see notes on section 379) in relation to the taxpayer of a non-portfolio dividend paid to the company by a company that is a resident of an unlisted country (paragraph (1)(f)); and
·
an amount that is an exempting receipt of the company in relation to the taxpayer under subsection (2) (paragraph (1)(g)).

Subsection 377(2) deals with the case where a partnership (referred to as the "main partnership") or a trust (referred to as the "main trust") derives income (referred to as the "notional exempting receipt") which would have been an exempting receipt referred to in paragraph (1)(a), (b) or (c) in relation to an accounting period in relation to a taxpayer if that partnership or trust were a company (paragraph (a)).

If a company that is a resident of an unlisted country is entitled as a partner to a share of the after-tax profits of the main partnership that is attributable to the notional exempting receipt, or receives a distribution from another partnership that is attributable directly, or through interposed partnerships or trusts to the notional exempting receipt, that share of profits or the distribution is treated as an exempting receipt of the company in relation to the taxpayer (subparagraph (b)(i)).

Similarly, if the company receives a distribution of the income of the main trust that is attributable to the notional exempting receipt of the trust, or receives a distribution from another trust or partnership that is directly or indirectly attributable to the notional exempting receipt, that distribution would also be an exempting receipt in relation to the taxpayer (subparagraph (b)(ii)).

Section 378: Exempting profits

Section 378 defines the term "exempting profits" and provides a rule for the determination of the amount of the exempting profits of a company in relation to a taxpayer at a particular time where that company has exempting profits and other profits and pays a dividend.

Subsection 378(1) defines the exempting profits in relation to the taxpayer of a company that is a resident of an unlisted country as so much of the distributable profits of the company (defined in section 317) as are attributable to the exempting receipts of the company in relation to any accounting period of the company in relation to a taxpayer.

Where a company has exempting receipts as well as other receipts, that part of the distributable profits that is attributable to the exempting receipts is to be ascertained by deducting from the exempting receipts:

·
any expenses that relate exclusively to those receipts;
·
so much of any expenses that were incurred in deriving those receipts, as well as other income, that may appropriately be related to those receipts; and
·
that part of the provision for taxation that may appropriately be related to those receipts.

Subsection 378(2) provides that the amount of the distributable profits of a company that comprise, at a particular time, exempting profits in relation to a taxpayer is to be determined by treating a dividend paid by the company as comprised of distributable exempting profits and other profits in proportion to the respective amounts of those profits immediately before the dividend was paid.

Section 379: Exempting profits percentage

This section deals with the computation of the exempting profits percentage, in relation to a taxpayer, of a dividend paid by a company that is a resident of an unlisted country. The exempting profits percentage is calculated using the formula:

(Exempting profits)/(Distributable profits) * 100

In the formula, "exempting profits" means the amount of the exempting profits in relation to a taxpayer immediately before the dividend is paid and "distributable profits" means the amount of the distributable profits immediately before the dividend is paid.

Section 380: Exempting receipt of a section 6 resident company

Section 380 identifies certain receipts of a company that is a resident company (referred to as an Australian company) that are to be treated as exempting receipts. The concept of an exempting receipt is relevant to an Australian company in relation to the exemption from income tax under section 23AJ of certain non-portfolio dividends received by that company from a non-resident company that is a related company. It is also relevant to the computation under subsection 160AFC(5A) of the underlying tax in relation to a non-portfolio dividend received by an Australian company from a non-resident company.

Paragraph (a) deals with a non-portfolio dividend received by the resident company from a company that is a resident of a listed country. Where an attribution debit arises for the paying company in relation to the Australian company when the dividend was paid, the exempting receipt is so much of the dividend as exceeds the attribution debit (subparagraph (a)(i)). In any other case, the whole of that dividend will be an exempting receipt (subparagraph (a)(ii)).

Paragraph (b) treats as an exempting receipt the exempting profits percentage of a non-portfolio dividend paid to the Australian company by a company that is a resident of an unlisted country.

Division 7 - Calculation of Attributable Income of CFC

Section 456 of Part X will include in the assessable income of certain residents a share of the attributable income of a CFC. The term "attributable income" is defined in section 317 to be the amount calculated in accordance with this Division. The Division is divided into four Subdivisions as follows:

·
Subdivision A which sets out the conditions that need to be satisfied before it is necessary for a taxpayer to calculate the amount of attributable income of a CFC for inclusion in the taxpayer's assessable income of a year of income, as well as identifying the items that are to be included in the calculation and establishing that the provisions of Australian tax law, as they apply to a resident taxpayer, are to be used as the basis of the calculation;
·
Subdivision B which modifies the application of the Principal Act to ensure that certain provisions of the Act are not taken into account in the calculation of the attributable income of a CFC, as well as modifying the operation of certain other provisions of the Principal Act in their application to the calculation of that attributable income;
·
Subdivision C which modifies the operation of Part IIIA of the Principal Act (Capital Gains and Capita] Losses) - the more important modifications being the provision of a valuation date for assets of a CFC owned at 30 June 1990, the removal of the exemption for assets purchased prior to 19 September 1985, and the modified operation of certain "rollover provisions"; and
·
Subdivision D which substitutes the existing provisions that deal with the creation and deductibility of a loss with new provisions which are, in essence, similar to section 160AFD of the Principal Act.

Certain terms, the use of which is confined to Division 7, are defined in Subdivision A, while other terms that are used in Division 7 (either exclusively or in other Divisions as well) are defined in other Divisions. Some of the more important terms used, along with a reference to the provision in which they are defined, are as follows:

·
"30 June 1990 non-taxable Australian asset" - defined in section 406;
·
"active income test" - takes its meaning from section 432;
·
"attributable income" - defined in section 382;
·
"attributable taxpayer" - defined in section 361;
·
"CFC" - defined in section 340;
·
"depreciation provision" - defined in section 317;
·
"eligible designated concession income" - defined in section 317;
·
"resident of a listed country" - takes its meaning from section 332;
·
"resident of a unlisted country" - takes its meaning from section 333;
·
"statutory accounting period" - defined in section 319; and
·
"subject to tax" - defined in section 324.

Subdivision A - Basic Principles

Introductory note

Where a foreign company is a CFC at the end of its statutory accounting period, its attributable income will be calculated separately for each attributable taxpayer. Broadly, the attributable income of a CFC is to be calculated using the rules that exist under the Principal Act for the calculation of the taxable income of a resident company. In this regard, the calculation of the attributable income of a CFC is comparable to the notional calculations that are made to determine the net income of a trust estate (Division 6 of Part III of the Principal Act) and the net income of a partnership (Division 5 of Part III of the Principal Act).

For the purpose of calculating the attributable income of a CFC certain basic assumptions need to be made. Whether a company is a resident of a listed country or an unlisted country, it is to be assumed that the CFC was a taxpayer that was a resident of Australia for the whole of the statutory accounting period, and that the statutory accounting period of the CFC was a year of income. These assumptions will enable a hypothetical calculation of the taxable income of the CFC. This hypothetical calculation of the taxable income will be subject to the modifications made by Subdivisions B, C and D of this Division.

The hypothetical calculation of taxable income is made by deducting from the notional assessable income any deductions that relate to that income (that is, the notional allowable deductions). All income of the CFC that is not notional assessable income will be notional exempt income.

Although these assumptions are common for all CFCs, the amount s of income to be included in the calculation of attributable income for a particular period will differ depending on the residence of the CFC at the end of that period, and on whether or not the CFC passes the active income test in respect of that attributable taxpayer in respect of that period.

Where, in respect of an attributable taxpayer, a CFC that is a resident of an unlisted country does not pass the active income test, the attributable income of the CFC for a particular statutory accounting period will be the amount that would have been its taxable income on the basis of the assumption that the CFC were a resident of Australia and that the only amounts derived by the CFC were certain passive income, amounts arising from related party transactions, amounts assessable under Division 6 of Part III of the Principal Act (income derived from a trust) and assessable income attributed to a taxpayer as transferor to a non-resident trust (see notes on clause 18). Where the CFC passes the active income test, the attributable income will be the amount that would have been the taxable income - again on the basis of the assumption that the CFC were a resident of Australia - on the further assumption that the only amounts included in assessable income were the trust amounts mentioned above.

Where a CFC that is a resident of a listed country does not pass the active income test in respect of an attributable taxpayer, the attributable income of the CFC for a particular statutory accounting period will be the amount that would have been the taxable income of the CFC for that period - on the basis of the assumption that the CFC were a resident of Australia - on the further assumption that the only income of the CFC were the amounts that fall within any of the following categories:

·
amounts that would notionally fall within assessable income if the only income of the CFC for the period were designated concession income which is also passive income or amounts arising from certain related party transactions provided that, broadly, the amounts are not comparably taxed in a listed country or in Australia;
·
amounts that would be assessable under Division 6 of Part III of the Principal Act (income derived from a trust) provided that they are not comparably taxed in a listed country or in Australia;
·
amounts that would be attributed to the CFC as transferor to a non-resident trust - that is, amounts that would notionally fall within section 102AAZD; and
·
amounts that would notionally fall within assessable income if the only income of the CFC for the period were amounts that are derived from a source outside the listed country that are not comparably taxed in the listed country, another listed country or in Australia.

In the case where a CFC is a resident of a listed country and passes the active income test, an exemption from attribution will be given for those amounts that are eligible designated concession income.

A more detailed explanation of Subdivision A is provided in the following notes.

Section 381: Separate attributable income for each attributable taxpayer

Section 381 sets out the conditions that must be satisfied before there is a need to calculate the attributable income of a company. The first of these is that the company be a CFC at the end of its statutory accounting period (paragraph 381(a)). This ensures that only a CFC has an attributable income within the meaning of this Division. It also ensures that the attributable income is calculated only at the end of that statutory accounting period. A company which is not a CFC at the end of its statutory accounting period, even though it may have been a CFC at some other time during that period, will not have an attributable income for that period. The second condition (paragraph 381(b)) is that there be at least one "attributable taxpayer" at the end of the statutory accounting period - see notes on section 361 for an explanation of the meaning of attributable taxpayer. Where these conditions are satisfied the attributable income is to be calculated in accordance with Division 7.

The section also makes it clear that the attributable income is only to be calculated for those taxpayers that are attributable taxpayers at the end of the CFC's statutory accounting period. A person who was an attributable taxpayer during the period, but is not so at the end of the period, is not required to calculate the attributable income for that period. Further, the attributable income is calculated separately for each person who is an attributable taxpayer at the end of the statutory accounting period. The result is that attributable taxpayers, in respect of the same CFC for the same period, may calculate a different attributable income of the CFC depending on the circumstances of the particular attributable taxpayer.

Further, the section gives a meaning to the following terms that are used in Division 7:

"eligible taxpayer" means a taxpayer that is an attributable taxpayer (within the meaning of section 361) at the end of a particular statutory accounting period;
"eligible period" means the particular statutory accounting period (defined in section 319) for which the attributable income is to be calculated; and
"eligible CFC" means the CFC in respect of which there is at least one or more eligible taxpayers at the end of the eligible period.

Section 382: Attributable income is taxable income calculated on certain assumptions

Under the Principal Act, the basis for the imposition of income tax is, in most circumstances, the taxpayer's "taxable income". Broadly, a taxpayer's taxable income is the amount ascertained by deducting the taxpayer's allowable deductions from the taxpayer's total assessable income derived during the year of income. Subsection 382(1) provides that, after making certain assumptions, the same basis is to be used for the calculation of the attributable income of a CFC for a particular period - that is, after making the assumptions, the attributable income is the amount that would be the taxable income of the CFC. The necessary assumptions are described in section 383.

Subsection 382(2) introduces the terms "notional assessable income", "notional allowable deductions" and "notional exempt income". As mentioned above, the calculation of the taxable income uses two key terms - "assessable income" and "allowable deductions". Further, under the Principal Act, income that is not included in assessable income is termed "exempt income". In describing the various assumptions that need to be made under section 383 (which includes the various modifications to the Principal Act that are made in Subdivisions B to D of this Division), subsection 382(2) provides that:

·
an amount referred to in the Principal Act as "assessable income" is referred to in this Division as "notional assessable income";
·
an amount referred to in the Principal Act as an allowable deduction is referred to in this Division as a "notional allowable deduction"; and
·
an amount referred to in the Principal Act as "exempt income" is referred to in this Division as "notional exempt income".

The subsection makes it clear that the assumption that the Principal Act is modified by Subdivisions B to D can in no way be taken to be a modification that applies other than for the calculation of the attributable income of the eligible CFC. Further, the concepts of notional assessable income, etc. distinguish between amounts that are assessable income, etc. of the company for an application of the Principal Act other than for the calculation of the attributable income (that is, the "actual" assessable income, etc.) and amounts that are assessable income, etc. for the notional calculation of taxable income under this Division.

Section 383: Basic assumptions

Section 383 establishes the assumptions referred to in section 382. Under this section there are four fundamental assumptions that are to be made to enable the hypothetical calculation of the CFC's taxable income for a period (that is, the attributable income of the eligible period). The first three assumptions are common to the calculation of the attributable income of any "eligible CFC" so that the assumptions are made whether the CFC is a resident of a listed country or is a resident of an unlisted country. The last of the assumptions will depend on whether the CFC is a resident of a listed or of an unlisted country.

Paragraph 383(a), which applies for a CFC whether a resident of a listed or an unlisted country, provides that the eligible CFC is to be assumed to be a taxpayer. It also provides that the eligible CFC is to be assumed to be a resident, within the meaning of section 6 of the Principal Act, for the whole of that statutory accounting period. This will enable the Principal Act to be applied to calculate the attributable income in the same way as it is applied to calculate the taxable income of a resident company. In particular it will ensure that, subject to the other assumptions made in this section, amounts derived by the CFC from all sources, whether within Australia or outside Australia, are taken into consideration in the calculation of attributable income. The assumption will not, however, deem any of the acts of the CFC to occur in Australia.

Paragraph 383(b), which applies for a CFC whether a resident of a listed or an unlisted country, provides that the eligible period is to be treated as if it were a year of income. This will ensure that, in effect, provisions of the Principal Act that refer to, or rely on there being, a year of income will apply as if they referred to the CFC's statutory accounting period. The paragraph also provides that the particular year of income to be used for the calculation of the attributable income of the eligible CFC is to be the same as the year of income of the eligible taxpayer in which the eligible period ends. For example, if an eligible taxpayer is calculating the amount to be included in assessable income under section 456 for the taxpayer's year of income that ended on 30 June 1992 in respect of a statutory accounting period of the eligible CFC that ended on 30 September 1991, the attributable income of the CFC for that statutory accounting period is to be calculated in accordance with the provisions of the Principal Act that applied for the year of income ended on 30 June 1992.

Although the attributable income of a CFC for an eligible period is to be the amount that would be the taxable income of the company if it were a resident taxpayer, some provisions of the Principal Act are to be disregarded or modified and in other cases a treatment for which there is no analogous treatment under the Principal Act is to be provided. Therefore paragraph 383(c), which applies to a CFC whether a resident of a listed or an unlisted country, provides for the assumption that the Principal Act is to be applied as if it were modified in accordance with the provisions of Subdivisions B, C and D of this Division.

Paragraph 383(d) provides that, in calculating the attributable income of a CFC, the assumption described in either of sections 384 (for an unlisted country CFC) or 385 (for a listed country CFC) also is to apply.

Section 384: Additional assumption for unlisted country CFC

Subsection 384(1) provides the assumption that is to be made in accordance with paragraph 383(d) in the case of an eligible CFC that is a resident of an unlisted country at the end of the CFC's statutory accounting period. Where this is the case, the assumption to be made is in two parts. First, under paragraph (1)(a), it is to be assumed that the only amounts of notional assessable income of the eligible CFC for the eligible period are the amounts described in subsection 384(2). Under paragraph (1)(b) it is also to be assumed that all other income of the CFC is to be treated as notional exempt income of the CFC.

Subsection 384(2) specifies the amounts that are to be taken into account as notional assessable income for the purposes of paragraph 334(1)(a). Under the subsection there are four categories which may give rise to notional assessable income.

Paragraph 384(2)(a) identifies the first of these categories. The paragraph only has application where, in respect of the eligible taxpayer, the CFC does not pass the active income test (see notes on Division 8 of Part X) for the eligible period. Where this is the case, the notional assessable income is to be calculated by first assuming that the only income or amounts derived by the CFC in the eligible period, and any earlier statutory accounting period, were amounts that fall within "adjusted tainted income". The amounts that are adjusted tainted income are determined under section 386 of this Subdivision (see notes on that section). In this context, the use of the term "derived" extends to cover all amounts that accrue to the CFC during the period in question and, where appropriate, will include a nil amount.

Once these amounts are identified, it is necessary to apply the provisions of the Principal Act to determine which of those items give rise to notional assessable income and also the amount of notional assessable income that results. However, in applying a provision of the Principal Act it is first necessary to take into account any modification of that provision that may be made by Subdivision B, C or D of this Division. It should be noted that the assumption that the only income or other amounts derived by the CFC are adjusted tainted income is also made for each preceding statutory accounting period of the CFC. The effect of this assumption is that, where a provision of the Principal Act requires that an amount to be included in notional assessable income is ascertained by reference to amounts included in assessable income of a previous period, such previous year amounts will be hypothetically created.

The reference to "income or other amounts" makes it clear that it is not only the gross amount of income that is taken into account but also any gross capital amounts derived by the CFC. Where a provision of the Principal Act requires that a capital profit be included in a taxpayer's assessable income rather than the gross capital receipt, only the amount that represents a capital profit will be included in the notional assessable income of a CFC for an eligible period, thus achieving the same result as if it were assumed that the only amounts derived by the CFC were income and capital profits. However, the assumption that the CFC derived the gross capital amount will also enable that amount to be taken into account for provisions of the Principal Act that either require the gross amount to be included in assessable income or require reference to the gross capital amount.

For example, under Part IIIA (Capital Gains and Losses) of the Principal Act it is, broadly, the amount by which capital gains exceed capital losses that is included in a taxpayer's assessable income. In calculating the amount to be included in the notional assessable income of the CFC for the eligible period, the net gain to be included in notional assessable income will be calculated as if the only disposals were those that yielded adjusted tainted income. Once it is determined which disposals may be taken into account, the amount of any gains or losses to be taken into account in the calculation of the net gain will be ascertained according to the rules that apply under Part IIIA as modified by Subdivision C of this Division.

Further, under Part IIIA, a net loss neither reduces assessable income nor is an allowable deduction but is carried forward and taken into account in the calculation of the net gain or loss of the next year of income. Similarly, a net loss of the statutory accounting period preceding the eligible period will be taken into account in calculating the net gain or loss of the eligible period on the assumption (see preceding notes) that the only amounts derived in the earlier period were amounts as specified in paragraph (a). This will be so whether or not the attributable taxpayer was required to calculate the attributable income of the CFC in that previous period. However, this is subject to the limitations imposed by section 409 (see later notes).

Paragraph 384(2)(b) provides that amounts to which section 102AAZD of Division 6AAA of Part III (to be inserted by clause 18 of this Bill) of the Principal Act applies are also to be included in the notional assessable income of the CFC for the eligible period. Like paragraph 384(2)(a), this is subject to the modifications made by Subdivisions B, C and D of this Division. An amount may be included under section 102AAZD where the CFC has transferred property or services to a trust estate and is an attributable taxpayer in relation to the trust estate within the meaning of Division 6AAA. This will only occur where it is not possible to identify a resident taxpayer who could be said to have indirectly caused the transfer to the trust. In such cases, the income of the trust estate in respect of which the CFC is an attributable taxpayer (within the meaning of Division 6AAA) will be included in the notional assessable income of the CFC according to the rules contained in that Division (see notes on clause 18).

Paragraph 384(2)(c) provides that the notional assessable income of a CFC will also include the amounts ascertained in accordance with Division 6 of Part III of the Principal Act. The operation of Division 6 is explained in the notes on Division 6AAA. The application of Division 6 in calculating attributable income will mean, broadly, that the notional assessable income of the eligible period will include:

·
amounts that are assessable income under section 97 of the Principal Act (trust income to which the CFC is presently entitled in the period); and
·
amounts that are assessable income under section 99B of the Principal Act (certain amounts distributed by the trustee of a trust estate - see notes on clause 16).

Paragraph 384(2)(d) deals with amounts to be included in the notional assessable income of a CFC where the CFC derives income or other amounts as a partner in a partnership. Under the Principal Act, the treatment of income derived through a partnership is governed by Division 5 of Part III. Broadly, that Division provides that the partner is to include in assessable income the partner's share of the net income of the partnership. The term "net income" is defined in section 90 of the Principal Act to be the amount that would be the taxable income if the partnership were a taxpayer and a resident. In calculating the notional assessable income of a CFC, the CFC's share of the net income of a partnership in which the CFC is a partner is to be calculated on a similar basis, but it is to be assumed that the only amounts included in the net income of the partnership were the amounts to which subparagraphs 384(2)(d)(i), (ii) and (iii) apply. These assumptions mirror those that are made for the calculation of the amounts to be included in the notional assessable income of the CFC under paragraphs 384(2)(a), (b) and (c) and only apply where it is the CFC that is the partner.

Where the CFC indirectly derives income or other amounts in respect of a partnership - for example, an amount derived by the CFC as a beneficiary of a trust estate, the trust of which is in turn a partner in a partnership - the assumptions in paragraph (d) about the calculation of the net income will not apply to that partnership. As is the case for the assumptions made in paragraphs 384(2)(a), (b) and (c) for amounts derived directly by the CFC, the assumption is subject to the modifications made by Subdivisions B, C and D of this Division. In this respect, reference should be made to section 399 which, broadly, provides that the modifications made to Principal Act for the calculation of the attributable income of a CFC are to also apply to the calculation of the net income of a partnership (see notes on that section).

Subparagraph 384(2)(d)(i) identifies the first of the amounts to be assumed to be derived by the partnership and corresponds to the amounts described in paragraph 384(2)(a) (see preceding notes). The subparagraph only applies where the CFC does not pass the active income test for the eligible period. In this case, the net income will be calculated on the basis that the income or other amounts derived by the partnership included amounts that fall within the definition of adjusted tainted income. Where the CFC passes the active income test for the eligible period, the net income is to be calculated on the basis that the only amounts included in the net income of the partnership are the amounts to which subparagraphs 384(2)(d)(ii) and (iii) apply.

In addition to any amount included under paragraph 384(2)(d)(i), the net income of the partnership is also to include amounts that fall within section 102AAZD (subparagraph 384(2)(d)(ii)). This corresponds to paragraph 384(2)(b) (see preceding notes) and applies whether or not the CFC passes the active income test for the eligible period.

In addition to any amount included under paragraphs 384(2)(d)(i) or (ii), the net income of the partnership is also to include amounts that fall within Division 6 of the Principal Act (subparagraph 384(2)(d)(iii)). This corresponds to paragraph 384(2)(c) (see preceding notes) and also applies whether or not the CFC passes the active income test for the eligible period.

Section 385: Additional assumption for listed country CFC

Subsection 385(1) provides the assumption that is to be made in accordance with paragraph 383(d) in the case of an eligible CFC that is a resident of a listed country at the end of the CFC's statutory accounting period (the eligible period). Where this is the case, it is to be assumed that the only amounts of notional assessable income of the eligible CFC for the eligible period are the amounts described in subsection 385(2) (paragraph (1)(a)). By paragraph (1)(b) it is also to be assumed that all other income of the CFC is to be treated as notional exempt income of the CFC.

Subsection 385(2) specifies the amounts that are to be included in the notional assessable income of the eligible CFC under paragraph 385(1)(a). Subparagraph 385(2)(a)(i) has application only where, in respect of the eligible taxpayer, the CFC does not pass the active income test for the period. Where this is the case, it is assumed that the amounts derived by the CFC that are "eligible designated concession income" (defined in section 317) in respect of the CFC for that period and also fall within the definition of adjusted tainted income are to be included in the calculation of the notional assessable income of the CFC.

Whether or not the CFC passes the active income test, the amounts included in the calculation under paragraph 385(2)(a) include, by virtue of subparagraph 385(2)(a)(ii), income or amounts that:

·
are not eligible designated concession income of any listed country (sub-subparagraph (ii)(A)); and
·
are not treated as having a source in the listed country, the source being determined according to the rules of the listed country in which the CFC is resident (sub-subparagraph (ii)(B)); and
·
are not subject to tax (within the meaning of section 324) in any listed country in the tax accounting period ending before the end of the eligible period or commencing during the eligible period (sub-subparagraph (ii)(C)).

By paragraph 385(2)(b), amounts to which section 102AAZD of the Principal Act applies are also to be included in the notional assessable income of the CFC for the eligible period, whether or not the CFC passes the active income test for the period. This paragraph corresponds to paragraph 384(2)(b) (see notes on that paragraph).

By paragraph 385(2)(c), the notional assessable income of a CFC will also include the amounts ascertained in accordance with Division 6 of Part III of the Principal Act and also applies whether or not the CFC passes the active income test for the period. This paragraph generally corresponds to paragraph 384(2)(c) (see notes on that paragraph) with the exception that the amount will only be included in the notional assessable income of the CFC if either:

·
the amount is not subject to tax (within the meaning of section 324) in the listed country in which the CFC is resident in a tax accounting period that ends or commences within, or coincides with, the CFC's eligible period; and

· .
the income is not subject to tax in any other listed country in that tax accounting period; or
· .
if the income is subject to tax in another listed country in that tax accounting period, it is designated concession income of the CFC in respect of that country; or

·
the amount is subject to tax in the listed country in which the CFC is resident in a tax accounting period that ends or commences within, or coincides with the CFC's eligible period but is designated concession income in respect of that country; and

· .
the income is not subject to tax in any other listed country in that tax accounting period; or
· .
if the income is subject to tax in another listed country in that tax accounting period, it is designated concession income of the CFC in respect of that country.

Paragraph 385(2)(d) deals with amounts to be included in the notional assessable income of a CFC where the CFC derives income or other amounts as a partner in a partnership, and corresponds to paragraph 384(2)(d) (see notes on that paragraph). In calculating the net income of a partnership in which the CFC is a partner, it is to be assumed that the only amounts included in the net income of the partnership were the amounts to which paragraph 385(2)(d) applies. These assumptions only apply where it is the CFC that is the partner and are subject to the modifications made by Subdivisions B, C and D of this Division and, in this respect, reference should again be made to section 399. However, the amounts to be included in the net income of the partnership are different to those included where the CFC is a resident of an unlisted country.

Subparagraph (2)(d)(i), which identifies the first of the amounts to be assumed to be derived by the partnership, applies where the CFC does not pass the active income test for the eligible period and corresponds to the amounts described in subparagraph 385(2)(a)(i) - see preceding notes. Whether or not the CFC passes the active income test for the eligible period, the net income is to be calculated on the basis that the amounts derived by the partnership are as follows:

·
amounts which are not designated concession income and are not sourced in the listed country in which the CFC is resident, provided that the amounts are not subject to tax in a listed country, which corresponds to subparagraph 385(2)(a)(ii) (subparagraph (2)(d)(ii));
·
amounts that fall within section 102AAZD, which corresponds to paragraph 385(2)(b) and subparagraph 384(2)(d)(ii) (see preceding notes) (subparagraph (2)(d)(iii)); and
·
certain amounts that fall within Division 6 of the Principal Act, which corresponds to paragraph 385(2)(c) (subparagraph (2)(d)(iv)).

Under paragraph 385(2)(c), an amount will only be taken into consideration in the calculation of the notional assessable income of the eligible CFC under Division 6 of Part III of the Principal Act if, broadly, the amount is not subject to tax in a listed country other than as designated concession income. The same will apply in calculating such amounts to be taken into consideration where derived through a partnership. In these circumstances, the subject to tax rule is applied in accordance with subsection 385(3).

Subsection 385(3) provides that the test of whether an item is, or is not subject to tax under paragraphs (2)(c) or (2)(d), is not only applied to the amount of the net income of the trust (as calculated in accordance with section 95 and modified by Subdivisions B to D) mentioned in those provisions. It is also to be applied to the individual items included in the net income of that trust. Further, where there is a chain of trusts or trusts and partnerships the subject to tax test is applied to amounts included in the net income of the underlying trusts, or in the net income of the underlying partnerships (as calculated under section 95 of the Principal Act and modified in accordance with Subdivisions B to D). This treatment will extend through any number of underlying trusts or partnerships.

Where the underlying amount that is included in the tax base of a listed country is the whole or part of the net income of a partnership or another trust estate, then it is that whole or part of that net income that is considered to be subject to tax (see notes on section 324).

For practical purposes, this will mean that the calculation of the net income of trusts and partnerships through a chain of trusts and partnerships will be made by successively excluding from each of those net income calculations the underlying amounts that have been subject to tax other than as designated concession income.

Subsection 385(4) provides a de minimis exemption where the CFC is a resident of a listed country. There is no corresponding exemption for a CFC that is a resident of an unlisted country. The exemption will apply where the sum of the amounts of:

·
eligible designated concession income - that is, amounts covered by subparagraph 385(2)(a)(i); and
·
income or profits from sources outside the listed country that are not subject to tax in the listed country or in another listed country - that is, amounts covered by subparagraph 385(2)(a)(ii),

does not exceed the lesser of $50,000 or 5 per cent of the gross income of the CFC. In these circumstances, the amounts will not be included in the calculation of attributable income. In effect, this will mean that where a CFC has gross turnover of $1 million or more, the exemption will only apply if the sum of the abovementioned amounts of notional assessable income is $50,000 or less. Where the CFC has a turnover of less than $1 million, the exemption will only apply where the sum of the abovementioned amounts of notional assessable income is less than 5 per cent of the gross turnover. The amounts included under paragraph 385(2)(b), (c) or (d) - that is, certain trust income or amounts derived as a partner in a partnership - will not gain the benefit of the de minimis exemption.

Section 386: Adjusted tainted income

With the exception of amounts derived through a trust and certain amounts derived by a CFC resident in a listed country from a source outside the listed country, the only income or other amounts derived by the CFC that are to be considered in the calculation of the notional assessable income of the CFC under either of sections 384 or 385 will be amounts that are termed "adjusted tainted income" - see notes on those sections. Broadly, the amounts that are deemed to be adjusted tainted income are the same amounts that comprise the "gross tainted turnover" of the eligible CFC for the purpose of determining whether or not a CFC passes the active income test under Division 8. However, because of differences in the manner of calculation of the gross tainted turnover and the calculation of assessable income under the Principal Act, there is a need to modify the definitions used in Division 8.

By subsection 386(1), "adjusted tainted income" as used in sections 384 and 385 is defined to be any of the amounts that, under Division 8 of this Part, are:

"passive income", which is defined in section 446 and modified, as it applies to a subsidiary of an Australian financial institution (an "AFI subsidiary" within the meaning of section 326) in subsections 449(1) and (3) and 450(2) to (5) (see notes on those provisions);
"tainted sales income", which is defined in section 447 (see notes on that section); or
"tainted services income", which is defined in section 448 and modified, as it applies to AFI subsidiaries, in subsections 450(6) to (8) (see notes on those provisions).

In applying the definitions in Division 8 it is to be assumed that they are modified in accordance with subsection 386(2).

Paragraph 386(2)(a) modifies the definition of passive income in section 446 by making the assumptions that:

·
paragraph 446(1)(k) (which deals with the net gain on the disposal of tainted assets) is replaced so that the paragraph applies to all amounts derived from the disposal of tainted assets;
·
paragraph 446(1)(m) (which deals with the net gain on the disposal of tainted commodity investments) is replaced so that the paragraph applies to all amounts derived from the disposal of tainted commodity investments; and
·
paragraph 446(1)(n) (which deals with the net gain accruing from certain currency exchange fluctuations) is replaced so that the paragraph applies to all amounts derived from those currency exchange rate fluctuations.

This treatment is necessary since, for each of those categories in section 446, the paragraph in question will only apply to deem an amount to be passive income where the sum of the gains on the items that are taken into consideration under each paragraph exceeds the sum of the losses. However, for the purpose of calculating the attributable income of a CFC, it is to be the individual components of each category that are deemed to be passive income. Paragraph (2)(a) will allow the gross amount derived from the disposal of those individual items to be taken into account in determining the amount to be included in notional assessable income, or in a net gain to be included in notional assessable income under Part IIIA of the Principal Act (as modified by Subdivision C of this Division). One result of this will be that, even where there is an excess of losses over gains for each category, the component parts will be deemed to be passive income.

Where the CFC is an AFI subsidiary, subsections 450(2) and 450(5) modify the treatment of certain disposals that would otherwise be included in passive income for the purposes of Division 8 (see notes on those subsections). These exclusions refer to the net gain made on the disposal of tainted assets. Correspondingly, the amounts derived from the disposals referred to in those subsections is to be excluded from the definition of passive income for the purposes of the definition of adjusted tainted income. To achieve this, paragraph 386(2)(b) notionally modifies those subsections so that the references to the net gain is ignored and instead reference is made to the amounts derived from the underlying transactions that are described in those provisions.

Under Division 8 the treatment of a CFC that is an AFI subsidiary is also modified where the CFC engages in certain types of currency exchange transactions. Where the conditions of subsection 450(3) are met, the net gain on currency exchange transactions for section 446(1)(n) is calculated without reference to the transactions specified in those provisions (see notes on subsection 450(3)). Paragraph 386(2)(c), which is similar in effect to paragraph 386(2)(b), ensures that paragraph 446(1)(n), as modified by paragraph 386(2)(a), is further modified for AFI subsidiaries so that the references to the net gain on currency exchange fluctuations is ignored and instead reference is made to the amounts derived from the underlying transactions that are described in those provisions .

Paragraph 386(2)(d) deals with the modifications made under subsection 450(7) to the tainted services income of an AFI subsidiary. Under that provision, where certain of the transactions that are excluded from passive income are, broadly, with related parties or residents of Australia, the net gain on any such transactions is included in tainted services income. Again, this treatment needs to be modified for the definition of adjusted tainted income so that the tainted services income takes into account the individual amounts derived from the transactions described in subsection 450(7).

Section 387: Reduction of attributable income because of interim dividends

Where an attributable taxpayer has included in the assessable income of a year of income an amount under section 456 in respect of the attributable income of a CFC of a statutory accounting period, any income payment that is received by that taxpayer in a subsequent year of income that is referable, directly or indirectly, to that amount is to be exempt from tax. The exemption is to be provided under section 23AI of the Principal Act. The tracing of the income payments made by the CFC is achieved by Division 4 of this Part (see notes on those provisions). However, the attribution credit under Division 4 arises only at the end of the statutory accounting period. Where the CFC paid a dividend out of current year profits and the CFC had attributable income for the current year, the attributable taxpayer would, in the absence of specific rules to provide relief, be taxable on the taxpayer's share of the dividend as well as the share of the attributable income. A dividend paid by the eligible CFC to another CFC could also be subject to attribution under section 458. Where the dividend is paid out of the current profits of a CFC, attribution of the income and profits from which the dividend was paid may similarly result in multiple taxation. Section 387 ensures that such multiple taxation does not arise by reducing the amount of the attributable income of the CFC for that period .

Subsection 387(1) provides for the reduction of what would otherwise be the attributable income of the eligible CFC for the eligible period in respect of an attributable taxpayer. The reduction will apply where the CFC pays a dividend to the attributable taxpayer or to another entity (paragraph (1)(a)). In the case of a payment of a dividend to the attributable taxpayer, it is a further requirement that the dividend or a part of the dividend (called the "assessable component") is included in the taxpayer's assessable income of any year of income (paragraph (1)(b)). It will also be necessary that the whole or part of the dividend could reasonably be considered to have been paid out of the income and profits that are taken into account in the calculation of the attributable income of that period (paragraph (1)(d)).

Where these conditions are satisfied, the attributable income of the CFC for the eligible period will be reduced.

Where the eligible taxpayer's interest in the CFC - that is, the attribution percentage - is 100 per cent, the attributable income of the CFC will be reduced by the amount of the dividend that relates to the attributable income. Where the interest in the CFC is less than 100 per cent, only a part of the attributable income is included in the taxpayer's assessable income. Consequently, the attributable income of the CFC will be reduced by an amount (the "grossed-up assessable component") that will effectively result in a reduction of the taxpayer's share of the attributable income by the assessable component of the dividend that relates to the distributable profits of the CFC in respect of the attributable income.

Where the dividend has been paid to an entity other than the attributable taxpayer, the reduction will only apply where that dividend or a part of the dividend is included in the attributable taxpayer's assessable income under section 458 (paragraph (1)(c)). As in the case of a dividend paid to the attributable taxpayer, it is then necessary to "gross-up" the section 458 amount (called the "grossed-up 458 component"). Where the whole or a part of the grossed-up 458 component could reasonably be considered to have been paid out of the income and profits that are taken into account in the calculation of the attributable income of that period (paragraph (1)(d)), the attributable income of the CFC is to be reduced by the amount of the grossed-up 458 component that is referable to the attributable income.

In either case, the dividend paid is to be regarded as paid out of the attributable income of that year only to the extent that the accumulated distributable profits, if any, at the commencement of that year are exhausted - that is, the dividend is treated as first coming out of accumulated profits of earlier years.

Subsection 387(2) defines the terms used in subsection (1) as follows:

"grossed-up assessable component" is the amount of the assessable component (that is, the amount of the dividend included in a taxpayer's assessable income) divided by the taxpayer's attribution interest ("AT") in the CFC paying the dividend; and
"grossed-up 458 component" is the amount included in the attributable taxpayer's assessable income under section 458 as a result of the dividend paid by the CFC, divided by:

·
where the recipient of the dividend is a CFC (that is, attribution occurs under subsection 458(1)), the taxpayer's attribution percentage in the CFC receiving the dividend (that is, the component "AP" in subsection 458(1) (paragraph (a);
·
where the recipient of the dividend is a CFT (that is, attribution occurs under subsection 458(3)) the taxpayer's attribution percentage in the CFT receiving the dividend (that is, the component "AP" in subsection 458(3)) (paragraph (a));
·
where the recipient of the dividend is a partnership and a CFC or a controlled foreign trust benefits directly or indirectly under that partnership (that is, attribution occurs under subsection 458(4)) the taxpayer's attribution percentage in the recipient CFC or trust multiplied by that CFC's or trust's interest in the partnership (that is, the component "AP x IP" in subsection 458(4)) (paragraph (b)); or
·
where the recipient of the dividend is an Australian trust and a CFC or a CFT benefits directly or indirectly under that trust (that is, attribution occurs under subsection 458(5)), the taxpayer's attribution percentage in the recipient CFC or trust multiplied by that CFC's or trust's interest in the Australian trust (that is, the component "AP x IT" in subsection 458(5)) (paragraph (c)).

The formula components mentioned above are more fully explained in the notes on section 458.

Subdivision B - General Modifications of Australian Tax Law

This Subdivision modifies the application of the Principal Act, including modifications to the following areas:

·
application of the Income Tax (International Agreements) Act 1953;
·
depreciation and trading stock provisions;
·
foreign currency conversion rules;
·
provisions for the deductibility of foreign and Australian tax;
·
transfer pricing provisions;
·
deductibility of payments made in respect of certain share financing arrangements;
·
reduction of the consideration received on the sale of an asset where an amount was previously attributed in respect of that asset; and
·
exclusion of certain dividend receipts and other amounts derived from listed countries or Australia.

Section 388: Double tax agreements to be disregarded

Where Australia has an agreement with another country for the avoidance of double taxation, the Income Tax (International Agreements) Act 1953 ("the Agreements Act") modifies the application of the Principal Act to take into account the provisions of that agreement. Section 4 of the Agreements Act provides that the Agreements Act and the Principal Act are to be read as if they were one Act. Section 4 further provides that, where there is an inconsistency between the Principal Act and the Agreements Act, the inconsistency is to be resolved in favour of the treatment that applies by virtue of the Agreements Act.

Section 388 provides that, for the purpose of calculating the attributable income of a CFC, the operation of the Agreements Act is to be ignored. For example, certain of the agreements provide that, where a company is resident in both Australia and in the other country party to the agreement, the company will be treated as solely resident in the other country if it is managed and controlled in that country. In general, Australia will then not tax income and profits of the company unless it is derived from carrying on a business through a permanent establishment in Australia. In calculating the attributable income of a CFC the CFC is deemed to be a resident of Australia, although it could also remain a resident of a country with which Australia has an agreement - that is, the company would be a dual resident. The result of the application of the agreement would be to alter what would otherwise be the notional calculation of the taxable income of the CFC under the Principal Act. The effect of section 388 will be that the attributable income of the CFC will not be so altered by the Agreements Act.

However, provisions of the Principal Act may rely on definitions in the Agreements Act or in the agreements themselves. Unless qualified, section 388 may have the effect that the references would be invalid. In order that such references in the Agreements Act are preserved, section 388 makes it clear that a reference in the Principal Act to the Agreements Act is not to be affected.

Section 389: Certain provisions to be disregarded in calculating attributable income

Many provisions of the Principal Act can never have substantive operation for the calculation of the attributable income of a CFC. Such provisions include, for example, Part VI of the Principal Act - which, broadly, deals with the collection and recovery of tax - and Part IV of that Act - which, broadly, deals with the procedures for making returns and assessments. While such provisions will have no operation, other provisions of the Principal Act which rely on definitions and meanings in, or references to, such provisions may be potentially relevant to the calculation of attributable income. The operation of such provisions of the Principal Act has not been specifically disregarded. Other provisions of the Principal Act are to be disregarded so that it is certain that the provisions are not to be taken into account in the calculation of the attributable income of a CFC.

By paragraph 389(a) existing sections 6AC, 20, 38 to 43, 128D and 136A of the Principal Act will be disregarded. It will also have the effect that sections 23AH, 23AI, and 23AJ, subsection 136AF(1A) and sections 456, 457, 458, 459 and 461, all of which are to be inserted into the Principal Act by this Bill, will be disregarded. However, references to these provisions in other areas of Part X will be preserved.

Paragraph 389(b) provides that Part IIIAA of the Principal Act (Franking of Dividends) will not apply in calculating the attributable income of a CFC. However, certain provisions that are to be used in the calculation of the attributable income of a CFC rely on these provisions. For example, section 402 refers to Part IIIAA. Paragraph (b) ensures that the references in those sections to Part IIIAA will be preserved.

The provisions referred to in section 389 are discussed further in the following notes.

Section 6AC: Grossing-up of foreign income

Section 6AC of the Principal Act ensures that an amount of foreign income derived and included in the assessable income of a taxpayer is the gross amount derived - that is, the amount before the payment of any foreign tax. The effect of the section is that amounts of foreign taxes that are deemed to have been paid (for example, underlying taxes - see notes on clause 32) are included in assessable income. The section will not be applied for the calculation of attributable income. Instead, the treatment of foreign taxes for the purposes of Division 7 is dealt with in section 392.

Section 20: Income etc., to be expressed in Australian currency

Subsection 20(1) of the Principal Act provides statutory recognition of the general rule that income is to be expressed in Australian currency. With the introduction of the foreign tax credit system, more detailed rules were provided for the conversion to Australian dollars of income and amounts of tax that are expressed in a foreign currency. Broadly, the section provides separate rules for the conversion of employment, investment and business income. In the case of business income, the currency translation is on the basis of the average rate over the period the business was carried on. In the case of investment income, the conversion is on the basis of the rate of exchange that prevailed when the income was remitted or, if not remitted, at the end of the year of income. Foreign tax is converted when paid, except where the foreign tax was paid by deduction from the foreign income, in which case the rate of exchange used to convert that tax is the same as that used to convert the income to which the tax relates.

The section will not be applied for the calculation of attributable income. Instead, the rules contained in section 391 will apply.

Sections 23AH, 23AI and 23AJ: Exemption of certain amounts derived by residents

The Bill will insert three new sections - sections 23AH, 23AI and 23AJ - which, broadly, will provide an exemption from taxation for:

·
certain amounts derived by a resident company through a permanent establishment in a listed country (section 23AH - see notes on clause 8);
·
income paid out of amounts that have previously been attributed to the taxpayer (section 23AI - see notes on clause 8); and
·
certain non-portfolio dividends paid to a resident company by a company resident in a listed country or out of profits derived in a listed country (section 23AJ - see notes on clause 8).

Where a CFC is a resident of an unlisted country, the exemptions provided by these sections will instead be provided by the exclusions from notional assessable income in sections 402 and 404. In the case of a CFC that is a resident of a listed country, the exclusions will be achieved by section 402 or 404, or by the assumptions about the calculation of attributable income in section 385.

Sections 38 to 43: Business carried on partly in and partly out of Australia

Broadly, sections 38 to 43 of the Principal Act provide source rules where goods are sold into Australia or business is carried on partly in Australia and partly in a foreign country. The source rules provide for an amount to be deemed to be from a source in Australia and allow for a deemed profit to be included in assessable income. To avoid double counting the income that gave rise to the profit is then excluded from assessable income. In calculating the attributable income of a CFC, whether or not income is derived from sources in Australia is not directly relevant. Instead, the tests turn on whether amounts have been included in the CFC's "actual" assessable income. As a consequence, the deemed source rules in sections 38 to 42 are not relevant and the exclusion from assessable income in section 43 will not apply.

Section 128D: Certain income not included in assessable income

Section 128B of the Principal Act imposes a withholding tax on certain dividends and interest. Except in certain specified circumstances, withholding tax is a final liability. That is, no further tax is levied on the recipient of the dividend or interest in respect of that dividend or interest. This exemption is achieved by section 128D of the Principal Act which has the effect that, in most circumstances, dividends or interest in respect of which Australian withholding tax has been paid is not to be included in the assessable income of the recipient. In order to include such dividends (excluding dividends that have been franked - see notes on section 402) or interest in notional assessable income, section 128D of the Principal Act will be disregarded. Where such a withholding tax has been imposed on any dividend or interest that is included in notional assessable income, a deduction will be allowed for the tax paid - see notes on section 393. Further, in appropriate circumstances, a credit may be allowed for the tax paid against the Australian tax payable on foreign income - see notes on section 160AFCA, to be inserted by clause 33.

Subsection 136AF(1A): Consequential adjustments to assessable income and allowable deductions

Subsection 136AF(1A), which will be inserted into the Principal Act by this Bill (see notes on clause 27) is to be disregarded. This is a drafting measure. The effect of subsection 136AF(1A), which is to enable the Commissioner of Taxation to make a compensating adjustment where the Commissioner has adjusted the attributable income of a CFC or a non-resident trust by a notional application of Division 13 of the Principal Act, will be achieved by the insertion of section 400 (see notes on that section).

Section 136A: Film and video tape royalties derived by non-residents

Broadly, section 136A of the Principal Act applies where a payment is made by a resident of Australia to a non-resident for the use of or right to use certain videos or films, or a copyright in connection with these, where the amount has a source in Australia pursuant to section 6C of the Principal Act. The non-resident is then liable to pay as tax 10 per cent of the gross payment. The amount derived by the non-resident is then excluded from the assessable income of the non-resident under subsection 136A(4). In order that such payments are included in the notional assessable income of the recipient CFC, section 136A is to be disregarded in calculating the attributable income of a CFC. Any income tax paid on behalf of the CFC in accordance with section 136A will, subject to the quarantining measures that apply for the calculation of attributable income, be a notional allowable deduction of the CFC - see notes on section 393. As with other amounts of Australian tax paid, in appropriate circumstances a credit may be allowed for the amount under section 160AFCA - see notes on that section.

Part IIIAA: Franking of dividends

Where a company pays a dividend to a shareholder, Part IIIAA of the Principal Act may operate to allow tax paid by the company as a credit against tax payable by the recipient of the dividend. A dividend paid to a CFC that is franked in accordance with Part IIIAA will be notional exempt income of the CFC (see notes on sections 402). It is unlikely that Part IIIAA will have any effect. However, it is to be disregarded for the purpose of calculating attributable income to prevent any unintended consequences.

Sections 456, 457, 458 and 459: Attribution of attributable income and certain dividends

Sections 456, 457, 458 and 459, to be inserted by this Bill, provide for the inclusion in the assessable income of a resident taxpayer the attributable income of a CFC; certain dividends paid by one CFC to another CFC; and certain profits of a CFC on a change of residence of the CFC (see notes on those sections). In calculating the notional assessable income of the CFC, such amounts are to be excluded so that it is clear that income or profits of a CFC, or a dividend previously attributed to the attributable taxpayer, are not taxed more than once.

Section 461: Post-attribution asset disposals

Section 461, to be inserted by this Bill, provides for an adjustment to be made to the consideration in respect of the disposal, whether directly, or indirectly, by a taxpayer of an interest in an entity. The adjustment will be made where the disposal occurs after the attribution of the income or profits of a CFC under the accruals tax measures but prior to the distribution to the taxpayer of an amount equal to the income or profits attributed to the taxpayer.

The section will not be applied in the calculation of attributable income. Instead, the reduction of the consideration received on such disposals is to be provided by section 401.

Section 390: Elections to be made by eligible taxpayer

The Principal Act provides for the making of elections and selections, the exercise of options and the giving of notice in a wide range of circumstances. The elections, selections, options and notices are generally required to be made, given or exercised by the taxpayer whose taxable income is to be calculated. In notionally calculating the taxable income of a CFC in order to determine the attributable income of the CFC, the CFC will be deemed to be the taxpayer - see notes on paragraph 383(a). With the exception of elections made under the CGT roll-over provisions (see notes on subsection 390(3)), where there are two or more attributable taxpayers who are required to calculate the attributable income of the CFC, each attributable taxpayer is to be allowed to make independent elections. This section will enable the attributable taxpayers to make these separate elections.

Subsection 390(1) provides that, for the purpose of applying the Principal Act for the calculation of attributable income, any declaration, election or selection that would otherwise be required to be made by the CFC may instead be made separately by each attributable taxpayer. It is intended that the inclusion of declarations, elections, selections, options or notices will be wide enough to ensure that, in every circumstance where there is a requirement under the Principal Act for action to be taken by the taxpayer in order that a provision of the Principal Act applies, or applies in a certain way, the attributable taxpayer will be able to take the necessary action.

Further, it is a usual requirement that the elections, etc., that may be made under the Principal Act must be made at or before a certain time. Often the time may be extended at the discretion of the Commissioner of Taxation. Subsection 390(2) provides that any election, etc. to be made by the eligible taxpayer must be made at the time of lodgement of the return of income for the year of income of the taxpayer that corresponds to the year of income of the CFC. That is, the eligible period of the CFC that falls within, or coincides with, the taxpayer's year of income. In addition, the Commissioner will be given a discretion to extend the time for making an election, etc. The discretion will apply for all elections, etc., even if there is no such discretion in the provision that provides for the election, etc.

Subsection 390(3) provides that subsection 390(1) will not apply where the election in question is one which is made under any of the CGT roll-over provisions. This exception only applies to certain of the elections necessary under those provisions of Part IIIA (Capital Gains and Losses) of the Principal Act that are commonly referred to as roll-over provisions - see notes on the definition of the term "CGT roll-over provisions" in section 317. Because the roll-over provisions may have implications for both the transferor and transferee and require elections by both, it is not practicable to provide for independent elections by each attributable taxpayer in relation to the CFCs concerned. The effect of this subsection is that neither of subsections (1) or (2) will have any application. Instead, the manner and form of any election required under one of the CGT roll-over provisions will be determined by that provision, having regard to the modification of Part IIIA elections made by section 421.

Section 391: Income and expenses to be expressed in Australian Currency

In applying the Principal Act, it is a general rule that all amounts be expressed in Australian currency. This is also embodied in subsection 20(1) of the Principal Act. Subsections 20(2) to 20(5) of that Act provide more detailed rules for the manner of conversion to Australian currency of amounts of income that are expressed in a foreign currency. These rules will not apply for the calculation of attributable income - see notes on section 389. Broadly, the Bill provides separate rules for the conversion to Australian dollars of amounts of income expressed in a foreign currency for the purpose of calculating attributable income. Further, the same rules will be applied to the conversion to Australian dollars of expenses expressed in a foreign currency.

Subsection 391(1) provides that all amounts of income and expenses (called the "eligible amount") are to be expressed in Australian currency. This requirement corresponds to the existing requirement in subsection 20(1) of the Principal Act.

Subsection on 391(2) sets out the conversion rules to apply where any eligible amount is, according to the accounts defined in section 317 of the company, expressed in a currency other than Australian currency. In these circumstances, unless the taxpayer otherwise elects (see notes on subsection (3)), the currency is to be converted according to the rules set out in paragraphs (a), (b) and (c).

Paragraph (2)(a) applies in cases where a CFC maintains its records in one foreign currency, or in cases where there is a predominant foreign currency in which the CFC maintains its records. Whether or not there is a predominant foreign currency is not to be determined by the volume or size of the transactions. Rather, the test will turn on whether or not there is a particular foreign currency used for the basic record keeping of the CFC.

Subparagraph (a)(i) provides that, where there is a single foreign currency in which the CFC maintains its records, all eligible amounts expressed in that currency (other than foreign tax - see notes on paragraph 391(2)(b)) will be converted to Australian dollars using the average exchange rate that prevailed during the statutory accounting period (sub-subparagraph (i)(A)). In this context, an average exchange rate would include a weighted average - for example, an average of the exchange rates prevailing from time to time during the period, weighted in accordance with the volume of transactions to which any particular rate applied. As an alternative, the taxpayer may elect that the exchange rate to be used in the conversion is the rate that prevailed on the last day of the statutory accounting period (sub-subparagraph (i)(B)). The circumstances and method of election are explained in the notes to subsection 391(3).

Where there is a predominant currency, but no single currency, in which the eligible amounts are expressed, subparagraph (a)(ii) will apply. The subparagraph provides that the eligible amounts not expressed in the predominant foreign currency (other than amounts of foreign tax - see notes on 391(2)(b)) are to be converted to the predominant currency on any reasonable basis, and then to Australian currency using either of the exchange rates specified in sub-subparagraph (2)(a)(i)(A) or (B) - that is, the average rate of exchange (including a weighted average) or, if the taxpayer elects, the rate prevailing at the end of the CFC's statutory accounting period. It may be that there is more than one reasonable method, in which case any one of the methods could be used.

Whether or not a method of conversion is reasonable will be a question of fact and regard would be had to the nature of the eligible amount. For example, a CFC resident in one foreign country may, in another foreign country, derive income from the carrying on of a business which involves a large number of transactions. Where the income, and any expenses, are expressed in a currency other than the CFC's predominant currency, it may be reasonable to convert amounts expressed in the one foreign currency to the predominant foreign currency at the rate of exchange that applied when each transaction occurred, or to use the average - including a weighted average - of the exchange rates for the relevant period. However, where the CFC received only a few dividend receipts it may only be reasonable that the conversion be on a transaction by transaction basis - that is, the rate of exchange that applied at the time of payment of each dividend.

It would also be relevant to consider the circumstances of the attributable taxpayer and the CFC. For example, where the attributable taxpayer was required to calculate the attributable income of two CFCs, it may be reasonable to convert a type of payment by one of the CFCs on a certain basis and a type of receipt by the other CFC on another basis. However, if the payment by one CFC was the receipt of the other CFC, it may not be reasonable to use a different basis of conversion.

Paragraph (2)(b) provides the method of translation of eligible amounts that are "foreign taxes" (see notes on section 393). The conversion will be on the same basis as is used to convert foreign taxes under the existing subsection 20(3) of the Principal Act. That is, where a foreign tax was paid by deduction (for example, a withholding tax), the foreign tax is to be converted using the same exchange rate as was applicable to the conversion of the amount of income from which the foreign tax was deducted (subparagraph (b)(i)). Other taxes are converted to Australian currency using the same rate that applied on the date of payment of the tax (subparagraph (b)(ii)).

Where there is no single or predominant currency and the eligible amount is not foreign tax, paragraph (2)(c) provides that the conversion to Australian dollars will be made on any reasonable basis - see preceding notes on subparagraph 391(2)(a)(ii) for an explanation of the meaning of "reasonable basis".

Where the taxpayer wishes to use the end of year basis for conversion of currency, subsection 391(3) provides for the time that the election is to be made. The election is a once only election and is to be made in the first return of income in which an eligible taxpayer is required to include an amount in assessable income under section 456. However, the Commissioner of Taxation may extend the time in which the election may be made. However, there is no discretion for the Commissioner to allow a second election, or an election for a year other than the first year in which section 456 applies.

Subsection 391(4) makes it clear that, where an election is made in accordance with subsection 391(3), except for the conversion of foreign tax, the end of year rate instead of the average rate will apply for all future years. Where there is no single or predominant currency the election could not be made with the effect that, even if the CFC were to have a predominant currency in a later period, the conversions for that later period would always be in accordance with sub-subparagraph 391(2)(a)(i)(A).

Section 392: Notional assessable amounts are to be pre-tax

In calculating the attributable income of a CFC, section 6AC of the Principal Act will be disregarded (see notes on section 389). In effect, section 392 reapplies the requirement under section 6AC that amounts included in assessable income are the amounts before the payment of foreign tax.

Additionally, by subsection 393(1), any Australian taxes are to be deductible (and, therefore, potentially allowable as a credit, see notes on clause 33) if the amount in respect of which the tax was imposed is included in the notional assessable income (see notes on section 393). The section provides that the amounts included in attributable income are the amounts before the payment of Australian tax. The term "Australian tax" is defined in section 317 to be an "income tax" or a "withholding tax".

Where a dividend is included in the notional assessable income of the eligible CFC and an amount of underlying tax in respect of the dividend is deemed to be foreign tax paid, the dividend will be taken to be increased by the amount of the deemed tax paid (subsection 392(2)) the calculation of any foreign tax deemed to have been paid is determined in accordance with subsection 393(2) - see notes on that subsection.

Section 393: Notional allowable deductions for taxes paid

The attributable income of a CFC is to be calculated net of foreign taxes. Where a foreign tax credit is to be allowed in respect of the amount of attributable income included in the assessable income of a taxpayer (see notes on section 160AFCA, being inserted by clause 33), the attributable income is to be "grossed-up" by the amount of the foreign tax paid (see notes on clause 6) and, subject to the rules in Division 18 of the Principal Act, a credit allowed for that amount against the Australian tax payable on the foreign income.

Section 393 ensures that, irrespective of whether or not the eligible taxpayer is entitled to a credit for taxes paid by a CFC, a deduction will be allowed for foreign taxes. A deduction will only be allowed where the amount in respect of which the tax relates has been included in the notional assessable income of the CFC, and only in respect of the year in which that income is so included. Where the foreign tax has not been paid, or deemed to have been paid in accordance with section 6AB, no deduction is allowable. However, where the foreign tax is paid at a later time, an amendment may be made in accordance with the general rules for the amendment of assessments and credit determinations. The term "foreign tax" takes its meaning from the definition in section 6AB of the Principal Act (see notes on clause 5).

By subsection 393(1), deduction will also be allowed for any "Australian tax" paid. The term "Australian tax" is defined in section 317 to mean "income tax" or "withholding tax". This term includes only taxes on income and does not extend to include an additional tax which is imposed in accordance with the Principal Act.

Subsection 393(2) provides that in calculating the deduction for foreign taxes for an eligible period under subsection (1), the eligible CFC will be deemed to have paid certain underlying taxes in respect of a dividend included in the notional assessable income of the eligible CFC for that period. The underlying tax will only be taken to have been paid where the dividend included in notional assessable income is a non-portfolio dividend, broadly a dividend from a company in respect of which the eligible CFC has 10 per cent of the voting power (paragraph (2)(a)). Further, the eligible taxpayer must be a company, other than a company in the capacity of trustee (paragraph (2)(b)). Lastly, foreign tax will only be deemed to have been paid if section 160AFC deems the eligible CFC to have paid and to have been personally liable for the tax (paragraph (2)(c)).

In broad terms, a resident company (in this case, under the assumption of residency in 383(a), the eligible CFC) that receives a dividend from a related foreign company is treated, under sections 6AB and 160AFC, as having paid foreign company tax paid by the related foreign company on that portion of the profits of the company out of which the dividend is paid. A foreign company that pays a dividend to a related resident company, and which has itself received a dividend from another related foreign company, is deemed to have paid, in addition to its own underlying tax, a portion of the underlying tax paid by the second related foreign company on the profits out of which it paid the dividend to the first foreign company. The underlying tax is traced through a chain of related foreign companies. Paragraph (2)(c) inserts the additional requirement that each of the companies in the pairs of companies in the dividend series also be related to the eligible taxpayer.

Subsection 393(3) makes it clear that, except as provided in subsection (2), section 160AFC will not result in any other amount of foreign tax being taken to have been paid by the eligible CFC.

Section 394: Notional allowable deduction for eligible finance share dividends

Section 394 will allow a notional allowable deduction for certain dividends paid by the CFC during the eligible period on an eligible finance share (defined in section 327). Because subsection 356(4) ignores eligible finance shares for the purpose of measuring attribution interests, it is necessary to allow a compensating adjustment in the form of a notional allowable deduction from the attributable income. If such an adjustment were not made, the attributable income of other shareholders would include income from which dividends in respect of the eligible finance share were paid.

The first of the two conditions to be satisfied for an application of section 394 is that the CFC pays an eligible finance share dividend during or after the eligible period (paragraph (a)).

Under the second condition (paragraph (b)), it is assumed that the dividend paid was instead the amount of interest to which it was regarded as equivalent in the application of paragraph 327(d). The assumed interest is then tested to see how much (the "interest equivalent") would be a notional allowable deduction for the eligible period - that is, an apportionment is to be made where part only of the notional interest related to the earning of notional assessable income of the CFC for the eligible period.

Where the conditions of both paragraphs (a) and (b) are satisfied the interest equivalent will be a notional allowable deduction for the eligible period - this will be subject to the same quarantining of deductions (see section 430) as would apply if the amount were a payment of interest.

Section 395: Expenditure incurred to produce income or profits in later statutory accounting periods

Section 395 is primarily relevant for the application of the general deductions provision of subsection 51(1) of the Principal Act which allows a deduction for losses and outgoings to the extent to which they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for that purpose. A deduction is allowable under subsection 51(1) notwithstanding that the relevant loss or outgoing does not relate to assessable income of the period in which it was incurred. However, in calculating the attributable income of a CFC, there could be doubt as to the deductibility of the amount as the loss or outgoing may be incurred by the CFC during the eligible period for the purpose of producing income in a later period in respect of which the CFC may not have an amount included in notional assessable income. For example:

·
the CFC may not be a CFC in relation to that later period; or
·
the CFC may change residence from an unlisted country to a listed country.

Section 395 will ensure that losses and outgoings incurred for the purpose of producing income will not be disallowed as deductions by reason only that the income to which the expense relates is derived in a later year and is not included in attributable income in that year. The section will operate where expenditure was incurred during an eligible period for the purpose of producing income in a later statutory accounting period. This would also cover the case where the expenditure was incurred in part for producing income that is to be derived in a later accounting period.

In either case, in determining whether the expenditure is a notional allowable deduction for the eligible period it is to be assumed that it will be necessary for the attributable taxpayer to calculate the CFC's income in the later period (paragraph 395(a)). Further, where the CFC is a resident of a listed country in the eligible period, it is to be assumed that the CFC will be a resident of the listed country in all later statutory accounting periods. Similarly, for a CFC that is a resident of an unlisted country in the eligible period, that CFC is to be assumed to be a resident of an unlisted country in all future periods (paragraph 395(b)).

Section 396: Modified application of sections 25A and 52

In broad terms, section 25A of the Principal Act includes in assessable income a profit arising from, and section 52 allows a deduction for a loss incurred upon, the sale of property acquired for the purpose of profit-making by sale. Neither section applies in respect of property acquired on or after 20 September 1985, amounts to be included in assessable income or allowed as a deduction in respect of the sale of which being determined under Part IIIA (Capital Gains and Capital Losses). Section 396 will modify the application of sections 25A and 52 for the purpose of calculating the attributable income of the eligible CFC.

Subsection 396(1) will prevent sections 25A and 52 from applying in respect of the disposal of non-taxable Australian assets of an eligible CFC that were acquired before 20 September 1985. For the purpose of calculating attributable income, such disposals will be subject to Part IIIA by virtue of proposed new section 411 which will deem all non-taxable Australian assets owned by an eligible CFC at the end of 30 June 1990 to have been acquired on that day for the purposes of Part IIIA. Subsections 396(2) and (3) in effect define the term "non-taxable Australian asset" to mean an asset other than a taxable Australian asset within the meaning of Part IIIA.

Section 397: Modified application of trading stock provisions

Subsection 28(2) of the Principal Act includes in assessable income any excess of the value of trading stock on hand at the end of a year of income over the value of the trading stock at the beginning of the year of income. Correspondingly, where there is an excess of the value of trading stock at the beginning of the year of income over the value of trading stock at the end of the year of income, subsection 28(3) provides that the excess is an allowable deduction. For the purposes of these calculations, the taxpayer may value an item of trading stock (not being live stock) at the cost price, the replacement price or the market selling value. In the case of trading stock that is live stock, the taxpayer may, broadly, value the stock at the cost price or the market selling value. Further, the valuation of an item of trading stock (whether live stock or not) at the beginning of a period must be the same as the valuation at the end of the preceding period. The Bill will amend the operation of the trading stock provisions so that the only basis of valuation of trading stock will be the cost price.

Section 397 provides that, where there is a requirement for trading stock to be valued at the beginning or end of the year of income, the trading stock is to be valued at its cost price. This will ensure that trading stock purchased during the eligible period and on hand at the end of the period, or trading stock valued at cost at the end of the preceding period, will be brought to account at cost. Further, a taxpayer may not have valued an item of trading stock on hand at the end of the preceding period. This could occur because it is the first year in which the CFC measures apply or, in a later year, because there was no necessity for the attributable taxpayer to calculate the attributable income of the CFC in the previous year - for example, the foreign company was not a CFC, the taxpayer was not an attributable taxpayer or the CFC passed the active income test in respect of the attributable taxpayer. In such cases, section 397 operates so that all items of trading stock on hand are to be valued at cost.

Section 398: Modified application of depreciation provisions

This section provides for the ascertainment of the amount to be allowed as a deduction from, or included in, assessable income as a result of the application of a "depreciation provision". The term "depreciation provision" is defined in section 317 and will include the depreciation provisions of sections 54 to 62 of the Principal Act, as well as other provisions of that Act which provide for capital deductions, which are not strictly depreciation but which are analogous to depreciation (for example, the capital deduction provisions of Division 10).

Subsection 398(1) provides the condition that must be satisfied before this section will have application. It stipulates that subsection (2) will have application only where the CFC has held property in a previous statutory accounting period (called a "non-attributable income period" - see notes on section 317) in respect of which there was no need for the "depreciation provision" to be applied.

Subsection 398(2) authorises the Commissioner of Taxation to determine the amount to be notionally allowed as a deduction (paragraph (2)(a)) or included in the notional assessable income (paragraph (2)(b)) of a CFC under a "depreciation provision" and to substitute this amount for the amount that would be calculated if the discretion was not available.

Subsection 398(3) provides that, in applying subsection (1), the Commissioner must treat the asset as if it had always been held for the purpose of producing notional assessable income. Where the CFC has used an item partly for producing notional exempt income and partly for producing notional assessable income during the eligible period, the existing discretion under section 61 of the Principal Act would allow the Commissioner to determine the amount that is an allowable deduction.

Section 399: Modifications of net income of partnerships and trusts

Subdivisions B, C and D of this Division modify the Principal Act in its application to the calculation of the attributable income of a CFC. The modifications are expressed in terms of events and circumstances as they apply to the eligible CFC, or in terms of assumptions that are to be made about the eligible CFC. It may also be necessary to calculate the net income of a partnership or trust estate in circumstances where the CFC is a partner in a partnership or a beneficiary of a trust estate during the eligible period. Further, in determining the amount of the net income of a trust estate or a partnership, it may be necessary to calculate the net income of another trust estate or partnership where there is a chain of trust estates and partnerships. Section 399 extends the modifications to be made to the Principal Act as they apply to the calculation of the attributable income of the eligible CFC to any such calculation of the net income of a trust estate or partnership.

Broadly, the calculation of the net income in either case is made on the assumption that the trust or partnership is a taxpayer who is a resident of Australia. In applying the Principal Act on the basis of this assumption, paragraph 399(1)(a) provides that the calculation of the net income of a partnership or a trust estate under sections 90 or 95 is to be made as if the modifications to the Principal Act in Subdivisions B, C and D (other than "excluded modifications" - see notes on subsection (2)) applied equally to those calculations. However, where the modification that is made to the Principal Act is to a provision that only has application under the Principal Act to a company, that modification, and hence the provision of the Principal Act, is not to apply in the calculation of the net income of the partnership or trust estate.

Subdivisions B, C and D are expressed to apply in a like way to the calculation of the net income of a partnership or trust as they apply to the CFC, and as such provides a broad statement of principle. In applying the paragraph, certain conditions must be read into the section. For example, the various provisions of the Subdivisions are expressed in terms of their application to an "eligible period", a term which take its meaning from section 381 (see notes on that section) and which does not apply to trusts or partnerships. Therefore, where, in the application of a provision of Subdivision B, C or D, it is necessary to determine the eligible period of the trust or partnership, this needs to be read as a reference to the period for which the net income of the trust or partnership is to be calculated. Similarly, a reference to a previous statutory accounting period would be a reference to a previous period.

In calculating the attributable income of the eligible CFC it may also be necessary to determine the amount to be included in attributable income under section 102AAZD of Division 6AAA of Part III (see notes on paragraphs 384(2)(b) and 385(2)(b)). This will require the calculation of the attributable income of the trust estate under section 102AAU of that Division (see notes on clause 18). Because this section only extends Subdivisions B, C and D for the calculations of the net income under sections 90 and 95, the section will not operate to extend these modifications for the calculation under section 102AAU. Instead the assumptions made in section 102AAU, as well as the modifications of the Principal Act made by sections 102AAV to 102AAZC of Division 6AAA, will determine the calculation of the attributable income of the trust estate.

A number of the modifications made to the Principal Act will apply, or have a particular application, depending on whether the CFC is a resident of a listed or unlisted country. There are no rules that determine whether a trust estate or partnership is a resident of a listed or unlisted country. In order that the modifications apply in a similar manner as they apply to the CFC for which the calculation of the attributable income is to be made, paragraph 399(1)(b) provides that the trust estate or partnership is to be deemed to be a resident of the same listed or unlisted country as the eligible CFC.

Paragraph 399(1)(c) provides for the assumption that the Principal Act is also modified to exclude subsections 160M(13) and (14). This corresponds to the modification made by paragraph 410(a) and, in effect, will ensure that a trust estate is not taken to have changed residence by virtue of the assumption in paragraph 399(1)(d) that it is a resident unit trust or resident trust, as the case may be.

Paragraph 399(1)(d) provides that, for the purposes of the application of Part IIIA of the Principal Act to disposals of assets by the trustee of a trust estate, the trust estate will be treated as a resident trust estate or resident unit trust within the meaning of Part IIIA. This makes it clear that the provisions of Part IIIA apply to a disposal of an asset in the same way as they would if the trustee were a resident of Australia.

The "excluded modifications" referred to in paragraph 399(1)(a) are defined in subsection 399(2) to be the modifications made by paragraphs 402(2)(a) and 403(b) as well as sections 404 and 411 to 418(see notes on those sections). Broadly, this will mean that most dividends received by a partnership or the trustee of a trust estate will not be notional exempt income. Further, the "valuation date" provided under Subdivision C for the purposes of Part IIIA will not apply in calculating the gain or loss on a disposal of an asset by the trustee of a trust estate.

Section 400: Modified application of Division 13 of Part III

Division 13 of Part III of the Principal Act contains measures to counter arrangements that result in avoidance of Australian tax through what are commonly referred to as "transfer pricing" or "profit shifting" arrangements. In broad terms, the Division authorises the Commissioner of Taxation to increase a taxpayer's assessable income or reduce an allowable deduction where the Commissioner forms the opinion that property has been transferred for non-arm's length consideration. The Division will only operate if there is an "international agreement" within the meaning of section 136AC of the Principal Act. Broadly, an agreement will be an international agreement where:

·
a non-resident supplied or acquired property or services under the agreement otherwise than in connection with a business carried on in Australia by the non-resident at or through a permanent establishment of the non-resident in Australia; or
·
a resident, who is carrying on business outside Australia, has in connection with that business supplied or acquired property or services.

Under section 383, the attributable income of a CFC is to be calculated on the assumption that the CFC were a resident of Australia for the whole of the eligible period - see notes on that section. In certain limited circumstances, the notional application of Division 13 for the purpose of calculating the attributable income of a CFC may alter the nature of a transaction that would otherwise fall within the definition of an international agreement. The Bill will ensure that this does not occur.

Where a taxpayer's taxable income has been increased the Commissioner is, under section 136AD of the Principal Act, empowered to make a consequential adjustment to reduce any other taxpayer's taxable income. Section 136AF of the Principal Act operates where section 136AD has been applied to a taxpayer and the taxpayer's taxable income has been increased. The section authorises the Commissioner to make a compensating adjustment to the assessable income or allowable deductions of the taxpayer, or any other taxpayer. The Commissioner must first be satisfied that it would be fair and reasonable in the circumstances to make the compensating adjustment.

Paragraph 400(a) ensures that the definition of international agreement in section 136AC is determined by ignoring the assumption of residence made by paragraph 383 (called the residency assumption - see notes on section 317). Instead, for the purposes of the notional application of the definition in section 136AC, the CFC will be considered to be a non-resident. This will mean that the transactions that are international transactions for the actual application of Division 13 are not different for the notional application of the Division for the calculation of attributable income.

Subparagraph 400(b)(i) will extend the operation of section 136AF, which may not otherwise empower an adjustment to another taxpayer's taxable income where Division 13 has been notionally applied. The subparagraph will enable the Commissioner to adjust the attributable income of the eligible CFC where Division 13 has been applied to another CFC to increase its notional taxable income in order to calculate that CFC's attributable income, or to a trust estate to increase the net income for the calculation of the trust estate's attributable income (sub-subparagraph (b)(i)(A)), or to a taxpayer to increase the taxpayer's taxable income (sub-subparagraph (b)(i)(B)). This, together with the actual operation of section 136AF of the Principal Act (see notes on clause 27) will ensure that, where Division 13 has been applied or notionally applied in any context, an adjustment may be made to prevent multiple taxation.

Subparagraph 400(b)(ii) is a drafting measure which will ensure that the references to "assessable income" or "allowable deductions" of a taxpayer are to be read as references to the notional assessable income or notional allowable deductions of the eligible CFC. The effect of this subparagraph is that, where there has been an adjustment under section 136AD in the calculation of attributable income, subsection 136AF(1) (as it applies in that calculation) will not empower the Commissioner to adjust a taxpayer's "actual" assessable income. Instead, that adjustment is provided by subsection 136AF(1A) - inserted by clause 27.

Section 401: Reduction of disposal consideration where attributed income not distributed

Broadly, this section provides for an adjustment to the consideration received by the eligible CFC in respect of the disposal of an interest in an attribution account entity where income and profits of a CFC have been attributed to a taxpayer but has not yet been distributed. It will apply for the purposes of calculating the attributable income of the eligible CFC. It is similar in terms to the adjustment to consideration provided by section 461 of the Principal Act, to be inserted by this Bill. However, by paragraph 389(a), section 461 will not apply in calculating the attributable income of a CFC.

But for the adjustments to be provided by these sections, double taxation could result - the first point of taxation being when the taxpayer becomes liable to tax on the attributed income of the CFC, and the second when the shares in the CFC are disposed of, if an assessable profit or capital gain arises. The adjustment is based on the assumption that the share price reflects a premium for future dividends payable out of the undistributed previously attributed earnings. However, the adjustment will apply whether or not this is, in fact, the case. The reduction will be, in effect, a reduction of the disposal consideration by the amount of the undistributed previously attributed income.

Subsection 401(1) is the operative provision for this section that sets out the conditions to be met and the adjustments to be made when they are met.

Paragraph 401(1)(a) provides, as the first condition, that it is necessary, for the purpose of applying a provision of the Principal Act in calculating the attributable income of an eligible CFC in relation to an eligible taxpayer, to take into account the amount of consideration received, or taken to have been received, in respect of the disposal by the CFC of an "interest" in an attribution account entity (section 363). An attribution account entity is defined in section 363 to be a trust, partnership or, broadly, a non-resident company. It is referred to in this section as the "disposal entity".

The two additional conditions, either or both of which must be satisfied, are:

·
that there be an attribution surplus (broadly, an undistributed amount of attributed income - see definition of that term in section 370) for the disposal entity in relation to the eligible taxpayer (subparagraph 401(1)(b)(i));
·
that there be an attribution surplus for one or more other attribution account entities in relation to the eligible taxpayer, where each such entity is one in which the eligible taxpayer has an indirect attribution account interest (defined in section 369) held through the disposal entity (subparagraph 401(1)(b)(ii)).

Where the conditions in paragraphs 401(1)(a) and (b) are satisfied, paragraphs 401(1)(c), (d) and (e) apply.

Paragraph 401(1)(c) provides that, for the purpose of calculating the attributable income, the consideration in respect of the disposal that would otherwise be taken into account is, subject to subsection (3), to be taken to be reduced by the "grossed-up amount of the attribution surplus" or the sum of those surpluses - see notes on paragraph 401(3)(a).

Paragraph 401(1)(d) provides that, for the purpose of the Principal Act, attribution debits and credits (see definitions of those terms in sections 371 and 372) arise in accordance with subsection 401(5).

Paragraph 401(1)(e) similarly provides that attributed tax account debits and credits (see notes on sections 375 and 376) arise in accordance with subsection 401(6).

Subsection 401(2) provides that, where the consideration is taken into account under Part IIIA (Capital Gains and Losses) of the Principal Act, references in section 401 to the disposal of an asset are references to the disposal of an asset have the same meaning as in Part IIIA (as modified in accordance with this Division).

Subsection 401(3), modifies what would otherwise be the reduction in disposal consideration under paragraph 401(1)(c). Paragraph (3)(a) defines the term "grossed-up amount of an attribution surplus" to be the amount of the surplus divided by the eligible taxpayer's attribution account percentage for the eligible CFC.

Paragraph (3)(b) provides that, where the disposal of the asset causes the eligible taxpayer's attribution account percentage for an attribution account entity in relation to which there is an attribution surplus to be reduced by a proportion, then only that proportion of the attribution surplus is, subject to this subsection, to be taken into account under that paragraph. The balance of the attribution surplus will remain available for tax free distributions to the eligible taxpayer.

Paragraph (3)(c) applies where there is only one attribution surplus and, after any application of paragraph (b), its grossed-up amount exceeds the disposal consideration. In this case, the surplus is only to be taken into account in reducing the disposal consideration to the extent that its grossed-up amount equals the consideration - that is, the adjustment under this section cannot result in a negative consideration.

Last, paragraph (3)(d) applies where there are two or more attribution surpluses and, after applying paragraph (b), the sum of the grossed-up amounts exceeds the disposal consideration. In this case, the taxpayer may elect that a part of each surplus (after applying paragraph (b)), such that the sum of the grossed-up amounts of the parts so elected equals the consideration, be applied in reduction of the disposal consideration (subparagraph (d)(i)). Alternatively, if the taxpayer does not make any such election, a proportion of each surplus (after applying paragraph (b)) will be applied in reducing the disposal consideration (subparagraph (d)(ii)) . The proportionate reduction is made in accordance with the formula:

(Consideration)/(Total grossed-up surplus)

Subsection 401(4) provides that an election for the purposes of paragraph 401(3)(d) is to be made in the eligible taxpayer's return of income for the year of income in which the eligible period ends, or within such further period after the lodgment of the return as the Commissioner allows.

Subsection 401(5) sets out the attribution account entries that are to be made to the attribution accounts when attribution surpluses are applied in reduction of the consideration in respect of the disposal by an eligible CFC of an interest in an attribution account entity. The entries correspond to those that would be made if the attribution account entity had distributed to the eligible CFC an amount, equal to the amount of the surplus applied under this section, of the income the attribution of which gave rise to the attribution surplus (see notes on the relevant provisions of Division 4).

Subsection 401(6) sets out the attributed tax account entries that are to be made when attribution surpluses are applied under this section - see notes on sections 375 and 376. Like those described in relation to subsection 401(5), they correspond to those that would be made if an equivalent attribution account payment had been made by the surplus entity to the eligible CFC.

Subsection 401(7) defines, for the purpose of section 401, the "interest" in an attribution account entity that may be taken into account, as follows:

·
an interest in shares in a company, not being a Part X Australian resident, or an entitlement to acquire such an interest (paragraph (a));
·
an interest of a partner in the profits or property of a partnership, or an entitlement of a partner to acquire such an interest (paragraph (b)); or
·
an entitlement of a beneficiary to a share of the income or corpus of a trust, or an entitlement to acquire such an entitlement (paragraph (c)).

Section 402: Additional notional exempt income - unlisted or listed country CFC

Sections 384 and 385 determine the amounts that are to be included in the notional assessable income of a CFC. In doing so, it is assumed that regard can only be had to certain amounts derived by the CFC. Once these amounts are determined, it is necessary to apply the provisions of the Principal Act. In doing so, the assumption is made that the Principal Act is modified in accordance with this Subdivision - see notes on those sections. Section 402 identifies certain receipts that, for the purpose of calculating the attributable income of a CFC for the eligible period, are to be treated as notional exempt income of the CFC. Thus, if in an eligible period a CFC derives amounts identified in this section, the amounts do not form part of the notional assessable income of the CFC for that period.

Subsection 402(1) provides that, for an eligible period, the section will apply to any CFC whether the CFC is a resident of a listed or an unlisted country at the end of the eligible period. Subsection 402(2) provides that certain amounts are to be treated as notional exempt income and, in paragraphs (a) to (d), lists those categories of income or amounts.

The first of those categories is identified in paragraph 402(2)(a), and encompasses amounts derived during the eligible period which have been included in the assessable income - as distinct from the notional assessable income for a calculation under this Division - of the CFC, whether the amount was included in that period or in an earlier period. This will ensure that where amounts have already been taxed in Australia at the full corporate rate, no double taxation will arise.

Paragraph 402(2)(b) provides an exclusion from the notional assessable income of the CFC for the eligible period of certain dividends (frankable dividends) paid by, generally, a company resident in Australia. Thus, a fully franked dividend will be wholly excluded from the notional assessable income; an unfranked dividend will be wholly included in the notional assessable income; and a partially franked dividend will only be excluded from the notional assessable income to the extent that it is franked (that is, according to the proportion that the franked amount of the dividend bears to the total dividend).

Paragraph 402(2)(c) ensures that the exempting profits percentage of a non-portfolio dividend paid to the CFC in the eligible period is not included in the notional assessable income of the CFC. The "exempting profits percentage" is defined in section 379 (see notes on that section). The exclusion will apply whether or not the company paying the dividend is a CFC.

Paragraph 402(2)(d) ensures that a non-portfolio dividend paid to the eligible CFC by another company which is a CFC at the time the dividend is paid is excluded from the notional assessable income of the eligible CFC. This exclusion will only apply where the CFC receiving the dividend is resident in an unlisted country at the time of payment of the dividend.

Subsection 402(3) will enable certain other dividends paid to the eligible CFC to be treated as notional exempt income of the CFC. This exclusion from notional assessable income applies where income or other amounts derived by a CFC have previously been attributed to the attributable taxpayer under section 456. Where this is the case, a dividend paid to the eligible CFC will be excluded from the notional assessable income of the CFC for the eligible period to the extent that the dividend can be traced - directly or indirectly through one or more interposed non-resident companies, trust estates or partnerships - to the amounts that were previously attributed. The section will only apply for the calculation of attributable income in respect of the particular taxpayer to whom the underlying profits were previously attributed. Any other attributable taxpayer of the eligible CFC will not gain the benefit of the exclusion. The method of tracing of the previously attributed amounts is based on the operation of the attribution accounts kept by the attributable taxpayer (see notes on Division 4 of this Part). There are three conditions that must be satisfied before the subsection applies.

The first condition is that a dividend is paid to the CFC during the eligible period (paragraph (3)(a)). It is not necessary that the company paying the dividend be a CFC nor that the dividend be a non-portfolio dividend. The second condition is that there be at least a part of the dividend that would be included in notional assessable income of the CFC for the period if subsection 402(3) were not taken into account (paragraph (3)(b)). This ensures that there is no overlap between this exclusion and the exclusions provided by subsection 402(2) or sections 403 and 404. The third condition is that the payment of the dividend must result in an attribution debit in respect of the company paying the dividend in respect of the attributable taxpayer making the calculation of attributable income (paragraph (3)(c)). The term "attribution debit" is defined in section 372 of Division 4. In order to determine whether this is the case, reference needs to be made to the system of tracing of previously attributed income that is provided under that Division. In doing so, no regard is to be had to any of the assumptions of residence etc. made under this Division.

Where the preceding conditions are satisfied, the amount to be excluded from the notional assessable income of the CFC for the eligible period is the lesser of the dividend and the grossed-up amount, a term defined in section 373. Broadly, the grossed-up amount is the amount of the attribution debit divided by the attributable taxpayer's attribution account percentage in the eligible CFC (see notes on section 373). In effect, this converts the attribution debit, which takes into account only the attributable taxpayer's share of the dividend, into an amount which reflects a 100 per cent interest in the dividend paid to the CFC.

Section 403: Additional notional exempt income - unlisted country CFC

As is the case for section 402 (see notes on that section), section 403 modifies the operation of the Principal Act so that certain amounts are excluded from the calculation of the notional assessable income of the CFC. Unlike that section, section 403 provides that the section only applies where the CFC is a resident of an unlisted country at the end of the eligible period, and so only applies to exclude amounts from the calculation of the notional assessable income under section 384. The amounts that are deemed to be notional exempt income of the CFC for the eligible period are:

·
income or profits derived by the CFC in the eligible period in carrying on business at or through a permanent establishment (as defined in section 6 of the Principal Act), provided that the income is, broadly, subject to tax in a listed country (paragraph 403(a)); and
·
non-portfolio dividends paid to the CFC during the eligible period by a company that is a resident of a listed country, but not necessarily a CFC, at the time the dividend is paid (paragraph 403(b)).

The exclusion under paragraph (b) overlaps the exclusion provided in paragraph 402(2)(d). Thus the amount could be excluded under either of the sections. It is not intended that any preference be given to excluding the dividend under this section over the exclusion under that paragraph.

Section 404: Additional notional exempt income - listed country CFC

As is the case for sections 402 and 403 (see notes on those sections), section 404 modifies the operation of the Principal Act so that certain amounts are excluded from the calculation of the notional assessable income of the CFC. Unlike those sections, section 404 provides that the section only applies where the CFC is a resident of a listed country at the end of the eligible period, and so only applies to exclude amounts from the calculation of the notional assessable income under section 385. Section 404 excludes from the notional assessable income of the CFC a dividend paid to the CFC by a company that is a resident of a listed country at the time the dividend is paid. As with the exclusion under paragraph 403(b), the exclusion provided under this section overlaps the exclusion provided in paragraph 402(2)(d).

Subdivision C - Modifications relating to Australian Capital Gains Tax

This Subdivision modifies the application of Part IIIA (Capital Gains and Capital Losses) of the Principal Act for the purposes of applying the Act in calculating the attributable income of an eligible CFC - see introductory notes to clauses 38 to 42 for a general explanation of Part IIIA. Part IIIA as modified by this Subdivision will apply subject to the other provisions of Division 7, such as the assumption that an eligible CFC is a resident (section 383) and the reduction of consideration in respect of the disposal of an asset where income that has been attributed has not been distributed (section 401).

In particular, the Subdivision will deem all assets (not being taxable Australian assets) owned by CFCs as at the end of 30 June 1990 to have been acquired on that day. This will enable Part IIIA to have application to such assets regardless of their actual date of acquisition. Further, the gain or loss on disposal of any such assets will be calculated with regard to the market value of the asset at the end of 30 June 1990 or actual cost, whichever produces the smaller gain or loss. This will effectively prevent the application of the provisions of Part IIIA to gains or losses that accrued on assets other than taxable Australian assets before 1 July 1990.

Section 405: Interpretation

Subsection 405(1) provides that, in Subdivision C, the term "30 June 1990 non-taxable Australian asset" is to have the meaning given by section 406 - see notes on that section.

Subsection 405(2) gives expressions used in Subdivision C and also in Part IIIA the same meanings as in that Part. For example, this is relevant in determining, for the purposes of the definition of the term "30 June 1990 non-taxable Australian asset", whether an asset is a taxable Australian asset.

Subsection 405(3) makes it clear that the assumption in paragraph 383(a) that an eligible CFC is a resident (called the "residency assumption") is not to be taken into account in determining whether or not an asset is a taxable Australian asset for the purposes of Subdivision C.

This will ensure that the term taxable Australian asset is given its natural meaning - that is, the meaning it normally has under section 160T.

In most cases this will be of no importance since, in the calculation of the attributable income of CFC, whether or not the disposal of an asset constitutes the disposal of a taxable Australian asset will not be affected by the residency assumption. However, in the limited circumstances in which it could occur - for example, asset disposals described in paragraph 160T(j) - paragraph (b)(ii) ensures that the disposal of the asset is not taken to be a disposal of a taxable Australian asset.

Section 406: Meaning of "30 June 1990 non-taxable Australian asset"

Section 406 provides that, for the purposes of applying the Principal Act in calculating the attributable income of an eligible CFC, a 30 June 1990 non-taxable Australian asset of the CFC is an asset (other than a taxable Australian asset) owned by the CFC at the end of 30 June 1990.

Section 407: Certain provisions of this Subdivision to be treated as provisions of Part IIIA

Section 407 is a drafting measure which allows the expressions "provision of this Part" or "provisions of this Part" when used in Part IIIA to be taken to include a reference to any of the provisions in Subdivision C of Division 7 of Part X.

This is relevant, for example, in determining the time of acquisition of an asset for Part IIIA purposes. Subsection 160U(1) is expressed to be "subject to the provisions of this Part other than this section" in requiring the time of acquisition to be ascertained in accordance with section 160U. Proposed subsection 411(1) (see notes on that subsection) deems certain assets to have been acquired on 30 June 1990, thus overriding the normal operation of section 160U.

Section 408: Part IIIA not to apply to disposals of taxable Australian assets

This section makes it clear that, in calculating the attributable income of an eligible CFC, Part IIIA is not to apply to a disposal of a taxable Australian asset of the CFC. Part IIIA will, of course, apply to such disposals for the purpose of ascertaining the assessable income of the CFC for the purposes of the Act apart from Part X. In determining whether the disposal of an asset is a disposal of a taxable Australian asset the "residency assumption" is ignored - see notes on section 406.

Section 409: Losses on disposals before end of 30 June 1990 to be disregarded

Section 409 provides that for the purpose of calculating the attributable income of an eligible CFC, capital losses in respect of the disposal of assets before the end of 30 June 1990 are to be disregarded. This provision does not extend to the disposal of taxable Australian assets, which are not taken into account in calculating the attributable income of the eligible CFC (see section 408).

An asset owned by an eligible CFC at the end of 30 June 1990, other than a taxable Australian asset, is referred to as a "30 June 1990 non-taxable Australian asset" (see section 406). The cost base of such an asset is the greater of the market value and cost base to the eligible CFC as at 30 June 1990 (see section 412). For capital gains tax purposes, only a capital gain or loss incurred on the disposal of a 30 June 1990 non-taxable Australian asset and assets acquired after 30 June 1990 (other than the disposal of a taxable Australian assets) will be taken into account in the calculation of the attributable income of an eligible CFC.

Section 410: Modified application of Part IIIA - general modifications

Part IIIA of the Principal Act governs the taxation of capital gains made on the disposal of assets, to the extent that the gain is not taxed under another provision of the Principal Act. Under Part IIIA, certain consequences flow from a change of residence one being that a person taking up residence in Australia is deemed to have acquired assets (other than taxable Australian assets or assets actually acquired prior to 20 September 1985) at that time for their then market value. Another feature of Part IIIA is the effective exclusion of the disposal of an asset used solely to produce exempt income.

The Bill will modify the operation of Part IIIA in the calculation of attributable income to ensure that an acquisition is not deemed to have been made by the CFC simply because the CFC is deemed to be a resident of Australia for the purpose of that calculation. The Bill will also ensure that Part IIIA will apply where there is a disposal of an asset used to produce notional exempt income.

Paragraph 410(a) provides that subsection 160M(12) of the Principal Act is to be disregarded. Subsection 160M(12) provides that, where a company that is not a resident of Australia becomes a resident of Australia, every asset of the company (other than taxable Australian assets and assets acquired prior to 20 September 1985) is deemed to have been acquired by the company at the time of becoming a resident. The consideration for the deemed acquisition is the market value at the time of the change of residence. If this subsection were to apply for the calculation of the attributable income of the CFC, the assumption that the CFC was a resident for the whole of the year of income may, where the company was not a resident at the end of the preceding period, be construed as deeming a change of residence at the beginning of the eligible period. This paragraph makes it clear that this is not the case and, consequently, the cost base of the asset will not be affected by the residence assumption.

Paragraph 410(b) provides that subsection 160Z(6) and paragraph 160Z(9)(c) of the Principal Act are to be disregarded. Subsection 160Z(6) provides that no gain will arise on the disposal of an asset used solely to produce exempt income. Paragraph 160Z(9)(c) corresponds to subsection 160Z(6) and applies so that any loss incurred on the disposal of an asset used solely to produce exempt income will similarly be excluded. Disregarding these provisions will ensure that a capital gain or a capital loss, as the case may be, on the disposal of an asset used solely to generate income that is notional exempt income of a CFC will, subject to the other provisions of Part IIIA, be taken into account in the calculation of the attributable income of a CFC.

Paragraph 410(c) provides that section 160ZFA of the Principal Act, to be inserted by clause 39 this Bill, is to be disregarded. Section 160ZFA provides an adjustment to the consideration taken to have been received on disposal of an asset where the roll-over provisions of Division 17 applied at the time of acquisition of the asset and there was also an amount included in assessable income due to the application of section 47A on the acquisition of the asset. Instead, a similar adjustment is to be provided by section 423 - see notes on that section.

By paragraph 410(d), the operation of section 160ZP of Part IIIA of the Principal Act is to be disregarded. Under Part IIIA a company may incur a "net loss", within the meaning of section 160ZC, in a year of income in respect of asset disposals to which the Part applies. Subject to satisfaction of the conditions imposed by section 160ZP the loss may, at the election of the companies concerned, be effectively transferred to another company in the same wholly-owned corporate group to be offset against any capital gain accruing to the other company. As is the case for other losses incurred by the CFC in any period, any net loss that arises in the calculation of the attributable income of a CFC under Part IIIA, as modified by this Subdivision, is not to be transferred to another company. By disregarding section 160ZP of the Principal Act, paragraph 410(d) makes it clear that section 160ZP will not apply to allow such a transfer of a net loss incurred during the eligible period of the CFC.

Section 411: 30 June 1990 non-taxable Australian assets taken to have been acquired on that date

Subsection 411(1) deems a "30 June 1990 non Australian asset" of a CFC to have been acquired on 30 June 1990 for the purposes of Part IIIA of the Principal Act. A 30 June 1990 non taxable Australian asset is defined by section 406 to mean an asset other than a taxable Australian asset owned at the end of 30 June 1990. Although the application of Part IIIA is generally limited to the disposal of an asset acquired on or after 20 September 1985, this subsection allows Part IIIA to apply in calculating the attributable income of a CFC to assets (other than taxable Australian assets) owned by the CFC regardless of the actual dates of acquisition of the assets.

However, subsections 411(2) and (3) qualify the effect of subsection 411(1). Subsection 411(2) operates where a provision of Part IIIA refers to the cost base of an asset instead of its indexed cost - generally where the asset is disposed of within 12 months of its acquisition date. This is relevant because indexation is taken into account in calculating a capital gain or disposal of an asset only where the asset has been owned for at least 12 months. In relation to such a provision in Part IIIA (for example subsection 160Z(3)) subsection 411(2) specifies that subsection 411(1) is not to operate for the purpose of determining the acquisition day of the asset.

This means that if an asset deemed by subsection 411(1) to have been acquired on 30 June 1990 is later disposed of, that asset's cost base will be indexed provided the asset has actually been owned by the CFC for at least 12 months. In this respect Part IIIA has its ordinary operation for the purpose of determining the date of acquisition of an asset. To illustrate, a bonus share that is deemed to have been acquired on 30 June 1990 by virtue of paragraph 160ZYG(b) because that is the deemed acquisition date of the original shares to which the bonus relates, will be taken to have the same acquisition date for indexation purposes as the ordinary Part IIIA acquisition date of the original shares. However, proposed paragraph 412(2)(b) limits indexation so as to apply only from 30 June 1990.

Subsection 411(3) specifies that the deemed date of acquisition of 30 June 1990 under subsection 411(1) does not apply for the purpose of determining the cost base of an asset. This is relevant in ascertaining an asset's cost base as at 30 June 1990 for the purposes of Division 7.

Section 160ZH of the Principal Act sets out what amounts may be taken into account for the purpose of determining an asset's cost base, indexed cost base and reduced cost base respectively. For example, where a taxpayer has given property other than money in respect of the acquisition of the asset, paragraph 160ZH(4)(b) treats the acquisition consideration as the market value of the property at the time of acquisition. The effect of subsection 411(3) is that market value will be ascertained at the time of actual acquisition and not at the deemed date of 30 June 1990.

Section 412: Cost base of 30 June 1990 non-taxable Australian asset

Section 412 sets the basis for determining what amount a CFC is to be taken as having paid or given as consideration in respect of the acquisition of a 30 June 1990 non taxable Australian asset for the purposes of Part IIIA of the Principal Act in calculating the attributable income of the CFC. The effect of section 412 will be that, in calculating a capital gain or capital loss on a disposal of such assets, the cost base of the asset as at 30 June 1990, or the market value of the asset as at the end of 30 June 1990, will be used whichever produces the smaller gain or loss.

Subsection 412(1) is to the effect that the succeeding subsections are to have effect in calculating the attributable income of an eligible CFC.

For the purpose of ascertaining whether a capital gain accrued on a disposal of the asset subparagraph 412(2)(a)(i) deems the CFC to have paid or given consideration in respect of the acquisition of a 30 June 1990 non-taxable Australian asset. The amount deemed to have been paid or given is the market value of the asset as at the end of 30 June 1990 (sub-subparagraph (A)) or, if the cost base of the asset as at 30 June 1990 is greater than the market value, that cost base (sub-subparagraph (B)).

For these purposes, and subject to the operation of proposed section 413 in relation to shares or an interest or unit in a trust (see later notes), the cost base is to be determined in accordance with Part IIIA as though Part IIIA had always applied to the asset. Market value is to be ascertained according to ordinary valuation principles.

Subparagraph 412(2)(a)(ii) specifies the acquisition cost for the purpose of ascertaining whether a capital loss has been incurred on a disposal of a 30 June 1990 non-taxable Australian asset. The acquisition cost is the market value of the asset as at the end of 30 June 1990 (sub-subparagraph (A)) or, if the cost base of the asset as at 30 June 1990 is less than the market value, that cost base (sub-subparagraph (B)). This amount is subject to further adjustment in accordance with section 160ZK of the Principal Act to determine the reduced cost base of the asset at the time of disposal. It is only if the reduced cost base of an asset exceeds the consideration received on disposal that a capital loss arises.

By paragraph 412(2)(b) the deemed amount of consideration is to be taken to have been paid on 30 June 1990. This will ensure that the June 1990 quarter is the base for determining the indexation factor to be applied in calculating the indexed cost base of a 30 June 1990 non-taxable Australian asset.

Subsection 412(3) ensures that liabilities, costs or expenditure incurred before 1 July 1990 in respect of a 30 June 1990 non-taxable Australian asset are not taken into account other than under subsection 412(2) in determining the asset's cost base, indexed cost base and reduced cost base.

Section 413: Adjustment of cost base as at 30 June 1990 - return of capital

Both section 160ZL and section 160ZM of the Principal Act may operate to reduce the cost base of shares in a company or an interest or units in a trust. Section 160ZL applies where a company pays an amount that is not a dividend in respect of shares acquired after 19 September 1985 (not being a payment in respect of the disposal of the shares). Section 160ZM as amended by clause 39 of this Bill (see notes on that clause) applies where the trustee of a trust pays an amount that is not assessable income of the owner of an interest or units in a trust acquired after 19 September 1985 - provided that the payment is not in respect of the disposal of the interest or units or an amount attributable to a deduction allowed under Division 10C (Deductions for Capital Expenditure on Traveller Accommodation) or Division 10D (Deductions for Capital Expenditure on Certain Buildings) of Part III of the Principal Act. Section 413 operates in a similar way for 30 June 1990 non-TAAs of a CFC being shares or an interest or unit in a trust, for the purposes of Division 7 (subsection 413(1)). This adjustment will ensure that, in ascertaining the cost base of an asset, reductions are made for amounts of the types to which sections 160ZL and 160ZM apply. The receipt of such amounts would also be reflected in the market value of the asset.

Subsection 413(2) applies where 30 June 1990 non-taxable Australian assets of a CFC include or consist of shares in a company (paragraph 413(2)(a)). Where, during the period commencing at the time of acquisition of the shares and ending at the end of 30 June 1990, the company paid to the CFC an amount in respect of the shares that was not a dividend (paragraph 413(2)(b)) the cost base of the shares as at 30 June 1990 is reduced by the amount paid.

Subsection 413(3) applies where:

·
a 30 June 1990 non-taxable Australian asset of a CFC consists of an interest or unit in a trust (paragraph (3)(a)); and
·
at any time during the period commencing when the CFC acquired the interest or unit and ending at the end of 30 June 1990, the trustee of the trust paid an amount to the CFC in respect of the interest or unit, being an amount that would not have been notional assessable income of the CFC (paragraph (3)(b)).

In these circumstances, subsection 413(3) requires the cost base of the interest or unit as at 30 June 1990 to be reduced by so much of the amount as is not attributable to a deduction allowed under Division 10C or Division 10D.

Section 414: Rights to acquire shares or share options

Section 415: Rights to acquire units or unit options

Section 416: Company-issued options to acquire unissued shares

Section 417: Unit trust-issued options to acquire unissued units

Introductory note

Part IIIA contains provisions which deal with rights to acquire shares or units in a unit trust (Division 10 or Division 10A) and company-issued options to shareholders to acquire unissued shares (Division 11) or unit trust-issued options to unitholders to acquire unissued units (Division 11A). Each of these Divisions contains a provision which states that, where a shareholder or unitholder exercises rights or options that were acquired after 19 September 1985, the shareholder or unitholder is deemed to have paid or given as consideration in respect of the asset acquired an amount equal to the exercise price of the rights or options. This would mean that, in the case of rights or options being 30 June 1990 non-taxable Australian assets of a CFC and exercised after 30 June 1990, the acquisition cost of the new asset would only be the exercise price, although those rights or options could have a different cost by virtue of section 412.

Section 414 deals with cases under Division 10 where rights are issued to acquire shares in a company or to acquire an option to acquire shares in a company and stipulates a different acquisition cost in these circumstances to that which would be obtained under existing subsection 160ZYO(2).

Subsection 414(1) provides that the succeeding subsections are to have effect in calculating the attribution income of an eligible CFC.

Paragraph 414(2)(a) applies for the purpose of ascertaining whether a capital gain accrued to the CFC on a disposal of the new shares, the option or the shares to which the option relates (where the option has been exercised). In this case the acquisition cost of the new shares or the option is the sum of the exercise price of the rights and the market value of the rights as at the end of 30 June 1990 (subparagraph (a)(i)) or the cost base of the rights as at 30 June 1990 if it is greater than the market value (subparagraph (a)(ii)).

Paragraph 414(2)(b) applies for the purpose of ascertaining whether a capital loss arises on a disposal of the new shares, the option or the shares to which the option relates. The acquisition cost of the new shares or option is the sum of the exercise price and the market value of the rights as at the end of 30 June 1990 (subparagraph (b)(i)) or the cost base of the rights as at 30 June 1990 if it is less than the market value (subparagraph (b)(ii)).

By subsection 414(3) the amount in subparagraph (a)(i), (a)(ii), (b)(i) or (b)(ii), whichever is applicable, is deemed to have been paid on 30 June 1990. This parallels the operation of paragraph 412(2)(b) described earlier.

Similarly, section 415 deals with cases under Division 10A where rights are issued to acquire units in a unit trust or to acquire an option to acquire units in a unit trust.

Section 416 applies in respect of Division 11 which refers to the case of an issue by a company of an option to acquire other shares in the company. Section 417 applies in a similar way to cases under Division 11A where a unit trust issues options to unitholders to acquire unissued units in the trust.

Section 418: Options

Section 160ZZC of the Principal act sets out rules for the treatment of options, where those options are not already dealt with in Division 10 (rights to acquire shares), Division 10A (rights to acquire units), Division 11 (options to acquire shares) or Division 11A (options to acquire units). Generally, the grant of an option will be treated as the creation and disposal of the option, and may result in a capital gain. When an option is exercised the grant of the option and the transaction entered into as a result of the exercise are treated as a single transaction.

Subsection 160ZZC(3A) applies where, on or after 20 September 1985, a company grants an option to acquire shares in a company or debentures of a company or the trustee of a unit trust grants an option to acquire units in the unit trust or debentures of the unit trust. In these cases the grant of the option is not taken as a disposal of the option - a disposal of the option occurs only if the option expires without being exercised or is cancelled, released or abandoned.

Subsection 418(1) provides that the succeeding subsections are to have effect in calculating the attributable income of an eligible CFC.

Subsection 418(2) is to the effect that subsection 160ZZC(3A) applies to an option granted by an eligible CFC as if the reference to 20 September 1985 were a reference to 1 July 1990.

Subsection 418(3) states that subsection 160ZZC(9) does not apply to an option granted to an eligible CFC. Subsection 160ZZC(9) is relevant for those cases where an option granted before 20 September 1985 is exercised on or after that date and operates to include the market value of the option at the time of exercise as part of the acquisition cost of the asset. The subsection is not relevant for taxpayers who are subject to Division 7. Such options owned as at 30 June 1990 are taken to have been acquired on 30 June 1990 (subsection 411(1)) and to have been acquired at that date for an amount depending upon the cost base and market value of the option at that time.

Section 419: Modified application of section 160ZZO (transfer of asset between companies in the same group)

This section will modify the application of section 160ZZO of the Principal Act for the purposes of applying the Act in calculating the attributable income of an eligible CFC.

Section 160ZZO, which forms part of Division 17 of Part IIIA, permits a roll-over for asset transfers between companies in the same group, provided the companies share 100 per cent common ownership. Paragraph 160ZZO(1)(a) sets out specific situations in which a roll-over may be available, namely:

·
a company (referred to as the "transferor") that is a resident of Australia disposes of an asset to another company (referred to as the "transferee") that is also a resident of Australia;
·
a company (referred to as the "transferor") that is not a resident of Australia disposes of a taxable Australian asset to another company (referred to as the "transferee") that is a resident of Australia; and
·
a company (referred to as the "transferor") disposes of a taxable Australian asset to another company (referred to as the ''transferee'') that is not a resident of Australia and, immediately after the disposal, the asset is a taxable Australian asset of the transferee.

For the purpose of calculating the attributable income of an eligible CFC, the CFC is to be assumed to be a resident of Australia (paragraph 383(a)) and Part IIIA is not to apply to the disposal of a taxable Australian asset of an eligible CFC (section 408). As the circumstances in which roll-over relief is to be available in calculating attributable income are to be limited, the situations set out in paragraph 160ZZO(1)(a) are not relevant for purposes of calculating attributable income.

Accordingly, paragraph 419(a) provides that, for the purpose of calculating the attributable income of an eligible CFC, section 160ZZO is to have effect as if paragraph 160ZZO(1)(a) were omitted and a new paragraph (a) inserted in its place. Subparagraph (i) of the substituted paragraph (a) will apply where a company (the "transferor") that is a CFC and a resident of a listed country (see notes on section 332) at a particular time disposes of an asset not being the disposal of a taxable Australian asset) at that time to another company (the "transferee") provided that the transferee is, at that time, either:

·
a resident of the same listed country (sub-subparagraph (i)(A));
·
a resident of Australia (sub-subparagraph (i)(B)); or
·
a resident of a particular unlisted country (see notes on section 333) where, immediately before the disposal time, the asset was used in connection with a permanent establishment of the transferor in any unlisted country (that is, not necessarily the same country as the country of residence of the transferee) at or through which the transferor was then carrying on business (sub-subparagraph (i)(C)).

Subparagraph (ii) of substituted paragraph (a) will be applicable, in effect, where a company (also referred to as the "transferor") that is a CFC and a resident of an unlisted country at a particular time disposes an asset (not being a disposal of a taxable Australian asset) at that time to another company (the ''transferee'') which, at that time, is either:

·
a resident of an unlisted country (not necessarily the same country as the country of residence of the transferor) (sub-subparagraph (ii)(A)); or
·
a resident of Australia (sub-subparagraph (ii)(B)).

In broad terms, the effect of paragraph 419(a) is that, for the purposes of calculating the attributable income of an eligible CFC, roll-over relief to which section 160ZZO could apply will not be available, in respect of disposals of assets by a CFC that is a resident of a listed country to a company resident in another listed country, or to a company resident in an unlisted country unless the asset was being used by the transferor in carrying on business through a permanent establishment in an unlisted country; or to disposals by a CFC that is a resident of an unlisted country to a company that is a resident of a listed country. Nor, as indicated above, is roll-over relief available under the provisions of section 160ZZO as they will continue to apply to disposals of assets (other than disposals of taxable Australian assets) by residents of Australia to CFCs.

Paragraph 419(b) provides that the residency assumption in Division 7 of Part X is ignored. This will ensure that the term taxable Australian asset is given its natural meaning - that is, the meaning it normally has under section 160T (see notes on subsection 405(3)).

Section 420: Modified application of section 160ZZOA (transfer of asset from subsidiary to holding company for no consideration)

Section 160ZZOA, which forms part of Division 17 of Part IIIA, provides a modified form of roll-over relief on the transfer, after 15 August 1989, of an asset from a subsidiary company to a holding company for no consideration. The roll-over is at the election of the transferor and the transferee.

Paragraph 160ZZOA(1)(a) sets out the specific situations in which a roll-over may be available, which are essentially the same as those set out in paragraph 160ZZO(1)(a). Section 420 will modify the application of section 160ZZOA in exactly the same manner as the proposed modification of section 160ZZO by section 419 - see notes on that section.

Section 421: Elections under CGT roll-over provisions

The "CGT roll-over provisions" (see notes on the definition of that term in section 317) provide for a deferral of tax liability on certain capital gains. In some cases the roll-over relief applies automatically. In other cases an election by the person disposing of the asset concerned, and in some cases also by the person acquiring the asset, is required to be given by notice in writing to the Commissioner of Taxation on or before the date of lodgment of the return of income of the transferor for the year of income in which the disposal took place, or within such further period as the Commissioner allows.

Generally, for the purpose of applying the Principal Act in calculating the attributable income of an eligible CFC, section 390 provides that any election, etc. that otherwise may have been made by the CFC is not to be made by the CFC but instead may be made independently by eligible taxpayers - see notes on that section. However, for reasons indicated in the notes on that section, that section does not apply to elections under CGT roll-over provisions. Instead, for the purpose of calculation of the attributable income of an eligible CFC, the election will be able to be made by the eligible CFC.

Section 421 modifies the time at which elections under the CGT roll-over provisions may be made by an eligible CFC for the purpose of calculating the attributable income of the CFC for an eligible period. Instead of having to be made on or before the date of lodgment of a particular return of income, or within such further period as the Commissioner allows, the elections are to be made before the end of the period of 2 months after the end of the eligible period of the CFC or within such further period as the Commissioner allows.

Section 422: Adjustment of disposal consideration where change of residence by eligible CFC from unlisted to listed country

Section 422 will apply where a CFC that is a resident of an unlisted country becomes a resident of a listed country at a particular time and, at a subsequent time, disposes of an asset that it had at the residence change time. It will provide for an adjustment of the consideration on the disposal of that asset.

Subsection (1) specifies that this section will have effect in calculating the attributable income of the eligible CFC for the eligible period in relation to the eligible taxpayer.

Subsection (2) sets out the conditions that have to be satisfied for this section to have effect. The first condition is that the CFC has changed its residence from an unlisted country to a listed country at a time during the eligible period or an earlier period and an amount is or has been included in the taxpayer's assessable income under section 457 or because of paragraph 58(1)(d) of this Bill (paragraph (a)), in relation to that change of residence. It should also be the case that the eligible CFC disposes of an asset (the eligible asset) that has been held by the CFC since the residence-change time (paragraph (b)). Where these conditions are satisfied, the consideration for the disposal of the eligible asset is to be adjusted in accordance with this section in computing, under Part IIIA, the capital gain or loss on that disposal.

Subsection (3) deals with the adjustment to the consideration on the disposal by the CFC of the eligible asset where, due to the assumption in subparagraph 457(2)(a)(i) or in paragraph 58(2)(a) of this Bill that the CFC's assets were disposed of at the residence-change time for a consideration equal to their market value, there was an increase in the distributable profits of the CFC at that time (paragraph (a)). The amount of the increase in the distributable profits is referred to as the "DP creation/increase amount".

It should also be the case that the CFC would have made a profit had it disposed of the eligible asset at the residence-change time for its market value (paragraph (b)).

The effect of the adjustment will be to reduce the consideration in respect of the disposal, after the residence-change time, of the eligible asset by a part of the DP creation/increase amount. The amount of the adjustment is to be determined using the formula:

(Eligible asset profit)/(Total asset profits) * (DP creation or increase amount)

where:

"Eligible asset profit" refers to the profit that would have arisen to the CFC had it disposed of the eligible asset at the residence-change time for an amount equal to its market value; and
"Total asset profits" means the total of the profits that would have arisen to the CFC at the residence-change time if the assets of the CFC, other than taxable Australian assets, had been disposed of at the residence-change time for amounts equal to their market value and only assets the disposal of which yield profits were taken into account.

Subsection (4) deals with the adjustment to the consideration on the disposal by the CFC of the eligible asset where, due to the assumption in subparagraph 457(2)(a)(i) or in paragraph 58(2)(a) of this Bill that the CFC's assets were disposed of at residence-change time for a consideration equal to their market value, there was a decrease in the distributable profits of the CFC at that time (paragraph (a)). The amount of the decrease in distributable profits is referred to as the "DP reduction amount".

It should also be the case that the CFC would have incurred a loss had it disposed of the eligible asset at the residence-change time for its market value (paragraph (b)).

The effect of the adjustment will be to increase the consideration in respect of the disposal, after the residence-change time, of the eligible asset by a part of the DP reduction amount. The amount of the adjustment is to be determined using the formula:

(Eligible asset loss)/(Total asset losses) * (DP reduction amount)

where:

"Eligible asset loss" refers to the loss that would have arisen to the CFC had it disposed of the eligible asset at the residence-change time for an amount equal to its market value; and
"Total asset losses" means the total of the losses that would have arisen to the CFC at the residence-change time if the assets of the CFC had been disposed of at the residence-change time for amounts equal to their market value and only assets the disposal of which yield losses were taken into account.

Section 423: Adjustment of disposal consideration where section 47A applies to rolled over assets

Section 423 provides an adjustment to the consideration that is taken to have been received on disposal of an asset to which Part IIIA applies in accordance with this Subdivision. It is similar in terms to the adjustment provided by section 160ZFA that is to be inserted by Clause 39 of this Bill. However, by paragraph 410(c), section 160ZFA will not apply in calculating attributable income of the eligible CFC.

Section 423 will have effect where, on the transfer of the asset to the eligible CFC, the application of section 47A resulted in the inclusion of an amount in relation to that transfer in the assessable income of the eligible taxpayer. It should also be the case that a capital gain was not recognised on the transfer of that asset to the eligible CFC because of the application of a roll-over provision of Division 17 in the calculation of the attributable income of another CFC.

Subsection (1) specifies that this section will have effect in calculating the attributable income of the eligible CFC for the eligible period in relation to the eligible taxpayer.

Paragraphs (a) to (e) of subsection (2) set out the conditions that are necessary for the application of this section. The first condition is that, because of Division 17, Part IIIA does not apply in respect of the disposal of an asset by a CFC to the eligible CFC (paragraph (a)). Secondly, the taxpayer (the eligible taxpayer) whose share of the attributable income of the eligible CFC is being computed should have been an attributable taxpayer in relation to both CFCs at the time of the disposal (paragraph (b)). Thirdly, section 47A should have the effect, in relation to the transfer of the asset, that the other CFC is taken to have paid a dividend to the eligible CFC (paragraph (c)). The fourth condition, specified in paragraph (d), is that the whole or a part of that dividend, or an amount in respect of that dividend, should have been included in the assessable income of the attributable taxpayer under section 458 or 459. The last requirement is that the eligible CFC should, subsequently, dispose of that asset (paragraph (e)).

Where these conditions are satisfied, the consideration in respect of the disposal of the asset by the eligible CFC is to be reduced by the lesser of:

·
the amount of the deemed dividend (paragraph (f)); and
·
the amount that would have been the capital gain on the disposal of the asset by the CFC if the asset was deemed to have been disposed of for a consideration equal to its market value and the roll-over provision did not apply to the disposal (paragraph (g)).

Subdivision D - Modifications Relating to Losses

Introductory Note

This Subdivision establishes a system of quarantining certain amounts derived by the CFC according to various classes. The effect of the quarantining is that the allowable deductions that relate to amounts that fall into one of the classes cannot exceed the notional assessable income that relates to that class for the eligible period. Using this system of quarantining, the Subdivision also deals with the creation of a loss for a statutory accounting period of a CFC and the deductibility of that loss in a later year. Finally, the Subdivision provides a deduction for a loss incurred by the CFC in an eligible period in relation to certain amounts that are not included in the notional assessable income of the CFC.

Section 424: Classes of notional assessable income

Section 424 establishes the classes of income that are to apply for the purposes of Subdivision D. These classes correspond to the classes of assessable foreign income that apply for the purposes of section 79D and 160AFD of the Principal Act (see notes on clause 34). The classes of income for this Division are:

·
interest income, as defined in subsection 160AE(3) (paragraph (1)(a));
·
modified passive income, as defined in subsection 160AEA(2) (paragraph (1)(b));
·
offshore banking income, as defined in subsection 160AE(4) (paragraph (1)(c)); and
·
all other amounts (paragraph (1)(d)).

Section 425: Sometimes-exempt income etc.

Under sections 384 and 385, an amount that would otherwise be included in the CFC's notional assessable income may be excluded either because the CFC has passed the active income test for the period or gained the benefit of the de minimis exemption. Consequently, the outgoings relating to these amounts of notional exempt income of the period will not be notional allowable deductions. In calculating the notional allowable deductions or the loss incurred in the period, or the amount of a loss of a previous period that is to be made a notional allowable deduction of the CFC in a later period, these amounts are to be taken into account. To achieve this, section 425 introduces the following concepts that are used in the Subdivision:

·
"sometimes-exempt income" (subsection (1)), which is used to determine a (sometimes-exempt income) gain or loss;
·
"sometimes-exempt deduction" (subsection (2)), which is used to determine a (sometimes-exempt income) gain or loss;
·
"(sometimes-exempt income) loss" (subsection (3)), which is to be a notional allowable deduction in the year in which it is incurred; and
·
"(sometimes-exempt income) gain" (subsection (4)), which is used to reduce what would otherwise be the loss incurred in a statutory accounting period and also to reduce the amount of a loss carried forward from a previous statutory accounting period.

Subsection 425(1) provides that certain amounts derived by the CFC in the eligible period which are not included in notional assessable income of the period may be sometimes-exempt income of the CFC for that period. Further, certain amounts derived by the CFC in an earlier statutory accounting period which were not included in the notional assessable income of the CFC in that earlier period may be sometimes-exempt income of the CFC for that earlier period. The two types of income or gains that may be sometimes-exempt income are identified in paragraphs (a) and (b).

Paragraph 425(1)(a) applies where the CFC passed the active income test for the period in question (that is the eligible period or an earlier period), and covers any amount derived by the CFC during that period which was not included in notional assessable income but would have been included had the CFC not passed the active income test.

Paragraph 425(1)(b) applies where the CFC gained the benefit of the de minimis exemption in subsection 385(4) for the period in question, and as in paragraph (a), covers any amount derived by the CFC during that period that would have been included in notional assessable income had the exemption not applied. In either of these cases, the amounts are sometimes-exempt income of the CFC for the period in question.

Subsection 425(2) defines the term "sometimes-exempt deduction". To do so it is necessary to assume that for the period in question, whether it is the eligible period or an earlier statutory accounting period, the sometimes-exempt income is notional assessable income and then to determine what would have been the notional allowable deductions of the period. In doing so, any reduction of notional allowable deductions under section 430 is not taken into account. Further, deductions for losses under section 431 are ignored. Any resultant amount that is not already a notional allowable deduction is a sometimes-exempt deduction.

Subsection 425(3) defines the term "(sometimes-exempt income) loss". For each class of income, if the sometimes-exempt deductions of the period, as determined under subsection 425(2), exceed the sometimes-exempt income of that period, as determined under subsection 425(1), there is a (sometimes-exempt income) loss for the period.

Subsection 425(4) defines the term "(sometimes-exempt income) gain". For each class of income, if the sometimes-exempt income of the period as determined under subsection 425(1) exceeds the sometimes-exempt deduction of that period, as determined under subsection 425(2), there is a (sometimes-exempt income) gain for the period.

Section 426: Creation of loss in relation to a class of notional assessable income

Section 426 provides for the creation of a loss in relation to a statutory accounting period. This loss can then be carried forward indefinitely and, subject to the rules in section 431, be deducted from the notional assessable income of a CFC in a later period (see notes on that section). Consistent with section 160AFD of the Principal Act, the loss will be created on a class of income basis. Broadly, the loss for each class of income will be the excess of the notional allowable deductions of that class over the notional assessable income of that class. However, it will also be necessary to reduce the loss by the amount of any (sometimes-exempt income) gain of that class of that period.

Paragraph 426(a) provides the basis of the calculation of the loss and requires that:

·
the notional allowable deductions of a class of income be set-off against the notional assessable income of that class derived in that period (subparagraph (a)(i)); and
·
if there is any excess, it is set-off against the (sometimes-exempt income) gain of that class for the period (subparagraph (a)(ii)).

Any amount that remains (paragraph 426(b)) is the CFC's loss of that class for that period. In determining the amount of the notional allowable deductions of the class for the period, a notional allowable deduction for a loss of a previous period is not taken into account. Further, a loss can be created for a period in which there was no requirement under section 381 that the eligible taxpayer calculate the attributable income of the CFC. This would also extend to allow the creation of a loss in a period before the commencement of this Bill. However, no loss could be created for a statutory accounting period that commenced before 1 July 1983 (see notes on subclause 51(9)).

Section 427: Certain provisions to be disregarded

The provisions of sections 79E, 79F and 80 to 80G of the Principal Act govern the creation of a loss and its deductibility in a later year of income where the loss was not incurred in deriving foreign income. The provisions of section 79D govern the deductibility of expenses related to the production of foreign income, and section 160AFD governs the reduction of foreign income by a foreign loss incurred in a previous year of income (see notes on clauses 10 and 34). Section 427 provides that these sections are to be disregarded in the calculation of the attributable income of the CFC. Instead, the provisions of Subdivision D will be the only determinant of the creation and deductibility of losses. Paragraph 23(q) of the Principal Act which, prior to the 1987-88 year of income, provided an exemption for most income with an ex-Australian source, is also to be disregarded. Although this paragraph has been repealed, in order that a loss may be calculated for the period when it had effect the exemption as it then operated needs to be ignored. If this were not the case, most of the income of the CFC would be treated as notional exempt income and any excess of expenses over the income could not create a loss for the period.

However, certain provisions that apply in the calculation of attributable income rely on expressions used in sections 79E, 79F and 80 to 80G. For example, the anti-loss trafficking provisions of subsection 431(5), and also the anti-loss trafficking provisions of the capital gains provisions of Part IIIA of the Principal Act, contain references to sections 80, 80A and 80DA, and rely on the existence of sections 80 to 80E. The section ensures that references in sections used in the calculation of attributable income to those sections will be preserved.

Section 428: Subdivision to apply as if there were always a requirement to calculate attributable income

Section 428 provides that it must be assumed that there was always a requirement for an eligible taxpayer to calculate the attributable income of a CFC. This will ensure that, for a previous year where the attributable taxpayer was not an attributable taxpayer, a loss will be available to reduce the notional assessable income of a later period.

Section 429: Notional allowable deduction for (sometimes-exempt income) loss of a particular class

Section 429 provides that, where there is a (sometimes-exempt income) loss in respect of a particular class of income for the eligible period, in calculating the attributable income of the CFC for the period the amount will be a notional allowable deduction. Further, the deduction will be deemed to relate to the notional assessable income of that particular class of income. The effect will be that the amount will be taken into account in determining whether there is an excess of notional allowable deductions over notional assessable income for the purposes of section 431.

Section 430: Limitation on deductions for classes of notional assessable income

Section 430 provides a quarantining of the notional allowable deductions of the CFC for the eligible period and is analogous to subsection 79D(1) of the Principal Act - see notes on clause 10.

Section 431: Deduction etc. for previous period loss in relation to a class of notional assessable income

By subsection 431(1) a loss created in accordance with section 426, in relation to a class of income of a statutory accounting period before the eligible period, is to be taken into account as a notional allowable deduction of the eligible period in accordance with the provisions of section 431.

Subsection 431(2) provides that the losses are to be taken into account as follows:

·
the loss is first to be reduced by the amount of any (sometimes-exempt income) gain that may have accrued during the eligible period (paragraph (2)(a)). The loss is only to be reduced by the (sometimes-exempt income) gain that accrued during the period to the extent that the gain has not already been set-off in determining whether or not there is a loss in the eligible period under section 426 - that is, the gain is set-off first against a loss of the eligible period before is reduces a loss of a previous period; and
·
any amount of the loss that still remains is to be a notional allowable deduction of the eligible period, but only to the extent necessary to reduce the net amount of the class of income that would otherwise be included in the attributable income - that is, the excess of the notional allowable deductions (not including a deduction for a previous year loss) over the notional assessable income of that class (paragraph (2)(b));

Where there is more than one loss of the same class from previous periods which are eligible for deduction, the earliest loss is to be taken into account first and then the later losses in the order in which they were incurred (paragraph (2)(c)).

Subsection 431(3) places a constraint on the deductibility of a loss under subsection 431(1), and provides that the income of a CFC in the eligible period cannot be reduced by any loss incurred in a previous period unless the CFC was also a CFC at the end of that period and at the end of every subsequent period before the eligible period.

Subsection 431(4) places a further constraint on the operation of subsection 431(1). It provides that a CFC that is resident in a listed country at the end of the eligible period cannot have its notional assessable income reduced by any loss incurred in a previous period unless the CFC was resident in a listed country at the end of the period in which the loss was incurred and at the end of every subsequent period before the eligible period (paragraph (a)). There is a corresponding requirement for CFCs resident in unlisted countries. That is, a CFC that is resident in an unlisted country at the end of the eligible period cannot have its notional assessable income reduced by any loss incurred in a previous period unless the CFC was resident in a unlisted country (but not necessarily the same unlisted country) at the end of the period in which the loss was incurred and at the end of every subsequent period before the eligible period (paragraph (b)).

Subsection 431(5) provides an anti-avoidance rule which will prevent the trafficking in losses. As with the anti-trafficking provisions of section 160AFD that apply in respect of the foreign losses of resident taxpayers, the subsection adopts the anti-loss trafficking provisions of sections 80A and 80DA that apply for the purposes of the general loss provisions of section 80 (see further the notes on paragraph 160AFD(6)(b)).

Division 8 - Active Income Test

Introductory note

Income and gains of a CFC that is resident in an unlisted country, and designated concession income of a CFC resident in a listed country, will generally not be attributed to an Australian resident shareholder in respect of a year of income if the CFC passes an active income test in respect of the statutory accounting period of the CFC that ends during the year of income of the shareholder. With limited exceptions, shareholders in a company that passes the active income test because it has substantial business operations will be exempted from Australian accruals taxation. However, certain income (for example, trust distributions) will be attributed irrespective of whether the company passes the active income test. Where a company fails the active income test, the company's tainted income (see notes on section 384) or its tainted designated concession income (see notes on section 385) will also be attributed to Australian shareholders.

The Division contains the requirements for passing the active income test which encompass the satisfaction of certain basic conditions (Subdivision A) and some record substantiation requirements (Subdivision G). Subdivision B contains an explanation of the major component of the test, - that is, the calculation of the tainted income ratio. Where the CFC is a partner in a partnership the tainted income ratio of the company has to be calculated in accordance with the rules in Subdivision C. Subdivision D contains some general interpretive provisions and the definitions of the components of tainted income are to be found in Subdivision E. Finally, Subdivision F has some special rules for CFCs that are financial institutions.

Subdivision A - Basic Conditions for Passing the Active Income Test

Section 432: Active income test

Section 432 provides an active income test for determining whether the tainted income and net tainted gains of a company that is a CFC will be exempted from attribution to resident shareholders. It is the second threshold test for application of this Part; the control rule being the first (see notes on section 340). Its operation is subject to section 437 which deals with a company's interests in partnerships and to the substantiation requirements of sections 451 to 453.

The major element of the test is the tainted income ratio requirement in paragraph (1)(f) which measures the amount of tainted income and gains as a proportion of the gross revenue of the company. The conditions in each of paragraphs (a) to (f) of subsection 432(1) must be satisfied for a company to pass the active income test in relation to a statutory accounting period (see notes on section 319).

Paragraph (1)(a) requires that the company be in existence at the end of the statutory accounting period. Paragraph (1)(b) requires the company to be a resident of a particular listed or unlisted country at all times in the accounting period when the company was in existence. The meaning of the term "in existence" is explained in subsection 432(2). Sections 332 and 333 provide a mechanism for determining the listed or unlisted country of residence of a company. Where a particular listed or unlisted country of residence cannot be identified at all times during the accounting period the CFC will fail the active income test. A change of residence by the company during the accounting period does not mean that the company will automatically fail the active income test.

Paragraph (1)(c) has a number of requirements in relation to the keeping of accounts. These accounts must be prepared for the company's statutory accounting period. Subparagraph (c)(i) requires that the accounts be prepared in accordance with commercially accepted accounting principles. It is anticipated that the CFC's accounts would generally be prepared in accordance with the accounting principles generally in use in the country in which it is resident or in which it carries on its principal business activities. Where, however, the CFC carries on business in a number of business centres with different commercial accounting principles, the CFC may choose to use the accounting principles generally applicable in the country of residence of its principal shareholder. Without ruling out other possibilities, accounts prepared in accordance with such accounting principles would normally satisfy subparagraph (c)(i). The ability of a CFC to choose between different sets of commercially accepted accounting principles is constrained by the subparagraph (c)(ii) requirement that the accounts must give a true and fair view of the financial position of the company.

The company is required by paragraph (1)(d) to comply with the substantiation requirements of section 451. A company that does not fully satisfy a valid request to furnish specified accounting records, accounts and other documents relevant to an application of the active income test for a statutory accounting period will be taken not to have passed the active income test for the statutory accounting period.

The next condition is provided in paragraph 432(1)(e) and requires that at all times during the statutory accounting period when the company was in existence and was a resident of a particular listed or unlisted country it carried on business through a permanent establishment in that country. The term "permanent establishment" is defined in subsection 6(1) of the Principal Act to mean, broadly, a place at or through which a person carries on any business. If at any time during its statutory accounting period (other than a time when the company was dormant - see notes on subsection 432(3)), a company did not have a permanent establishment in the country in which it was then resident (for example, if it was a "letterbox" company), the company will fail the active income test.

Paragraph (1)(f) provides that the company's tainted income ratio (calculated in accordance with section 433) for the statutory accounting period must be less than 0.05 (5 per cent) for the company to pass the active income test.

The conditions in paragraphs 432(1)(b) and (e) apply only to a part of a statutory accounting period during which a company was in existence. Subsection 432(2) gives a primary meaning to the term "in existence" for the purpose of the section. The effect of the provision is that a company that was incorporated during the statutory accounting period will not fail to comply with the paragraph (1)(e) "at all times" test merely because, for part of the period, it had not been incorporated.

Subsection 432(3) extends the circumstances in which a company will be taken to have not been in existence to include any "dormant period". The effect of this subsection is to save a company from failing the active income test by reason only of the fact that, for part of the statutory accounting period, the company was dormant within the meaning of Part VI of the Companies Act 1981.

Subdivision B - Tainted Income Ratio

Subdivision B contains the formulae for calculating the tainted income ratio of a CFC, whether it is resident of an unlisted country or of a listed country. The basis for the formula in either case is the concept of gross turnover of the company which is defined in section 434 in this Subdivision. The other fundamental component of the formulae is the concept of gross tainted turnover of the company which is defined in section 435.

Section 433: Tainted income ratio

This section provides the formulae for calculating the tainted income ratio for unlisted country CFCs and for listed country CFCs. Application of the appropriate formula will determine whether a company's tainted income ratio for the statutory accounting period is below 0.05 (as required by paragraph 432(1)(f) if it is to pass the active income test).

The formula for unlisted country CFCs contained in subsection 433(1) is:

(Gross tainted turnover)/(Gross turnover)

The terms "gross tainted turnover" and "gross turnover" are defined in sections 435 and 434, respectively. The unlisted country CFC formula will be applied only to a company that is a resident of a particular unlisted country at the end of its statutory accounting period. Subsection 333(2) contains the requirements for meeting this condition.

If the company is a resident of a listed country at the end of its statutory accounting period (see subsection 332(2)), the formula in subsection 433(2) will be applied to determine its tainted income ratio. The formula is:

(Tainted eligible designated concession income)/(Eligible designated concession income)

The formula operates in a similar manner to the unlisted country CFC formula described in the notes on subsection 433(1) with the exception that, for listed country CFCs, eligible designated concession income (see notes on section 317) is treated as if it were the CFC's only income. The formula is restricted in this manner because the attribution of eligible designated concession income only depends on the result of the application of the active income test. All other income or profits are either always exempt or always attributable (see notes on Division 7 of Part X).

Subsection 433(3) makes it clear that where a CFC's tainted income ratio is 0/0 the CFC is to be regarded as having satisfied the requirement in regard to its tainted income ratio. For example, if none of the gross turnover or of the gross tainted turnover of a listed country CFC is eligible designated concession income, the CFC's tainted income ratio will be less than 0.05.

By subsection 433(4), the tainted income ratio of a CFC is to be calculated using amounts expressed in the currency used to prepare its accounts. The same currency should be used for all amounts but it does not have to be the Australian dollar.

Section 434: Gross turnover

This section explains how the "gross turnover" of a company is to be calculated for use in the denominator of the tainted income ratio in section 433.

Section 432, which requires the keeping of certain accounts for the statutory accounting period (defined in section 317 as "recognised accounts"), also explains the basis on which those accounts are to be prepared. The gross turnover is calculated, principally, by reference to the recognised accounts. Amounts that are not brought to account as revenue or income according to acceptable accounting principles, properly applied, will not be taken into consideration in either the numerator or the denominator of the tainted income ratio. On the other hand, amounts shown in those accounts (for example, as a share of partnership income) may have to be modified before being included in the calculation of gross turnover.

By subsection 434(1) gross turnover is to be the sum of:

·
net gains from certain defined transactions; and
·
other gross revenue,

less:

·
amounts excluded from the active income test under section 436,

except where the company is a partner in a partnership. In that case, the company's share of the partnership's notional gross turnover, calculated in a similar way as if the partnership were a separate entity (see notes on section 437), must be added to the above result which should be calculated excluding any share of partnership profits.

Paragraph 434(1)(a) provides that the gross turnover of a company of a statutory accounting period is to generally include the amount shown in the recognised accounts of the company as gross revenue - that is, before the deduction of any expenses.

Subparagraph (a)(i) excludes from the gross revenue certain amounts excluded from the active income test by section 436 - see notes on that section. Their exclusion from both the numerator and the denominator of the tainted income ratio ensures that the ratio is not distorted by amounts that would be irrelevant for accruals taxation purposes.

Subparagraph (a)(ii) excludes amounts that may be included in the gross revenue in respect of the disposal of assets other than trading stock or commodity contracts. Amounts that may be included in gross revenue as revenue from disposing of commodity investments and from currency exchange rate fluctuations are excluded by subparagraphs (a)(iii) and (iv).

Under paragraphs (1)(b) to (d), net gains (that is, total gains less total losses) are included in the gross turnover of the company where they arise from:

·
the disposal of assets (other than trading stock);
·
disposing of commodity investments; and
·
currency exchange rate fluctuations.

Gains and losses covered by section 436 (for example, in respect of the disposal of taxable Australian assets) are excluded from the calculation of these net gains. Double counting is eliminated by the exclusion of gross revenue from these transactions in subparagraphs (a)(ii) to (iv). If losses exceed gains in any one of these categories, nothing is included in gross turnover for that category of income or profit.

Subsection 434(2) provides that expressions used in subsection (1) in relation to particular amounts shown in the recognised accounts are to adopt the meanings given to those terms in the recognised accounts rather than the defined meanings given in this Bill or in the Principal Act in those situations where there is any doubt or inconsistency as to the meaning of those terms. The operation of this subsection is subject to section 437 so that the rules in that section dealing with interests in partnerships prevail and a share of the profits of a partnership is not included in gross turnover under section 434. Similarly, when determining net gains from the disposal of assets, adjustments set out in section 438 or section 440 have to be followed. Finally, there is a specific exception to the subsection's rule for amounts that are to be excluded from gross turnover under section 436, since that section refers to amounts that take their meaning from the Principal Act (as amended by this Bill).

Section 435: Gross tainted turnover

The "gross tainted turnover" ascertained in accordance with section 435 is used as the numerator of the tainted income ratio in subsection 433(1). It is also the commencement point for the numerator of the formula in subsection 433(2). The term "gross tainted turnover" is defined by reference to the gross turnover (see notes on section 434) of the company for the statutory accounting period. As a result, an amount that is not included in gross turnover (for example, because it is excluded under section 436 or because it is not shown as revenue in the company's accounts) will not be included in gross tainted turnover, even though it may fit within the description of one of the components of gross tainted turnover.

Gross tainted turnover, in general terms, will be the amount of the gross revenue that relates to sales or services provided to Australian residents or associates of the company plus amounts included in gross turnover which are passive income of the company. "Passive income", "tainted sales income" and "tainted services income" are ascertained respectively in accordance with sections 446, 447 and 448. Section 435 would be applied by examining the amounts included in gross turnover and determining whether they also satisfy any of the definitions of passive income, tainted sales income or tainted services income.

Section 436: Amounts excluded from active income test

For the most part, section 436 eliminates from both the numerator and denominator of the tainted income ratio particular types of income that would not be attributed to shareholders of a CFC that failed the active income test. In the absence of such a provision, the tainted income ratio may be distorted by factors that are irrelevant to the active income test or to attribution of income. The excluded amounts will generally have been taxed in Australia or in a listed country. The section applies to all CFCs, wherever resident, for which tainted income ratios are calculated.

Paragraph (1)(a) excludes from the active income test income or profits that are assessable income of the company (for example, income derived from carrying on a business through a permanent establishment in Australia or gains from the disposal of taxable Australian assets). Such amounts fall to tax under Australia's general tax law and it is therefore not necessary that they be brought into account for the purpose of accruals tax.

Subject to the condition that the income or profit is not eligible designated concession income and has been taxed by a listed country, paragraph (1)(b) excludes from the active income test the income or profit that is derived by a company from carrying on a business through a permanent establishment in a listed country. Because such an amount is not attributed to Australian resident shareholders on the basis that it has been comparably taxed, paragraph 436(1)(b) ensures that it is not brought into account for the active income test.

Paragraph (1)(c) excludes from gross turnover amounts of trust income derived by a CFC from a trust estate whether as a result of a distribution or otherwise. This income will be attributed to the CFC's shareholders irrespective of the active income test (see notes on sections 384 and 385) and it is therefore not necessary that the income be counted under the active income test.

By paragraph (1)(d), dividends will be excluded from the active income test to the extent that they are franked in accordance with section 160AQF of the Principal Act. Such dividends are paid out of income that has been subject to Australian tax and, as the dividend income will not be attributed to Australian resident shareholders, it will also be excluded from the active income test.

Paragraph (1)(e) will exclude from the active income test non-portfolio dividends received from certain companies where such dividends will not be included in the attributable income of the CFC.

Subparagraph (e)(i) excludes a non-portfolio dividend received from a CFC that was resident of an unlisted country when the dividend was paid. The dividend will not be included in the attributable income of the receiving CFC because:

·
it is a distribution of income that has been subject to tax in a listed country or in Australia or which has been attributed to the Australian shareholders of the paying company;
·
it will be included in the assessable income of the Australian shareholders of the receiving company under section 458; or
·
it is paid between CFCs in unlisted countries. These payments will be exempted from attribution under section 458 and from attributable income under section 402.

Subparagraph (e)(ii) provides an exclusion for a non-portfolio dividend received from a company that was a resident of a listed country at the time the dividend was paid. All such dividends will be exempt from attribution (see notes on sections 403 and 404) and are therefore excluded from the active income test for the receiving company.

Paragraph (1)(f) excludes that part of a non-portfolio dividend, received from a non-CFC company resident in an unlisted country, which is exempt from attribution under section 402. This mirrors the treatment given to some of the dividends covered by paragraph (1)(e), especially those referred to in subparagraph (e)(ii). Instead of coming directly from a company in a listed country, in this case they are being received via another company in an unlisted country.

Subsection 436(2) excludes amounts that are not excluded by subsection (1) (for example, a portfolio dividend), where they are dividends paid out of income that has been attributed to a taxpayer. The amount to be excluded is the grossed-up amount of the attribution debit that arises for the paying company in the taxpayer's records (see notes on section 373) so that the excluded amount is independent of the taxpayer's percentage interest in the receiving CFC. Nevertheless, where exclusion of an amount from the test results from this subsection the resulting tainted income ratio of the company becomes specific to the taxpayer. That is, not all shareholders of a CFC need record the same tainted income ratio for the CFC.

Subdivision C - Treatment of Partnership Income

Section 437: Treatment of partnership income

Where a company derives income or profits as a partner in a partnership special rules provided in section 437 will apply for the purpose of determining whether the company passes the active income test. The major effect of this section is to include in the company's gross turnover its interest in the partnership's gross turnover when calculating the tainted income ratio of the company.

Subsection 437(1) imposes additional requirements on the company in respect of its interest in the partnership.

Paragraph (1)(a) requires the partnership to be treated as a separate entity from the company for the purpose of the active income test.

Account keeping requirements are imposed by paragraph (1)(b) in similar terms to those provided for the company under section 432. Partnership accounts are to be kept for the statutory accounting period of the company. Such accounts are to be prepared in accordance with commercially accepted accounting principles and must give a true and fair view of the financial position of the partnership.

The partnership is required by subparagraph (b)(ii) to comply with the substantiation requirements of section 452. Where a partnership does not fully satisfy a valid request to provide accounting records, accounts or other documents relevant to the application of the active income test for a statutory accounting period in relation to a company that is a partner in the partnership the partnership will not satisfy the requirements of section 437.

For the purpose of determining the company's interest in the turnover of the partnership for tainted income ratio purposes, paragraph (1)(c) provides for the calculation of "notional gross tainted turnover" and "notional gross turnover" of the partnership. These terms have similar meanings to "gross tainted turnover" (section 435) and "gross turnover" (section 434), which in broad terms, are based on gross revenue as shown in the recognised accounts of the partnership.

In order to apply these definitions in the case of a partnership, paragraph (c) makes a number of assumptions in relation to the partnership. Subparagraph (c)(i) generally assumes that the partnership was a company. This mechanism enables other sections of this Division to be applied to the partnership being considered under this section. An exception is made to this assumption when it comes to determining the associates of the partnership - these will be determined in accordance with subsection 318(4), so that the company would be an associate of the partnership. Subparagraph (c)(ii) provides that the accounts required to be kept by paragraph (b) are to be the "recognised accounts" of the partnership for the purpose of the active income test. Subparagraph (c)(iii) assumes that the partnership has the same country of residence as the company. This is for the purpose of determining the partnership's tainted rental income.

Paragraphs (1)(d) and (e) provide for the company's gross turnover, or gross tainted turnover, and the company's interest in the notional gross turnover, or notional gross tainted turnover, of the partnership to be aggregated for the purpose of the tainted income ratio. For this purpose the company's interest is its percentage interest in the profits of the partnership.

Where a company does not itself satisfy the requirement in paragraph 432(1)(e) of maintaining a permanent establishment in its country of residence, a partnership in which the company is a partner may be able to do so. Subsection (2) provides for this. Paragraphs (2)(a) and (b) assume the above conditions hold. Paragraph (2)(c) assumes that a partnership in which the company is a partner carries on business through a permanent establishment in the company's country of residence. The subsection concludes that under these conditions the requirement of paragraph 432(1)(e) is satisfied.

Subdivision D - General Interpretive Provisions

Subdivision D contains a number of sections aimed at assisting in the application of other sections in Division 8. There are special rules for calculating net gains on the disposal of assets (sections 438, 440, 443 and 445), net currency exchange gains (sections 439 and 444) and tainted interest income (sections 441 and 442).

Section 438: Roll-overs - asset disposals

The purpose of section 438 is to modify the amounts included in the calculation of gross turnover (under paragraph 434(1)(b)) and of passive income (under paragraph 446(1)(k)) on the disposal of assets where roll-over relief has been, or will be, chosen or applied in calculating the attributable income of a CFC. That is, the roll-over provision is to apply to both the active income test and the calculation of attributable income.

Subsection 438(1) limits the operation of the section to the determination of gross turnover and net gains on the disposal of tainted assets, in respect of assets which are not taxable Australian assets. The latter restriction is a point of clarification because, by the interaction of sections 434 and 436, disposals of taxable Australian assets are disregarded for purposes of the active income test.

Subsection 438(2) specifies the outcomes to apply where a CGT roll-over provision (see section 317) overrules the application of Part IIIA of the Principal Act to the disposal of an asset by the company or to the company by another entity (paragraphs (2)(a) and (b)). In the latter case, the company is deemed to have paid, as consideration for the asset, the cost of the asset to the other entity plus the cost of any capital improvements to the asset (paragraph (2)(c)). This would be relevant when the company comes to dispose of the asset and the gain or loss on disposal is to be calculated. Paragraph (2)(d) provides that the company disposing of an asset does not derive any gain or incur any loss from the disposal, where roll-over relief is sought.

To determine whether a CGT roll-over provision applies to the disposal of an asset by the company, subsection 438(3) assumes that the company fails the active income test and that Part IIIA were being applied, in relation to the disposal, to calculate the attributable income of the company.

Subsection 438(1) uses the term "non-taxable Australian asset of a company" which subsection 438(4) clarifies to mean an asset of the company that is not a taxable Australian asset within the meaning of Part IIIA.

Section 439: When currency exchange gains or losses relate to active income transactions

Section 439 will enable a company to determine which of its currency exchange gains and losses (if any) realised in the statutory accounting period are taken into account in calculating its passive income. Passive income includes a company's net tainted currency exchange gains (see notes on section 444) and its currency exchange gains or losses are tainted unless they relate to active income transactions. The section is generally based on the principle that a Currency exchange gain or loss assumes the same character as the income from the transaction to which the gain or loss relates. If the underlying transaction does not produce any income or profit, the associated currency exchange gain or loss is generally tainted with certain specified exceptions.

Paragraph 439(1)(a) applies to currency exchange gains and losses generally. Paragraph (b) relates to gains and losses from a business of currency dealing.

Under subparagraph (a)(i), where a transaction produces income or a gain or a loss which is not taken into account in determining passive income, tainted sales income or tainted services income, a currency exchange gain or loss associated with the transaction will be treated as related to an active income transaction. An exchange gain or loss that relates to a transaction that does not produce income cannot qualify under this subparagraph - for example, the purchase of trading stock. Such a transaction may, however, qualify under subparagraph (ii).

A currency exchange gain or loss in relation to the purchase of goods from an entity that was not an associate of the company would qualify under subparagraph (a)(ii) as related to an active income transaction.

Under subparagraph (a)(iii) a currency exchange gain or loss on a transaction for the purchase of property will be treated as related to an active income transaction if the property would qualify for depreciation in the hands of a resident and the property was to be used by the company exclusively or principally for producing income other than passive income, tainted sales or services income. Property that may be used to produce a small amount of passive or other tainted income on occasions would not fail the test in this subparagraph.

Subparagraph (a)(iv) treats as relating to an active income transaction a currency exchange gain or loss that relates to a loan of money to the company in its capacity as an AFI subsidiary (see notes on section 326) carrying on a financial intermediary business. A gain or loss on a borrowing by any other company would be a tainted gain or loss.

Currency hedging transactions are dealt with in subparagraph (a)(v). Where a currency exchange gain or loss arises from a currency hedging transaction that relates to a transaction under any of subparagraphs (a)(i) to (iv), the gain or loss will be treated as related to an active income transaction.

Paragraph (1)(b) treats currency exchange gains and losses realised in a business of currency dealing as being related to an active income transaction provided that when the gain or loss was realised no other party to the transaction was an associate or an Australian resident. There are special rules in section 450 for gains and losses from currency dealing for AFI subsidiaries.

Subsection 439(2) eliminates a potential conflict between provisions. The classification of net tainted currency exchange gains of a company as passive income under paragraph 446(1)(n) is disregarded for the purpose of this section.

Section 440: Asset disposals - revaluations and arm's length amounts

Section 440 has two requirements in relation to the calculation of gains and losses in respect of the disposal of an asset. Net gains from the disposal of tainted assets are ascertained under section 445 for inclusion in passive income (see notes on section 446). Net gains from the disposal of all assets are included in gross turnover of a company under section 434.

Paragraph 440(a) provides for adjustment of such gains or losses that are shown in the company's recognised accounts, to eliminate the effect of any asset revaluations. The effect of an asset revaluation on gross turnover in an accounting period other than one in which the asset is disposed of is also to be disregarded.

This means that where an asset revaluation may otherwise have altered the amount of gain or loss on disposal of an asset the revaluation is to be ignored. For example, take an asset that is acquired in year 1 for $100 and is revalued in year 2 to $200. A gain of $100 may be taken into account on revaluation in year 2. That gain would not be included in gross turnover. Disposal of the asset in year 3 for $350 may be accounted for as a gain on disposal of $150

($350 - $200)

in year 3. Paragraph (a) operates to negate the effect of the revaluation so that the gain on disposal in year 3 is $250

($350 - $100)

.

By paragraph 440(b), any consideration paid on acquisition or received on disposal of the asset, or other amount that is relevant to determining a gain or loss, which is not an arm's length amount is to be adjusted to an arm's length value. This is to apply whether the parties to the transactions are associates or not. This paragraph is subject to section 438 so that it does not apply when a CGT roll-over provision applies to an asset disposal.

Section 441: Hire-purchase and other property financing transactions

The purpose of section 441 is to make it clear that income derived from certain property financing transactions is to be treated as passive income except where derived by an AFI subsidiary in the conduct of financial intermediary business (in which case it may be tainted services income).

Paragraph (1)(a) provides that a hire-purchase transaction or a transaction that provides finance for the acquisition of property is to be treated as a loan. This would extend to finance leasing business conducted by banks and other financial institutions that may not otherwise be regarded for taxation purposes as leasing. Under paragraph (1)(b), income from so-called finance leases will be treated the same as interest on a loan if, in substance, the "leases" are transactions that meet the description in paragraph (a). The income from such transactions would be tainted interest income except where subsection 449(1) applies.

By subsection 441(2) the terms "loan", "interest" and "payment in the nature of interest" are not to be limited to the meanings given by subsection (1). This subsection prevents a narrow construction being given to those terms.

Section 442: Assumption of rights of lender under a loan

When a company assumes the rights of a lender under a loan, for example by the purchase in a secondary market of debentures, bonds or other similar securities, section 442 has the result that the company is deemed to have made the loan to the borrower (paragraph 442(a)). Further, by paragraph 442(b), interest derived by the company from the loan is deemed to be derived in the course of carrying on financial intermediary business where the security was acquired in the course of that business. These results are relevant to the application of section 449 to AFI subsidiaries.

Section 443: Net tainted commodity gains

In this and the following two sections, items of passive income that will be included as components of the tainted income ratio on a net basis are determined (see paragraphs 446(1)(k), (m) and (n)). In all three cases, the net gain is the amount, if positive, by which gains exceed losses from the relevant transactions. This matches the treatment of the corresponding items in gross turnover (see notes on paragraphs 434(1)(b), (c) and (d)). The relevant terms used in this section, "tainted commodity gain" and "tainted commodity loss", are defined in section 317, as are the terms "commodity investment" and "commodity".

All gains and losses realised by the company in the statutory accounting period from disposing of tainted commodity investments, that are included in the calculation of gross turnover, will be taken into account in determining the company's net tainted commodity gains for the statutory accounting period.

Paragraph 443(a) provides that the matching of tainted commodity gains against tainted commodity losses under this section cannot create a net tainted commodity loss. The lowest net amount that can be achieved is nil.

Paragraph 443(b) provides that the excess (if any) of tainted commodity gains over tainted commodity losses is the amount of net tainted commodity gain.

Section 444: Net tainted currency exchange gains

Under section 444, net tainted currency exchange gains are ascertained for inclusion in passive income which forms a component of the numerator of the tainted income ratio. These net gains are ascertained using the same principles as are described in the notes on section 443 for net tainted commodity gains. The terms "currency exchange gain", "currency exchange loss", "tainted currency exchange gain" and "tainted currency exchange loss" are defined in section 317. The latter two terms depend on the concept of a gain or loss not being related to an active income transaction (see notes on section 439).

Section 445: Net gains - disposal of tainted assets

Net gains on the disposal of tainted assets are ascertained under section 445 for the purpose of the numerator of the tainted income ratio. An amount will be included in passive income only if the sum of the gains on the disposal of tainted assets during the statutory accounting period exceeds the sum of losses (if any) on the disposal of tainted assets - that is, if the net amount is positive. Tainted assets are defined in section 317 and include loans, shares, forward and futures contracts, life assurance policies and other assets not used solely in carrying on a business.

As for the calculation of gross turnover under section 434, gains and losses on the disposal of tainted assets are ascertained by reference to the recognised accounts of the company, subject to any necessary adjustments required by sections 438 and 440.

Subdivision E: Passive Income, Tainted Sales Income and Tainted Services Income

Subdivision E contains three sections of Division 8 which are critical to the calculation of a CFC's tainted income ratio (see notes on Subdivision B) as follows:

·
Section 446: passive income;
·
Section 447: tainted sales income; and
·
Section 448: tainted services income.

Some of the interpretive provisions in Subdivision D are needed to apply these sections as are many of the definitions in Division 1 of Part X. Some modifications to the application of these sections are contained in Subdivision F of Division 8.

Section 446: Passive income

"Passive income" is defined in section 446 for the purpose of the active income test. With some modifications it is also relevant for loss quarantining and credit quarantining purposes in Division 18 of Part III of the Principal Act (see notes on clause 29). While the terms used in this section to describe particular types of income - for example, dividend, annuity and royalty - take their meaning from the Principal Act or from general law, the quantum of these income amounts is limited by sections 434 and 435. Generally, only amounts shown in the recognised accounts of a company will be taken into account. Where such amounts fit into one of the categories of income in section 446 they will be passive income for tainted income ratio purposes. The various categories of income that comprise passive income are discussed below. Subsection 446(1) contains the general definition of passive income, subsections 446(2) and (3) deal with a special rule for life assurance companies and subsections 446(4) and (5) contain a similar rule for general insurance companies.

Paragraph (1)(a) includes as passive income, dividends paid to a company in the statutory accounting period. Unit trust dividends paid by corporate unit trusts and public trading trusts are also passive income (paragraph (1)(b)). By paragraph (1)(c) a liquidator's distribution, which by section 47 is deemed to be a dividend paid to shareholders by a company out of profits, is included as passive income.

Under paragraph (1)(d), passive income will include tainted interest income (see section 317) derived in the statutory accounting period. Interest derived by an AFI subsidiary in the ordinary course of financial intermediary business is excluded from passive income (but not necessarily from gross tainted turnover) by subsection 449(1).

Paragraph (1)(e) includes as passive income the gross amount of any annuity that is derived by a company in a statutory accounting period.

"Tainted rental income" is, by paragraph (1)(f), included as passive income to the extent that it is derived by a company in the statutory accounting period. Section 317 defines "rent" and "tainted rental income". Income derived from a lease (defined in section 317) will generally be "tainted rental income" where an associate of the company was a party to the lease at the time the income was derived. Generally, income from a lease of land, will be passive income except in circumstances given in paragraph (e) of the definition of tainted rental income. Income from leasing of fully crewed and maintained ships and aircraft will not be passive income. Rent from leases of property, to non-associates of the company, that is not passive income may be "tainted services income" (see notes on section 448).

Paragraph (1)(g) includes in passive income royalties derived by a company in the statutory accounting period except where derived from unrelated parties in the active conduct of a business (see the definition of "tainted royalty income" in section 317).

Passive income of a company includes, by paragraph (1)(h), income derived by a company in the statutory accounting period as consideration for the assignment of certain industrial or commercial property. This provision will apply to a copyright, patent, design, trade mark or other like property or right. Other commercial property that may give rise to royalty income, such as motion picture films and industrial, commercial or scientific equipment, would be considered under the heading of tainted sales income (section 447) if it were sold.

Paragraph (1)(j) includes in passive income an amount of income derived from carrying on a business of trading in tainted assets (see section 317). The designation of this income as passive income is subject to the exceptions in section 450 in relation to certain tainted assets of an AFI subsidiary carrying on a financial intermediary business.

Net gains on the disposal or redemption of tainted assets are included in passive income under paragraph (1)(k). Net gains are calculated in accordance with section 445. This will bring to account net gains of a company that disposes of tainted assets other than in the course of carrying on a business of trading in those assets. Gains and losses taken into account for this paragraph are not necessarily of a capital nature and, for the active income test, are not calculated in accordance with the capital gains provisions of Part IIIA of the Principal Act. Again, there are exceptions to the inclusion in passive income of these net gains in section 450 for an AFI subsidiary carrying on financial intermediary business.

"Net tainted commodity gains" of a company in a statutory accounting period will be passive income by virtue of paragraph (1)(m). "Net tainted commodity gains" are calculated in accordance with section 443. Broadly, tainted commodity gains and losses are gains and losses realised from trading in forward and futures contracts in respect of commodities, other than by a company that carries on a business of producing or processing the relevant commodity (see notes on section 317).

"Net tainted currency exchange gains" (see notes on section 444) of a company in a statutory accounting period will be passive income by paragraph (1)(n). Section 317 defines a "tainted currency exchange gain" as a currency exchange gain that does not relate to an active income transaction within the meaning of section 439.

Subsection 446(2) reduces the amount that would otherwise be the passive income of a life assurance company. Subsection 446(3) and section 317 apply the meanings given in Division 8 of Part III of the Principal Act to the terms "life assurance company", "life assurance policy" and "calculated liabilities" that are used in subsection (2). The life company's passive income is to be reduced by the proportion of its life assurance liabilities that relate to policies owned by unrelated non-residents. According to paragraph 448(1)(c), premiums from these policies would not be tainted services income. Taken together, these two provisions have the effect that where a CFC sells life assurance policies only to unrelated, non-residents it will have no passive income and no tainted services income from that business.

The passive income of a general insurance company (see section 317) is reduced in a similar manner to that of a life assurance company by subsection 446(4). In this instance, the calculated liabilities referable to general insurance policies are used to reduce the passive income of the company. "General insurance policy" is defined in subsection 446(5) to include a reinsurance policy but not a life assurance policy.

Section 447: Tainted sales income

The "tainted sales income" of a company for a statutory accounting period, ascertained under section 447, will, in broad terms, consist of the gross income from sales of goods where the goods were purchased from or sold to an associate which had a relevant connection with Australia. Where the goods are not acquired from another entity by the company (that is, they are created or produced by the company) or where they are substantially changed by the company (for example, by manufacturing or processing) their sale will not give rise to tainted sales income.

Income from the sale of goods (see section 317) in a statutory accounting period will consist of sales income included in gross revenue and shown in the company's recognised accounts. No deductions are to be made for the cost of the goods nor for any other costs.

Subsection 447(1) formulates the conditions to be met for sales income to be tainted sales income. Paragraph (1)(a) will taint income from the sale of goods where the goods were sold to the company either by an associate (see notes on section 318) who was a resident of Australia or by a non-resident associate who sold the goods in the course of carrying on a business at or through a permanent establishment in Australia. The purchaser of the goods from the company may be anyone, including an unrelated person. The relevant time for testing residency and associate status for purposes of this paragraph is when the goods are sold to the company.

Paragraph (1)(b) is in similar terms to paragraph (a) but deals with the reverse situation where the goods are sold into Australia by the CFC. Where a sale of goods satisfies the requirements of both paragraphs (a) and (b), the income will be tainted sales income but it will only be counted once in gross tainted turnover.

An exclusion from tainted sales income is provided in subsection 447(2) in respect of meals and goods commonly supplied in connection with the provision of certain services, for example, hotel type accommodation.

Some types of sales income may qualify under more than one of the categories of gross tainted turnover (see notes on section 435). To avoid double counting, income that could be both tainted sales income and passive income under section 446 will be excluded from tainted sales income by subsection 447(3).

Subsection 447(4) will exclude from tainted sales income that income arising from the sale of goods that have been processed or manufactured from other goods by the company in the course of carrying on a business. This provision will ensure that income from the sale of goods will not be tainted sales income of a company that adds significant value to the goods. Goods that are created, grown, extracted or otherwise produced by the company will not give rise to tainted sales income because they do not satisfy a basic requirement of subsection (1) - that is, the goods were not sold to the company by another entity.

A manufacturing process that changes the character of the goods (for example, cocoa made into chocolate bars) or that uses the goods in the manufacture of new goods (for example, the assembly of car parts into a motor car) are outside the scope of the section. However, a company that purchased manufactured goods and did no more than package or label the goods would not benefit from the subsection (4) exclusion, even if the market value of the packaged or labelled goods was significantly greater than their market value in an unpackaged or unlabelled state.

Subsection 447(5) provides for the situation where goods are purchased or sold by two or more persons acting jointly. Where the CFC itself is acting in partnership with others, the provisions in section 437 will apply. Subsection 447(1) will be applied to each of the joint purchasers or sellers as if that person were the sole purchaser or seller. The effect of this provision is to satisfy a particular requirement of subsection (1) where at least one of the persons satisfies that requirement. There may be more than one such joint owner who satisfies the subsection (1) test through the successive application of this subsection but there will be no double counting of the company's tainted sales income.

Section 448: Tainted services income

Section 448 describes what will be treated as tainted services income and therefore included in gross tainted turnover by paragraph 435(c) for the purpose of the tainted income ratio in section 433. In broad terms, income derived from the provision of services to either an associate of the company, to a resident of Australia or in connection with a permanent establishment in Australia will be tainted services income.

The performance of technical, managerial, engineering, architectural, scientific, industrial, transport, commercial, agency or other professional or similar work would generally qualify as services. The term "services" is defined in section 317 and includes any benefit, right or privilege provided under an arrangement for the performance of work or the provision of facilities. Certain personal services such as meals and accommodation provided by a hotel or motel would not give rise to tainted services income.

Subsection 448(1) sets out the conditions for income to be tainted services income (paragraphs (a) and (b)) and includes special rules for insurance premiums (paragraphs (c), (d) and (e)). Paragraph (1)(a) contains the primary test for determining whether services income is tainted. Income that is derived by a company from the provision of services to an entity that was, at the time the income was derived, either an associate of the company or was a resident of Australia will be tainted services income. It will not be necessary that the services be rendered by the company that derived the income - that is, the company could use an agent or subcontractor to carry out the work, etc. Similarly, the company could derive commission or other income from acting as an agent for an associate or an Australian resident. Such income would be tainted services income even where the company was dealing with an unrelated person who was not an Australian resident.

The alternate test provided by paragraph (1)(b) is whether the income was derived from the provision of services to an entity that was a non-resident when the income was derived and the services were provided in connection with a business carried on by the non-resident at that time at or through a permanent establishment of the non-resident in Australia. As for tainted sales income, if services income qualifies as tainted services income under both paragraphs (a) and (b) it will be counted only once in gross tainted turnover.

The treatment of insurance premiums as tainted services income is provided by paragraphs (1)(c), (d) and (e). Premiums in relation to both insurance and reinsurance will be covered. Paragraph (1)(c) includes as tainted services income premiums (but not reinsurance premiums) in relation to a life policy where the owner of the policy is an associate of the company or an Australian resident. Subsection 446(2) contains a special rule for the passive income of a life assurance company that depends for its operation on the identification of policies that give rise to tainted services income under this paragraph.

Paragraph (1)(d) deals with insurance other than life assurance and reinsurance and will taint premium income where:

·
the insured person is an associate of the company or an Australian resident;
·
the insured property, at the time of the making of the contract, was situated in Australia; or
·
the insured event is one that can only happen in Australia.

Paragraph (1)(e) deals with all reinsurance premiums which will be tainted services income where the risks of an associate are being reinsured by the company or where the insurer dealing directly with the company is an associate or an Australian resident.

But for subsection 448(2), certain sales transactions could produce both tainted sales income (section 447) and tainted services income. Such transactions will give rise to tainted sales income only. Furthermore, the subsection precludes any income from the sale of goods being tainted services income.

Where the company provides services (for example, maintenance, training) in conjunction with goods it produces, manufactures or processes and sells, the services income will not be tainted services income even where provided to associates or Australian residents (subsection 448(3)). For example, where a car manufacturer provides after sales services to its customers the services income will not be tainted services income. Clearly, where the sales income is tainted sales income any associated services income would not be excluded from tainted services income by this subsection.

Meals and hotel type accommodation provided by the company do not give rise to tainted sales income by subsection 447(2). Subsection 448(4) ensures that income from those services is not treated as tainted services income.

To avoid double counting, subsection 448(5) ensures that amounts that fall within the meaning of passive income in section 446 are not also tainted services income.

Subsection 448(6) excludes certain categories of income from tainted services income. The first condition for the operation of this subsection is that the income is not passive income (paragraph (6)(a)). If income is passive income it will not be included in tainted services income by virtue of subsection (5). Paragraph (6)(b) lists the classes of income to which the subsection applies. They are all forms of income that could be passive income but satisfy a condition for exclusion. There may be overlap between the classes but an item of income need only be excluded from tainted services income under one of the headings.

Subparagraph (b)(i) consists of rental income derived from a lease of land. The definition of tainted rental income in section 317 implies that this can only apply to a lease of land to an unrelated party, where the land is situated in the company's country of residence and the company provides substantial property management services in connection with the land or fixtures.

Royalty income that is not tainted royalty income (that is, royalties received from unrelated persons in the conduct of a business of producing or developing patents, trademarks, designs, etc.) is not tainted services income by subparagraph (b)(ii).

Income from trading in, or gains from disposing of, tainted assets is passive income. Subparagraphs (b)(iii) and (iv) provide that income or gains derived from the disposal of assets that are not tainted assets cannot be tainted services income.

Similarly, subparagraphs (b)(v) and (vi) relate to gains from disposing of commodity investments and from currency exchange rate fluctuations, respectively, that are not tainted according to the definitions of tainted commodity gains and tainted currency exchange gains in section 317.

Finally, subparagraphs (vii) and (viii) ensure that income that is not passive income of a life insurance company or of a general insurance company by virtue of subsection 446(2) or 446(4) is not included in gross tainted turnover as tainted services income.

Subsection 448(7) provides for the situation where services are provided to two or more persons acting jointly. Where the CFC itself is acting in partnership with others, the provisions in section 437 will apply. Subsection 448(1) will be applied to each of the joint recipients of the services as if that person were the sole recipient. The effect of this provision is to satisfy a particular requirement of subsection (1) where at least one of the persons satisfies that requirement. There may be more than one such recipient who satisfies the subsection (1) test through the successive application of this subsection but there will be no double counting of the company's tainted services income.

Subdivision F - Special Rules Relating to AFI Subsidiaries Carrying on Financial Intermediary Business

Subdivision F contains two sections modifying the definitions of passive income and tainted services income (see Subdivision E) for CFCs which are AFI subsidiaries (see notes on section 326) the sole or principal business of which is financial intermediary business. Because financial intermediary business, as defined in section 317, has to be the sole or principal business of a company for this subdivision to apply, its provisions cannot apply to a life assurance company or a general insurance company.

Section 449: AFI subsidiaries - interest income

Section 449, excludes from passive income or tainted services income certain interest income derived by an AFI subsidiary in the course of carrying on a financial intermediary business.

Subsection 449(1) provides that tainted interest income (see section 317) derived by an AFI subsidiary in the course of financial intermediary business will not be passive income. Income from certain property financing transactions is to be treated as interest on a loan (see notes on section 441). The fact that tainted interest income will not be passive income means that it could be tainted services income if the requirements of subsection 448(1) were met. By section 442, loan includes a loan made by way of the purchase of securities, where the borrower is the entity that originally issued the security. If the issuer were an associate of the AFI subsidiary, interest derived by the AFI subsidiary from the security would be tainted services income.

Certain loan interest will not be tainted services income by virtue of the operation of subsection 449(2). In addition to the conditions in subsection (1) for the income not to be passive income, the loan must be a loan to the Commonwealth (for example, a purchase of Australian government bonds).

Subsection 449(3) excludes from both passive and tainted services income, interest on a deposit with a central bank.

In the calculation of tainted services income of an AFI subsidiary, subsection 449(4) provides that the interest on a loan to an entity that is an associate or an Australian resident at the time the loan is made (rather than when the interest is derived) is tainted services income. A corresponding change to the application of paragraph 448(1)(b) to loan interest derived by an AFI subsidiary is also effected by this subsection.

Section 450: AFI subsidiaries - asset disposals and currency transactions

Section 450 contains further special rules for the classification of the income or profits of an AFI subsidiary the sole or principal business of which is financial intermediary business. Some income from trading in tainted assets (see section 317), gains or losses from disposing of certain tainted assets and some currency exchange gains and losses are excluded from the calculation of the AFI subsidiary's passive income. However, special rules include some of this income, these gains or losses in tainted services income.

First, by subsection 450(1), the gross tainted turnover of the AFI subsidiary does not include income from trading in a number of tainted assets: swaps, certain forward and futures contracts, rights or options in respect of such contracts and similar financial instruments. Income from disposing of commodity investments (see section 317) is not excluded from gross tainted turnover by this subsection nor is income from trading in share futures.

A gain or loss arising from the disposal of a tainted asset by an AFI subsidiary in the course of its financial intermediary business are disregarded if the tainted asset is a swap, forward or other contract of a kind referred to in paragraph (1)(b). In this way, subsection 450(2) completes the total exclusion from gross tainted turnover for income and gains derived by an AFI subsidiary from transactions in certain tainted assets.

Currency exchange gains and losses from an AFI subsidiary's currency dealing business are, by subsection 450(3), disregarded in the calculation of net tainted currency exchange gains under section 444. Unlike for other companies (see paragraph 439(1)(b)), this exclusion extends to dealing with all other parties, including associates and Australian residents.

The remainder of section 450 excludes further income or profits derived by an AFI subsidiary from passive income but includes some in tainted services income. Subsections 450(4) and (5) exclude income from trading in, and gains or losses from disposing of, loans, debentures, bonds and other securities from the calculation of the AFI subsidiary's passive income. However, to the extent that these assets were acquired from, or sold to, associates, Australian residents or permanent establishments in Australia, the tainted services income of the AFI subsidiary includes the resulting trading income or net gains, as the case may be (subsections 450(6) and (7)).

Finally, subsection 450(8) includes certain factoring income (see section 317) in the tainted services income of an AFI subsidiary. This is determined in a similar way to subsections (6) and (7): the income is tainted services income to the extent that the relevant debts were acquired from or disposed of to an associate, an Australian resident or an Australian permanent establishment of a non-resident.

Subdivision G - Substantiation Requirements

The record keeping requirements contained in Division 11 will not apply to records required to substantiate the active income test. Instead, the substantiation requirements in sections 451, 452 and 453 will enable a check to be made on whether a company has passed the active income test in relation to a particular statutory accounting period.

A requirement to verify a company's status in relation to the active income test will be initiated by a notice which the Commissioner serves on the attributable taxpayer requiring the taxpayer to produce certain accounts, accounting records or accounting related documents. The attributable taxpayer may, in turn, serve notice on the company requiring it to produce documents to the taxpayer. Where the company is a partner in a partnership and some or all of the required documents are included in the partnership accounts or accounting records it may be necessary for the company to serve a notice on the partnership requiring it to supply documents to the company.

Section 451: Active income test - substantiation requirements for company

Section 451 contains the substantiation requirements for a company that passes the active income test. It specifies the records that must be kept and the method by which an attributable taxpayer may obtain the information required to substantiate a claim that a CFC has passed the active income test.

The company is required by paragraph 451(1)(a) to keep accounting records, such as invoices, receipts, cheques and other documents that correctly record and explain the matters, transactions, acts and operations that are relevant to the preparation of its recognised accounts for the statutory accounting period. These accounting records are called the "general accounting records".

Under paragraph (1)(b), the general accounting records must be kept in a manner that enables the company's recognised accounts for the statutory accounting period to be prepared. In other words, these records must be available to verify the matters and figures disclosed in the recognised accounts.

Paragraph (1)(c) requires the company to retain the recognised accounts and the general accounting records for the "retention period" which, by virtue of the definition of that term in section 317, is the period of five years commencing at the end of the statutory accounting period of the company.

A further condition, contained in paragraph (1)(d), is that the company must comply with a request under subsection 451(2) to make available to the taxpayer copies of documents included in, or drawn from, the recognised accounts and general accounting records.

Subsection 451(2) describes the information that may be sought from a company in relation to the active income test. An attributable taxpayer in relation to a company, that is a CFC at the end of its statutory accounting period, may serve the company with a written request ("taxpayer's notice") requiring the company to produce information of the kind specified in paragraphs (2)(a), (b) or (c).

A taxpayer's notice may request the company to provide copies of documents included in the recognised accounts or general accounting records of the company for the statutory accounting period (paragraph (2)(a)).

Paragraph (2)(b) refers to a document containing particulars of the calculation of the company's tainted income ratio for the statutory accounting period. To satisfy a taxpayer's notice for a paragraph (2)(b) document, a company may have to prepare the document if it is not already in existence. Such a document will generally be in the form of a summary of such of the general accounting and recognised accounts information as is relevant to trace all steps in the calculation of the company's tainted income ratio. A taxpayer's notice may request documents under either or both of paragraphs (2)(a) and (b).

Where the company was a partner in a partnership at any time in the statutory accounting period, paragraph (2)(c) provides that certain partnership documents, to which subsection 452(2) applies, may be requested in a taxpayer's notice. The taxpayer's notice will require the company to serve notice on the partnership to provide the documents to the company. The taxpayer's notice will also require the company to provide the documents to the taxpayer within the period and in the manner specified in the taxpayer's notice.

Subsection 451(3) provides that the taxpayer's notice must allow the company a full 60 days to comply from the date of service of the notice (paragraph (3)(a)). The period for compliance must end before the end of the retention period in relation to the statutory accounting period (paragraph (3)(b)).

Within the period specified in the taxpayer's notice the taxpayer may apply in writing to the Commissioner for permission to extend the period and the Commissioner may extend the period in response to that application (subsection 451(4)).

Subsection 451(5) may operate to provide an automatic extension of time where, at the end of the period for compliance with a taxpayer's notice, the Commissioner has not responded to an application for an extension of time.

That automatic extension will apply where:

·
an application for permission to extend the period in a taxpayer's notice is made before the end of that period (paragraph (5)(a)); and
·
at the end of the period, the Commissioner has not notified the taxpayer of the decision on that application (paragraph (5)(b)).

Where the conditions of paragraphs (5)(a) and (b) are satisfied, the provisions of paragraphs (5)(c), (d) and (e) have effect.

If the Commissioner's decision on the application is not notified to the taxpayer before the end of the retention period in relation to the relevant statutory accounting period the Commissioner is taken to have extended the period to the end of the retention period (paragraph (5)(c)).

By paragraph (5)(d), if the Commissioner's decision is notified to the taxpayer before the end of the retention period in relation to the relevant statutory accounting period, the Commissioner is taken to have extended the period under subsection 451(4) to the end of the day on which the Commissioner's decision is notified to the taxpayer. Thus, for example, where the Commissioner decides not to extend the period, the period will nevertheless be extended until the end of the day on which the Commissioner's refusal is notified to the taxpayer (the "decision day").

If the Commissioner decides to extend the period, the extended period must, subject to subsection (6), end later than the decision day (paragraph (5)(e)).

Subsection 451(6) requires that the extended period must end before the end of the retention period in relation to the statutory accounting period.

Subsection 451(7) enables an extended period approved by the Commissioner to be treated as if it had been the period specified in the taxpayer's notice.

By subsection 451(8), a refusal or failure to comply with the taxpayer's notice is not an offence. The sanction for failure or refusal to comply is that the company will be treated as having failed the active income test (subsection 453(8)).

By subsection 451(9), the five year retention requirement for records, specified in subsection 262A(4) of the Principal Act, does not apply to records kept or obtained for the purpose of these substantiation requirements.

Section 452: Active income test - substantiation requirements for partnership

For a company that is a partner in a partnership in the statutory accounting period, the active income test substantiation requirements in respect of its partnership interest are outlined in section 452. The section specifies certain requirements for the keeping of the partnership recognised accounts and its general accounting records and the method by which certain accounting documents may be provided to the company in relation to the company's active income test.

Subsection 452(1) contains the requirements for the keeping of the partnership recognised accounts and general accounting records. Paragraph (1)(a) requires the partnership to keep accounting records, such as invoices, receipts, cheques and other documents that correctly record and explain the matters, transactions, acts and operations that are relevant to the preparation of its recognised accounts for the statutory accounting period. These accounting records are called the "general accounting records".

Under paragraph (1)(b), the general accounting records must be kept in a manner that enables the partnership's recognised accounts for the statutory accounting period to be prepared. In other words, these records must be available to verify the matters and figures disclosed in the recognised accounts.

Paragraph (1)(c) requires the partnership to retain the recognised accounts and general accounting records for the period of five years commencing at the end of the statutory accounting period of the company partner.

A further condition, contained in paragraph (1)(d), is that the partnership complies with a request under subsection 452(2) to make available to the company copies of documents included in, or drawn from, the recognised accounts and general accounting records.

Subsection 452(2) describes the information that may be sought from a partnership to verify matters relevant to the company's active income test. A company that qualifies as a CFC at the end of its statutory accounting period may serve the partnership with a written request in relation to the kind of information specified in paragraphs (2)(a) or (b).

A notice may request the partnership to provide to the company copies of documents included in the recognised accounts or general accounting records of the partnership for the statutory accounting period (paragraph (2)(a)).

Paragraph (2)(b) refers to a document containing particulars of the calculation of the partnership's notional gross tainted turnover and notional gross turnover for the statutory accounting period. To satisfy a company's notice for a paragraph (2)(b) document, a partnership may have to prepare the document if it is not already in existence. Such a document will generally be in the form of a summary of such of the general accounting and recognised accounts information as is relevant to trace all steps in the calculation of the partnership's notional gross tainted turnover and notional gross turnover. A company's notice may request documents under either or both of paragraphs (2)(a) and (b).

Subsection 452(3) provides that the company's notice must allow the partnership a full 30 days to comply from the date of service of the notice (paragraph (3)(a)). The period for compliance must end before the end of the retention period in relation to the statutory accounting period (paragraph (3)(b)).

Within the period specified in the company's notice the company may apply in writing to the Commissioner for permission to extend the period and the Commissioner may extend the period in response to that application (subsection 452(4)).

Subsection 452(5) may operate to provide an automatic extension of time where, at the end of the period for compliance with a company's notice, the Commissioner has not responded to an application for an extension of time. That automatic extension will apply where:

·
an application for permission to extend the period in a company's notice is made before the end of that period (paragraph (5)(a)); and
·
at the end of the period, the Commissioner has not notified the company of the decision on the application (paragraph (5)(b)).

Where the conditions of paragraphs (a) and (b) are satisfied, the provisions of paragraphs (c), (d) and (e) have effect.

If Commissioner's decision on the application is not notified to the company before the end of the retention period in relation to the relevant statutory accounting period the Commissioner is taken to have extended the period to the end of the retention period (paragraph (5)(c)).

By paragraph (5)(d), if the Commissioner's decision is notified to the company before the end of the retention period in relation to the relevant statutory accounting period, the Commissioner is taken to have extended the period under subsection 452(4) to the end of the day on which the Commissioner's decision is notified to the company. Thus, for example, where the Commissioner decides not to extend the period, the period will nevertheless be extended until the end of the day on which the Commissioner's refusal is notified to the company (the "decision day").

If the Commissioner decides to extend the period, the extended period must, subject to subsection (6), end later than the decision day (paragraph (5)(e)).

Subsection 452(6) requires that the extended period must end before the end of the retention period in relation to the statutory accounting period.

Subsection 452(7) enables an extended statutory period approved by the Commissioner to be treated as if it had been the period specified in the company's notice.

By subsection 452(8), a refusal or failure to comply with the company's notice is not an offence. The sanction for failure or refusal to comply is that the company will be treated as having failed the active income test (subsection 453(8)).

By subsection 452(9), the five year retention requirement for records specified in subsection 262A(4) of the Principal Act does not apply to records kept or obtained for the purpose of these substantiation requirements.

Section 453: Active income test - substantiation requirements for attributable taxpayer

Section 453 sets out the substantiation requirements for a taxpayer who is an attributable taxpayer in relation to a CFC and who claims that the CFC has passed the active income test. The section also sets out the method by which the taxpayer may obtain documents from a CFC that are relevant to a consideration of whether the CFC has passed the active income test.

Subsection 453(1) specifies the circumstances in which the Commissioner may initiate a notice requiring the taxpayer to obtain and produce documents to substantiate the CFC's passing of the active income test. Both of the conditions in paragraph (1)(a) and at least one of the conditions in paragraph (1)(b) must be satisfied before the Commissioner may issue a notice under this section.

Subparagraph (a)(i) sets the condition that the Commissioner has reason to believe that the taxpayer is an attributable taxpayer in relation to a CFC at the end of its statutory accounting period. The Commissioner must also have reason to believe that the application of a provision of the active income test to the company is relevant to the taxpayer's assessment (subparagraph (a)(ii)).

It is also necessary that at least one of the following conditions of paragraph (1)(b) is satisfied in relation to an application of the active income test to the company for its statutory accounting period:

·
the taxpayer has claimed that the company has passed the active income test (subparagraph (b)(i));
·
the taxpayer's return for a year of income has been prepared on the basis that the company has passed the active income test (subparagraph (b)(ii)); or
·
the Commissioner has reason to believe that the company has passed the active income test (subparagraph (b)(iii)).

Where the appropriate conditions from paragraphs (1)(a) and (b) are satisfied, the Commissioner may serve written notice (the "Commissioner's notice") on the taxpayer requesting the taxpayer:

·
to obtain from the company, under a notice to be served by the taxpayer on the company under subsection 451(2), copies of documents specified in the Commissioner's notice (paragraph (1)(c));
·
as necessary, to translate the copies of requested documents into the English language (paragraph (1)(d)); and
·
to produce to the Commissioner, within the allotted time, copies of the requested documents, and if applicable, the translations (paragraph (1)(e)).

Subsection 453(2) requires the time specified in the Commissioner's notice to be more than 90 days from the date of service and before the end of the retention period in relation to the statutory accounting period.

Within the period specified in the taxpayer's notice the taxpayer may apply in writing to the Commissioner for permission to extend the period and the Commissioner may extend the period in response to that application (subsection 453(3)).

Subsection 453(4) may operate to provide an automatic extension of time where, at the end of the period for compliance with a Commissioner's notice, the Commissioner has not responded to an application for an extension of time. That automatic extension will apply where:

·
an application for permission to extend the period in the Commissioner's notice is made before the end of that period (paragraph (4)(a)); and
·
at the end of the period, the Commissioner has not notified that taxpayer of the decision on the application (paragraph (4)(b)).

Where the conditions of paragraphs (a) and (b) are satisfied, the provisions of paragraphs (c), (d) and (e) have effect.

If the Commissioner's decision on the application is not notified to the taxpayer before the end of the retention period in relation to the relevant statutory accounting period the Commissioner is taken to have extended the period to the end of the retention period (paragraph (4)(c)).

By paragraph (4)(d), if the Commissioner's decision is notified to the taxpayer before the end of the retention period in relation to the relevant statutory accounting period, the Commissioner is taken to have extended the period under subsection 453(3) to the end of the day on which the Commissioner's decision is notified to the taxpayer. Thus, for example, where the Commissioner decides not to extend the period, the period will nevertheless be extended until the end of the day on which the Commissioner's refusal is notified to the taxpayer (the "decision day").

If the Commissioner decides to extend the period, the extended period must, subject to subsection (5), end later than the decision day (paragraph (4)(e)).

Subsection 453(5) requires that the extended period must end before the end of the retention period in relation to the statutory accounting period.

Subsection 453(6) enables an extended statutory period approved by the Commissioner to be treated as if it had been the period specified in the Commissioner's notice.

By subsection 453(7), a refusal or failure to comply with the Commissioner's notice is not an offence. The sanction for failure or refusal to comply is that the company will be treated as having failed the active income test (subsection 453(8)).

Section 454: Assessment on assumption - retention of accounts etc. and compliance with information notices

Section 454 will enable an assessment of a taxpayer to be made without necessarily having to first request the taxpayer to substantiate a claim that the active income test has been passed in respect of a CFC. A subsequent notice issued by the Commissioner under section 453, requiring the taxpayer to substantiate such a claim, will not affect the validity of the earlier assessment.

If, within the time limits for substantiating a claim that the active income test has been passed in respect of a CFC, the taxpayer does not substantiate the claim, the Commissioner may subsequently amend the assessment at any time to take account of the effect of the company's failure to satisfy paragraph 432(1)(d) of the active income test.

Where the conditions in paragraphs 454(1)(a) and (b) are satisfied - that is:

·
the statutory accounting period of the company has ended (paragraph (1)(a)); and
·
the retention period in relation to the statutory accounting period has not ended (paragraph (1)(b)),

an assessment may be made of a taxpayer on the assumption that, after the assessment is made, the company substantiation requirements of paragraphs 451(1)(c) and (d) and the partnership substantiation requirements of paragraphs 452(1)(c) and (d) will be met in relation to the statutory accounting period.

Subsection 454(2) provides that where the assessment is made (paragraph (2)(a)) and the Commissioner subsequently becomes aware that the substantiation requirements were not complied with in relation to the statutory accounting period (paragraph (2)(b)) then, notwithstanding restrictions on amendment of assessments contained in section 170 of the Principal Act, the Commissioner may amend the assessment at any time to ensure that the assessment is made as if the assumption in subsection 454(1) were disregarded.

Section 455: Amendment of assessments

Section 455 will apply where an assessment has been made in relation to a year of income (paragraph (a)) and a provision of the Subdivision G substantiation requirements that is relevant to the assessment, is dependent on a circumstance that occurs, or may occur, after the end of the year of income (for example, substantiation that the company has passed the active income test). Where these conditions are satisfied, the restrictions on amendment of assessments contained in section 170 of the Principal Act will not prevent an amendment of the assessment at any time to give effect to the Principal Act as amended by the Bill in relation to the circumstance occurring after the end of the year of income.

Division 9 - Attribution of Attributable Income and Other Amounts

The provisions of Division 9 will include in the assessable income of an attributable taxpayer the taxpayer's attribution percentage of the attributable income of a CFC (section 456). The expressions "attributable taxpayer", "attribution percentage" and "attributable income" are defined in sections 361, 362 and 317 respectively.

Section 457 will include in the assessable income of an attributable taxpayer in relation to a CFC, the taxpayer's attribution percentage of certain accumulated profits and deemed profits of a CFC that changes residence from an unlisted to a listed country. Where the CFC ceases to be a resident of an unlisted country and becomes a Part X Australian resident, the section will include in the assessable income of an attributable taxpayer in relation to a CFC certain accumulated profits of the CFC.

The provisions of Division 9 will also include in the assessable income of an attributable taxpayer in certain circumstances, a percentage of a dividend paid or deemed to have been paid by a CFC that is a resident of an unlisted country to a CFC that is a resident of a listed country. The percentage of the dividend that will be included in the assessable income of the taxpayer is the taxpayer's attribution percentage of the CFC that received the dividend (sections 458 and 459). These provisions will not apply where the dividend is subject to tax in a listed country at the normal company rate of tax applicable in that country (see notes on section 325).

Provisions similar to those that apply to a non-portfolio dividend that is paid by a CFC to another CFC apply to a non-portfolio dividend paid by a CFC to a controlled foreign trust, or to a partnership or Australian trust where a CFC or a controlled foreign trust would, directly or through interposed entities, receive an amount in respect of that dividend.

Section 460 will ensure that a taxpayer who is not a Part X Australian resident is not required to pay Australian tax in respect of income attributed to an Australian partnership or an Australian trust under sections 456, 457, 458 and 459.

Section 456: Assessability in respect of CFC's attributable income

Subsection 456(1) will include in the assessable income of an Australian entity that is an attributable taxpayer (defined in section 361) in relation to a CFC the taxpayer's attribution percentage (defined in section 362) of the attributable income of the CFC (Division 7 - Calculation of Attributable Income of CFC) for the statutory accounting period of the CFC that ends in the taxpayer's year of income. The term statutory accounting period is defined in section 319.

Subsection 456(2) provides for a modification to the general application of subsection (1) where the CFC has one or more changes of residence during the statutory accounting period referred to in subsection (1) and where section 457 applies in relation to the attributable taxpayer in relation to the change or changes of residence. In this event, subsection (1) is to apply only to so much of the attributable income of the CFC as relates to the period specified in paragraphs (a) or (b) of this subsection.

Paragraph (2)(a) deals with the case where the CFC is a resident of an unlisted country at the end of the statutory accounting period. In this case, only the attributable income of any part of the statutory accounting period when the CFC was a resident of a listed country and that part of the statutory accounting period since the change of residence or the last change of residence when the CFC was a resident of an unlisted country are to be taken into account for the purposes of subsection (1).

Paragraph (2)(b) deals with the case where the CFC is a resident of a listed country at the end of the period. In this case, only the attributable income of the CFC for any part of the statutory accounting period during which the CFC was a resident of a listed country is to be taken into account for the purposes of subsection (1).

Section 457: Assessability where CFC changes residence from an unlisted country to a listed country or to Australia

Section 457 applies where, at any time, a CFC that has an attributable taxpayer changes residence from an unlisted country to a listed country or to Australia and provides for an amount calculated in accordance with the provisions of this section to be included in the assessable income of the attributable taxpayer of the year of income in which the "residence-change" time occurred.

Subsection 457(1) is the operative provision, and sets out the conditions for the application of the section and its effect. The conditions for the application of this section are that, at any time, a CFC that has an attributable taxpayer has ceased to be a resident of an unlisted country and has become a resident of a listed country or a Part X Australian resident. Where these conditions are satisfied, subsection (1) provides for the inclusion of an amount calculated in accordance with subsection (2) in the assessable income of the attributable taxpayer of the year of income in which the residence-change time occurred.

Subsection 457(2) provides the formula for the calculation of the amount that is to be included, under subsection (1), in the assessable income of the attributable taxpayer. In broad terms, the amount to be included in the attributable taxpayer's assessable income will be the taxpayer's attribution percent at the residence-change time of the CFC's adjusted distributable profits, reduced by any attribution surplus for the CFC in relation to the taxpayer immediately before the residence-change time.

The attribution percent refers to the taxpayer's attribution percentage (defined in section 362) for the CFC at the residence-change time.

The term "adjusted distributable profits" is defined separately for a CFC that changes its residence to a listed country and for a CFC that becomes a Part X Australian resident. Where a CFC changes residence from an unlisted country to a listed country, and that is its only change of residence in a statutory accounting period, its adjusted distributable profits at the residence-change time will be the amount that would be its distributable profits (defined in section 317) at that time if all of the CFC's assets were disposed of for a consideration equal to their market value and no account was taken of the exempting profits of the CFC (subparagraph (a)(i)).

Where the CFC ceases to be a resident of an unlisted country and becomes a Part X Australian resident, and that is its only change of residence in a statutory accounting period, its adjusted distributable profits at the residence-change time will be its distributable profits (without any assumption regarding a disposal of its assets), reduced by any exempting profits (subparagraph (a)(ii)). However, the amendment to be made by clause 37 will have the effect that the cost bases of the company's assets will not be adjusted on the change of residence (see notes on clause 37).

Where, during a statutory accounting period of the CFC, there is more than one change of residence, the amount that is to be included in the assessable income of an attributable taxpayer is calculated at each residence-change time. The amount that is to be included in the assessable income at a later residence-change time would be calculated by reference to so much of the adjusted distributable profits as are referable to the period after the previous residence-change time (paragraph (2)(b)).

"Attribution surplus" means the amount of any attribution surplus (defined in section 370) for the CFC in relation to the attributable taxpayer immediately before the residence-change time (paragraph (2)(c)). Where the CFC undergoes multiple changes of residence to which section 457 applies, the attribution surplus to be taken into account at a later residence-change time will not include amounts previously taken into account under this section (paragraph (2)(d)).

Section 458: Assessability in respect of certain dividends paid by a CFC

This section deals with the circumstances in which the assessable income of a resident taxpayer is to include an amount in respect of a non-portfolio dividend paid in the taxpayer's year of income by a CFC that is a resident of one unlisted country to a CFC that is a resident of another country or to a partnership, a controlled foreign trust or an Australian trust, and the determination of the amount to be so included.

Subsection 458(1) specifies the conditions necessary for the application of this section to a non-portfolio dividend paid by a CFC that is a resident of an unlisted country to another CFC, and provides the formula for the determination of the amount that is to be included in the assessable income of a resident taxpayer.

The conditions are that:

·
the resident taxpayer is an attributable taxpayer in relation to both CFCs; and
·
the exceptions provided in subsection (2) are not applicable.

Where these conditions are satisfied, the assessable income of the taxpayer of the year of income in which the dividend is paid is to include an amount calculated using the formula

AP * (D - GD - EPP - T)

.

The amount to be included in the assessable income of a resident taxpayer in relation to a dividend paid by the CFC is determined by the taxpayer's attribution percentage for the CFC receiving the dividend - AP in the formula. This percentage is applied to the amount of the dividend (D) reduced by:

·
that part of the dividend that is related to the income of the paying CFC that was attributed to the resident taxpayer (GD in the formula);
·
that part of the dividend that was deemed to be paid out of the CFC's exempting profits (EPP in the formula); and
·
foreign withholding tax paid by deduction from the remaining part of the dividend (T in the formula).

The terms "grossed up amount of an attribution debit" and "exempting profits percentage" are defined in sections 373 and 379 respectively.

In the application of the formula, the dividend is to be reduced by the exempting profits percentage only where the taxpayer and the CFCs are members of a non-portfolio company group when the dividend is paid. The term "member of a non-portfolio company group" is defined in section 334.

Subsection 458(2) provides that subsection (1) is not to apply to a non-portfolio dividend paid by a CFC that is a resident of an unlisted country to a CFC that is a resident of a listed country if the listed country subjected that dividend to tax at its normal company rate of tax (paragraph (2)(a)). A listed country is to be treated as subjecting a dividend to tax at its normal company rate of tax (see notes on section 325) if the dividend is taxed at the same rate of tax as other income derived by a company that is a resident of that country or at a higher rate of tax. Additionally, the dividend should not attract any special tax concessions such as lower rates of tax, credits or rebates other than a credit for foreign tax paid to another country.

Paragraph (2)(b) specifies that a dividend paid by a CFC that is a resident of an unlisted country to a CFC that is a resident of the same or another unlisted country is not to be attributed to any resident taxpayer at the time the dividend was paid unless the dividend was paid as part of a dividend stripping scheme. A dividend stripping scheme refers to a scheme (within the meaning of section 177A of the Principal Act) that was by way of or in the nature of dividend stripping or had substantially the effect of a scheme by way of or in the nature of dividend stripping.

Subsection 458(3) deals with the case where a CFC that is a resident of an unlisted country pays a dividend to a controlled foreign trust (CFT - defined in section 342) and the dividend would be a non-portfolio dividend within the meaning of section 317 if the CFT were a company (paragraphs (3)(a) and (b)). This subsection will apply to a taxpayer if that taxpayer is an attributable taxpayer (defined in section 361) in relation to the CFC and the CFT at the time the dividend was paid (paragraph (3)(c)). The subsection is subject to subsection (6) and will therefore not apply where the dividend is subject to tax in a listed country at the normal company tax rate of that country.

Where these conditions are satisfied, the assessable income of the taxpayer of the year of income in which the dividend is paid is to include an amount calculated using the formula:

AP * (D - GD - T)

.

In the formula:

AP is the taxpayer's attribution percentage (defined in section 362) of the CFT;
D is the amount of the dividend paid by the CFC to the CFT;
GD is the grossed-up amount of the attribution debit (defined in section 373), that arose as a result of the payment of the dividend, in relation to the taxpayer; and
T is the foreign tax paid, by deduction from the dividend, by or on behalf of the CFT on D-GD of the dividend.

Subsection 458(4) deals with the case where a CFC that is a resident of an unlisted country pays a dividend to a partnership, and when the dividend is paid a CFC or a CFT (referred to as the ultimate recipient) is a partner of that partnership or has an indirect interest in the profits of that partnership through interests in Australian partnerships or through present entitlements in Australian trusts.

It is also a requirement for the application of this subsection that the dividend received by the partnership would, if the partnership were a company, be a non-portfolio dividend within the meaning of section 317. The subsection is subject to subsection (6) and will therefore not apply where the dividend is subject to tax in a listed country at the normal company tax rate of that country. The subsection is also subject to subsection (7), with the effect that it will not apply where the ultimate recipient of the dividend is a CFC that is a resident of the same unlisted country as the paying entity or of another unlisted country, unless the dividend is paid as part of a dividend stripping scheme.

If these conditions are satisfied, the assessable income of a taxpayer who is an attributable taxpayer in relation to both the CFC that paid the dividend and in relation to the CFC or CFT that is the ultimate recipient, is to include, in the year of income in which the dividend is paid, an amount calculated using the formula:

AP * IP * (D - GD - T)

The meaning to be attached to the components of the formula corresponds to the meaning of those components in subsection (3) except for the component IP which is relevant only to this subsection. IP means the sum total of the direct and indirect interests of the ultimate recipient in the partnership profits.

Subsection 458(5) deals with the case where a CFC that is a resident of an unlisted country pays a dividend to an Australian trust and, when the dividend is paid, a CFC or a CFT (referred to as the ultimate recipient) is presently entitled to a share of the income of the trust or has an indirect interest in that income through holdings of present entitlements in the income of other Australian trusts or Australian partnerships (paragraphs (5)(a) and (b)).

It is also a requirement that the dividend would be a non-portfolio dividend within the meaning of section 317 if the Australian trust that received the dividend were a company (paragraph (5)(c)). The subsection is subject to subsection (6) and will therefore not apply where the dividend is subject to tax in a listed country at the normal company tax rate of that country. The subsection is also subject to subsection (7) with the effect that it will not apply where the ultimate recipient of the dividend is a CFC that is a resident of the same unlisted country as the paying entity or of another unlisted country unless the dividend is paid as part of a dividend stripping scheme.

Where these conditions are satisfied, the assessable income of a taxpayer who is an attributable taxpayer in relation to both the CFC that paid the dividend and the CFC or CFT that is the ultimate recipient (paragraph 5(d)) is to include an amount computed using the formula:

AP * IT * (D - GD - T)

. The meanings of the components of the formula, other than IT, are explained in the notes on subsection (3). "IT" means the sum total of direct and indirect interests of the ultimate recipient in the income of the Australian trust.

Subsection 458(6) provides that subsection (3) does not apply where the dividend paid by the CFC is subject to tax in a listed country at its normal company rate of tax. Subsection (4) and (5) also do not apply where the amount that is included in the tax base of a CFC or CFT or of a partnership or other trust estate in respect of a dividend paid by a CFC is subject to tax in a listed country at its normal company rate of tax. The effect of subsection (6) is explained in the notes on subsections (3), (4) and (5).

Subsection 458(7) provides that subsections (4) and (5) do not apply where the ultimate recipient referred to in those subsections is a CFC that is resident in an unlisted country unless that dividend arose out of or was made in the course of a scheme (within the meaning of section 177A of the Principal Act) that was by way of or in the nature of dividend stripping or had substantially the effect of a scheme by way of or in the nature of dividend stripping.

Subsection 458(8) limits the application of subsections (4) and (5) to Australian trusts that are not corporate unit trusts, public trading trusts or eligible entities within the meaning of Part IX of the Principal Act.

Section 459: Assessability in respect of certain dividends deemed to be paid by a CFC under section 47A

New section 47A will deem certain distribution payment made by a CFC in relation to distribution benefits in relation to a CFC to be dividends paid by the CFC (see notes on section 47A to be inserted in the Principal Act by clause 9). To the extent that these dividends are paid by a lower tier foreign company to an upper tier entity (for example, by a subsidiary to its parent), section 458 would determine whether the dividend or a part of the dividend would be included in the assessable income of a year of income of an attributable taxpayer. Section 459 complements section 458 and deals with dividends that are treated as paid by a CFC to any other associated entity of the CFC (for example, to an associate of a shareholder of the CFC, where the associate may be a lower-tier entity). Subsection 459(1) deals with the case where the whole or a part of a distribution payment made by a CFC (referred to as the first company) in relation to a distribution time is treated as a dividend under section 47A, section 458 does not apply to that dividend, the recipient of the payment is a CFC that is a resident of a listed country or a CFT, and the taxpayer is an attributable taxpayer in relation to the first company and the recipient at the distribution time (paragraphs (1)(a), (b), (c) and (d)).

Where these conditions are satisfied, the assessable income of the taxpayer of the year of income in which the distribution time occurred is to include an amount calculated using the formula

AP * D

, where:

AP means the taxpayer's attribution percentage of the CFC or the CFT that receives the dividend; and
D means the amount of the dividend.

Subsection (1) is subject to subsection (4) which provides that subsection (1) does not apply where the dividend referred to is taxed in a listed country at the country's normal company tax rate (see notes on section 325).

Subsection 459(2) deals with the case where the whole or a part of a distribution payment made by a CFC (referred to as the first company) in relation to a distribution time is treated as a dividend under section 47A, section 458 does not apply to the dividend, the recipient of the payment is a partnership, and a CFC that is a resident of a listed country or a CFT (referred to as the ultimate recipient) has certain specified interests in the partnership (paragraphs (2)(a) to (d)).

The CFC or CFT should be a partner of the partnership or have an indirect interest in the profits of that partnership through present entitlements in Australian trusts or through Australian partnerships. It should also be the case that, at the distribution time, a taxpayer is an attributable taxpayer in relation to the first company and the ultimate recipient (paragraph (2)(e)).

Where these conditions are satisfied, the assessable income of a taxpayer of the year of income in which the distribution time occurred is to include an amount calculated using the formula

AP * IP * D

, where:

AP means the taxpayer's attribution percentage for the ultimate recipient;
IP means the percentage of the total interests in the profits of the partnership represented by the direct and indirect interests of the ultimate recipient; and
D means the amount of the dividend.

Subsection (2) is expressed to be subject to subsection (4) which specifies that subsection (2) is not to apply to a dividend that is taxed in a listed country at the country's normal company rate of tax.

Subsection 459(3) deals with the case where the whole or a part of a distribution payment made by a CFC (referred to as the first company) in relation to a distribution time is treated as a dividend under section 47A, section 458 does not apply to the dividend, the recipient of the payment is an Australian trust, and a CFC that is a resident of a listed country or a CFT (referred to as the ultimate recipient) has specified interests in the trust. The ultimate recipient should be presently entitled to a share of the income of the Australian trust or have an indirect interest in that income through holdings of present entitlements in the income of other Australian trusts or Australian partnerships (paragraphs (3)(a) to (d)).

It should also be the case that, at the distribution time, a taxpayer is an attributable taxpayer in relation to the first company and the ultimate recipient (paragraph (3)(e)).

Where these conditions are satisfied, the assessable income of a taxpayer of the year of income in which the distribution time occurred is to include an amount calculated using the formula

AP * IT * D

, where:

AP means the taxpayer's attribution percentage for the ultimate recipient;
IT means the percentage of the income of the Australian trust that is represented by the sum of the direct and indirect interests of the ultimate recipient; and
D means the