Foreign income return form guide
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Chapter 3 Taxation of foreign dividends and branch profits
|Part 1||Taxation of foreign dividends|
|Part 2||Taxation of branch profits|
This part explains how dividends and other distributions paid by a foreign company are taxed in Australia. This can occur in two ways:
- when a resident taxpayer is taxed on a dividend or other distribution received from a non-resident company, or
- when an attributable taxpayer in relation to a controlled foreign company (CFC) or a controlled foreign trust is liable to tax on the taxpayer's share of a dividend paid by an unlisted country CFC directly or indirectly to another CFC or controlled foreign trust.
|Section 1||How do you treat a distribution received from a foreign resident company?|
|Section 2||What if a CFC receives a dividend from another CFC?|
|Section 3||When is a CFC deemed to have paid a dividend?|
Subdivision 768-A in the ITAA 1997 determines whether distributions from a foreign company are non-assessable non-exempt income. A foreign equity distribution on participation interests will be non-assessable and non-exempt income for these purposes if:
- the entity receiving the distribution is an Australian resident corporate tax entity (including public trading trusts, corporate unit trusts, and corporate limited partnerships)
- the Australian corporate tax entity receiving the distribution has a 10% or greater participation interest in the foreign company that paid the distribution (this participation test must be satisfied at the time the foreign equity distribution is made; for more information, see TR 2017/3 Income tax: distributions from foreign companies - meaning of 'at the time the distribution is made' when applying the participation test) , and
- the entity does not receive the distribution in the capacity of a trustee; or the entity receives the distribution in the capacity of a trustee of a corporate unit trust or public trading trust.
A foreign equity distribution is a distribution or non-share dividend, made by a company that is a foreign resident, in respect of an equity interest in the company. A non-share dividend is a dividend on a non-share equity interest. A non-share equity interest is an equity interest in a company that is not solely a share..
An entity is taken to have a participation interest in relation to another entity if at that time the sum of the following is at least 10%:
- the direct participation interest the entity would have in the other entity if rights on winding-up were disregarded
- the indirect participation interest the entity would have in the other entity if:
- rights of winding-up were disregarded, and
- section 960-185 only applied to intermediate entities that are not corporate tax entities.
Both direct and indirect participation interests are defined insubdivision 960-GP.
Foreign equity distributions received through interposed trusts and partnerships
A foreign equity distribution received or derived indirectly:
- by an Australian resident corporate tax entity, through
- an interposed trust, or
- partnership, or
- from a company that is a resident of a foreign country
is non-assessable non-exempt income, where the conditions in subsection 768-5(2) are met.
The foreign equity distribution will not be non-assessable non-exempt income where it flows through an interposed trust or partnership that is a corporate tax entity (section 768-5(2)(c)).
Overall, a foreign equity distribution will be non-assessable non-exempt income for an Australian beneficiary or partner where:
- the amount is ultimately received by an Australian corporate beneficiary of a trust, or an Australian corporate partner in a partnership
- the amount would otherwise be included in the trust or partnership's assessable income under Division 5 or 6 of Part III of the ITAA 1936
- the amount can be attributed, either directly or indirectly through one or more interposed trusts and partnerships that are not corporate tax entities, to a foreign equity distribution
- at the time distribution is made, the trust or partnership satisfies the participation test, and
- the Australian beneficiary or partner does not receive the distribution in the capacity of a trustee (unless it is received in the capacity of a trustee of a corporate unit trust or public trading trust).
Foreign equity distribution paid partly from profits taxed on an accruals basis
- Amdoy, a resident company, has a participation interest of 100% in Endoy, a CFC resident in a listed country. Attributable income of $10,000 from Endoy was included in Amdoy's assessable income for 2018-19.
- Endoy then makes a foreign equity distribution of $25,000 to Amdoy on 31 December 2018.
- Amdoy can treat part of the non-portfolio dividend ($10,000) as non-assessable non-exempt income under section 23AI, as it is a distribution out of previously attributed income.
- The $15,000 balance of the foreign equity distribution can be treated as non-assessable non-exempt income under section 768-5.
Distributions of attributed income: maintaining records to support a claim that an amount is not assessable
To be able to work out what distributions out of a CFC's attributed income are non-assessable non-exempt income, you will need to keep certain records called attribution accounts.
You must maintain an attribution account for:
- each CFC from which income is attributed to you; this account will contain a record of:
- income attributed to you from the CFC, and
- income distributed to you by the CFC which is treated as distributed from attributed income
- each entity through which the income of that CFC is distributed to you; these entities may be
- trusts, or
- companies that are not Part X Australian residents
- each CFC that has changed residence from an unlisted country to Australia. Dividends paid by a company out of profits which were attributed to you before the company becoming a resident of Australia are non-assessable non-exempt income.
These accounts are used to keep track of profits that have been taxed on an accruals basis so that you determine what amounts are non-assessable non-exempt income when you receive a distribution from those profits.
- A resident company, Amdoy, owns all the share capital of a CFC that is a resident of an unlisted country. The CFC commenced business on 1 July 2017. For the 2017-18 income year, its only income was attributable income of $2,500; it paid no tax. On 1 August 2018, it paid a dividend of $2,500 to Amdoy.
- Attribution credit
- Amdoy will open an attribution account for the CFC and credit it with $2,500 on 30 June 2018 because this amount was included at that time in Amdoy's assessable income under the CFC measures. The CFC is called an attribution account entity.
- Attribution debit
- Amdoy will debit $2,500 to the attribution account for the CFC on 1 August 2018 because of the dividend paid by the CFC. The debit is referred to as an 'attribution debit'. The amount of the debit cannot be more than the credit balance in the account (called the 'attribution surplus') at the time the debit is made; in this case, the debit could not be more than $2,500.
- The dividend received by Amdoy is non-assessable non-exempt income to the extent the dividend gave rise to an attribution debit. In this case, Amdoy can claim the whole amount of the dividend as non-assessable non-exempt income in the 2018-19 income year; the effect is that Amdoy only pays tax on the CFC's income when it is attributed, and not again when it is distributed.
An attribution account maintained by you for a CFC is specific to you; this means that when you sell shares in a CFC, you cannot transfer the attribution account to the purchaser of the shares.
Tracing the path of distributions of attributed income
There are a number of ways you can receive amounts that were paid from profits that have previously been attributed to you. In general, these amounts will be distributed to you as a dividend. The dividend may be distributed to you directly, or indirectly through a chain of companies, partnerships, or trusts.
When are attribution account payments made?
To work out your exemption, you will need to know the date on which attribution account payments are taken to have been made.
The following table sets out:
- the types of attribution account payments that can occur
- the entities that are treated as making and receiving an attribution account payment
- the date on which the payment is taken to be made.
When are attribution account payments made?
|Type of attribution payment||Entity making payment||Entity receiving payment||Date payment made|
|Dividend||Paying company||Shareholder||On date dividend is paid|
|Partner's share in the net income of a partnership||Partnership||Partner||At the end of the income year of the partnership|
|Share of the net income of a trust estate equal to the beneficiary's present entitlement||Trust||Beneficiary||At the end of the income year of the trust|
|Whole or part of the net income of a trust estate is assessable to the trustees. Sections 99 or 99A||Trust||Trustee||At the end of the income year of the trust|
|Other distribution of accumulated trust income||Trust||Beneficiary||Income year in which the distribution was made|
What accounting entries should you make?
As mentioned earlier, attribution accounts link distributions a CFC has made to you (either directly or through other entities) to the income of the CFC that has already been attributed to you. The link is made when you:
- debit the attribution account of the entity that makes the payment, and
- credit the account of the entity that receives the payment.
Continue this process down a chain of entities until you receive a distribution made by the CFC.
Distribution of attributed income
- A resident company, Amdoy, owns all of the shares of CFC 1, which owns all of the shares of CFC 2. The CFCs are residents of unlisted countries.
- CFC 2 commenced business on 1 July 1997, and for the 2018 income year CFC 2 derived $100 which was attributed under the CFC measures. The company paid no tax on the attributed amount. On 1 August 2018, the company paid its first dividend of $100 to CFC 1, which paid the dividend to Amdoy on the same day.
- All the entities close accounts to 30 June 2019.
- Attribution accounts CFC2
Debit Amount Credit Amount 1 August 2018 dividend to CFC1 $100 30 June 2018 amount attributed to Amdoy $100
- Attribution accounts CFC1
Debit Amount Credit Amount 1 August 2018 dividend to Amdoy $100 30 June 2018 amount attributed to CFC2 $100
- As the $100 attributed from CFC 2 to Amdoy on 30 June 2018 was included in Amdoy's 2018 assessable income, and as the distribution Amdoy received on 1 August 2018 is no more than the income already attributed, Amdoy will treat the dividend as non-assessable non-exempt income.
Proportionate interests in the CFC and in interposed entities
A resident taxpayer might hold only a proportion (that is, less than 100%) of the interests in a CFC. That interest may be held directly or indirectly through interests in other foreign entities.
If you hold an interest of less than 100% in a CFC, only a proportion of the attributable income of the CFC is included in your assessable income. The proportion you use depends on the interest (called the attribution percentage) you have in the CFC: see chapter 1 .
When tracing a distribution made by a CFC through a chain of interposed entities to yourself, note any proportionate interests you have in any of these entities.
Your interest in the CFC, and in each interposed entity, is called your attribution account percentage. This interest may differ from your attribution percentage in an entity. The foreign entities in the chain, along which the attributed income of the CFC is later distributed to you, need not necessarily be controlled foreign entities.
If you have both direct and indirect attribution account interests in an entity, then your attribution account percentage in that entity is the sum of the interests as follows:
|Attribution account percentage||=||Direct attribution account interest||+||Indirect account attribution interest|
How do you work out your direct attribution account interest in an entity?
Your direct attribution account interest in an entity will depend on the type of entity it is.
If the entity is a foreign company, your direct attribution account interest in the company is the same as your direct attribution interest in that company.
If the entity is a partnership of which you are a partner, your direct attribution account interest is the percentage that you hold (and any percentage you are entitled to acquire) of either:
- the partnership's profits,or
- the partnership's property.
If the two percentages differ, use the higher percentage as your direct attribution account interest.
Your interest in a partnership is measured at the end of the accounting period in which the dividend is distributed through the partnership to you. The date of the dividend payment is called the test time. You should assume that you held the same interest in the profits and property of the partnership throughout the accounting period that you held at the test time. When working out your interest in the profits, use the amount of profit for the whole of the period.
Attribution account interest in a partnership
- A resident company owns 100% of CFC 1 which owns a 50% interest in a partnership which owns 50% of CFC 2. CFC 2 pays a dividend to the partnership on 1 August 2018. Income is attributed to the resident company for 2018-19.
- It is necessary to measure the direct attribution account interest of CFC 1 in the partnership in order to measure the attribution account percentage of the resident company in the partnership when the dividend is paid.
If the entity is a trust of which you are a beneficiary, your interest in the trust is the percentage of either the income or property of the trust to which you are presently entitled, and any percentage you are entitled to acquire. If the two percentages differ, use the higher percentage as your attribution account interest.
As in the case of an interest in a partnership, your interest in a trust is measured at the end of the accounting period of the trust in which the dividend is distributed through the trust to you; the date of this payment is called the test time. You should assume that you held the same interest in the income or property of the trust throughout the accounting period as you held at the test time. When working out your interest in the income, use the amount of income earned for the whole period.
How do you work out your indirect attribution account interest in an entity?
Your attribution account percentage in an entity is the sum of your direct and indirect attribution account interests in that entity. To work out your indirect interest in an entity (Entity B) which is held through another entity (Entity A), multiply your direct interest in Entity A by Entity A's direct interest in Entity B.
If there are more than two entities in a chain, continue the process of multiplication along the chain until you reach the entity in which you are measuring your indirect interest.
Example 5: Attribution account interest
- In this case, the resident taxpayer's attribution account percentage in CFC 2 is 61%: that is, the taxpayer has a direct attribution account interest of 25%, plus an indirect attribution account interest of 36%.
Example 6: Direct and indirect attribution account percentage
- The following example shows how to work out direct and indirect attribution account interests and the attribution account percentage in an entity.
- A resident company owns 50% of the share capital of CFC 1, and CFC 1 owns 50% of the share capital of CFC 2. The CFCs are residents of unlisted countries. CFC 2 commenced business on 1 July 2018. For 2018-19, the only income of CFC 2 was attributable income of $100. On 1 August 2018, CFC 2 paid a dividend of $50 to CFC 1.
- The resident company's attribution percentage in CFC 2 is 25%: that is, 50% of 50%. As a result, the resident company's share of the attributable income of the CFC is $25: that is, 25% of $100.
- The dividend of $50 paid to CFC 1 is an attribution account payment. When the dividend is paid to CFC 1, it is necessary to measure how much of the dividend can be treated as a distribution of CFC 2's previously attributed income. The amount is worked out by applying the attribution account percentage of the resident company in CFC 1 to the dividend paid to CFC 1.
- The attribution account percentage of the resident company in CFC 1 is 50%.
- As a result, up to $25 of the dividend can be treated as paid from previously attributed income.
Example 7: Attribution debit
- A resident individual has a direct attribution account interest of 80% in CFC 1. CFC 1 has a direct attribution interest of 90% in CFC 2. The CFCs are resident in unlisted countries.
- CFC 2 commenced business on 1 July 2018. For 2018-19, its only income was attributable income of $100: it paid no tax. On 1 August 2019, it distributed its 2018-19 income. On the same day, CFC 1 distributed the full amount of the dividend it received from CFC 2.
- Attribution accounts CFC2
Debit Amount Credit Amount 1 August 2019 dividend to CFC 1 (see note 2) $72 30 June 2019 attributed income (see note 1) $72
- Attribution accounts CFC1
Debit Amount Credit Amount 1 August 2019 dividend to the resident individual (see note 4) $72 30 June 2019 dividend from CFC 2
(see note 3)
- Note 1: This represents CFC 2's attributable income of $100, multiplied by the resident's attribution percentage in CFC 2, that is, 80% (interest of the resident in CFC 1) x 90% (interest of CFC 1 in CFC 2) x $100 = $72.
- Note 2: This represents the resident's attribution account percentage in the dividend received by CFC 1, that is, 80% of the $90 dividend.
- Note 3: The resident's attribution account percentage in the dividend received by CFC 1, worked out as in note 2.
- Note 4: The dividend paid by CFC 1 to the resident.
- The dividend of $72 received by the resident individual is non-assessable non-exempt income to the extent of the attribution debit that arose when the dividend was paid. As this debit was also $72, the entire dividend is non-assessable non-exempt income.
When should you make a credit in an attribution account?
You must make a credit in an attribution account if you include an amount in your assessable income because an amount of the CFC's income has been attributed to you (section 456). The credit amount will be the amount of the attributed income included in your assessable income under section 456 without any addition for foreign or Australian tax paid by the CFC on that income. You must enter the credit at the end of the CFC's statutory accounting period. Where a company is a CFC at the beginning of its statutory accounting period but ceases to exist during that period, the statutory accounting period is deemed to end immediately before the company ceases to exist. However, in this circumstance, the credit arises at the beginning of the statutory account period.
An amount is included in your assessable income under section 457 where the CFC has both:
- ceased to be a resident of an unlisted country, and
- become a resident of a listed country or of Australia.
Where section 457 applies, the amount of the credit will be the amount you included in your assessable income under section 457, without any addition for foreign or Australian tax the CFC paid on that amount. You must normally enter the credit at the time the CFC changed residence. However, you have the option to defer the credit to the extent it relates to an amount included in attributable income under section 457 for an unrealised gain on a tainted asset.
The credit may be deferred until immediately before the CFC pays a dividend out of profits arising from the subsequent disposal of the asset.
You must also make a credit in an entity's attribution account if:
- that entity receives an attribution account payment from another entity, and
- the payment gives rise to an attribution debit for the paying entity.
The credit amount will be the same as the attribution debit. You must enter the credit on the date of the attribution account payment.
How are credits made when the taxpayer is an Australian partnership or Australian trust?
Only the taxpayer who is actually liable to tax on the attributed income of the CFC can obtain an exemption from tax for distributions of that income. While the Australian partnership is the attributable taxpayer and has attributable income included in its net income, it is the partners of the partnership that are liable for tax in respect of this income as their assessable income includes their share of the net income of the partnership.
A similar result applies in relation to presently entitled trust beneficiaries where the net income included in a presently entitled trust beneficiary's assessable income includes income attributed to the trust under the CFC provisions.
The attribution accounts are intended to ensure that only the relevant partners or trust beneficiaries are entitled to the exemption on distributions of previously attributed income. In these cases, the partners or beneficiaries keep attribution accounts in respect of the relevant CFCs and partnerships or trusts; for attribution account purposes, these entities are known as 'attribution account entities'.
This means that if the income of a CFC is attributed to an Australian partnership (which may include a foreign hybrid limited partnership or foreign hybrid company) or Australian trust, the credit made in the CFC's account is for the partner of the partnership or for the trust beneficiary who is presently entitled to the trust income. If there is no such beneficiary, the credit arises for the trustee.
The credit does not normally arise directly for the partnership or trust itself. There is an exception where the trust is a corporate unit trust, a public trading trust, an approved deposit fund, an eligible superannuation fund or a pooled superannuation trust; there is also an exception for Australian corporate limited partnerships, which are treated as Australian companies for tax purposes.
The amount of the credit made for the partner of a partnership is equal to the increase in the amount included under section 92 in the partner's assessable income, resulting from attributed income being included in the partnership net income. For a trust beneficiary, the credit equals the increase in the amount included under section 97, 98A or 100 in the beneficiary's assessable income, resulting from attributed income being included in the trust net income; the amount calculated is called the 'tax detriment'.
When should you make debits in attribution accounts?
You must make an attribution debit in an entity's attribution account if that entity makes an attribution account payment to either:
- an attributable taxpayer, or
- another attribution account entity.
You must also observe the following two rules:
- You can only make a debit if there is an attribution surplus in the attribution account at the time the attribution account payment is made, that is, the account balance must be more than nil.
- The debit cannot be more than the amount of the surplus in the account at the time.
What is the amount of the attribution debit?
Again, there are two rules to observe:
- If an entity makes an attribution account payment to a resident taxpayer, the debit is the same as the amount of the payment.
- If the entity makes an attribution account payment to another entity, the debit will equal the resident taxpayer's attribution account percentage of the payment received by the second entity.
How are debits made when the attributable taxpayer is an Australian partnership or Australian trust?
If a CFC makes an attribution account payment to an Australian partnership, an attribution debit will arise for the CFC in relation to a partner in the partnership provided that, immediately before the payment is made, there is an attribution account surplus for the CFC in relation to the partner.
The amount of the attribution debt is the lesser of:
- the attribution surplus for the CFC in relation to the partner, and
- the partner's attribution account percentage (in the partnership) of the attribution account payment.
Similarly, an attribution account payment made by a CFC to an Australian trust will give rise to an attribution debit for the CFC in relation to a beneficiary of the trust where there is an attribution account surplus for the CFC in relation to the trust: in this case, the attribution debit will be the lesser of:
- the attribution account surplus for the CFC in relation to the beneficiary, and
- the beneficiary's attribution account percentage (in the trust) of the attribution account payment.
Where such a debit is made for a CFC in relation to a partner in a partnership or beneficiary in a trust, a corresponding attribution credit must also be made for the partnership in relation to the partner or the trust in relation to the beneficiary. This is so that, when calculating the partner's share of the partnership net income, or the beneficiary's share of the trust net income, at year end, there is an attribution account surplus against which to debit the attribution account payment arising from that calculation.
Example 8: Attribution account entries for interest in a CFC held by a foreign hybrid limited partnership
- A resident company (Oz Co) has a 50% interest in the net income of a foreign hybrid limited partnership (FHLP) which owns all of the shares of a CFC. The CFC is a resident of an unlisted country. The unlisted country does not impose tax on these entities. FHLP is an Australian partnership, as Oz Co is a partner. All the entities close their accounts to 30 June.
- In 2018-19, the CFC derived a profit of $200, which was attributed to the foreign hybrid limited partnership under the CFC measures. On 1 August 2019, the CFC paid a dividend out of these profits of $200 to FHLP, to which Oz Co is entitled to 50%, that is, $100.
Attribution accounts CFC
Debit Amount Credit Amount 1 August 2019 Dividend to FHLP (see note 2) $100 30 June 2019 Attributed income (see note 1) $100
Attribution accounts FHLP
Debit Amount Credit Amount 30 June 2020
Share of net partnership income (see note 4)
$100 1 August 2019 Dividend from CFC (see note 3) $100
- Note 1: This represents the tax detriment to Oz Co resulting from income being attributed to FHLP ($200). The income attributed to FHLP gives rise to an attribution credit for the CFC in relation to Oz Co of $100 - subsection 371(6).
- Note 2: This represents Oz Co's attribution account percentage in the dividend paid by CFC to FHLP on 1 August 2019, that is, 50% of the $200 dividend. Oz Co's attribution account percentage of the dividend gives rise to an attribution debit for the CFC in relation to Oz Co of $100 - subsection 372(2).
- Note 3: This represents the attribution credit for FHLP in relation to Oz Co corresponding to the debit for CFC in relation to Oz Co arising as a result of CFC's dividend - subsection 371(1)(d).
- Note 4: This represents the calculation of Oz Co's share of the net partnership income of FHLP. The debit arises at the end of the year of income - subsections 365(1)(b) and 372(1) and (2).
- Oz Co's share of the net partnership income is an attribution account payment by FHLP to Oz Co. As FHLP has an attribution account surplus in relation to Oz Co equal to the amount of the attribution account payment, Oz Co will treat the entire attribution account payment as non-assessable non-exempt income.
Dividends other than non-portfolio dividends
Portfolio dividends are generally taxable unless they are paid from profits taxed previously on an accruals basis. Portfolio dividends are dividends that do not qualify as non-portfolio dividends.
You must maintain an attribution account for each CFC from which income is attributed to you. For an explanation of how these accounts are maintained, see Attribution accounts.
Sub-division 768-A of the ITAA 1997 is also applied in determining the attributable income of a controlled foreign company (CFC) to which a foreign company distribution is made.
It is possible that a resident taxpayer with an interest in an unlisted country CFC may try to minimise Australian tax by arranging for the CFC to distribute benefits in a form other than dividends to its shareholders or their associates.
There are rules to prevent this form of tax avoidance in section 47A. These rules deem certain transfers and payments made by an unlisted country CFC to be dividends; these dividends are then taxed in the normal way.
For section 47A to apply, a CFC must provide a benefit to:
- a resident who is a shareholder or an associate of a shareholder of the CFC, or
- another CFC or controlled foreign trust, directly or through other entities, where the first entity that received the dividend is a shareholder or an associate of a shareholder of the CFC.
When should you deem a dividend to have been paid by a CFC?
Types of benefits that are covered under section 47A
The following seven types of benefits provided by a CFC could be treated as dividends:
|the waiver by the CFC of a debt owed by another entity|
|the grant by the CFC of a non-arm's-length loan to another entity|
|the grant by the CFC of a loan (whether at arm's-length or not) to another entity to facilitate, directly or indirectly, the payment by that entity of a dividend that would be non-assessable non-exempt income|
|the transfer by the CFC to another entity of property or services for no consideration, or for inadequate consideration|
|a payment made by the CFC for allotment of:
|a payment made by the CFC in respect of calls on shares in another company|
|the grant by the CFC of a loan (whether at arm's-length or not) to another entity to facilitate a transaction of the type referred to in any of the above points.|
Treat the fifth and sixth types of payments as dividends only if:
- a shareholder of the CFC (or shareholder's associate) holds any direct interest, or later acquires any direct interest, in any of the shares of the company in which the CFC acquired shares or in the unit trust in which the units were acquired, or
- the company (or unit trust) uses the proceeds of the issue to facilitate a transaction providing any of the above types of benefits.
Entities providing and receiving the benefit
For a benefit to be treated as a deemed dividend, the benefit must be provided by the CFC to a shareholder or an associate of a shareholder.
The benefit must be provided by either:
- an unlisted country CFC, or
- another entity under an arrangement with the CFC, where the CFC has transferred property or services in consideration for the benefit to:
- the other entity, or
- any other entity.
These transfers of property or services are referred to as arrangement transfers.
The time the benefits are deemed to have been provided
The following table sets out some of the types of benefits provided by a CFC that are subject to section 47A, the time at which they are taken to be provided and the amount of the benefit.
Some types of benefits provided by a CFC
|Type of benefit||Time||Amount|
|Waiver of a debt||Time the debt was waived||Amount of the debt|
|non-arm's-length loan||Time the loan was made||Amount of the loan|
|Transfer of property for no consideration||Time the property was transferred||Market value at time of transfer|
|Transfer of property or services for a consideration less than market value||Time the property or services were transferred||Difference between the market value of the property or services and the consideration paid|
|Payment or transfer of property for the allotment of shares or units||Time the payment or transfer was made||Amount paid or market value of the property transferred|
|Benefit provided by another entity under an arrangement with the CFC (if there is one 'arrangement transfer')||Time the CFC made the arrangement transfer||Amount of the arrangement transfer or market value of arrangement transfer|
|Benefit provided by another entity under an arrangement with the CFC (if there are several arrangement transfers)||Time the agreement to make the arrangement transfers was entered into||Total amount of the arrangement transfers or the total market value of the arrangement transfers|
Working out the amount of the deemed dividend
The amount of a benefit that can be treated as a dividend paid by a CFC cannot be more than the CFC's profits at the time the benefit was provided.
In this context, 'profits' do not mean distributable profits: 'profits' in this situation mean 'commercial profits' of either an income or capital nature that the company has at the time the benefit is provided. Work out these profits at the time the company provided the benefit.
If the CFC provided a benefit by transferring property or services at less than their market value, work out the CFC's profits at the time the benefit was provided as if the property or services were transferred for their full market value.
Effect of deeming a benefit to be a dividend
A deemed dividend paid to a resident taxpayer is generally treated the same as other dividend payments; for example, a deemed dividend that is qualified as foreign equity distribution on participation interests under Subdivision 768-A, and paid by an unlisted country CFC to an Australian company is treated as non-assessable non-exempt income.
Disclosure of deemed dividends
You will be denied access to certain tax offsets and concessions in relation to a section 47A deemed dividend if you:
- do not disclose the deemed dividend in your tax return, and
- do not notify us of the deemed dividend within one year of the end of the income year in which the dividend is deemed to have been paid.
The tax offsets and concessions you lose are:
- any tax offsets for foreign taxes you have paid on the dividend, and
- any possibility that a part of the deemed dividend may qualify as non-assessable non-exempt income under section 23AI.
The deemed dividend will also not give rise to an attribution credit.
Foreign branch income of a resident company that is not assessable
Which resident companies qualify?
Two broad groups qualify to have certain branch profits treated as non-assessable non-exempt income. These are resident companies that either:
- carry on business through a permanent establishment: for example, a branch, or
- are partners of a partnership or are presently entitled beneficiaries of a trust, and that partnership or trust carries on business through a permanent establishment.
Non-assessable non-exempt income treatment does not apply to resident taxpayers, other than companies, with foreign permanent establishments.
What is a permanent establishment?
A permanent establishment includes a fixed place of business. The term 'permanent establishment' is defined in section 6 of the Act.
If the country in which an Australian company has a permanent establishment is one with which Australia has a double-taxation agreement, the meaning of the term permanent establishment is determined by the agreement.
Permanent establishments are referred to as branches in this part.
What income is non-assessable non-exempt?
Whether branch profits are treated as non-assessable non-exempt income depends on whether the branch is in a listed or unlisted country.
Non-assessable non-exempt income treatment
Branches in listed countries
In general, non-assessable non-exempt income treatment may be available for income derived by a resident company through a branch in a listed country if:
- the income is from carrying on a business in the listed country, and
- the branch satisfies an active income test.
Non-assessable non-exempt income treatment is not available for income derived through a branch in a listed country if:
- the branch does not satisfy the active income test, and
- the income is both adjusted tainted income and eligible designated concession income.
You must test each item of income individually against these criteria to see if it is non-assessable non-exempt income.
Branches in unlisted countries
Non-assessable non-exempt income treatment is generally available for income derived by a resident company through a branch in an unlisted country if:
- the income is from carrying on a business in the unlisted country, and
- the branch satisfies an active income test.
Non-assessable non-exempt income treatment is not available for income derived through a branch in an unlisted country if:
- the branch does not satisfy the active income test, and
- the income is adjusted tainted income.
The same concept of adjusted tainted income is used for this purpose as that used in determining the attributable income of a CFC. However, the following modifications apply in determining the adjusted tainted income of a branch:
- the passive income of a branch conducting life assurance activities is not reduced under subsection 446(2)
- a branch and its Australian head office are treated as separate legal entities for the purpose of determining whether the branch has derived tainted sales income, and
- branches of Australian financial institutions are provided with an exemption for banking income broadly consistent with the exclusion from accruals taxation available under the CFC measures for Australian financial institution's subsidiaries.
An active income test concession is provided to allow branches in both listed and unlisted countries to derive up to 5% of gross turnover as tainted income, and still obtain non-assessable non-exempt income treatment under section 23AH for income amounts.
Broadly, this active income test is the same as that for CFCs - the following modifications are made to the test for branches:
- the only amounts taken into account are those derived through the branch
- the income year of the company with the branch is used for the purposes of the test
- those conditions of the active income test relating to the existence and residency of a CFC do not apply because they are not relevant to branches, and
- the modifications to the adjusted tainted income of a branch referred to above also apply in determining the adjusted tainted income of the branch for the purposes of the active income test.
What branch capital gains are non-assessable non-exempt income?
Permanent establishment in a listed country
A resident company includes in the calculation of its net capital gains any capital gain or capital loss as a result of a capital gains tax (CGT) event happening in relation to a tainted asset that is used in carrying on a business through a permanent establishment in a listed country if:
- the gain is also eligible designated concession income, or
- there is a loss, but there would have been eligible designated concession income if the loss had instead been a gain.
Permanent establishment in an unlisted country
A resident company includes in the calculation of its net capital gains any capital gain or capital loss arising as a result of a CGT event happening in relation to a tainted asset that is used in carrying on a business through a permanent establishment in an unlisted country.
Effect of non-assessable non-exempt income treatment on a resident company's deductions, losses and foreign income tax offsets
A deduction is not allowable for:
- outgoings or expenses incurred in producing branch income and gains that are non-assessable non-exempt income
- capital losses on the disposal of a branch asset if, had there been a profit on the disposal, the profit would have been non-assessable non-exempt income.
Current year losses or carried forward losses of a resident company are not reduced by branch income or gains that are non-assessable non-exempt income.
Foreign income tax offsets are not allowed for foreign taxes paid on branch income that is non-assessable non-exempt income.
|1 July 2002||Original document|
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