Foreign income return form guide

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Chapter 5 Proving your assessment

Overview

You will need to keep receipts, invoices, ledgers and other accounting records of a company or trust that relate to the calculation of its notional assessable income.

In addition, you will need to keep details of your interest in the company, the interests of your associates and how you worked out the amount you included in your assessable income.

This chapter also explains the substantiation requirements of the active income test, the use of offshore information notices, and the keeping of records of elections.

This chapter also explains the record-keeping requirements for accessing FIF exemptions.

Overview table

PartSubjectApplies toActionIf not done
Part 1 Record keeping for CFC attributable taxpayersAttributable taxpayerKeep records of CFC attributable amountProsecution, with a maximum penalty of 30 penalty units. The value of the Commonwealth penalty unit increased from $180 to $210, effective from 1 July 2017 under Crimes Amendment (Penalty Unit) Act 2017.
Part 2 Passing the active income testAttributable taxpayerSupply accounts and accounting information to us 
Part 3 Can we ask you to get information from overseas?TaxpayerProduce documentsEvidentiary sanction: no documents can be used in evidence without the consent of the Commissioner of Taxation (Commissioner)  
Part 4 What records of elections must you keep?CFC or taxpayerMake election  Treated as if no election made
Part 5 Record keeping for FIF attributable taxpayersTaxpayerKeep records of post-FIF abolition debits and credits 

Part 1 Record keeping for CFC attributable taxpayers

Who needs to keep records?

You must keep records (as set out below) if you are an attributable taxpayer of:

  • a controlled foreign company (CFC), or
  • a non-resident trust estate.

An attributable taxpayer is a person who:

  • alone, or together with associates, has an interest in a CFC or a controlled foreign trust of at least 10%, or
  • is a transferor of a non-resident trust, or
  • is one of the actual controllers of the CFC with an interest of at least 1%.

Record keeping for a controlled foreign company

You will need to keep records of your interest in a CFC and of its financial transactions if you meet both of the following conditions:

  • you are an attributable taxpayer of a controlled CFC at the end of the company's statutory accounting period, and
  • the company has attributable income.

You must keep records of:

  • the circumstances that resulted in your becoming an attributable taxpayer for the statutory accounting period of the CFC
  • how you worked out your direct and indirect attribution interest and your attribution percentage for the CFC's statutory accounting period, and
  • how you worked out the amount you included in your assessable income.

You must keep records of your calculations even if they show that no amount is to be included in your assessable income.

Specific record-keeping requirements called attribution accounts apply where an amount is included in an attributable taxpayer's assessable income because a CFC paid a dividend to another controlled entity.

Record keeping for non-resident trusts

You are required to keep records for a non-resident trust estate if you are an attributable taxpayer in relation to the trust estate.

You must keep records of:

  • how you became an attributable taxpayer for the non-resident trust
  • how you worked out the trust's attributable income for each of the trust's income years which falls wholly or partly within your year of income, and
  • how you worked out the amount included in your assessable income.

If you cannot get the information necessary to work out the trust's attributable income, the amount to be included in your assessable income is worked out using a formula, see chapter 2 .

You must keep these records even if no amount is to be included in your assessable income.

Record keeping for partnerships

A partnership needs to keep records if it is an attributable taxpayer.

A partnership may be an attributable taxpayer if it:

  • has transferred property or services to a non-resident trust, or
  • is an attributable taxpayer in relation to a controlled foreign company.

Each individual partner could be liable if the partnership breaches the record-keeping requirements.

What happens if the records are not kept?

You may be prosecuted and fined up to 30 penalty units by a court if you fail to keep adequate records.

You will not be convicted if you can show that any of the following statutory defences apply to you:

  • you did not know that you had an obligation to keep the records and you had no reason to suspect the obligation existed; if you suspected that the record- keeping requirements applied to you, you won't be able to claim the benefit of this exemption, or
  • you did not know that you had an obligation to keep the records even after you had made all reasonable efforts to find out whether there was an obligation to keep the records, or
  • if you have made all reasonable efforts to obtain the information required but simply can't get it. If you had actual or effective control of the company or another entity which has the information, you would not be considered to have made a reasonable effort unless you used your position of influence in a genuine attempt to get the information required.

If you wish to take advantage of any of these exemptions, you will have to prove that reasonable grounds existed or that you made reasonable efforts; to do this, you will need to keep a record of the efforts you have made to get the information.

How should the records be kept and for how long?

If you are required to keep records, you must do the following:

  • Keep written records in English. If records are not in a written form (for example, if kept on magnetic tape or computer disc) you must be able to get access to them readily to convert them into written English.
  • Keep records in a way that allows your tax liability to be readily determined.
  • Keep the records either for five years after they were prepared or obtained, or for five years after the completion of the transactions to which those records relate, whichever is the later.

The records need not necessarily be kept in Australia, but they must be kept by the attributable taxpayer; this means that you, as the attributable taxpayer, are responsible for the custody and control of the records. If an Australian company allows its CFC to physically keep records outside Australia, the Australian company must maintain custody and control of those records.

Are you required to keep attribution accounts?

There is no legal requirement for an attributable taxpayer of a CFC to keep attribution accounts. However, taxpayers are required to keep records that explain all transactions and other acts relevant to (among other statutes) the Income Tax Assessment Act 1936 and Income Tax Assessment Act 1997 . A taxpayer must maintain adequate records to substantiate their tax treatment of dividends paid by a CFC: for example, as non-assessable non-exempt income, or as conduit foreign income.

Part 2 Passing the active income test

Who has to prove they have passed the test?

A person who is an attributable taxpayer for a CFC and who claims that the CFC has passed the active income test may be asked to prove that the CFC has passed the test.

How do you prove that you meet the requirements?

If you wish to claim that a CFC has passed the active income test (see chapter 1 ) you must:

  • ensure that the company has kept accounts for the statutory accounting period; these accounts must
    • be prepared in accordance with commercially accepted accounting principles
    • give a true and fair view of the financial position of the company
  • ensure that the CFC will assist by providing accounting and other information which we may ask you to supply.

Commissioner's notice to an attributable taxpayer

If you prepared a tax return claiming the active income test exemption, we may give you a Commissioner's notice asking you to prove that the test has been passed. In this notice, the Commissioner will ask you to get copies of accounts and other documents from the CFC.

If the documents are not in English, you will have to translate them and give the documents and translations to us within the allotted time.

We will allow you a minimum of 90 days to produce these documents. If you want extra time, you must apply in writing to us before the time runs out. We may agree to extend the time allowed.

Extra time will be taken to be granted if we have not answered your request before the time allowed runs out.

Taxpayer's notice to a CFC

To get the documents from the CFC, you may send the CFC a written request , called a 'taxpayer's notice'.

General accounting records

So that you can get the documents that we may ask for, we require the company to keep general accounting records. These may be kept either in Australia or elsewhere.

These records include:

  • invoices
  • receipts
  • orders for the payment of money
  • bills of exchange
  • cheques
  • promissory notes
  • vouchers
  • other documents of prime entry.

The records would also include any working papers and other documents necessary to explain how the accounts are made up.

General accounting records should also correctly record and explain the matters, transactions, acts and operations that are relevant to the preparation of the CFC's recognised accounts for the statutory accounting period. These records must be available if we need to check the matters and figures in the accounts.

Recognised accounts

Recognised accounts are accounts kept for the statutory accounting period that are:

  • prepared in accordance with commercially accepted accounting principles, and
  • give a true and fair view of the financial position of the company.

These accounts include:

  • journals
  • ledgers
  • profit and loss accounts
  • balance sheets
  • other financial statements
  • reports and notes attached to, or intended to be read with, the accounts.

The company must keep both the recognised accounts and the general accounting records for five years, starting from the end of the company's statutory accounting period.

If you ask the CFC for copies of documents included in or drawn from the recognised accounts and general accounting records, the CFC must give them to you; but you must allow the CFC at least 60 days to comply.

In your taxpayer's notice to the CFC, you may ask the CFC for any or all of the following:

  • copies of the recognised accounts of the company for the statutory accounting period
  • copies of the general accounting records of the company for the statutory accounting period
  • copies of a document showing how the tainted income ratio of the company was worked out for the statutory accounting period; this document will summarise information drawn from the recognised accounts and general accounts to work out the tainted income ratio.

CFC's notice to its partnership

If the CFC is a partner in a partnership, the CFC may ask the partnership for information it needs to answer the taxpayer's notice. The CFC's notice must allow the partnership at least 30 days to comply.

Minimum time for notice to produce documents

ATO>Taxpayer

minimum 90 days notice
>CFC

minimum 60 days notice
>Partnership

minimum 30 days notice

What will happen if you don't fully meet the substantiation requirements of the active income test?

If you refuse or fail to comply with the Commissioner's notice, you have not committed an offence; you will not be prosecuted if the CFC or a partnership involving a CFC does not keep the records listed above.

However, if you fail to meet the substantiation requirements because you have not produced the documents requested, the CFC will be treated as if it has failed the active income test. As a result, we may amend your tax assessment to include attributable income. You may also have to pay the shortfall interest charge and a penalty in respect of the tax that would have been paid if you had treated the active income test as applying to you.

Part 3 Can we ask you to get information from overseas?

Offshore information notices

If we believe that information relevant to your assessment is held overseas, you may receive a written 'offshore information notice' asking to provide the information.

We will give you 90 days to supply the information. You may ask for extra time by applying in writing to one of our offices before the time runs out. If you are allowed extra time, you will be advised of this in writing. The extra time will be given if we have not answered your request before the time allowed runs out.

We may change the notice in writing to:

  • reduce its scope, or
  • correct a clerical error or obvious mistake.

We may also issue you with another notice, or vary or withdraw a notice.

If you fail or refuse to comply with an offshore information notice, you have not committed an offence.

However, if you don't give us all of the information asked for, you could be stopped from using it as evidence in proceedings in which you dispute the assessment.

We may consent to information being admissible in proceedings where the Commissioner considers that its use would not be misleading.

Part 4 What records of elections must you keep?

If you have been required to do any of the following when working out your attributable income, you are required to keep a record of having done so:

  • make an election
  • make a declaration
  • make a selection, or
  • give certain notices to us.

You are also required to keep a record of a CFC's election if you are claiming the benefit made either:

  • under capital gains tax rollover provisions, or
  • due to a change in its statutory accounting period.

The CFC may make an election to vary its statutory accounting period from the standard period ending 30 June.

Part 5 Record keeping for FIF attributable taxpayers

You should maintain records relating to your FIF attribution accounts: for more information, see FIF attribution accounts .

Keeping these records enables you to correctly calculate your entitlement to:

  • the exemption of distributions paid out of profits which were previously attributed to you (section 23AK), and
  • a reduction of the amount to include in your assessable income after the disposal of a FIF interest (section 23B).

ATO references:
NO 51231-2

Foreign income return form guide
  Date: Version:
  1 July 2002 Original document
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