Foreign investment funds guide (current to 30 June 2010)

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Chapter 3: Exemptions

This document has been archived. It is current only to 30 June 2010.

To allow the FIF measures to focus on cases that provide the greatest opportunity for deferral of Australian tax, there are a number of exemptions from FIF taxation set out in Part   XI:

• attributable taxpayers under the CFC or the transferor trust measures
• an interest in an active business
• an interest in a foreign bank
• an interest in a foreign holding company of a foreign bank
• an interest in a foreign life insurance company
• an interest in a foreign holding company of a foreign life insurance company
• an interest in a foreign general insurance company
• an interest in a foreign holding company of a foreign general insurance company
• an interest in a foreign company engaged in certain real property activities
• an interest in a foreign holding company of a foreign company engaged in certain real property activities
• an interest of $50,000 or less
• temporary residents
• an interest in an employer-sponsored foreign superannuation fund
• an interest in a FIF that is trading stock
• an interest in a foreign company principally engaged in several activities
• an interest in a foreign holding company of a foreign mixed activity company
• an interest in a premium trust fund by an underwriting member of Lloyd's
• a balanced investment portfolio in FIFs
• an interest in certain FIFs resident in the United States
• complying Australian superannuation entities and interests in certain assets of life insurance companies and certain fixed trusts.

Exemption for attributable taxpayers

Apart from the FIF regime, there are two other components of the foreign source income attribution regime:

• the CFC measures, and
• the transferor trust measures.

These measures attribute specified income and gains of foreign companies and trusts to certain Australian residents - known as attributable taxpayers.

If the FIF measures overlap with the other components of the foreign source income regime, the CFC or transferor trust measures apply and, in general, the FIF measures will not apply. However, if a CFC, either directly or through a CFT or transferor trust, holds an interest in a FIF, the FIF measures do apply in working out the attributable income of those entities. [sections 492, 493 and 494]

Exemption for active business

The active business exemption exempts you from taxation under the FIF measures for interests you have in foreign companies principally engaged in certain active businesses, being eligible activities as defined in Division   3, Part   XI. [sections 496 and 497]

This exemption also applies when working out:

• the net income of a trust estate where the trust invests directly in a foreign company engaged in an active business, and
• the FIF income of a CFC or a CFT - because the income of a CFC or CFT is worked out as though they were a resident taxpayer.

This exemption does not apply to an interest in a non-resident trust.

What are eligible activities?

To be eligible for the active business exemption, you must establish that the foreign company was principally engaged in one or more eligible activities. [sections 496 and 497]

All business activities (including the provision of services) that are not named in Schedule   4 of the ITAA 1936 are eligible activities (for a complete list, see Appendix   2: Business activities that are not eligible activities ). For example, mining, agriculture and the management of funds are eligible activities. However, some of those activities listed in Schedule   4 as not eligible may still be exempt by virtue of another specific exempting provision - see Appendix   2 for more information.

There are two methods for establishing whether a foreign company is principally engaged in eligible activities:

• the stock exchange listing method, and
• the balance sheet method.

If both of the methods can be applied, you may choose which one to use. [section 498]

The stock exchange listing method

You can use the stock exchange listing method to decide whether a FIF is principally engaged in one or more eligible activities.

Your interest in the FIF must be included in a class of interests quoted on a stock market of an approved stock exchange. See Appendix   1: Approved stock exchanges for more information. [section 499]

Under this method, your interests in the FIF will be exempt if you can establish that the foreign company FIF is included in a class of companies classified or designated as engaged in an eligible activity on either:

• an approved stock exchange, or
• an approved international sectoral classification system - see Appendix   3: Approved international sectoral classification systems for more information.

The balance sheet method

The balance sheet method tests whether a foreign company was principally engaged in eligible activities by reference to its balance sheet and, if appropriate, the balance sheets of its subsidiaries. [subsection 500(1)]

A company is principally engaged in eligible activities if 50% or more of the gross value of the company's assets were for use in eligible activities - the '50% assets test'. [subsection 500(2)]

This percentage is worked out as follows:

Gross value of the company's assets used in eligible activities Gross value of all of the company's assets

X

100 1

The gross value of an asset is its value shown in the company's balance sheet prepared for reporting to the shareholders on an annual basis.

The balance sheet test cannot be used if the balance sheet for the company was not prepared in accordance with commercially accepted accounting principles or if it does not give a true and fair view of the financial position of the company. [subsection 500(9)]

Balance sheet method and lower tier companies

An offshore holding company may not satisfy the active business exemption in its own right under the balance sheet test if the company does not have any active business of its own. To prevent this, the active business exemption allows the first-tier foreign holding company to look through to the underlying assets of certain subsidiaries.

This look-through rule is available if a holding company owns 50% or more of the paid-up share capital of another company, either directly, indirectly or in a combination of these.

Companies that satisfy this requirement are referred to as subsidiaries of the holding company. [subsection 500(3)]

The holding company treats its share of the underlying assets of its subsidiaries as its own in using the balance sheet method to claim the active business exemption. [subsection 500(3)]

There is no limit to the number of tiers of companies a holding company may look through, provided the holding company has an indirect ownership interest of 50% or more in the lowest tier company being tested. [sections 501 and 500]

Whenever the look-through rule applies, any intercompany indebtedness in relation to the holding company and its subsidiaries is not taken into account when working out the percentage of the holding company's assets used in eligible activities. Shares held by the holding company or its subsidiaries in subsidiaries of the holding company are also not taken into account. [subsection 500(5)]

Exemption for an interest in a foreign bank

You can get an exemption for your interest in a foreign bank if the following requirements are satisfied:

• Approved stock exchange

You must hold shares in the bank of a class listed on a stock exchange approved in regulation 152I, Schedule   12 of the Income Tax Regulations 1936 (the Regulations). See Appendix   1: Approved stock exchanges for more information. Unlisted shares issued by some banks as a substitute for deposits with the bank would not satisfy this criterion.

• Trading requirement

The class of shares you hold in the bank must be widely held and actively traded on a regular basis on a stock market of an approved stock exchange during the period for which you are seeking the exemption.

• Authorised to carry on banking business

The bank must be authorised under the law of its place of residence to carry on banking business.

• Principally engaged in the banking business

The bank must be principally engaged in the active carrying on of banking business. [section 503]

Exemption for an interest in a foreign holding company of a foreign bank

Some banking businesses are structured so that shares in the licensed bank are held by a holding company. Members of the public invest in the bank by acquiring publicly listed shares in the holding company.

To allow for this, the exemption for certain shares in a publicly listed foreign bank is extended to an interest that an Australian resident holds in a holding company with a wholly owned subsidiary that is a foreign bank. [section 504]

A company will qualify for the exemption from the FIF measures as a holding company of a bank if the following requirements are satisfied:

• Approved stock exchange

You hold shares in the holding company of a class listed on any stock market of a stock exchange approved in regulation   152I, Schedule   12 of the Regulations. See Appendix   1: Approved stock exchanges for more information.

• Designated a bank

The holding company is included in a class of companies designated as a bank or engaged in banking on either:

• an approved stock exchange, or
• an approved international sectoral classification system.

See Appendix 3: Approved international sectoral classification systems for more information.

• Trading requirement

The class of shares you have in the holding company must be widely held and actively traded on a regular basis on a stock market of an approved stock exchange during the period in which the exemption applies.

• Subsidiaries principally engaged in banking business

If the holding company has only one wholly owned subsidiary, that subsidiary must be authorised under the law of its place of residence to carry on banking business and have been principally engaged in the active carrying on of a banking business.

If the holding company has more than one wholly owned subsidiary, the principal activities of the wholly owned subsidiaries in the group, considered together, must be the active carrying on of a banking business. At least one of the wholly owned subsidiaries must be authorised under the law of its place of residence to carry on a banking business.

Exemption for an interest in a foreign life insurance company

This exemption allows you to invest in a foreign life insurance company without attracting FIF taxation. [section 506]

A foreign company is considered to be engaged in life insurance business (as defined in the Life Insurance Act 1995 ) only if:

• the company is authorised in its country of residence to carry on life insurance business, and
• the balance sheet of the company shows that at least 50% of the gross value of the company's assets were for use in carrying on life insurance business. [section 507 and definition of 'life insurance business' in section 470]

The look-through rule

If the foreign life insurance company has an interest in a subsidiary company, the foreign life insurance company can look through to a 50%, or more, owned subsidiary. The look-through rule allows the subsidiary's assets to be looked at to decide whether the foreign life insurance company passes the 50% assets test. [subsections 507(3) to (11)]

Exemption for an interest in a foreign holding company of a foreign life insurance company

A company qualifies for this exemption if the following requirements are satisfied:

• Approved stock exchange

You must hold shares in the holding company of a class listed on any stock market of a stock exchange approved in regulation 152I, Schedule   12 of the Regulations. See Appendix   1: Approved stock exchanges for more information.

• Designated a life insurance company

The holding company is included in a class of companies designated as engaged in the carrying on of life insurance business on either:

• an approved stock exchange, or
• an approved international sectoral classification system.

See Appendix 3: Approved international sectoral classification systems for more information.

• Trading requirement

The class of shares you have in the holding company must be widely held and actively traded on a regular basis on a stock market of an approved stock exchange during the period in which the exemption applies.

• Subsidiaries principally engaged in life insurance business

If the holding company has only one wholly owned subsidiary, that subsidiary must be authorised under the law of its place of residence to carry on life insurance business, and have been principally engaged in the active carrying on of life insurance business.

If the holding company has more than one wholly owned subsidiary, the principal activities of the wholly owned subsidiaries in the group, considered together, must be the active carrying on of life insurance business. At least one of the wholly-owned subsidiaries must be authorised under the law of its place of residence to carry on life insurance business.

Whether the subsidiary or subsidiaries were principally engaged in the active carrying on of life insurance business is decided by a balance sheet test. This test requires that at least 50% of the gross value of the subsidiary company's assets were for use in carrying on life insurance business as defined in section   11 of the Life Insurance Act 1995 . [section 507A and definition of 'life insurance business' in section 470]

Exemption for an interest in a foreign general insurance company

Australian residents with shares in a publicly listed general insurance company can get this exemption if the following requirements are satisfied:

• Approved stock exchange

Shares you hold in the company must be of a class listed on any stock market of a stock exchange approved in regulation 152I, Schedule   12 of the Regulations. See Appendix   1: Approved stock exchanges for more information.

• Trading requirement

The class of shares you hold in the company must be widely held and actively traded on a regular basis on a stock market of an approved stock exchange during the period in which the exemption applies.

• Authorised to carry on general insurance business

The general insurance company must be authorised under the law of its place of residence to carry on general insurance business. This requirement ensures that the company meets regulatory requirements for general insurance businesses in its country of residence.

• Principally engaged in general insurance business

The general insurance company must also be principally engaged in the active carrying on of general insurance business during the period in which the exemption applies. [section 509]

Exemption for an interest in a foreign holding company of a foreign general insurance company

A company will qualify for this exemption if the following requirements are satisfied:

• Approved stock exchange

The shares you have in the holding company must be of a class listed on any stock market of a stock exchange approved in regulation 152I, Schedule   12 of the Regulations. See Appendix   1: Approved stock exchanges for more information.

• Designated a general insurance company

The holding company is included in a class of companies designated as engaged in the carrying on of general insurance business on either:

• an approved stock exchange, or
• an approved international sectoral classification system.

See Appendix 3: Approved international sectoral classification systems for more information.

• Trading requirement

The class of shares you have in the holding company must be widely held and actively traded on a regular basis on a stock market of an approved stock exchange.

• Subsidiaries principally engaged in general insurance business

If the holding company has only one wholly owned subsidiary, that subsidiary must be authorised under the law of its place of residence to carry on general insurance business, and be principally engaged in the active carrying on of general insurance business.

If the holding company has more than one wholly owned subsidiary, the principal activities of the wholly owned subsidiaries in the group, considered together, must be the active carrying on of general insurance business. At least one of the wholly owned subsidiaries must be authorised under the law of its place of residence to carry on general insurance business. [section 509A]

Exemption for an interest in a foreign company engaged in certain activities connected with real property

You can qualify for this exemption if you have an interest consisting of shares in a publicly listed company principally engaged in certain types of activities connected with real property. [section 511] The following requirements must be satisfied:

• Approved stock exchange

You hold shares in the company of a class listed on any stock market of a stock exchange approved in regulation 152I, Schedule   12 of the Regulations. See Appendix   1: Approved stock exchanges for more information.

• Trading requirement

The class of shares you hold in the foreign company must be widely held and actively traded on a regular basis on a stock market of an approved stock exchange during the period in which the exemption applies. [section 511]

• A foreign company principally engaged in real property activities

The foreign company must be principally engaged in actively carrying on one or more activities connected with real property.

The specified activities are:

• construction
• development of real property through capital improvement
• receipt of rental income from commercial real property owned by the foreign company where the management, maintenance and security services for the commercial property are principally provided by directors or employees of the foreign company or by a wholly owned subsidiary that is principally engaged in providing those services through its directors and employees
• provision of management services in respect of real property through directors or employees of the foreign company
• acting as agent in connection with the sale or purchase of commercial real property. [subparagraph 511(b)(ii)]

Exemption for an interest in a foreign holding company of a foreign real property company

A company will qualify for the exemption from the FIF measures as a holding company of a real property company if the following requirements are satisfied:

• Approved stock exchange

You hold shares in the holding company of a class listed on any stock market of a stock exchange approved in regulation 152I, Schedule   12 of the Regulations.

See Appendix   1: Approved stock exchanges for more information.

• Designated a real property company

The holding company is included in a class of companies designated as engaged in carrying on one or more of the specified activities mentioned above on either:

• an approved stock exchange, or
• an approved international sectoral classification system.

See Appendix 3: Approved international sectoral classification systems for more information.

• Trading requirement

The class of shares you have in the holding company must be widely held and actively traded on a regular basis on a stock market of an approved stock exchange.

• Subsidiaries principally engaged in real property activities

If the holding company has only one wholly owned subsidiary, that subsidiary must be principally engaged in the active carrying on of one or more of the activities mentioned above that are connected with real property.

If the holding company has more than one wholly owned subsidiary, the principal activities of the wholly owned subsidiaries in the group, considered together, must be the active carrying on of one or more of the activities mentioned above. [section 511A]

Exemption for an interest of A$50,000 or less

Individuals (other than trustees) with small levels of offshore investments can qualify for an exemption. You may qualify for this exemption in one of two ways:

1. If the total of your interests and your associates' interests in foreign companies, trusts and life policies does not exceed A$50,000, the FIF taxation provisions will not apply to your investments. [subsection 515(1)]
   
    
2. If the total of your interests and your associates' interests in foreign companies, trusts and life policies and interests in resident public unit trusts does not exceed A$50,000, the FIF taxation provisions will not apply in calculating your share of net income of the resident public unit trust. [subsection 96A(2)]

Associates

Your associates include:

• Your 'spouse' includes another person (whether of the same sex or opposite sex) who:
  • you were in a relationship with that was registered under a prescribed state or territory law,
  • although not legally married to you, lived with you on a genuine domestic basis in a relationship as a couple.
• your child, whether or not the child lives with you and includes children of same sex relationships
• your stepchild who lives with you
• your partner in a partnership and a spouse or child of the partner
• a trustee of a trust, other than a public unit trust or a complying superannuation fund, a non-complying superannuation fund, a complying approved deposit fund, a non-complying approved deposit fund or a pooled superannuation trust - if you or an associate benefit under the trust, and
• a company in which you and your associates have a majority voting interest or which is sufficiently influenced by you and your associates.

If you are under 18 years of age, your associates include, in addition to the above:

• your parents, and
• your brother or sister. [section 491]

Direct interests in FIFs and FLPs

If you and your associates' direct interests in FIFs and FLPs are A$50,000 or less, the FIF taxation provisions do not apply. [subsection 515(1)]

Direct interests in resident public unit trusts

This test measures your and your associates' interests in Australian resident public unit trusts, FIFs and FLPs.

If the total of these interests is A$50,000 or less, your share of the net income of the resident public unit trust will not include any amount included in the net income of the trust under the FIF measures because of the FIF interests held by the trust.

If the interests are more than A$50,000 under both tests, you do not qualify for the exemption. The example below sets out how the exemption applies. [subsection 96A(2)]

Example: Exemption for interests of A$50,000 or less

A	B
Direct interests of taxpayer and associates in FIFs and FLPs	Direct interests of taxpayer and associates in resident public unit trusts	Total (A   +   B)	Does small investor exemption apply to direct interests in FIFs and FLPs?	Does small investor exemption apply to direct interests in resident public unit trusts?
$30,000	$15,000	$45,000	Yes	Yes
$26,000	$25,000	$51,000	Yes	No - therefore taxpayer's share of the net income of the resident public unit trust includes those amounts which relate to FIF income of the trust.
$50,000	$1,000	$51,000	Yes	No - therefore taxpayer's share of the net income of the resident public unit trust includes those amounts which relate to FIF income of the trust.
$1,000	$60,000	$61,000	Yes	No - therefore taxpayer's share of the net income of the resident public unit trust includes those amounts which relate to FIF income of the trust.
$60,000	$60,000	$120,000	No	No - therefore taxpayer's share of the net income of the resident public unit trust includes those amounts which relate to FIF income of the trust.

Exemption for temporary residents

From 1   July 2006, if you are a temporary resident at the end of an income year the FIF provisions will not apply to an interest you hold in a FIF or FLP for the notional accounting period that ends in that income year, in accordance with section   768-965 of the ITAA 1997.

You will qualify as a temporary resident under the definition of that term in subsection 995-1(1) of the ITAA 1997 if you meet all of the following conditions:

• you hold a temporary visa granted under the Migration Act 1958
• you are not an Australian resident within the meaning of the Social Security Act 1991 , and
• your spouse (if applicable) is not an Australian resident within the meaning of the Social Security Act 1991 .

However, if you are an Australian resident for tax purposes but not a temporary resident on or after 6   April 2006 you will not be entitled to the temporary resident exemptions from that time, even if you later hold a temporary visa.

For further information, see the electronic publications Foreign income exemption for temporary residents - introduction or Foreign income exemption for temporary residents - general questions .

Exemption for employer-sponsored foreign superannuation

If you are a natural person with an interest in a FIF that is an employer-sponsored superannuation fund, you may qualify for this exemption.

The FIF must be a superannuation fund maintained by your employer, or an associate of your employer, for the benefit of their employees. Also, you must be an employee or former employee of the employer. [section   519]

Exemption for an interest in a FIF that is trading stock

If an interest in a FIF forms part of your trading stock and you elect, under subsection 70-70(2) of the ITAA 1997 to bring those interests to account at market value, you are not subject to FIF taxation on income accruing from that interest. [section   521]

If you bring an interest in a FIF to account as trading stock but do not make the election to use market value, you must value your interest at the FIF cost for the purposes of the trading stock provisions in the ITAA 1997 [section 70-70 of the ITAA 1997].

This exemption is not available to a CFC that has an interest in a FIF as part of its trading stock. This is because a CFC cannot elect to value its trading stock at anything but cost when working out its attributable income under Part   X of the ITAA 1936. For more information, see Taxation Determination TD   96/39 - Income tax: foreign income: can a controlled foreign company (CFC) obtain the benefit of the trading stock exemption under section 521 of the Income Tax Assessment Act 1936? [section 397]

Exemption for an interest in a foreign company principally engaged in several activities

Your interest in a multi-industry foreign company is exempt from FIF taxation if the foreign company is principally engaged in two or more of the following activities:

• construction
• development of real property through capital improvement
• receipt of rental income from commercial real property owned by the company where the management, maintenance and security services for the property are principally provided by the directors or employees of the company or by a wholly owned subsidiary that is principally engaged in providing those services through the directors and employees of that subsidiary
• provision of management services for real property by the directors or employees of the company
• acting as agent in connection with the sale or purchase of commercial real property
• general insurance business of a kind that the company was authorised to carry on under the law of its place of residence
• life insurance business of a kind that the company was authorised to carry on under the law of its place of residence
• activities that allow an exemption under the active business exemption. [subparagraph 523(b)(ii)]

The foreign company must also be listed on a stock market of any approved stock exchange. The class of shares you hold in the foreign company must be widely held and actively traded on a regular basis on a stock market of an approved stock exchange during the period in which the exemption applies to you. A list of approved stock exchanges is at Schedule   12 of the Regulations. See Appendix   1: Approved stock exchanges . [section 523]

Exemption for an interest in a foreign holding company of a foreign mixed activity company

Your FIF interest will qualify for the exemption from the FIF measures as a holding company if the following requirements are satisfied [section 523A]:

• Approved stock exchange

Your shares in the holding company are of a class listed on any stock market of a stock exchange approved in Schedule   12 of the Regulations. See Appendix   1: Approved stock exchanges .

• Trading requirement

The class of shares you have in the holding company must be widely held and actively traded on a regular basis on a stock market of an approved stock exchange.

• Subsidiaries principally engaged in two or more specified activities

If the holding company has only one wholly owned subsidiary, that subsidiary must have been principally engaged in actively carrying on two or more of the activities mentioned above or in subparagraph 523(b)(ii).

If the holding company has more than one wholly owned subsidiary, the principal activities of the wholly owned subsidiaries in the group, considered together, must be the active carrying on of two or more of the activities mentioned above or in subparagraph 523(b)(ii).

Exemption for an interest in a premium trust fund by an underwriting member of Lloyd's

If you are an underwriting member of Lloyd's and have an interest in assets that form part of a Lloyd's premium trust fund, you are exempt from taxation for FIF income from that interest. Funds that qualify as premium trust funds are referred to in section   83 of the Insurance Companies Act 1982 (UK) . [section 527]

Exemption for a balanced investment portfolio in FIFs

An exemption is provided for investment in non-exempt FIF activities if their aggregate value is not more than 10% of the value of your total investments in FIFs.

For the purposes of this exemption, your total investments do not include your interests which, at the end of a notional accounting period, are excluded from the FIF measures because you:

• are an attributable taxpayer covered by sections 492 to 494
• have an interest in an employer-sponsored superannuation fund.

You value your FIF interests at the end of the income year at cost or market value, whichever is the greater. [section 525]

There are no restrictions on the types of FIFs that are eligible for this balanced portfolio exemption. The FIFs may include non-exempt activities such as financial services and they may or may not be listed on any stock exchange, approved or otherwise. They may also include trusts.

In the example below, Marika's interests in FIFs are excluded from the FIF measures because her interests in non-exempt FIFs are not more than 10% of her total FIF interests.

The United Kingdom superannuation fund is not included when working out total FIF interests, as it is an employer-sponsored superannuation fund.

Example: Investments in FIFs

 

Marika's FIF interest	Amount invested in FIFs	Exempt FIFs: percentage of total investments	Non-exempt FIFs: percentage of total investments
Company   X - exempt shares listed on Athens stock exchange	$25,000	($25,000/$166,000)   x   (100/1) = 15.1%
Foreign financial intermediation services company - non-exempt	$5,000		($5,000/$166,000)   x   (100/1) = 3.0%
Company   Y - satisfies active business exemption	$60,000	($60,000/$166,000) x (100/1) = 36.1%
United Kingdom employer superannuation fund	$150,000	This is an amount under Division   11 of Part   XI and is not included in the total of FIF investments
Bank of United States - satisfies bank exemption	$66,000	($66,000/$166,000) x (100/1) = 39.8%
Swedish Foreign Trust - non-exempt	$10,000		($10,000/$166,000)   x   (100/1) = 6.0%
Total	$166,000	91.0%	9.0%

Note: For assessments for income years beginning before 1   July 2003, the allowable value for non-exempt FIF activities to satisfy the balanced portfolio exemption was only 5%.

Exemption for interests in certain FIFs resident in the United States

An exemption is available for your FIF interests in:

• an entity that is treated as a corporation and is subject to tax on its worldwide income, and
• a company or trust that is treated as a regulated investment company or real estate investment trust

for the purposes of the United States Internal Revenue Code 1986 .

Subject to the conditions outlined below, an exemption is also available for your FIF interests in:

• a limited partnership or a limited liability company formed under a United States law or United States state law, and
• a common trust fund recognised under the United States Internal Revenue Code 1986 . [subsection 513(2)]

Note: 'Entity' in the following text refers to limited partnerships, limited liability companies and common trust funds.

Your FIF interests in the entity are exempt if:

• your interest in the entity is held for the sole purpose of investing in
  • a business conducted in the United States of America (USA), or
  • real property located in the USA, and
• the entity does not
  • have an interest in income or gains from non-USA sources
  • hold an interest in a FIF not resident in the USA, or
  • hold real property outside the USA. [subsection 513(3)]

Alternatively, your FIF interests in the entity are exempt where:

• the total value of the entity's interests in
  • income or gains from non-USA sources
  • non-USA FIFs, and
  • non-USA real property

does not exceed 5% of the total value of all interests held by the entity in other entities, and

• the value of assets held by the entity that
  • produce income from sources outside the USA, or
  • if disposed of would give rise to a gain from a source outside the USA

does not exceed 5% of the value of assets held by the entity. [subsection 513(4)]

Use the entity's accounting records to determine the value of FIF interests and assets when considering whether this condition for exemption is satisfied. [subsection 513(5)]

Exemption for trustees of complying superannuation entities, and interests in certain assets of life insurance companies and certain fixed trusts [Division 11A]

Complying superannuation entities

If you are the trustee of a complying superannuation entity, you are exempt from taxation under the FIF rules. Complying superannuation entities are complying superannuation funds, complying approved deposit funds and pooled superannuation trusts (PSTs) which take their meaning from the Superannuation Industry (Supervision) Act 1993.

If you are a superannuation entity that becomes non-complying, the exemption will not be available for each year that you are non-complying. Whether you are non-complying is to be determined in accordance with the Superannuation Industry (Supervision) Act 1993.

Complying superannuation/FSHA assets or segregated exempt assets of life insurance companies

If you have an interest in a FIF that is a complying superannuation/FHSA asset or a segregated exempt asset of a life insurance company, you are exempt from taxation under the FIF rules for that interest. [paragraph 519A(a) and subsection 519B(1)]

Fixed trusts

If you are the trustee of a fixed trust where all the fixed entitlements to shares of the income and capital of the trust at the end of the income year are held by trustees of complying superannuation entities, complying superannuation/FHSA assets or segregated exempt assets of life insurance companies, you are exempt from taxation under the FIF rules. This exemption may also apply to a chain of fixed trusts. [paragraph 519B(3)(a)]

The purpose of this exemption is to ensure that if complying superannuation entities pool their investments through a fixed trust, the investment will not be subject to the FIF rules.

There is a limited concession that allows the FIF exemption to continue to apply to the trust if a complying superannuation entity becomes non-complying. If a complying superannuation entity becomes non-complying, the FIF exemption may continue to be available to the trust provided:

• the non-complying superannuation entity was a complying superannuation entity when it became a beneficiary of the trust, and
• the entitlements of all non-complying superannuation entities are not more than 5% of the market value of the trust.

In relation to the first point, it does not matter if a complying superannuation entity is later notified that it was non-complying for the year in which it became a beneficiary of the trust.

In relation to the second point, if the interests of the beneficiaries that are non-complying superannuation entities exceed the 5% threshold, the exemption will not apply to the trust in each year that the threshold is exceeded. In these circumstances, all beneficiaries (including complying and non-complying superannuation entities) will effectively become liable to tax on any FIF income of the trust. [paragraphs 519B(4) (a) and (c)]

Will this exemption apply to a chain of trusts?

This exemption can apply to a chain of fixed trusts. A fixed trust whose only beneficiary is a fixed trust that qualifies for the FIF exemption will also qualify for the FIF exemption. A fixed trust whose beneficiaries comprise fixed trusts that qualify for the FIF exemption, complying superannuation entities (and potentially non-complying superannuation entities entitled to not more than 5% of the assets of the fixed trust), complying superannuation/FHSA assets and segregated exempt assets of life insurance companies will also qualify for the exemption.

Note: This exemption applies only to assessments for income years beginning on or after 1   July 2003.

ATO references:
NO NAT 2130