Foreign income return form guide

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Chapter 3: Taxation of foreign dividends and branch profits and the foreign tax credit system

This chapter explains the taxation treatment of foreign dividends and of branch profits derived by Australian companies. It also explains the rules for claiming a foreign tax credit.

Summary of chapter 3

Part 1

Taxation of foreign dividends

Part 2

Taxation of branch profits

Part 3

What credit can you claim for foreign tax?

Part 1 - Taxation of foreign dividends

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

  • when a resident taxpayer is taxed on a dividend received from a non-resident company or
  • when an attributable taxpayer in relation to a controlled foreign company (CFC) or a controlled foreign trust (CFT) 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 a CFT.

Summary of part 1

Section 1

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

Section 2

What if a CFC or CFT receives a dividend from another CFC?

Section 3

When is a CFC deemed to pay a dividend?

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

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

Non-portfolio dividends

Definition of non-portfolio dividends

The concept of a non-portfolio dividend is central to the scheme of taxation of foreign dividends. A dividend is a non-portfolio dividend if five conditions are met. These are:

  • the dividend is paid to a company
  • the company receiving the dividend has a 10 per cent or greater voting interest in the voting power of the company that paid the dividend

    The voting power in a company is the maximum number of votes that can be cast on a poll at a general meeting of the company at which all matters that can be referred to such a meeting are decided.
  • the shareholder is the beneficial owner of the shares that carry the required voting interest
  • the voting interest is held at the time the dividend is paid
  • there is no arrangement in force at that time by which any person is in a position - or may become in a position - to affect the voting right.

Non-portfolio dividends received from a listed country company

Non-portfolio dividends received by a resident company from a listed country company are exempt from tax. These dividends are exempt because they are paid out of:

  • profits of a CFC that have been attributed to the resident company under the accruals tax measures - section 23AI
  • profits that are treated as having been comparably taxed in a listed country - section 23AJ .

A non-portfolio dividend paid by a listed country company to a resident company is treated as paid first from profits that have been attributed to the resident company, and then from other profits.

Example 1

Non-portfolio dividend paid from comparably taxed profits

  • On 1 January 1998, a company that is a resident of the United Kingdom paid a resident company a non-portfolio dividend of $10,000. None of the income of the UK company had been attributed under the accruals tax system.

    In this case, the dividend will be exempt under section 23AJ .

Example 2

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

  • Resco, a resident company, has a CFC in a listed country. Attributable income of $10 000 from the CFC was included in Resco's assessable income for the 1996-97 income year.

    The CFC then paid a dividend of $25 000 to Resco on 1 August 1997.

    $10 000 of the dividend will be exempt from tax under section 23AI as a distribution of attributed income. The $15 000 balance of the dividend will be exempt from tax under section 23AJ .

Non-portfolio dividends received from an unlisted country company

The taxation of a non-portfolio dividend paid by an unlisted country company to a resident company depends on the profits from which the dividend was paid. There are three types of profits:

  • comparably taxed profits - called exempting profits - from accounting periods ending after 30 June 1990
  • income attributed to the shareholder under the accruals tax measures
  • other profits.

In the three simplest cases, a non-portfolio dividend paid to a resident company from a company resident in an unlisted country will be treated as follows:

  • if all the profits of the unlisted country company are exempting profits, the dividend will be exempt from Australian tax
  • if all the profits of an unlisted country company have been attributed to the resident company, the dividend paid out of those profits will also be exempt from Australian tax
  • if the unlisted country company has no exempting profits or profits which have been accruals taxed, the dividend will be subject to Australian tax.

If an unlisted country company has exempting profits and other profits, a non-portfolio dividend paid by the company is treated as paid proportionately from its exempting profits and other profits. The part of the dividend that is treated as paid from other profits is in turn treated as paid first from attributed income, and then from other profits.

To work out the exemption you will need to determine how much of the dividend is treated as paid respectively from exempting profits, attributed income and other profits. The following guidelines and examples tell you how to do this.

Resident company

 

100%

Unlisted country company

distributable profits

Exempting profits

All other profits including attributed income

The dividend paid by the unlisted country company is treated as paid proportionately from exempting profits and other profits

Resident company

 

100%

Unlisted country company

distributable profits

From exempting profits - exempt from tax - s.23AJ

from other profits

First from attributed income - exempt from tax - s.23AI

Balance from other income

Taxable

Working out the exempting profits percentage of a non-portfolio dividend paid by an unlisted country company

The exempting profits percentage of a dividend paid by an unlisted country company is calculated using the formula:

Exempting profits percentage of dividend

=

Exempting profits

Distributable profit

X

100

This percentage represents the part of a non-portfolio dividend paid by an unlisted country company that is exempt from Australian tax because it is paid from exempting profits.

Distributable profits

A distributable profit is the amount a company can distribute as dividends. Any decision or requirement restricting the availability of profits for distribution as dividends, other than any requirement providing for the following provisions or reserves, is disregarded:

  • a provision or reserve which is required to be maintained by law
  • a provision for any liability in respect of foreign tax or Australian tax
  • a reserve maintained for the purpose of qualifying for relief from foreign tax
  • a provision or reserve for depreciation, bad or doubtful debts or leave payments or
  • any other provision or reserve of a kind prescribed by regulations - to date, no regulations have been made for this purpose.

Exempting profits

Exempting profits are the distributable profits of a company that result from exempting receipts. Exempting profits are worked out using the formula:

Exempting profits

=

Exempting receipts

-

Expenses and taxes attributable to those receipts

There are special rules for working out exempting profits of an unlisted country CFC which has changed residence from a listed country. The exempting profits are determined in the normal manner except that distributable profits the CFC had at the time it changed residence are also treated as exempting profits. However, profits taxed previously under the CFC measures are not treated as exempting profits.

Exempting receipts

In broad terms, exempting receipts are amounts received by a company that have been either:

  • included in assessable income for Australian tax purposes or
  • taxed at comparable tax rates in a listed country.

Only amounts received by a company in accounting periods that end after 30 June 1990 can constitute exempting receipts.

The following seven types of amounts received by an unlisted country company qualify as exempting receipts:

  • amounts derived by the company in carrying on a business in a broad-exemption listed country through a permanent establishment in that country providing:
    • the amounts are not eligible designated concession income
    • the amounts are subject to tax in a listed country in an accounting period ending or commencing during the statutory accounting period of the CFC
  • amounts derived by the company in carrying on a business in a limited-exemption listed country through a permanent establishment in that country providing:
    • the amounts are not adjusted tainted income
    • the amounts are subject to tax in a listed country in an accounting period ending or commencing during the statutory accounting period of the CFC
  • income derived by the company that is included in the assessable income of the company for Australian tax purposes and is taxed by assessment
  • net capital gains included in assessable income on the disposal of a taxable Australian asset
  • non-portfolio dividends paid to the company by a listed country company - except where the dividend is treated as paid out of previously attributed income
  • fully franked dividends paid by resident companies
  • the exempting profits percentage of a non-portfolio dividend paid to the company by another unlisted country company.

The first four types of exempting receipts mentioned above could flow to the company through either a partnership or a trust. If the receipts flow to the company through a partnership of which it is a partner, the exempting receipt will be the company's share of the after-tax profits of the partnership that can be attributed to those receipts. The company's share of those exempting receipts could also be distributed to the partnership through other partnerships and trusts.

If the receipts flow to the company through a trust, the exempting receipt will be the trust distribution. Again, the receipts could be derived by the trust directly or through other trusts and partnerships.

Accounting records for exempting receipts and exempting profits

The law does not set out the records that have to be kept to identify exempting receipts and exempting profits. However, if you claim that a part of a dividend paid by an unlisted country company was paid from exempting profits, you will have to maintain adequate records to substantiate this claim.

Adequate records include:

  • a statement of the exempting receipts of the foreign company
  • an analysis of the outgoings and expenses incurred by the foreign company that are attributable to the exempting receipts
  • an analysis of the taxes paid or provided for by the foreign company that are attributable to the exempting receipts.

Distributions of attributed income - maintaining records to support a claim for exemption

Attribution accounts

To be able to work out and claim the exemption from income tax for distributions out of attributed income of a CFC, 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
    • income distributed to you by the CFC which is treated as distributed from attributed income
  • each entity through which the income of that CFC is distributed to you. These entities may be:
    • partnerships
    • trusts
    • companies that are not Part X Australian residents
  • each FIF where an amount of FIF income is included in the notional assessable income of the CFC
  • each CFC that has changed residence from an unlisted country to Australia. You can claim an exemption from tax on dividends paid by a company out of profits which were attributed to you prior to the company becoming a resident of Australia.

These accounts are used to keep track of profits that have been taxed on an accruals basis so that you can claim an exemption when you receive a distribution from those profits.

Example 3

Attribution accounts

  • A resident company - Resco - owns all the share capital of a CFC that is a resident of an unlisted country. The CFC commenced business on 1 July 1997. For the 1997-98 income year, its only income was attributable income of $2500. It paid no tax. On 1 August 1998, it paid a dividend of $2500 to Resco.

    Attribution credit:

    Resco will open an attribution account for the CFC and credit it with $2500 on 30 June 1998 because this amount was included at that time in Resco's assessable income under the CFC measures. The CFC is called an attribution account entity.

    Attribution debit:

    Resco will debit $2500 to the attribution account for the CFC on 1 August 1998 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 $2500.

    The dividend received by Resco is exempt from tax to the extent the dividend gave rise to an attribution debit. In this case, Resco can claim an exemption from Australian tax in the 1998-99 income year for the whole amount of the dividend. The effect is that Resco 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.

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. 99 or s. 99A

trust

trustee

at the end of the income year of the trust

Other distribution of accumulated trust income

trust

beneficiary

income year in which the distribution was made

What accounting entries should you make?

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

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

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

Example 4

Distribution of attributed income

  • A resident company - Resco - owns all of the shares of CFC1, which owns all of the shares of CFC2. The CFCs are residents of unlisted countries.

    CFC2 commenced business on 1 July 1997 and for the 1998 income year CFC2 derived $100 which was attributed under the CFC measures. The company paid no tax on the attributed amount. On 1 August 1998 the company paid its first dividend of $100 to CFC1, which paid the dividend to Resco on the same day.

    All the entities close accounts to 30 June 1999.

Attribution accounts

CFC2

Debit

Credit

1 August 1998 dividend to CFC1

$100

30 June 1998 amount attributed to Resco

$100

CFC1

Debit

Credit

1 August 1998 dividend to Resco

$100

30 June 1998 amount attributed to CFC2

$100

  • As the $100 attributed from CFC2 to Resco on 30 June 1998 was included in Resco's 1998 assessable income, and as the distribution Resco received on 1 August 1998 is no more than the income already attributed, Resco will be exempt from tax on the dividend.

Proportionate interests in the CFC and in interposed entities

A resident taxpayer might hold only a proportion - that is, less than 100 per cent - 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 per cent in a CFC, only a proportion of the attributable income of the CFC is included in your assessable income. The proportion to use depends on the interest - called the attribution percentage - you have in the CFC - see chapter 1 .

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

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

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

Attribution account percentage

=

direct attribution account interest

+

indirect account attribution interest

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

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

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

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

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

Example 5

Attribution account interest in a partnership

  • It is necessary to measure the direct attribution account interest of CFC1 in the partnership in order to measure the attribution account percentage of the resident individual 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 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 6

Attribution account interest

  • 36 per cent indirect attribution account interest (60% x 60% )

    In this case, the resident taxpayer's attribution account percentage in CFC2 is 61 per cent - that is, the taxpayer has a direct attribution account interest of 25 per cent plus an indirect attribution account interest of 36 per cent.

Example 7

Direct and indirect attribution account percentage

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

    A resident company owns 50 per cent of the share capital of CFC1 and CFC1 owns 50 per cent of the share capital of CFC2. The CFCs are residents of unlisted countries. CFC2 commenced business on 1 July 1997. For the 1998 financial year the only income of CFC2 was attributable income of $100. On 1 August 1998, CFC2 paid a dividend of $50 to CFC1.

  • The resident company's attribution percentage in CFC2 is 25 per cent - that is, 50 per cent of 50 per cent. The resident company's share of the attributable income of the CFC is therefore $25 - that is, 25 per cent of $100.

    The dividend of $50 paid to CFC1 is an attribution account payment. When the dividend is paid to CFC1 it is necessary to measure how much of the dividend can be treated as a distribution of CFC2's previously attributed income. The amount is worked out by applying the attribution account percentage of the resident company in CFC1 to the dividend paid to CFC1.

    The direct attribution account interests will be as follows:

  • Direct attribution account interest of the resident company in CFC1
  • = 50%
  • Direct attribution account interest of CFC1 in CFC2
  • = 50%
  • The indirect attribution account interest is obtained by multiplying the direct attribution interests along the chain. The indirect attribution account interest of the resident in CFC2 will be 25 per cent (50% x 50%). Up to $25 of the dividend can therefore be treated as paid from previously attributed income.

Example 8

Attribution debit

  • A resident individual has a direct attribution account interest of 80 per cent in CFC1. CFC1 has a direct attribution interest of 90 per cent in CFC2. The CFCs are resident in unlisted countries.

    CFC2 commenced business on 1 July 1997. For the 1998 income year, its only income was attributable income of $100. It paid no tax. On 1 August 1998 it distributed its 1998 income. On the same day, CFC1 distributed the full amount of the dividend it received from CFC2.

Attribution accounts

CFC2

Debit

Credit

1 August 1998 dividend to CFC1 (note 2)

$72

30 June 1998 attributed income (note 1)

$72

CFC2

Debit

Credit

1 August 1998 dividend to Resco (note 4)

$72

30 June 1998 dividend from CFC2 (note 3)

$72

  • Note 1

    This represents CFC2's attributable income of $100 multiplied by the resident's attribution percentage in CFC2 - that is, 80 per cent (interest of the resident in CFC1) x 90% (interest of CFC1 in CFC2) x $100 = $72.

    Note 2

    This represents the resident's attribution account percentage in the dividend received by CFC1 - that is, 80 per cent of the $90 dividend.

    Note 3

    The resident's attribution account percentage in the dividend received by CFC1 - worked out as in note 2.

    Note 4

    The dividend paid by CFC1 to the resident.

    The dividend of $72 received by the resident is exempt from tax to the extent of the attribution debit that arose when the dividend was paid. As this debit was also $72, the dividend is fully exempt from tax.

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 of FIF income is included in the attributable income of a CFC. In this case a credit arises in relation to the FIF equal to the amount included in your assessable income under section 456 that is referable to the FIF income. The credit that would otherwise arise for the CFC is reduced by the amount that arises for the FIF. If a FIF has an interest in another FIF and the calculation method applies to determine the FIF income of the first FIF, a credit will arise for the second FIF. The FIF income is based on the FIF income of the first FIF referable to the FIF income of the second FIF. In this case, the attribution credit for the first FIF is reduced by the credit that arises for the second FIF
  • the CFC has both:
    • ceased to be a resident of an unlisted country
    • become a resident of a listed country or of Australia.

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. You have the option to defer the credit, however, to the extent it relates to an amount included in attributable income under section 457 for an unrealised gain on an asset.

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

  • an unlisted country CFC paid a non-portfolio dividend to either:
    • a CFC resident in another country or
    • in certain circumstances, to a CFT or partnership or Australian trust.

The credit is for the amount you included in your assessable income under section 458 without the addition of any foreign tax treated as paid by the CFC on that dividend. You must enter the credit at the time the dividend was paid.

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.

An attribution credit will not arise when an amount is included in your assessable income under section 459.

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.

This means that if the income of a CFC is attributed to an Australian partnership or Australian trust, the credit you make 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 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.

When is the credit reduced for foreign taxes paid?

If a non-resident company pays a non-portfolio dividend to another non-resident company of which you are an attributable taxpayer, you may make an attribution credit in the second company's account. The general rule is that the credit will be equal to the amount included in your assessable income under section 458, without the addition of any foreign tax paid by the company that received the dividend. Reduce this credit by the amount of any foreign tax payable by the company that received the dividend to the extent the tax is related to either the dividend or to income that includes the dividend.

If, for example, an unlisted country CFC pays a non-portfolio dividend to a listed country CFC of which you are an attributable taxpayer, you may be attributed certain amounts of the dividend - see section 458. If this is so, you will make an attribution credit for yourself in the listed country CFC's attribution account. The credit amount will be equal to the dividend minus any foreign tax payable in a foreign country on the dividend.

If the listed country taxes the non-portfolio dividend at its normal company tax rate, there will be no attribution of the income to you and no attribution credit will arise for the dividend - refer to sect i o n 2 of this part.

Example 9

Reduction of an attribution credit for foreign tax

  • Resco, a resident company, owns CFC1 - a subsidiary in a listed country - which owns CFC2 - a subsidiary in an unlisted country. CFC2 pays a dividend of $100 to CFC1. The listed country's normal company tax rate is 35 per cent, however the dividend is taxed at only 10 per cent in that country.

    The attribution credit in CFC1's account will be for $90 - that is, $100 minus the foreign tax of $10.

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.

There are, however, two rules you must observe. These are that:

  • 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?

There are again 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.

Working out the amount of the attribution debit where a non-portfolio dividend is paid by an unlisted country company

If a company that is a member of a non-portfolio company group pays a non-portfolio dividend to another member of the same group, you must reduce the amount of the attribution account debit by the exempting profits percentage of the dividend.

A non-portfolio company group will arise if an Australian company has a 10 per cent or greater voting interest in a foreign company. If this occurs, the two companies are members of a non-portfolio company group.

If the foreign company has a 10 per cent or greater voting interest in another foreign company, the Australian company and the two foreign companies constitute the non-portfolio company group. Other companies are added to the group if each company has a 10 per cent or greater voting interest in the company immediately below it.

The attribution debit that you make in the attribution account for the company that paid the dividend is equal to your attribution account percentage of the balance of the dividend - that is, the dividend less the exempting profits percentage.

Working out the exempting receipt resulting from a dividend paid by a listed country company to an unlisted country company

The method for working out the exempting profits percentage of a non-portfolio dividend paid by an unlisted country company was discussed earlier in this section. One type of exempting receipt that could give rise to exempting profits is where a listed country company pays a non-portfolio dividend to an unlisted country company.

The dividend may be paid:

  • out of income of the listed country company that was attributed to you under the accruals tax measures or
  • out of other income.

Before you can work out the exempting profits percentage of the dividend you will need to determine:

  • the amount of the dividend paid by the listed country company that is to be treated as an exempting receipt of the unlisted country company
  • the amount to be treated as paid out of income previously attributed to you.

To work out the amount of the exempting receipt, use the formula:

Exempting receipt = dividend - grossed up attribution debit

The grossed up attribution debit is the attribution debit arising from the attribution account payment divided by your attribution account percentage for the payment.

The attribution debit is the debit that arose for the listed country company when it paid the dividend. The debit is for the amount of your interest in the dividend - that is, your attribution account percentage in the unlisted country company that received the dividend multiplied by the dividend. Note, however, that the debit cannot be more than the attribution surplus in the attribution account of the listed country company.

Example 10

Exempting receipts arising on the payment of a non-portfolio dividend

  • Resco, a resident company, owns 100 per cent of an unlisted country company. The unlisted country company owns 60 per cent of a listed country company. The listed country company commenced business on 12 July 1997. It had distributable profits of $20 000 which represent attributable income of $2000 and other profits of $18 000. On 1 August 1998, the listed country company paid a dividend of $10 000 to the unlisted country company.

    On attribution

    Resco will open an attribution account for the listed country company and credit it $1200.

    On the dividend being paid

    Resco will debit the attribution account for the listed country company with $1200. Resco will open an attribution account for the unlisted country company and credit the account with $1200 (60% of $2000) .

    The exempting receipt of the unlisted country company will be the dividend less the grossed up attribution debit:

    $10 000 -(attribution debit $1200/100% ) = $8800

Further examples showing how to work out exempting profits

Example 11

  • Resco, a resident company, has a wholly owned subsidiary, Subco, in an unlisted country. The distributable profits of Subco on 1 July 1997 were $15 000.

    In the year ended 30 June 1998, the subsidiary derived the following profits:

 

$

Passive income from its business in the unlisted country - see chapte r 1

6 000

Profits from its branch in a broad-exemption listed country

16 000

  • Subco paid tax of $1000 on its unlisted country income and $6000 in the broad-exemption listed country on its branch profits.

    On 1 August 1998 it paid a dividend of $15 000 to Resco.

    The attributable income of Subco for the 1998 income year was worked out as follows:

 

$

Passive income from business in the unlisted country

16 000

deduct: foreign tax

1 000

Subco's attributable income for 1998

5 000

  • Subco's distributable profits on 30 June 1998 were:

 

$

distributable profits on 1 July 1997

15 000

distributable profits derived in the year ended 30 June 1997:

 

from unlisted country operations

($6000 -tax $1000)

5 000

from the broad-exemption listed country branch ($16 000 - tax $6000)

10 000

Distributable profits 30 June 1998

30 000

  • The dividend of $15 000 paid to Resco on 1 August 1998 was treated as paid from exempting profits and other profits as follows:

Resco's exempting profits that were included in distributable profits - that is, profits from the broad-exemption listed country branch for the accounting years ending on or after 1 July 1997

10 000

Resco's other profits that were included in distributable profits -

20 000

  • consisting of $15 000 distributable profits for the period prior to 1 July 1997 plus $5000 distributable profits from unlisted country operations in the year ended 30 June 1998.

    Exempting profits percentage of the dividend

=

exempting profits

distributable profits

X 100

=

10,000

30,000

X 100

=

33 1/3%

  • A third of the dividend of $15 000 - that is, $5000 - was treated as paid from exempting profits and the balance of the dividend - $10 000 - was treated as paid from other profits.

    $5000 of the dividend that is treated as paid from exempting profits was exempt from Australian tax.

    The balance of the dividend - $10 000 - was treated as paid first from previously attributed income. It was exempt from Australian tax up to the amount of the attribution debit that arose when the dividend was paid.

    The attributable income of Subco for the 1997-98 income year was $5000. When the income was included in Resco's assessable income, Resco opened an attribution account for Subco and credited it with $5000. On 1 August 1998, when the dividend was paid, there was an attribution surplus of $5000 in the attribution account.

    When the $15 000 dividend was received by Resco, $10,000 was treated as paid out of profits other than exempting profits. An attribution debit of $5000 was made and an exemption from tax claimed for that amount.

    The $5000 balance of the dividend was taxable. The amount of this dividend is increased by the amount of foreign tax for which a foreign tax credit was claimed - see chapter 3 part 3 .

    Summary

    The dividend of $15 000 is divided into:

 

$

exempt dividend paid out of exempting profits

5 000

exempt dividend paid out of attributed income

5 000

assessable dividend

5 000

 

15 000

Example 12

  • It is assumed, in this example, that Subco is owned by another unlisted country company, Parentco, which is owned by Resco. The data used is the same as in the previous example, except that the dividend is paid to Parentco.

    On 1 July 1998, Parentco had distributable profits of $60,000 made up of $20,000 exempting profits and $40,000 other profits. On 1 August 1998, Parentco received the dividend of $15 000 from Subco. Parentco did not pay any foreign tax on the dividend.

    For the year ended 30 June 1999, Parentco derived distributable profits - excluding the dividend from Subco - of $30,000 made up of $10,000 exempting profits and $20,000 active income, none of which was attributable income.

    On 1 August 1999, Parentco paid a dividend of $75,000 to Resco.

    In this case, the exempting profits of Parentco are worked out as follows:

 

Exempting profits

$

Other profits

$

Distributable profits

$

On 1 July 1998

20 000

40 000

60 000

In relation to the dividend from Subco

5 000

10 000

15 000

On other profits for the year ended 30 June 1999

10 000

20 000

30 000

Total

35 000

70 000

105 000

  • The dividend that Parentco paid to Resco was divided into an exempting profits part and the balance as follows:

The exempting profits percentage of the dividend

=

exempting profits

distributable profits

X 100

 

=

35,000

105,000

X 100

 

=

33 1/3%

The exempting profits part of the dividend

=

33 1/ 3% x $75 000

 

=

$25,000

  • This amount is exempt from Australian tax.

    Attribution accounts

    When the attributable income of Subco was attributable to Resco, Resco opened an attribution account for Subco and credited it $5000.

    When Subco paid the dividend of $15 000 to Parentco, Resco debited the attribution account of Subco with $5000, opened an attribution account for Parentco and credited it with $5000. The debit was for the amount of the dividend not treated as paid from exempting profits. Note, however, that the debit was limited to the attribution surplus.

    When Parentco paid the dividend of $75 000 to Resco, Resco debited $5000 to the attribution account of Parentco and claimed an exemption from tax for $5000.

    The balance of the dividend was liable to Australian tax - that is:

Dividend

 

$75 000

Less:

part paid from exempting profits

$25 000

 

part paid from attributed income

$5 000

 
 

$30 000

 

Taxable part of dividend

$45 000

  • This $45 000 was increased by the amount of foreign tax for which a foreign tax credit was claimed - see chapter 3 part 3 .
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. An explanation of how these accounts are maintained was provided earlier in this part.

S ection 2 - What if a CFC or CFT receives a dividend from another CFC?

Non-portfolio dividends paid by a listed country company to a resident company are always exempt from tax. Non-portfolio dividends paid by an unlisted country company to a resident company, however, are exempt from tax only in very limited circumstances. It is possible therefore that a resident company with an interest in an unlisted country company held through a listed country company may try to minimise Australian tax by arranging for the dividends from the unlisted country company to flow back to Australia through the listed country company.

This could be effective if the unlisted country company could distribute its low-taxed profits as dividends to a listed country company which taxed those dividends at very low rates, and if the listed country company in turn distributes those non-portfolio dividends to its Australian parent company free of tax. There are rules in section 458 to prevent this form of tax avoidance.

Non-portfolio dividends

Paid to a listed country CFC

The general rule is that section 458 will include a share of a dividend in your assessable income where a non-portfolio dividend is paid from an unlisted country CFC to a listed country CFC and you are an attributable taxpayer in relation to both CFCs. To work out the amount to include in your assessable income, you will need to know your attribution percentage in the listed country CFC receiving the dividend.

There is an exception to the general rule if a listed country taxes the dividend at its normal company tax rate. In this case, the dividend will not be attributed to you. To qualify for the exemption the dividend must be subject to tax in the listed country at the same rate as, or at a higher rate than, the rate of tax that applies to non-dividend income of a company resident in that country. The tax law of the listed country should not provide any credit, rebate or other concession in respect of the dividend other than for foreign tax payable in another country.

The dividend will also qualify for the exemption if it was exempt from tax in a broad-exemption listed country because it was paid from income previously attributed in that country under an accruals tax law and it was subject to tax at or above the country's normal company tax rate.

The attributable dividend is reduced by the exempting profits percentage of the dividend if:

  • you are a resident company with a non-portfolio interest in both CFCs at the time the dividend is paid
  • the CFC receiving the dividend has a non-portfolio interest in the paying CFC
  • both CFCs are in a non-portfolio group with you - that is, each company in the group must have a non-portfolio interest in the company in the tier immediately below it.

Apply your attribution account percentage in the CFC that received the dividend to the balance of the dividend. Take away from this amount an attribution debit or a FIF attribution debit that arose at the time the dividend was paid.

You must include the remaining amount in your assessable income.

Example 13

Reduction for exempting profits

  • Ausco has an interest of 75 per cent in a listed country subsidiary, CFC1. CFC1 has a wholly owned subsidiary, CFC2, in an unlisted country.

    On 1 November 1997, CFC2 paid a non-portfolio dividend of $15,000 from its distributable profits. The distributable profits on that date comprised $20,000 exempting profits and $10 000 other profits. None of these profits had been attributed to Ausco. The dividend was not taxed in the listed country at its normal company tax rate.

    The amount that Ausco included in its assessable income for 1998 is worked out as follows:

Dividend paid by CFC2

$15 000

deduct the exempting profits part of the dividend

 

20 000

30 000

X $15 000

$10 000

 

$5 000

Ausco's interest in CFC1

75% of $5000

$3 750

  • $3750 was included in assessable income. This amount is increased by the amount of a foreign tax credit that can be claimed under section 160AFCC .

Example 14

Reduction for an attribution debit

  • The facts are the same as in the previous example except that Ausco was attributed a part of the income of CFC2 and had an attribution surplus of $1000 for CFC2 at the time the dividend was paid.

    In this case, the amount of $3750 that was to be included in Ausco's assessable income is further reduced by the attribution debit that arose in the attribution account for CFC2 when CFC2 paid the dividend.

    Since the attribution debit cannot be more than the attribution surplus, the attribution debit was the lesser of:

  • the attribution surplus - $1000 or
  • Ausco's attribution account interest in the dividend paid by CFC2 multiplied by the dividend that was not paid out of exempting profits - that is:

    75% x $5000 = $3750
  • This means that the attribution debit was $1000. The amount included in the assessable income of Ausco will be:

the amount in Example 13

$3750

deduct attribution debit

$1000

amount included in assessable income

$2750

  • This amount is increased by the amount of a foreign tax credit that can be claimed under section 160AFCC .

Paid to an entity other than a CFC

Similar rules apply where an unlisted country CFC pays a dividend to:

  • a controlled foreign trust (CFT)
  • a partnership of which a CFC or a CFT is a partner
  • an Australian trust of which a CFC or a CFT is a beneficiary or
  • a partnership or Australian trust from which a CFC (or a CFT) benefits through interests in interposed entities.

The rules apply if:

  • the dividend paid by the unlisted country CFC would have been a non-portfolio dividend if it had been paid to a company instead of the partnership or trust and
  • the resident taxpayer was an attributable taxpayer for both the CFC that paid the dividend, and the CFC or CFT that received the dividend.

Paid to another unlisted country CFC

In general, section 458 does not apply to a dividend paid to an unlisted country CFC unless the payment of the dividend was part of a dividend stripping scheme or a scheme of that nature.

Section 3 - When is a CFC deemed to pay a dividend?

It is possible that a resident taxpayer with an interest in an unlisted country CFC may try to minimise Australian tax by arranging for the CFC to distribute benefits in a form other than dividends to its shareholders or their associates.

There are rules to prevent this form of tax avoidance in section 47A . These rules deem certain transfers and payments made by an unlisted country CFC to be dividends. These dividends are then taxed in the normal way.

For section 47A to apply, a CFC must provide a benefit to:

  • a resident who is a shareholder or an associate of a shareholder of the CFC or
  • another CFC or CFT, 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 either:
    • exempt from tax or
    • an exempting receipt of an unlisted country company
  • 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:
    • shares in a company
    • rights or options to acquire shares
    • units in a unit trust or
    • rights or options to acquire units - see below
  • a payment made by the CFC in respect of calls on shares in another company - see below
  • the grant by the CFC of a loan - whether at arm's length or not - to another entity to facilitate a transaction of the type referred to in any of the above points.

Treat the fifth and sixth types of payments as dividends only if:

  • a shareholder of the CFC - or shareholder's associate - holds any direct interest, or later acquires any direct interest, in any of the shares of the company in which the CFC acquired shares or in the unit trust in which the units were acquired or
  • the company - or unit trust - uses the proceeds of the issue to facilitate a transaction providing any of the above types of benefits.

Entities providing and receiving the benefit

For a benefit to be treated as a deemed dividend, the benefit must be provided by the CFC to a shareholder or an associate of a shareholder.

The benefit must be provided by either:

  • an unlisted country CFC or
  • another entity under an arrangement with the CFC, where the CFC has transferred property or services in consideration for the benefit to:
    • the other entity or
    • any other entity

These transfers of property or services are referred to as arrangement transfers.

The time the benefits are deemed to have been provided

The following table sets out some of the types of benefits provided by a CFC that are subject to section 47A , the time at which they are taken to be provided and the amount of the benefit.

Type of benefit

Time

Amount

Waiver of a debt

time the debt was waived

amount of the debt

Non-arm's length loan

time the loan was made

amount of the loan

Transfer of property for no consideration

time the property was transferred

market value at time of transfer

Transfer of property or services for consideration less than market value

time the property or services were transferred

difference between the market value of the property or services and 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 does not mean distributable profits. Profits in this situation means 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. In this regard, a dividend from an unlisted country company paid to an Australian company is normally assessable unless the dividend was paid from exempting profits or previously attributable income.

Dividends deemed paid by a CFC to a CFC or CFT

If a non-portfolio dividend is deemed, under section 47A , to have been paid by an unlisted country CFC to:

  • a listed country CFC or
  • a controlled foreign trust (CFT) or
  • a CFC or CFT through interposed partnerships or Australian trusts

and a resident taxpayer holds an attribution interest in the CFC deemed to have paid the dividend and in the other CFC or CFT, the taxpayer's attribution percentage of the deemed dividend will be included in its assessable income - see section 458. However, this attribution will not occur if the dividend is taxed in a listed country at its normal company tax rate.

Disclosure of deemed dividends

You will be denied access to certain credits and exemptions in relation to a section 47A deemed dividend if you:

  • do not disclose the deemed dividend in your tax return
  • do not notify the ATO of the deemed dividend within one year of the end of the income year in which the dividend is deemed to have been paid.

The credits and exemptions you will lose are:

  • any credit for foreign taxes you have paid on the dividend
  • any possibility that a part of the deemed dividend will be treated as an exempting receipt
  • any possibility that a part of the deemed dividend may be treated as exempt from tax as a payment out of the income of a CFC already attributed to you.

The deemed dividend will also not give rise to an attribution credit.

Portfolio dividends

Not all deemed dividends paid by a CFC directly or through other entities to a CFC or CFT are non-portfolio dividends. These dividends may be attributed to a resident taxpayer under section 459. An example of how a portfolio dividend can arise under section 47A is where a dividend is deemed to have been paid to a lower tier company or a sister subsidiary. The following diagram illustrates two such dividends.

When are portfolio dividends taxable under section 459?

The following five conditions must be satisfied for a portfolio dividend to be included in the assessable income of a resident taxpayer under section 459:

  • the dividend must be deemed, under section 47A , to have been paid by an unlisted country CFC
  • the dividend must be paid to:
    • a listed country CFC or
    • a CFT or
    • an amount of that dividend must flow to a listed country CFC or to a CFT through interposed partnerships or Australian trusts
  • a resident taxpayer must be an attributable taxpayer for the CFC that pays the dividend and for the recipient CFC or CFT
  • section 458 must not apply to the dividend
  • the dividend must not be subject to tax in a listed country at its normal company tax rate.

Amount included in assessable income

The amount of a dividend paid to a CFC or CFT that is included in the assessable income of an attributable taxpayer depends on the taxpayer's attribution percentage in the CFC or CFT.

Do not adjust the dividend for any exempting profits part or any part paid from previously attributed income. No part of the dividend will be an exempting receipt, and no foreign tax credit is allowed.

Example 15

Dividends included in assessable income

  • Ausco has an attribution percentage of 80 per cent in unlisted country CFC1 and 80 per cent in listed country CFC2. CFC1 is deemed, under section 47A , to have paid a dividend of $1000 to CFC2 on 1 August 1997. Under section 459, Ausco has to include $800 in its assessable income.
Other deemed dividends - section 108

Under section 108 of the Act, the ATO may treat as a dividend:

  • an amount paid by a private company to a shareholder - or a shareholder's associate - by way of an advance or loan or
  • an amount paid or credited on behalf of, or for the individual benefit of, a shareholder or a shareholder's associate.

To deem these payments to be dividends, the ATO must be of the opinion that the payments and credits represent a distribution of profits.

Section 108 will not apply to an amount paid or credited after 2 June 1990 by an unlisted country CFC if that amount is deemed, under section 47A , to be a dividend.

P art 2 - Taxation of branch profits

Exemption for listed country branch income of a resident company

Which resident companies qualify?

Two broad groups qualify for an exemption from Australian tax on certain branch profits. These are resident companies that either:

  • carry on business through a permanent establishment - for example, a branch - in a listed country or
  • are partners of a partnership - or are presently entitled beneficiaries of a trust - that carries on business through a permanent establishment in a listed country.

The exemption does not apply to:

  • resident companies with permanent establishments in unlisted countries
  • resident taxpayers, other than companies, with foreign permanent establishments.

What is a permanent establishment?

A permanent establishment of an Australian resident company is a place through which the business of the company is carried on. The term 'permanent establishment' is defined in section 6 of the Act. .

If the listed country 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 exempt?

The exemption for branch profits depends on whether the branch is in a broad-exemption or limited-exemption listed country.

If you are applying the exemption for amounts derived by a branch before 1 July 1997, treat countries on the former list of comparable tax countries - refer to attachment A of appendix 1 - as broad-exemption listed countries. Branches in other countries were not eligible for the exemption.

Exemption for branches in broad-exemption listed countries

In general, an exemption is available for income derived by a resident company through a branch in a broad-exemption listed country if the income:

  • is from carrying on a business in the country
  • is subject to tax in the country on a current basis and
  • is not eligible designated concession income.

You must test each item of income individually against these criteria to see if it is exempt.

Exemption for branches in limited-exemption listed countries

The exemption is generally available for income derived by a resident company through a branch in a limited-exemption listed country if the income:

  • is from carrying on a business in the country
  • is subject to tax in the country on a current basis
  • is not adjusted tainted income or is adjusted tainted income and the branch satisfies an active income test.

The same concept of adjusted tainted income is used for this purpose as that used in determining the attributable income of a CFC. The following modifications apply, however, 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
  • branches of Australian financial institutions (AFIs) are provided with an exemption for banking income broadly consistent with the exclusion from accruals taxation available under the CFC measures for AFI subsidiaries

An active income test concession is provided to allow branches in limited-exemption listed countries to derive up to 5 per cent of gross turnover as tainted income and still obtain full exemption 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 year of income 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
  • 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.

The meaning of income subject to tax on a current basis

The income of a branch for an accounting period is treated as subject to tax in a foreign country on a current basis if the income is included in the tax base of the country for a tax year ending or commencing in the accounting period.

What branch capital gains are exempt from tax?

An exemption is also available for capital gains derived by a resident company on disposal of plant, equipment, land and buildings that are used wholly or principally for deriving foreign income through a branch in a listed country if:

  • the whole of the gain is subject to tax in the country in which the branch is located and
  • the asset was used at some time in the income year in which is was disposed of, or in the previous year, in carrying on business through the branch.

The exemption will not apply to a gain derived by a branch in a broad-exemption listed country if the gainn gives rise to an amount of eligible designated concession income. Similarly, the exemption will not apply to a gain derived by a branch in a limited-exemption listed country if the gain gives rise to an amount of adjusted tainted income.

The exemption is also available if the above conditions are satisfied for capital gains arising on the disposal of assets on the closure of a branch.

Disposals of assets other than those mentioned above, such as goodwill, will be subject to Australian tax.

Branch income derived through a partnership or trust

The net income calculation of a partnership or trust is modified where a resident company derives branch income through the partnership or trust. The modification applies only to determine the amount to be included in the assessable income of the resident company. The net income of the partnership or trust is worked out for this purpose as if the branch income, that would have been exempt if derived directly by the resident company, were exempt income.

Effect of the exemption on a resident company's deductions, losses and foreign tax credits

A deduction is not allowable for:

  • outgoings or expenses connected to exempt branch income and gains
  • capital losses on the disposal of a branch asset if, had there been a profit on the disposal, the profit would have been exempt from tax.

Current year losses or carried forward losses of a resident company are not reduced by exempt branch income or gains.

Foreign tax credits are not allowed for foreign taxes paid on exempt branch income.

P art 3 - What credit can you claim for foreign tax?

This part explains the general foreign tax credit rules for Australian residents and the rules that apply specifically to Australian companies.

Summary of part 3

Section 1

General credit available to Australian residents

Section 2

Credit specific to Australian companies

The general rule is that:

  • if you are an Australian resident for taxation purposes, you may be entitled to a credit for the foreign tax you have paid and
  • if you are an Australian company, you may also be entitled to a credit for foreign underlying tax paid by a related company on profits out of which a dividend is paid.

Section 1 - Foreign tax credits available to all Australian residents

Partnerships

Partners can claim a credit for their share of foreign tax paid on foreign income derived through a partnership. The amount of foreign income and the credit for foreign tax paid should be included in each partner's return.

Trusts

Where an amount of trust income is included in the return of a beneficiary, that beneficiary may claim a credit for the foreign tax paid by the trust.

The trust's income must be divided into the appropriate classes of income. The beneficiary's share of the trust income must also be divided into the appropriate classes of income.

The trustee has to state in the trust return the amount of foreign income and attributed foreign income and the amount of foreign tax paid and deemed paid in respect of that income. The trustee is also required to state in the trust return the amount of foreign income to which no beneficiary is presently entitled.

A credit is not available for foreign tax paid in respect of income that is attributed to a transferor as a result of the transferor trust measures. For details on the transferor trust measures, refer to chapt er 2 .

Unit trusts

The foreign income of a unit trust is treated in the same manner as foreign income of any other trust.

For which types of foreign tax is a credit allowable?

Creditable taxes include:

  • foreign tax equivalent in nature to Australian income tax - for example, a tax on net income or capital gains
  • foreign withholding tax similar to Australian withholding tax on interest and dividends
  • foreign taxes listed in Australia's double taxation agreements.

Taxation ruling IT 2507 provides a list of creditable taxes. The list in the ruling is not exhaustive. If you wish to seek credit for foreign taxes not identified in the list you should ask for a ruling from the Australian Taxation Office, using the format set out in Taxation Ruling IT 2507 .

You are not allowed a credit for penalties, fines, interest, and unitary or credit absorption taxes.

Credit for notional tax foregone by developing countries

Certain double taxation agreements with developing countries provide for 'tax sparing'. Tax sparing preserves taxation incentives which are provided by a treaty partner to promote economic development. If tax sparing applies to a tax incentive, you can claim a credit for tax foregone by a treaty partner under the incentive. The double taxation agreements list the taxes for which tax sparing is provided.

Foreign tax credit allowable for a dividend paid from income which has previously been attributed

An exemption applies for dividends derived by an Australian resident from profits that have been taxed on an accruals basis. A credit is available for tax paid by the Australian resident on these dividends even though they are exempt from tax.

Credit for foreign taxes paid after your assessment

You are allowed a credit only for foreign tax which you have actually paid or which you are deemed to have paid. You will need to request that a determination of your foreign tax credit entitlement be made or amended if you wish to claim a credit for foreign tax paid after your original assessment. Your assessment may also need to be amended to gross up your foreign income for any additional foreign tax credit you claim.

For further information please refer to Taxation Ruling IT 2529 . Note that the three-year period for claiming a credit referred to in the ruling has since been extended to four years.

Refunds of foreign tax

You cannot claim a credit for foreign tax refunded to you or to another person. Nor can you claim a credit where any other benefit is provided as a result of the payment of the foreign tax.

Two types of benefits will not result in the denial of a tax credit:

  • a general benefit which arises as a result of the payment of foreign tax - a general benefit is a benefit not directly linked with the payment of foreign tax
  • a benefit which is a reduction of a tax liability.

A credit will therefore not be denied solely because a country provides an imputation credit, a rebate of tax or a foreign tax credit for the foreign tax.

Evidence of foreign tax paid

The following documents will be acceptable as evidence of payment of foreign tax:

  • a notice of assessment and receipt for the tax paid or
  • a statement from a foreign tax authority setting out particulars normally recorded on a notice of assessment and receipt for payment or
  • a certificate for deduction of withholding tax issued by the person who pays the interest, dividends or any other income that is subject to a deduction of foreign tax.

In all cases, retain the original documents for future reference because the Australian Taxation Office may need to see them at a later date.

If the documentary evidence is in a foreign language, you will need a translation of the documents.

For further information refer to Taxation Ruling IT 2527 .

Working out your foreign tax credits

You must work out your foreign tax credit entitlement separately for each class of foreign income. This is called quarantining. Your foreign tax credit for each class cannot be more than the Australian tax applicable to that class of your taxable foreign income.

What are the classes of foreign income?

Foreign income is divided into four classes for the purpose of allowing a foreign tax credit:

  • passive income
  • offshore banking income
  • certain lump sum payments from foreign non-complying superannuation funds
  • other income.

What is passive income?

Passive income includes dividends, interest, annuities, rental income, royalties, amounts received for the assignment of a patent, copyright, capital gains, passive commodity gains and amounts included in assessable income under the CFC, FIF or transferor trust measures.

Capital gains

An assessable gain or profit of a capital nature is deemed to be foreign income for working out a foreign tax credit if it is derived from a source in a foreign country. Capital gains are included in the 'passive' class of foreign income.

For further details on credits for foreign tax paid on capital gains, please refer to Taxation Ruling IT 2562 .

What is offshore banking income?

Offshore banking income includes:

  • interest, fees, commissions or similar income derived from offshore banking transfers
  • dividends paid by a company out of profits derived from offshore banking transfers.

What are lump sum payments from foreign non-complying superannuation funds?

These lump sum payments included in assessable income under section 27CAA are treated as a separate class of income.

What is other income?

Other income is income that does not belong to any of the other classes of income. For instance, it would include income from commercial activities, salary or wages and most pensions.

Working out the amount of assessable foreign income for creditable foreign taxes

Your assessable foreign income for each class is 'grossed up' by the amount of foreign tax credit you can claim for that class of income. A company must also include an amount equal to any credit allowable for foreign underlying tax.

Example 1

Creditable foreign taxes

  • A company resident in New Zealand pays a dividend of $100 to an Australian resident individual. As New Zealand deducts $15 withholding tax, the taxpayer actually received $85. The taxpayer's assessable foreign income for that dividend will be $100 - that is, the amount of the dividend before the payment of withholding tax.

What deductions are allowable?

You may claim the following deductions for each class of assessable foreign income:

  • expenses directly related to that class of foreign income
  • other deductions relating to that class of foreign income
  • a share of the apportionable deductions - that is, deductions that cannot be related to a particular type of income - for example, gifts
  • unused quarantined foreign losses from prior years
  • prior year domestic losses, if you make an election to offset those losses against a class of foreign income
  • if your allowable deductions for the current year are more than your domestic source income, the amount by which those deductions are more than your domestic source income.

Refer to appendix 3 of this guide and to Taxation Ruling IT 2446 for more information on allowable deductions.

Working out your Australian tax payable

The foreign tax credit you are allowed for each class of foreign income is limited to the Australian tax payable on that class of income. Therefore, you first must work out the Australian tax payable.

To do this, multiply your average rate of Australian tax by your adjusted net foreign income. Deduct any rebates which apply to that income - apart from a rebate under an Act fixing the rates of income tax or under an Act imposing income tax. Expressed as a formula, the calculation is as follows:

ATP=AR X ANFI

ATP

Australian tax payable

AR

average rate of Australian tax

ANFI

adjusted net foreign income

How is the average rate of Australian tax worked out?

The average rate of Australian tax (AR) is worked out by dividing the gross tax on your taxable income less certain rebates by your taxable income. Expressed as a formula, the calculation is as follows:

AR =

gross tax + Medicare levy - rebates

taxable income

For this calculation, deduct concessional, zone or overseas service rebates.

What is the adjusted net foreign income?

The adjusted net foreign income is your net foreign income adjusted for apportionable deductions. Apportionable deductions are deductions of a concessional nature that do not relate directly to income producing activities - for example, gifts.

Net foreign income is your gross assessable foreign income less:

  • allowable deductions relating exclusively to your foreign income
  • any domestic loss carried forward that you have elected to use against your foreign income
  • deductions allowed as being appropriately related to your foreign income.

How is adjusted net foreign income determined?

Your adjusted net foreign income is determined as follows:

  • if your net foreign income exceeds the sum of your taxable income plus apportionable deductions, your adjusted net foreign income will equal your taxable income
  • if your net foreign income consists of two or more classes of income - that is, quarantining applies - and your combined net foreign income from all classes is more than the sum of your taxable income plus apportionable deductions, your adjusted net foreign income (ANFI) for each class will equal your taxable income. This is divided proportionately, as shown in Example 2, into:
  • ANFI - passive income

    ANFI - offshore banking income

    ANFI - lump sum payments assessable under section 27CAA

    ANFI - other income

  • in any other case, your adjusted net foreign income is your net foreign income multiplied by your taxable income divided by the total of your taxable income and apportionable deductions. Expressed as a formula, the calculation is as follows:

ANFI = NFI x

TI

TI + AD

ANFI

adjusted net foreign income

NFI

net foreign income of a class

TI

taxable income

AD

apportionable deductions

Example 2

Working out adjusted net foreign income

An individual has:

$

domestic source income

7 000

allowable deductions from domestic source income

10 000

net passive foreign income

2 000

net other foreign income

5 000

apportionable deductions

100

Taxable income

($7000 - $10 000 + $2000 + $5000 - $100)

3 900

Taxable income plus apportionable deductions

($3900 + $100)

4 000

Net foreign income ($2000 + $5000)

7 000

  • The net foreign income is greater than the taxable income and apportionable deductions. Therefore, the adjusted net foreign income is taken to equal taxable income. As there are two classes of foreign income, it is necessary to apportion the adjusted net foreign income into the relevant classes - that is, passive income and other income.

    The taxpayer's passive income is 2/ 7 and other income 5/ 7 of the combined net foreign income. The adjusted net foreign income for each class is as follows:

 

$

ANFI - passive Income $

(2/ 7 of the taxable income of $3900)

1 114

ANFI - other Income

(5/ 7 of the taxable income of $3900)

2 786

Example 3

Working out adjusted net foreign income

An individual has:

$

domestic income

7 000

passive foreign income

2 000

other foreign income

5 000

apportionable deductions

100

  • First work out ANFI for passive income:

The taxpayer's taxable income

($7000 + $2000 + $5000 - $100)

13 900

ANFI-passive income

 

2000 X

13,900

(13,900+100)

 

1 986

  • then work out ANFI for other income:

ANFI-other income

 

5000 X

13,900

(13,900+100)

 

4 964

Working out the credit

Your foreign tax credit entitlement for a class of foreign income is the lesser of:

  • the creditable foreign tax which you have paid on that class of income and
  • the Australian tax payable on that class of income, worked out using the above procedure.

The following example shows the steps to use to work out your foreign tax credit.

Example 4

Working out the foreign tax credit

An individual has:

$

domestic income

7 000

passive income - net of foreign tax

2 000

foreign tax paid - passive income

200

other income - net of foreign tax

5 000

foreign tax paid - other income

1 000

apportionable deductions

100

  • Step 1

    Work out taxable income

    Gross up foreign income by the amount of creditable foreign tax paid:

Assessable passive income (2000 + 200)

2 200

Assessable other income (5000 + 1000)

6 000

Taxable income (7000 + 2200 + 6000 - 100)

15 100

  • Step 2

    Work out the average rate (AR) of Australian tax

  • AR =
  • gross tax + Medicare levy - rebates

    taxable income

Gross tax on 15 100

1940.00

Medicare levy

226.50

Rebates

0

  • AR =
  • 1940 + 226.50 - 0

    15 100
 
  • 0.144
  • Step 3
  • Work out adjusted net foreign income.
  • For the passive class of income:

  • ANFI (passive income) =
  • NFI x TI

    TI + AD

NFI - net foreign passive income

2 200

TI - taxable income

15 100

AD - apportionable deductions

100

ANFI (passive income) =

2200 x 15 100

15 100 + 100

 

2185.53

  • For the other class of income:

NFI - net foreign passive income

6 000

TI - taxable income

15 100

AD - apportionable deductions

100

ANFI (other income) =

6000 x 15 100

15 100 + 100

 

5960.53

  • Step 4

    Work out the Australian tax payable (ATP) on each class of income.

    For foreign passive income:

    • ATP = AR x ANFI (passive income)

      ATP = 0.144 x 2185.53 = 314.72

    For foreign other income:

    • ATP = AR x ANFI (other income)

      ATP = 0.144 x 5960.53 = 858.32

    Step 5

    Determine allowable foreign tax credit for each class of foreign income.

 

$

Foreign tax paid on passive income

200

Australian tax payable

314.72

As the foreign tax paid is less than the Australian tax payable, the foreign tax credit is

200

Foreign tax paid on other income

1000

Australian tax payable

858.32

  • As the foreign tax paid is more than the Australian tax payable, the foreign tax credit is limited to the extent of the Australian tax payable on the foreign income - that is, $858.32.

    The excess credit of $141.68 can be carried forward for offset in later years against Australian tax payable on the same class of foreign income.

Carry forward of excess foreign tax credits

You will have an excess foreign tax credit for an income year if the amount of foreign tax you have paid is more than the Australian tax payable on that class of foreign income.

You may carry forward an excess foreign tax credit that arises in an income year for a class of foreign income for 5 years immediately following that income year. Your excess credit for a class of income may only be used where there is a credit shortfall for the same class of income in a later year. A credit shortfall will arise where the credit allowed for a class of foreign income for an income year is less than the Australian tax payable on that class of foreign income.

If you have incurred a loss for a class of foreign income, you cannot claim a tax credit in that year because the Australian tax payable on that class of income is nil. You may, however, carry forward the foreign tax credit relating to that class of income to subsequent years.

Section 2 - Credits available only to resident companies

Australian resident companies are entitled to a foreign tax credit as worked out in section 1. In addition, in some circumstances a company - other than a company in the capacity of trustee - may be:

  • entitled to a credit for foreign underlying tax - see section 160 AFC
  • entitled to a credit for tax paid by a CFC on amounts attributed to the Australian company
  • able to transfer a foreign tax credit to another group company
  • exempt from tax on foreign non-portfolio dividends where those dividends are an exempting receipt of that company - see part 1 of this chapter
  • exempt from tax on foreign income derived through a branch in a listed country - see p a rt 2 of this chapter.
Credits available to resident companies for underlying tax

An Australian resident company which receives a dividend from a related company is entitled to a credit for both:

  • the direct foreign tax - for example, withholding tax - on the dividend received and
  • the underlying tax paid by a foreign company on the portion of the distributable profits out of which the dividend was paid.

These credits will generally be available only where the dividend is included in assessable income. The only exception is where a dividend is received from a related foreign company and is treated as paid out of income previously attributed to the resident company under the accruals tax system. A tax credit can be claimed for both the direct foreign tax and underlying tax on these exempt dividends.

Related foreign companies

Under section 160AFB , an Australian company is treated as related to any number of linked foreign companies provided that:

  • each company in the chain - starting with the Australian company - has at least a 10 per cent voting interest in the company in the tier below it and
  • the Australian company has a direct or indirect interest of at least 5 per cent in the voting shares of each foreign company that is a member of the chain.

A chain of related companies cannot include a trust or partnership - that is, the chain will be broken by the interposition of a trust or partnership.

Example 5

Related foreign companies

  • Australian company A has a 50 per cent voting interest in foreign company B, which in turn has a 10 per cent voting interest in foreign company C. Both B and C will be treated as related to A.

    Step 1

    Are the companies members of the same group?

    Yes - each company in the chain, starting with the Australian company, has at least a 10 per cent voting interest in the company in the tier below it.

    Step 2

    Does company A have a 5 per cent or more direct or indirect voting interest?

    Yes - company A has a voting interest of 50 per cent (50% x 100%) in company B and a voting interest of 5 per cent (50% x 10%) in company C.

    Step 3

    Are the companies related?

    Yes - both tests are satisfied for both companies B and C. Therefore, they are both related to company A.

Working out underlying tax

Underlying tax is traced through a chain of related companies. In each successive distribution in the chain, the portion of underlying tax deemed paid by the recipient company is worked out by multiplying the underlying tax paid by the company making the dividend by the amount of the dividend divided by the paying company's distributable profits.

Working out underlying tax where there are only two companies in a dividend series

The following formula is used to work out underlying tax deemed paid when there are only two companies in a dividend series.

FUT =

D X EUT

DPE

 

FUT

foreign underlying tax deemed paid

D

the amount of the dividend

UT

the amount of the underlying tax

DP

the number of whole dollars in the distributable profits out of which the dividend was paid

Example 6

Underlying tax where there are two companies

  • On 1 August 1997 an Australian resident company - Ausco - received a dividend from a wholly owned subsidiary - Forco1 - in an unlisted country.

    Forco1

 

$

Distributable profit - that is, profits which accumulated during accounting periods commencing after 30 June 1987

50 000

The distributable profits did not include exempting profits or attributed income.

 

Foreign tax paid on those profits

5 000

Dividend paid to Ausco

10 000

Ausco is deemed to have paid foreign tax on the dividend of

 

(10 000 x 5 000)

50 000

 

1 000

Working out underlying tax where there are more than two companies in a dividend series

The following formula is used to work out underlying tax deemed paid where there are more than two companies in a dividend series:

FUT2 =

D (UT + FUT1)

DP

 

FUT2

underlying tax deemed paid

D

amount of the dividend

UT

amount of underlying tax paid that relates to the distributable profits out of which the dividend was paid

FUT1

amount of foreign tax deemed to have been paid by the previous calculation in relation to the dividend series

DP

number of whole dollars in the distributable profits out of which the dividend was paid

Example 7

Underlying tax where there are more than two companies

  • On 1 August 1997, an Australian resident company - Ausco - received a dividend from a wholly owned unlisted country subsidiary - Forco1. Forco1 paid the dividend out of distributable profits that included a dividend it received from Forco2. Forco2 is a wholly owned unlisted country subsidiary of Forco1. The distributable profits did not include exempting profits or attributed income.

 

$

Forco1

 

Distributable profit

50 000

Dividend paid to Ausco

10 000

Foreign tax paid

5000

Forco2

 

Distributable profit

20 000

Foreign tax paid on those profits

2000

Dividend paid to Forco1

5000

Forco1 is deemed to have paid foreign tax on the dividend of

500

5000 x

(2000 + 0)

20 000

 

Ausco is deemed to have paid foreign tax on the dividend of

1100

1000 x

(5000 + 500)

50 000

 

Working out underlying tax when a dividend is wholly or partly an exempting receipt

An Australian resident company is not entitled to a foreign tax credit for the exempting receipts component of a non-portfolio dividend because the component is not included in the assessable income of the resident company.

Exempting receipts of an Australian resident company

The following are exempting receipts of an Australian resident company:

  • a non-portfolio dividend received from a company resident in a listed country. The extent to which the dividend is treated as an exempting receipt depends on whether an attribution debit arises for the company paying the dividend. If no attribution debit arises in relation to the payment, all of the dividend is an exempting receipt. If an attribution debit arises - refer to part 1 of this chapter - the amount of the dividend that is more than the attribution debit is an exempting receipt
  • the exempting profits percentage - refer to part 1 - of a non-portfolio dividend received from a company resident in an unlisted country.

The exempting profits percentage for a dividend from the unlisted country company is worked out using the following formula.

EPP =

EP

DP

X100

 

EPP

exempting profits percentage

EP

exempting profits

DP

distributable profit

The distributable profit is the amount of profits of the company that would be available for distribution as dividends if any decision or requirement restricting their distribution as dividends was disregarded - other than any requirement providing for an eligible provision or reserve. An eligible provision or reserve is:

  • a provision or reserve which is required to be maintained by law
  • a provision for any liability in respect of foreign tax or Australian tax
  • a reserve maintained for the purpose of qualifying for relief from foreign tax
  • a provision or reserve for depreciation, bad or doubtful debts or leave payments or
  • any other provision or reserve of a kind prescribed by regulations.

The exempting profits of an unlisted country company is the amount of the distributable profit that is attributable to exempting receipts of the unlisted country company.

Working out foreign underlying tax credits if a dividend is paid by a listed country company from previously attributed income

A resident company will be entitled to a foreign tax credit for a non-portfolio dividend received from a listed country company if part of the dividend is paid from previously attributed income. The credit for that part of the dividend is worked out as follows. The credit is reduced by the amount of a foreign tax credit allowed previously when the income was attributed.

FUT =

D X

UT

DP

D

amount of the dividend that is not an exempting receipt

UT

amount of underlying tax relating to the amount of the distributable profits attributable to the attribution surplus - that is, UT = AST + (GT x ASP)

AST

amount of underlying tax relating exclusively to that part of the distributable profits attributable to any attribution surplus immediately before the payment of the dividend

GT

amount of underlying tax relating to both attributed profits - in respect of the attribution surplus - and the remainder of the distributable profits

ASP

percentage of the general tax that may reasonably be related to the part of distributable profits relating to that attribution surplus

DP

amount of distributable profits relating to an attribution surplus existing immediately before the dividend was paid

Working out foreign underlying tax credits if a dividend is paid by an unlisted country company from exempting profits

The foreign underlying tax credit for a dividend received from an unlisted country company which is partly an exempting receipt of an Australian resident company is worked out as follows.

FUT =

D X

UT

DP

 

D

amount of the dividend that is not an exempting receipt

UT

amount of underlying tax relating to the distributable profits, worked out as follows:

  • UT = N - ET + (GT x N - EP)

N- ET

amount of the underlying tax relating exclusively to non-exempting profits - that is, profits other than exempting profits

GT

amount of underlying tax that relates to both exempting and non-exempting profits

N - EP

percentage of GT that may reasonably be related to non-exempting profits of the Australian company and that form part of the distributable profits

DP

number of whole dollars in the non-exempting portion of the distributable profit out of which the dividend was paid

Example 8

Dividend paid by an unlisted country company

  • Ausco is an Australian resident company which has a wholly owned subsidiary - Forco - that is a resident of an unlisted country.

    Forco has distributable profits of $30 000. Of this amount, $20 000 represents profits from operations in the unlisted country and $10 000 represents profits from a branch located in a listed country. None of these profits have been attributed to Ausco.

 

$

Dividend paid to Ausco

27 000

Tax paid in the unlisted country

2 500

Tax paid by the branch in the listed country - no tax credit was allowed for this tax in the unlisted country

4 000

Distributable profits that are exempting profits

10 000

Distributable profits that are other profits

20 000

  • The dividend is treated as paid proportionately from exempting profits and other profits.

 

$

Dividend paid out of exempting profits

9 000

( 10 000

30 000

x 27 000)

  

D

dividend that is not an exempting receipt (27 000 - 9000)

18 000

UT uses the following components:

 

N - ET

underlying tax that relates exclusively to the non-exempt portion of distributable profits

nil

GT

amount of underlying tax which relates to both exempting and non-exempting profits

2 500

N - EP

percentage of GT that may reasonably be related to non-exempting profits, in relation to the Australian company, forming part of the distributable profits - $20 000 divided by $30 000 = 2/ 3. This example assumes that the accounting profits were also the taxable income of the company.

 

UT =

N - ET + + (GT x N - EP)

1 666.67

 

(nil + (2500 x 2/ 3))

 

DP

number of whole dollars in the non-exempting portion of the distributable profit out of which the dividend was paid

20 000

Underlying tax is therefore

1 500

 

18 000

20 000

X 1 666.67

 
Credits available to resident companies for attributed income

Working out the foreign tax credit when income is attributed

Where a company is related to a CFC at the end of the CFC's statutory accounting period and the assessable income of the company includes a share of the attributable income of the CFC - refer to chap ter 1 - the company is allowed a credit for an amount of tax equal to its attribution percentage of the CFC's notional allowable deductions for taxes paid.

A CFC can claim a notional deduction for foreign or Australian tax paid by the CFC on amounts included in the CFC's notional assessable income.

If the notional assessable income of the CFC includes a non-portfolio dividend from a related company, a notional deduction is also allowable for underlying tax the CFC is taken to have paid on the dividend.

Example 9

Foreign tax credit for attributed income

  • An Australian resident company - Ausco - has a 60 per cent interest in a CFC resident in an unlisted country - Forco.

Forco details:

$

Profits from a foreign branch in a listed country - not attributable income

2 000

Tax paid in the listed country on foreign branch income

600

Income derived in an unlisted country - it is all attributable income

10 000

Tax paid in the unlisted country on all income - this includes the foreign branch income

1 200

  • Ausco is deemed to have paid the following amount of tax on the attributed income:

    Attribution percentage: 60 per cent

Tax paid on attributed income

1 000

  • (10 000/1200) 12 000
 

Tax deemed paid by Ausco

600

  • (1000/60) 100
 
  • Ausco must gross up its assessable foreign income by this amount. It can claim a foreign tax credit for $600.

Credits where benefits deemed to be dividends are attributed

If a benefit provided by a CFC is deemed to be a dividend under section 47A and is attributed to a taxpayer, a credit for foreign tax paid will be allowed only if:

  • the amount of the deemed dividend is included in the taxpayer's assessable income in their return lodged in the year of the distribution or
  • the taxpayer notifies the ATO, in writing, within twelve months after the end of the income year in which the benefit was provided.

Credits where income is attributed due to a change in residence of a CFC

A resident company is allowed a credit for foreign tax paid by a CFC where an amount of income is attributed to it because the CFC changed its residence from an unlisted country to a listed country or to Australia. The credit is available, however, only if the resident company is related to the CFC at the time of the change of residence - see section 160 AFCB. The company is allowed a credit for the foreign tax and the Australian tax paid by the CFC on the attributed amount.

An underlying tax credit may also be available for an attributed amount referable to a non-portfolio dividend paid to the CFC from a foreign company. A credit will be allowed only if the foreign company was related to the resident company at the time the dividend was paid. In this case, the tax deemed paid by the resident company will include an amount equal to its attribution percentage - at the residence-change time - of the underlying tax that the CFC would have been taken to have paid if the CFC were an Australian resident company.

Credits when income is attributed due to a CFC paying dividends to another CFC

Income may be attributed to a taxpayer if:

  • a CFC resident in an unlisted country pays a dividend to another CFC
  • both the CFCs are related to the taxpayer at the time the dividend was paid - see section 160AFCC .

The income attributed is referred to as the section 458 amount.

Where a section 458 amount is included in the assessable income of a company, the company is allowed a credit for foreign tax paid on the amount.

The credit can be claimed for:

  • the part of the foreign tax paid on the dividend that relates to the amount included in the assessable income of the resident company - this is referred to as the 'adjusted foreign tax paid'
  • the part of the foreign underlying tax paid on the dividend that relates to the amount included in the assessable income of the resident company - this is referred to as the 'adjusted foreign underlying tax'.

The amount of adjusted foreign tax paid by the CFC receiving the dividend does not include tax paid under the taxation law of the country in which it is resident. The amount is worked out using the formula:

AFT = section 458 amount AFT x

FT

D

 

AFT

adjusted foreign tax paid by the CFC receiving the dividend on that part of the dividend which is not deemed to be paid out of exempting profits

FT

foreign tax paid by the CFC receiving the dividend

D

amount of the dividend

The adjusted foreign underlying tax deemed paid by the CFC receiving the dividend is worked out as follows:

AFUT = FUT x

section 458 amount

D - EPP

 

FUT

foreign underlying tax deemed paid by the CFC receiving the dividend

D

amount of the dividend

EPP

that part of the dividend which relates to exempting profits

Example 10

Adjusted foreign tax

  • Ausco has a wholly owned subsidiary - Forco1 - which is a resident of a listed country. Forco1 has a wholly owned subsidiary - Forco2 - which is a resident of an unlisted country. Forco2 pays a dividend of $50 000 to Forco1. There has been no previous attribution of Forco2 income - that is, there are no attribution credits - and no withholding tax has been paid on the dividend.

Forco2

$

Exempting receipts less expenses

10 000

Other net income

42 000

Tax paid

2 000

Distributable profits

(10 000 + 42 000 - 2000)

50 000

  • The income attributed to Forco1 under section 458 would be worked out as follows:

    Section 458 amount = AP x (D - GD - EPP - T)

AP

attribution percentage:

100%

D

amount of the dividend

50 000

GD

grossed up amount of any attribution debit

nil

EPP

that part of the dividend which relates to exempting profits - that is, exempting profits divided by distributable profits multiplied by the amount of the dividend

 
  • The exempting profits are the part of the distributable profits that relates to exempting receipts.

Tax relating to the exempting receipts

384.62

10 000

52 000

X 2000

  

Exempting profits (10 000 - 384.62)

9 615

EPP

exempting profits

distributable profits

X dividend amount

 
 

9615

50 000

X 50 000

9615

T

any foreign tax deducted from the dividend by or on behalf of the CFC receiving the dividend, multiplied by the percentage of the dividend represented by (D - GD - EPP)

 
 

nil x (50 000 - nil - 9615)

50 000

 

nil

section 458 amount

40 385

 

100% x (50 000 - nil - 9615 - nil)

 
  • The adjusted foreign tax paid by the CFC receiving the dividend is worked out as follows:

AFT

section 458 amount x

FT

D

 

AFT

adjusted foreign tax paid by the CFC receiving the dividend

 

FT

foreign tax paid by the CFC receiving the dividend

nil

Section 458 amount

40 385

D

amount of the dividend

50 000

AFT

nil x (40 385/52 000)

nil

The adjusted foreign underlying tax deemed paid by the CFC receiving the dividend is worked out as follows:

AFUT

FUT x (section 458 amount/D)

 

AFUT

adjusted foreign underlying tax

 

FUT

foreign underlying tax deemed paid by the CFC receiving the dividend

1615.39

 

2000 x (42 000/50 000)

 

Section 458 amount

40 385

D

amount of the dividend less withholding tax

50 000

EPP

that part of the dividend which relates to exempting profits

9 615

AFUT

1615.39 x (40 385/(50 000 - 9615))

1615.39

Working out a foreign tax credit when a dividend is paid from income which was previously attributed to an Australian resident company

A dividend paid out of income previously attributed to an Australian resident is exempt from tax - refer to part 1 of this chapter. In addition, an Australian resident company is allowed a credit for foreign tax - including foreign underlying tax - paid on a dividend from attributed income. The credit is reduced to the extent a credit was claimed for taxes paid when the income was attributable.

The formula to work out the foreign tax for which a credit is due when a dividend is received from previously attributed income is:

 

FTP = (EP x DT) + (AEP x UT) - AT

FTP

foreign tax paid on previously attributed income for which a credit is now allowable

EP

percentage of the payment which is exempt because the income has been previously attributed

DT

amount of foreign tax which the taxpayer is taken to have paid, and to have been personally liable for, in relation to the attribution account payment

AEP

percentage that would be EP if the attribution account payment were reduced by the amount of any exempting receipts of the Australian resident company

UT

foreign underlying tax credit allowable for the attribution account payment, except CFC-type foreign tax - that is, foreign tax which generally corresponds to tax payable under Australia's accruals tax measures

AT

amount of the attributed tax account debit arising from the payment of the dividend that is equal to or less than AEP x UT

Example 11

Credit for foreign taxes on a dividend paid from profits attributed to an Australian company

  • Ausco has a wholly owned subsidiary, Subco, in an unlisted country. Subco had distributable profits of $10 000 on which it paid foreign tax of $1000. These profits have previously been attributed to Ausco.

    On 1 August 1998, Subco paid a dividend of $10 000 to Ausco. The unlisted country levied dividend withholding tax at a rate of 10 per cent.

    The dividend received by Ausco is exempt from tax because it was paid from previously attributed income. At the attribution stage, Ausco would have received a credit of $1000 for foreign tax paid.

    Even though the dividend was not included in Ausco's assessable income, a foreign tax credit is available for withholding tax and underlying tax relating to the dividend. This is because the profits out of which the dividend was paid were attributed to Ausco and taxed in Australia.

    The method by which this credit is granted is as follows:

    Step 1

    Work out the foreign tax credit for dividend withholding tax and for underlying tax on the dividend as though the dividend was paid from income that had not been attributed to Ausco. 94

    Step 2

    Reduce the credit by the amount of a credit given at the attribution stage.

 

$

Dividend

10 000

Dividend withholding tax

1 000

  • Underlying tax (UT) is worked out as though the dividend was paid from income that was not attributed:

          dividend          

distributable profits

x

tax paid on profits out of which the dividend was paid

  • $10 000/$1000 x $10 000

    = $1000

Under the first step, Ausco's credit is the total of the amounts of dividend withholding tax and underlying tax ($1000 + $1000)

2 000

  • This credit is reduced, under the second step, by the $1000 credit given at the attribution stage.

    The formula for working out the foreign tax credit Ausco can claim is as follows:

    FTP = (EP x DT) + (AEP + UT) - AT

    This formula can be broken down as follows

EP x DT

tax paid on the dividend paid out of previously attributed income

EP

percentage of the dividend paid from previously attributed income - 100 per cent in the example

DT

tax paid on the dividend - dividend withholding tax of $1000 in the example

AEP x UT

underlying tax in relation to the dividend - $1000 tax was paid in the unlisted country on the profits out of which the dividend was paid

AEP

referred to as the adjusted exempt percentage of the dividend. This is the dividend reduced by the exempting profits part of the dividend. In the example, there is no exempting profits part of the dividend, therefore, AEP = 100%

UT

underlying tax paid on the dividend - do not include tax paid under an accruals tax law of another country

AT

tax for which a credit was allowed when the income of the unlisted country company was attributed to Resco - $1000 in the example. The amount of the tax is worked out using accounts referred to as attributable tax accounts. These accounts trace the tax for which credit was allowed at the attribution stage

  • In this example, when the income of $10 000 was attributed to Resco and a credit was given for $1000, Resco would have opened accounts as follows:

Attribution Account for Subco

Attributed Tax Account for Subco

Attributed income

$10 000

Tax credited

$1000

  • When the dividend is received, Resco will debit the attribution account $10 000 and claim exemption for the dividend. It will also debit $1000 to the attributed tax account.

    This debit is the amount referred to as AT. Attributed tax accounts are dealt with below.

Evidence of underlying tax paid

Your company should retain full particulars of the material on which its underlying tax credit has been worked out. Obtain a statement from the company which paid the dividend, certifying the amount of tax paid on the distributable profits out of which the dividend was paid. When underlying tax paid is traced down a chain of related foreign companies, such details will be required for each company in the chain.

Attribution accounts relevant to foreign tax credits for companies

Attributed tax accounts

What is the purpose of attributed tax accounts?

A resident company can claim a foreign tax credit for dividend withholding tax and certain underlying taxes on an exempt dividend paid from previously attributed profits.

The credit is initially worked out on the basis that no foreign tax credit was allowed at the time the profits were attributable. The foreign tax credit worked out in this way is then reduced by the credit allowed at the time the attributable income of the CFC was included in the assessable income of the resident company. The attributed tax accounts trace the foreign tax credit allowed at the attribution stage so that this reduction can be made.

Who should maintain attributed tax accounts?

Attributed tax accounts are to be maintained by a resident company to which the attributable income of a related foreign company has been attributed under the CFC measures. Other taxpayers need not maintain these accounts.

Attributed tax account credits

An attributed tax account credit can arise in relation to a CFC where an amount is attributed under any of the following sections:

  • section 160AFCA where the attribution of income of the CFC arises under section 456
  • section 160AFCB where the attribution of income of the CFC on a change of residence arises under section 457
  • section 160AFCC where the attribution of certain dividends paid by the CFC arises under section 458.

Each time a credit is made to an attribution account - as explained in part 1 of this chapter - a corresponding credit must be made to an attributed tax account for the entity for which the attribution account is operated.

Attributed tax account debits

An attributed tax account debit must be made each time the attribution account entity pays a dividend. The attributed tax account debit is worked out using the following formula.

Attributed tax account debit

=

attribution debit

attribution surplus

x

attributed tax account surplus

In order to claim a credit for foreign tax paid on income that was previously attributed, the amount of attributed tax account debit must be verifiable. The attributed tax accounts for each of the relevant entities in respect of the taxpayer claiming the credit must be available or a credit will not be allowed.

Example 12

Credit for foreign tax reduced by credits previously allowed

  • Forco1 is a resident of an unlisted country and is a wholly owned subsidiary of Ausco. Forco1 derived income of $16 500 from sources in its country of residence, all of which is attributed to Ausco, and pays foreign tax of $1500.

    Forco1 has distributable profits of $15 000

    ($16 500 - $1500) .

    It pays a dividend of $10 000 to Ausco in the following year, from which withholding tax of $1500 was deducted - the net dividend is therefore $8500.

    The dividend Ausco received is exempt from Australian tax. Ausco is also entitled to a credit for foreign tax paid on the income which was previously attributed. The credit is reduced, however, to the extent a credit for foreign tax was allowed when the income was attributed to Ausco. The exempt income is not included when working out the Australian tax payable on the foreign income and thus does not increase Ausco's foreign tax credit limit.

    The credit is worked out as follows:

 

FTP = (EP x DT) + (AEP x UT) - AT

FTP

foreign tax paid on previously attributed income for which a credit is now allowable

EP

percentage of the payment which is exempt because the income has been previously attributed - that is, profits which have been previously attributed or distributable profits. In this example EP is 100 per cent as the dividend is paid from previously attributed income

DT

amount of foreign tax which the taxpayer is taken to have paid and to have been personally liable for, in relation to the attribution account payment - that is, $1500 withholding tax

AEP

percentage that would be EP if the attribution account payment were reduced by any amount of that payment which is an exempting receipt of the Australian resident company. In this case, AEP is 100 per cent because there is no exempting receipt

UT

foreign underlying tax credit allowable for the attribution account payment, other than CFC-type foreign tax - that is, foreign tax arising from laws that generally correspond with Australia's accruals measures

 

(D/DP) x tax on distributable profits

 

(10 000/15 000)x1500

$1000

AT

amount of the attributed tax account debit for the tax credit previously allowed on the attributed income that is equal to or less than AEP x UT. The attributed tax account debit is equal to

 

attribution debit

attribution surplus

x

attributed tax account surplus

 

(10 000/15 000) x 1500

1000

  • Note : When $15 000 income was attributed to Ausco, Ausco would have credited an attribution account for Forco1 with $15 000. It would also have credited $1500 tax to the attributed tax account for Forco1 - that is, tax for which a credit was allowed at the attributed stage. When the dividend was paid by Forco, this would have remained as an attribution surplus. The dividend of $10 000 is an attribution account payment.

FTP

1500 + 1000 - 1000

1500

Transfer of excess foreign tax credits

A resident company that is a member of a company group may transfer an excess credit to another member of the group if:

  • there is 100 per cent common ownership within the group
  • there is a shortfall of foreign tax credits in a class of income for the company receiving the transfer
  • the shortfall is for income of the same class as that for which there is an excess foreign tax credit in the company transferring the credit
  • both companies retain a record of the transfer showing the credit transferred.

The transfer of an excess credit may include credit carried forward from five prior years as well as the current year. The transfer operates only for the following two classes of income:

  • passive income
  • other income - excluding offshore banking income.

A company can transfer only an amount equal to the credit shortfall for that class of income - that is, the transferee cannot carry forward the transferred amount.

Carry forward of foreign losses by companies

An overall foreign loss for a class of assessable foreign income may be carried forward indefinitely and used to reduce a future year's assessable foreign income for that class.

Losses incurred by a company before the 1990-91 income year can be carried forward only for seven years and are therefore no longer available.

Claiming foreign tax credits on your foreign income

To work out if you can claim a foreign tax credit on your foreign income, read the booklet How to claim a foreign tax credit .

ATO references:
NO NAT 1840

Foreign income return form guide
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