Foreign income return form guide
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Chapter 3: Taxation of foreign dividends and branch profits
This chapter explains the taxation treatment of foreign dividends and of branch profits derived by Australian companies.
Taxation of foreign dividends
Taxation of branch profits
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 is liable to tax on the taxpayer's share of a dividend paid by an unlisted country CFC directly or indirectly to another CFC or controlled foreign trust.
How do you treat a dividend received from a non-resident company?
What if a CFC receives a dividend from another CFC?
When is a CFC deemed to have paid a dividend?
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 for these purposes if two conditions are met. These are:
- the dividend is paid to a company
- the company receiving the dividend has a 10% 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, or arising out of, a general meeting of the company as regards all questions that can be submitted to such a poll.
A company is taken to have a voting interest in another company if:
- the company 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, and
- 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 foreign company
Non-portfolio dividends received by a resident company from a company that is a resident of a foreign country are non-assessable non-exempt income where:
- they are paid out of profits of a CFC that have been previously attributed to the resident company under the accruals tax measures (section 23AI), and/or
- they are paid from a foreign company and the recipient company does not receive the dividend in the capacity of a trustee (section 23AJ).
Non-portfolio dividend paid partly from profits taxed on an accruals basis
Amdoy, a resident company, wholly owns a CFC in a listed country. Attributable income of $10,000 from the CFC was included in Amdoy's assessable income for the 2004-05 income year.
The CFC then paid a non-portfolio dividend of $25,000 to Amdoy on 1 August 2008.
Amdoy can treat part of the non-portfolio dividend - $10,000 - as non-assessable non-exempt income under section 23AI, as it is a distribution out of previously attributed income.
The $15,000 balance of the non-portfolio dividend can be treated as non-assessable non-exempt income under section 23AJ.
Non-portfolio dividends received by a resident individual from a company that is a resident of a foreign country may also be treated as non-assessable non-exempt income if they are paid out of profits of a CFC that have been previously attributed to the resident individual under the accruals tax measures (section 23AI).
Distributions of attributed income - maintaining records to support a claim that an amount is not assessable
To be able to work out what distributions out of a CFC's attributed income are non-assessable non-exempt income, you will need to keep certain records called attribution accounts.
You must maintain an attribution account for:
- each CFC from which income is attributed to you. This account will contain a record of:
- income attributed to you from the CFC, and
- income distributed to you by the CFC which is treated as distributed from attributed income
- each entity through which the income of that CFC is distributed to you. These entities may be
- trusts, or
- companies that are not Part X Australian residents
- each foreign investment fund (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. Dividends paid by a company out of profits which were attributed to you before the company becoming a resident of Australia are non-assessable non-exempt income.
These accounts are used to keep track of profits that have been taxed on an accruals basis so that you determine what amounts are non-assessable non-exempt income when you receive a distribution from those profits.
A resident company - Amdoy - owns all the share capital of a CFC that is a resident of an unlisted country. The CFC commenced business on 1 July 2004. For the 2004-05 income year, its only income was attributable income of $2,500. It paid no tax. On 1 August 2005, it paid a dividend of $2,500 to Amdoy.
Amdoy will open an attribution account for the CFC and credit it with $2,500 on 30 June 2005 because this amount was included at that time in Amdoy's assessable income under the CFC measures. The CFC is called an attribution account entity.
Amdoy will debit $2,500 to the attribution account for the CFC on 1 August 2005 because of the dividend paid by the CFC. The debit is referred to as an 'attribution debit'. The amount of the debit cannot be more than the credit balance in the account - called the 'attribution surplus' - at the time the debit is made. In this case, the debit could not be more than $2,500.
The dividend received by Amdoy is non-assessable non-exempt income to the extent the dividend gave rise to an attribution debit. In this case, Amdoy can claim the whole amount of the dividend as non-assessable non-exempt income in the 2005-06 income year. The effect is that Amdoy only pays tax on the CFC's income when it is attributed, and not again when it is distributed.
An attribution account maintained by you for a CFC is specific to you. This means that when you sell shares in a CFC, you cannot transfer the attribution account to the purchaser of the shares.
Tracing the path of distributions of attributed income
There are a number of ways you can receive amounts that were paid from profits that have previously been attributed to you. In general, these amounts will be distributed to you as a dividend. The dividend may be distributed to you directly, or indirectly through a chain of companies, partnerships, or trusts.
When are attribution account payments made?
To work out your exemption, you will need to know the date on which attribution account payments are taken to have been made.
The following table sets out:
- the types of attribution account payments that can occur
- the entities that are treated as making and receiving an attribution account payment
- the date on which the payment is taken to be made.
Type of attribution payment
Entity making payment
Entity receiving payment
Date payment made
On date dividend is paid
Partner's share in the net income of a partnership
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
At the end of the income year of the trust
Whole or part of the net income of a trust estate is assessable to the trustees. Sections 99 or 99A
At the end of the income year of the trust
Other distribution of accumulated trust income
Income year in which the distribution was made
What accounting entries should you make?
As mentioned earlier, attribution accounts link distributions a CFC has made to you - either directly or through other entities - to the income of the CFC that has already been attributed to you. The link is made when you:
- debit the attribution account of the entity that makes the payment, and
- credit the account of the entity that receives the payment.
Continue this process down a chain of entities until you receive a distribution made by the CFC.
Distribution of attributed income
A resident company - Amdoy - owns all of the shares of 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 2004 income year CFC2 derived $100 which was attributed under the CFC measures. The company paid no tax on the attributed amount. On 1 August 2004 the company paid its first dividend of $100 to CFC1, which paid the dividend to Amdoy on the same day.
All the entities close accounts to 30 June 2005.
1 August 2004 dividend to CFC1
30 June 2004 amount attributed to Amdoy
1 August 2004 dividend to Amdoy
30 June 2004 amount attributed to CFC2
As the $100 attributed from CFC2 to Amdoy on 30 June 2004 was included in Amdoy's 2004 assessable income, and as the distribution Amdoy received on 1 August 2004 is no more than the income already attributed, Amdoy will treat the dividend as non-assessable non-exempt income.Proportionate interests in the CFC and in interposed entities
A resident taxpayer might hold only a proportion - that is, less than 100% - of the interests in a CFC. That interest may be held directly or indirectly through interests in other foreign entities.
If you hold an interest of less than 100% in a CFC, only a proportion of the attributable income of the CFC is included in your assessable income. The proportion you use depends on the interest - called the attribution percentage - you have in the CFC - see chapter 1 .
When tracing a distribution made by a CFC through a chain of interposed entities to yourself, note any proportionate interests you have in any of these entities.
Your interest in the CFC - and in each interposed entity - is called your attribution account percentage. This interest may differ from your attribution percentage in an entity. The foreign entities in the chain along which the attributed income of the CFC is later distributed to you need not necessarily be controlled foreign entities.
If you have both direct and indirect attribution account interests in an entity, then your attribution account percentage in that entity is the sum of the interests as follows:
Attribution account percentage
Direct attribution account interest
Indirect account attribution interest
How do you work out your direct attribution account interest in an entity?
Your direct attribution account interest in an entity will depend on the type of entity it is.
If the entity is a foreign company, your direct attribution account interest in the company is the same as your direct attribution interest in that company.
If the entity is a partnership of which you are a partner, your direct attribution account interest is the percentage that you hold - and any percentage you are entitled to acquire - of either the partnership's profits or the partnership's property. If the two percentages differ, use the higher percentage as your direct attribution account interest.
Your interest in a partnership is measured at the end of the accounting period in which the dividend is distributed through the partnership to you. The date of the dividend payment is called the test time. You should assume that you held the same interest in the profits and property of the partnership throughout the accounting period that you held at the test time. When working out your interest in the profits, use the amount of profit for the whole of the period.
Attribution account interest in a partnership
It is necessary to measure the direct attribution account interest of CFC 1 in the partnership in order to measure the attribution account percentage of the resident company in the partnership when the dividend is paid.
If the entity is a trust of which you are a beneficiary, your interest in the trust is the percentage of either the income or property of the trust to which you are presently entitled - and any percentage you are entitled to acquire. If the two percentages differ, use the higher percentage as your attribution account interest.
As in the case of an interest in a partnership, your interest in a trust is measured at the end of the accounting period of the trust in which the dividend is distributed through the trust to you. The date of this payment is called the test time. You should assume that you held the same interest in the income or property of the trust throughout the accounting period as you held at the test time. When working out your interest in the income, use the amount of income earned for the whole period.
How do you work out your indirect attribution account interest in an entity?
Your attribution account percentage in an entity is the sum of your direct and indirect attribution account interests in that entity. To work out your indirect interest in an entity - Entity B - which is held through another entity - Entity A - multiply your direct interest in Entity A by Entity A's direct interest in Entity B.
If there are more than two entities in a chain, continue the process of multiplication along the chain until you reach the entity in which you are measuring your indirect interest.
Attribution account interest
In this case, the resident taxpayer's attribution account percentage in CFC2 is 61% - that is, the taxpayer has a direct attribution account interest of 25% plus an indirect attribution account interest of 36%.
Direct and indirect attribution account percentage
The following example shows how to work out direct and indirect attribution account interests and the attribution account percentage in an entity.
A resident company owns 50% of the share capital of CFC1 and CFC1 owns 50% of the share capital of CFC2. The CFCs are residents of unlisted countries. CFC2 commenced business on 1 July 2004. For the 2004-05 financial year the only income of CFC2 was attributable income of $100. On 1 August 2005, CFC2 paid a dividend of $50 to CFC1.
The resident company's attribution percentage in CFC2 is 25% - that is, 50% of 50%. The resident company's share of the attributable income of the CFC is therefore $25 - that is, 25% 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 attribution account percentage of the resident company in CFC1 is 50%.
Up to $25 of the dividend can therefore be treated as paid from previously attributed income.
A resident individual has a direct attribution account interest of 80% in CFC1. CFC1 has a direct attribution interest of 90% in CFC2. The CFCs are resident in unlisted countries.
CFC2 commenced business on 1 July 2004. For the 2005 income year, its only income was attributable income of $100. It paid no tax. On 1 August 2005 it distributed its 2005 income. On the same day, CFC1 distributed the full amount of the dividend it received from CFC2.
1 August 2005 dividend to CFC1 (note 2)
30 June 2005 attributed income (note 1)
1 August 2005 dividend to the resident individual (note 4)
30 June 2005 dividend from CFC2 (note 3)
Note 1: This represents CFC2's attributable income of $100 multiplied by the resident's attribution percentage in CFC2 - that is, 80% (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% 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 individual is non-assessable non-exempt income to the extent of the attribution debit that arose when the dividend was paid. As this debit was also $72, the entire dividend is non-assessable non-exempt income.
When should you make a credit in an attribution account?
You must make a credit in an attribution account if you include an amount in your assessable income because:
- an amount of the CFC's income has been attributed to you - section
456. The credit amount will be the amount of the attributed income included in your assessable income under section
456 without any addition for foreign or Australian tax paid by the CFC on that income. You must enter the credit at the end of the CFC's statutory accounting period. Where a company is a CFC at the beginning of its statutory accounting period but ceases to exist during that period, the statutory accounting period is deemed to end immediately before the company ceases to exist. However, in this circumstance the credit arises at the beginning of the statutory account period
- an amount 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, and
- 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. However, you have the option to defer the credit to the extent it relates to an amount included in attributable income under section 457 for an unrealised gain on a tainted asset.
The credit may be deferred until the CFC pays a dividend out of profits arising from the subsequent disposal of the asset.
You must also make a credit in an entity's attribution account if:
- that entity receives an attribution account payment from another entity, and
- the payment gives rise to an attribution debit for the paying entity.
The credit amount will be the same as the attribution debit. You must enter the credit on the date of the attribution account payment.
How are credits made when the taxpayer is an Australian partnership or Australian trust?
Only the taxpayer who is actually liable to tax on the attributed income of the CFC can obtain an exemption from tax for distributions of that income. Whilst the Australian partnership is the attributable taxpayer and has attributable income included in its net income, it is the partners of the partnership that are liable for tax in respect of this income as their assessable income includes their share of the net income of the partnership.
A similar result applies in relation to presently entitled trust beneficiaries where the net income included in a presently entitled trust beneficiary's assessable income includes income attributed to the trust under the CFC provisions.
The attribution accounts are intended to ensure that only the relevant partners or trust beneficiaries are entitled to the exemption on distributions of previously attributed income. In these cases the partners or beneficiaries keep attribution accounts in respect of the relevant CFCs and partnerships or trusts. For attribution account purposes these entities are known as 'attribution account entities'.
This means that if the income of a CFC is attributed to an Australian partnership (which may include a foreign hybrid limited partnership or foreign hybrid company) or Australian trust, the credit made in the CFC's account is for the partner of the partnership or for the trust beneficiary who is presently entitled to the trust income. If there is no such beneficiary, the credit arises for the trustee.
The credit does not normally arise directly for the partnership or trust itself. There is an exception where the trust is a corporate unit trust, a public trading trust, an approved deposit fund, an eligible superannuation fund or a pooled superannuation trust. There is also an exception for Australian corporate limited partnerships which are treated as Australian companies for tax purposes.
The amount of the credit made for the partner of a partnership is equal to the increase in the amount included under section 92 of the ITAA 1936 in the partner's assessable income, resulting from attributed income being included in the partnership net income. For a trust beneficiary, the credit equals the increase in the amount included under section 97, 98A or 100 of the ITAA 1936 in the beneficiary's assessable income, resulting from attributed income being included in the trust net income. The amount so calculated is called the 'tax detriment'.
When should you make debits in attribution accounts?
You must make an attribution debit in an entity's attribution account if that entity makes an attribution account payment to either:
- an attributable taxpayer, or
- another attribution account entity.
There are, however, two rules you must observe. These are:
- 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.
How are debits made when the attributable taxpayer is an Australian partnership or Australian trust?
If a CFC makes an attribution account payment to an Australian partnership, an attribution debit will arise for the CFC in relation to a partner in the partnership, provided that immediately before the payment is made, there is an attribution account surplus for the CFC in relation to the partner.
The amount of the attribution debt is the lesser of:
- the attribution surplus for the CFC in relation to the partner, and
- the partner's attribution account percentage (in the partnership) of the attribution account payment.
Similarly, an attribution account payment made by a CFC to an Australian trust will give rise to an attribution debit for the CFC in relation to a beneficiary of the trust where there is an attribution account surplus for the CFC in relation to the trust. In this case, the attribution debit will be the lesser of the attribution account surplus for the CFC in relation to the beneficiary, and the beneficiary's attribution account percentage (in the trust) of the attribution account payment.
Where such a debit is made for a CFC in relation to a partner in a partnership or beneficiary in a trust, a corresponding attribution credit must also be made for the partnership in relation to the partner or the trust in relation to the beneficiary. This is so that, when calculating the partner's share of the partnership net income, or the beneficiary's share of the trust net income, at year end, there is an attribution account surplus against which to debit the attribution account payment arising from that calculation.
Attribution account entries for interest in a CFC held by a foreign hybrid limited partnership
A resident company - Oz Co - has a 50% interest in the net income of a foreign hybrid limited partnership - FHLP - which owns all of the shares of a CFC. The CFC is a resident of an unlisted country. The unlisted country does not impose tax on these entities. FHLP is an Australian partnership as Oz Co is a partner. All the entities close their accounts to 30 June.
In the 2006 income year the CFC derived a profit of $200 which was attributed to the foreign hybrid limited partnership under the CFC measures. On 1 August 2006 the CFC paid a dividend out of these profits of $200 to FHLP, to which Oz Co is entitled to 50%, that is, $100.
1 August 2006 Dividend to FHLP (note 2)
30 June 2006 Attributed income (note 1)
30 June 2007
Share of net partnership income (note 4)
1 August 2006 Dividend from CFC (note 3)
Note 1: This represents the tax detriment to Oz Co resulting from income being attributed to FHLP ($200). The income attributed to FHLP gives rise to an attribution credit for the CFC in relation to Oz Co of $100 [subsection 371(6)].
Note 2: This represents Oz Co's attribution account percentage in the dividend paid by CFC to FHLP on 1 August 2006 - that is, 50% of the $200 dividend. Oz Co's attribution account percentage of the dividend gives rise to an attribution debit for the CFC in relation to Oz Co of $100 [subsection 372(2)].
Note 3: This represents the attribution credit for FHLP in relation to Oz Co corresponding to the debit for CFC in relation to Oz Co arising as a result of CFC's dividend [subsection 371(1)(d)].
Note 4: This represents the calculation of Oz Co's share of the net partnership income of FHLP. The debit arises at the end of the year of income [subsections 365(1)(b) and 372(1) and (2)].
Oz Co's share of the net partnership income is an attribution account payment by FHLP to Oz Co. As FHLP has an attribution account surplus in relation to Oz Co equal to the amount of the attribution account payment, Oz Co will treat the entire attribution account payment as non-assessable non-exempt income.Dividends other than non-portfolio dividends
Portfolio dividends are generally taxable unless they are paid from profits taxed previously on an accruals basis. Portfolio dividends are dividends that do not qualify as non-portfolio dividends.
You must maintain an attribution account for each CFC from which income is attributed to you. An explanation of how these accounts are maintained was provided earlier in this part.
Non-portfolio dividends paid by a foreign company to a CFC are non-assessable non-exempt income of the CFC. Therefore, such dividends cannot form part of the attributable income of the CFC in relation to which an attributable taxpayer may be assessable under section 456.
It is possible that a resident taxpayer with an interest in an unlisted country CFC may try to minimise Australian tax by arranging for the CFC to distribute benefits in a form other than dividends to its shareholders or their associates.
There are rules to prevent this form of tax avoidance in section 47A. These rules deem certain transfers and payments made by an unlisted country CFC to be dividends. These dividends are then taxed in the normal way.
For section 47A to apply, a CFC must provide a benefit to:
- a resident who is a shareholder or an associate of a shareholder of the CFC, or
- another CFC or controlled foreign trust, directly or through other entities, where the first entity that received the dividend is a shareholder or an associate of a shareholder of the CFC.
Types of benefits that are covered under section 47A
The following seven types of benefits provided by a CFC could be treated as dividends:
the waiver by the CFC of a debt owed by another entity
the grant by the CFC of a non-arm's length loan to another entity
the grant by the CFC of a loan - whether at arm's length or not - to another entity to facilitate, directly or indirectly, the payment by that entity of a dividend that would be non-assessable non-exempt income
the transfer by the CFC to another entity of property or services for no consideration, or for inadequate consideration
a payment made by the CFC for allotment of:
a payment made by the CFC in respect of calls on shares in another company
the grant by the CFC of a loan - whether at arm's length or not - to another entity to facilitate a transaction of the type referred to in any of the above points.
Treat the fifth and sixth types of payments as dividends only if:
- a shareholder of the CFC - or shareholder's associate - holds any direct interest, or later acquires any direct interest, in any of the shares of the company in which the CFC acquired shares or in the unit trust in which the units were acquired, or
- the company - or unit trust - uses the proceeds of the issue to facilitate a transaction providing any of the above types of benefits.
Entities providing and receiving the benefit
For a benefit to be treated as a deemed dividend, the benefit must be provided by the CFC to a shareholder or an associate of a shareholder.
The benefit must be provided by either:
- an unlisted country CFC, or
- another entity under an arrangement with the CFC, where the CFC has transferred property or services in consideration for the benefit to:
- the other entity, or
- any other entity.
These transfers of property or services are referred to as arrangement transfers.
The time the benefits are deemed to have been provided
The following table sets out some of the types of benefits provided by a CFC that are subject to section 47A, the time at which they are taken to be provided and the amount of the benefit.
Type of benefit
Waiver of a debt
Time the debt was waived
Amount of the debt
Non-arm's length loan
Time the loan was made
Amount of the loan
Transfer of property for no consideration
Time the property was transferred
Market value at time of transfer
Transfer of property or services for a consideration less than market value
Time the property or services were transferred
Difference between the market value of the property or services and the consideration paid
Payment or transfer of property for the allotment of shares or units
Time the payment or transfer was made
Amount paid or market value of the property transferred
Benefit provided by another entity under an arrangement with the CFC - if there is one 'arrangement transfer'
Time the CFC made the arrangement transfer
Amount of the arrangement transfer or market value of arrangement transfer
Benefit provided by another entity under an arrangement with the CFC - if there are several arrangement transfers
Time the agreement to make the arrangement transfers was entered into
Total amount of the arrangement transfers or the total market value of the arrangement transfers
Working out the amount of the deemed dividend
The amount of a benefit that can be treated as a dividend paid by a CFC cannot be more than the CFC's profits at the time the benefit was provided.
In this context, 'profits' do not mean distributable profits. 'Profits' in this situation mean 'commercial profits' of either an income or capital nature that the company has at the time the benefit is provided. Work out these profits at the time the company provided the benefit.
If the CFC provided a benefit by transferring property or services at less than their market value, work out the CFC's profits at the time the benefit was provided as if the property or services were transferred for their full market value.
Effect of deeming a benefit to be a dividend
A deemed dividend paid to a resident taxpayer is generally treated the same as other dividend payments. For example, a deemed dividend that is a non-portfolio dividend paid by an unlisted country CFC to an Australian company is treated as non-assessable non-exempt income.
Disclosure of deemed dividends
You will be denied access to certain tax offsets and concessions in relation to a section 47A deemed dividend if you:
- do not disclose the deemed dividend in your tax return, and
- do not notify 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 tax offsets and concessions you lose are:
- any tax offsets for foreign taxes you have paid on the dividend, and
- any possibility that a part of the deemed dividend may qualify as non-assessable non-exempt income under section 23AI.
The deemed dividend will also not give rise to an attribution credit.
Foreign branch income of a resident company that is not assessableWhich resident companies qualify?
Two broad groups qualify to have certain branch profits treated as non-assessable non-exempt income. These are resident companies that either:
- carry on business through a permanent establishment - for example, a branch, or
- are partners of a partnership or are presently entitled beneficiaries of a trust - and that partnership or trust carries on business through a permanent establishment.
Non-assessable non-exempt income treatment does not apply to resident taxpayers, other than companies, with foreign permanent establishments.What is a permanent establishment?
A permanent establishment 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 non-assessable non-exempt?
Whether branch profits are treated as non-assessable non-exempt income depends on whether the branch is in a listed or unlisted country.
Non-assessable non-exempt income treatment
Branches in listed countries
In general, non-assessable non-exempt income treatment is available for income derived by a resident company through a branch in a listed country if:
- the income is from carrying on a business in the listed country, and
- the branch satisfies an active income test.
Non-assessable non-exempt income treatment is not available for income derived through a branch in a listed country if:
- the branch does not satisfy the active income test, and
- the income is both adjusted tainted income and eligible designated concession income.
You must test each item of income individually against these criteria to see if it is non-assessable non-exempt income.
Branches in unlisted countries
Non-assessable non-exempt income treatment is generally available for income derived by a resident company through a branch in an unlisted country if:
- the income is from carrying on a business in the unlisted country, and
- the branch satisfies an active income test.
Non-assessable non-exempt income treatment is not available for income derived through a branch in an unlisted country if:
- the branch does not satisfy the active income test, and
- the income is adjusted tainted income.
The same concept of adjusted tainted income is used for this purpose as that used in determining the attributable income of a CFC. However, the following modifications apply in determining the adjusted tainted income of a branch:
- the passive income of a branch conducting life assurance activities is not reduced under subsection 446(2)
- a branch and its Australian head office are treated as separate legal entities for the purpose of determining whether the branch has derived tainted sales income, and
- branches of Australian financial institutions are provided with an exemption for banking income broadly consistent with the exclusion from accruals taxation available under the CFC measures for Australian financial institution's subsidiaries.
An active income test concession is provided to allow branches in both listed and unlisted countries to derive up to 5% of gross turnover as tainted income and still obtain non-assessable non-exempt income treatment under section 23AH for income amounts.
Broadly, this active income test is the same as that for CFCs. The following modifications are made to the test for branches:
- the only amounts taken into account are those derived through the branch
- the income year of the company with the branch is used for the purposes of the test
- those conditions of the active income test relating to the existence and residency of a CFC do not apply because they are not relevant to branches, and
- the modifications to the adjusted tainted income of a branch referred to above also apply in determining the adjusted tainted income of the branch for the purposes of the active income test.
Permanent establishment in a listed country
A resident company includes in the calculation of its net capital gains any capital gain or capital loss as a result of a capital gains tax (CGT) event happening in relation to a tainted asset that is used in carrying on a business through a permanent establishment in a listed country if:
- the gain is also eligible designated concession income, or
- there is a loss but there would have been eligible designated concession income if the loss had instead been a gain.
Permanent establishment in an unlisted country
A resident company includes in the calculation of its net capital gains any capital gain or capital loss arising as a result of a CGT event happening in relation to a tainted asset that is used in carrying on a business through a permanent establishment in an unlisted country.Effect of non-assessable non-exempt income treatment on a resident company's deductions, losses and foreign income tax offsets
A deduction is not allowable for:
- outgoings or expenses connected to branch income and gains that are non-assessable non-exempt income
- capital losses on the disposal of a branch asset if, had there been a profit on the disposal, the profit would have been non-assessable non-exempt income.
Current year losses or carried forward losses of a resident company are not reduced by branch income or gains that are non-assessable non-exempt income.
Foreign income tax offsets are not allowed for foreign taxes paid on branch income that is non-assessable non-exempt income.
NO NAT 1840
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