1051282403135 | Legal database

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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your written advice

Authorisation Number: 1051282403135

Date of advice: 14 September 2017

Ruling

Subject: NANE income under Subdivision 768-A

Question 1

Will dividends paid by ForeignCorp to you from 17 October 2014 to 30 June 2016 be considered non-assessable non-exempt (‘NANE’) income under the Subdivision 768-A of the ITAA 1997.

Answer

Yes.

This ruling applies for the following periods:

01/07/2014 - 30/06/2016

The scheme commences on:

17 October 2014

Relevant facts and circumstances

1. You are an Australian registered company.

2. You are not a trustee of a public trading trust.

3. You hold a minority share greater than 10% in both the ordinary share capital and the non-voting preference share capital of ForeignCorp, a foreign resident company. The remaining shares in ForeignCorp are held by an unrelated Australian incorporated company.

4. The above shareholding of ForeignCorp did not change in the period 17 October 2014 to 30 June 2016. There are no other equity interests in ForeignCorp on issue.

5. ForeignCorp is not an Australian tax resident. The central management and control of ForeignCorp is located in overseas and ForeignCorp does not carry on business in Australia.

6. ForeignCorp holds a minority share greater than 10% of the ordinary shares and a majority of the non-voting preference shares on issue in XYZ Corp, a foreign resident company that carries on an online business.

7. From 17 October 2014 to 30 June 2016, ForeignCorp paid the dividends to you.

8. The dividends were paid to you in respect of your shareholding in ForeignCorp and were not debited against the share capital account of ForeignCorp.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 6

Income Tax Assessment Act 1936 section 350

Income Tax Assessment Act 1997 section 768-5

Income Tax Assessment Act 1997 section 768-10

Income Tax Assessment Act 1997 section 768-15

Income Tax Assessment Act 1997 section 960-115

Income Tax Assessment Act 1997 section 960-190

Income Tax Assessment Act 1997 section 974-75

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Summary

The dividends paid to you by ForeignCorp between 17 October 2014 and 30 June 2016 are foreign equity distributions that are considered NANE income under Subdivision 768-A of the ITAA 1997.

Detailed reasoning

Legislative Background

Under Subdivision 768-A of the Income Tax Assessment Act 1997 (ITAA 1997), where an Australian corporate tax entity receives a foreign equity distribution from a foreign company, either directly or indirectly through one or more interposed trusts or partnerships, and the Australian corporate tax entity holds a participation interest of at least 10% in the foreign company, the distribution is non-assessable non-exempt income for the Australian corporate tax entity.

Subsection 768-5(1) states:

A * foreign equity distribution is not assessable income, and is not * exempt income, of the entity to which it is made if:

(a) the entity is an Australian resident and a * corporate tax entity; and

(b) at the time the distribution is made, the entity satisfies the participation test in section 768-15 in relation to the company that made the distribution; and

(i) does not receive the distribution in the capacity of a trustee; or

(ii) receives the distribution in the capacity of a trustee of a * public trading trust.

Subsection 995-1(1) states that “Australian resident” means a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936). Subsection 6(1) of ITAA 1936 states that a resident of Australia includes a company which is incorporated in Australia.

Section 960-115 states that an entity that is a company is a “corporate tax entity”.

Section 768-10 defines a “foreign equity distribution” as:

A * distribution or * non-share dividend made by a company that is a foreign resident in respect of an * equity interest in the company.

Item 1 of the table in subsection 960-120(1) states that a “distribution” by a company is constituted by “a dividend, or something that is taken to be a dividend, under this Act.”

Subsection 995-1(1) states that a “foreign resident” means a person who is not a resident of Australia for the purposes of ITAA 1936.

Item 1 of subsection 974-75(1) states that “an interest in the company as a member or stockholder of the company” is an “equity interest”.

Section 768-15 provides that an entity satisfies the participation test in relation to another entity where the sum of the following is at least 10%:

(a) the * direct participation interest the entity would have in the other entity if rights on winding-up were disregarded;

(b) the * indirect participation interest the entity would have in the other entity if:

(i) rights on winding-up were disregarded; and

(ii) section 960-185 only applied to intermediate entities that are not * corporate tax entities.

The definition of “direct participation interest” in a company in item 1 of subsection 960-190(1) directs to the definition of “direct control interest”, which per paragraph 350(1)(a) of ITAA 1936 includes the percentage of the total paid-up share capital of a company that an entity holds.

Taxation Ruling TR 2017/3 Income tax: distributions from foreign companies - meaning of 'at the time the distribution is made' when applying the participation test states at paragraph 10:

For the purposes of section 768-5 the Commissioner considers that an entity will satisfy the participation test 'at the time the distribution is made' by the foreign company if the entity is the registered holder of at least a 10% participation interest in that company at the commencement of the day that the distribution is made.

Analysis

Between 1 July 2014 and 30 June 2016 you received dividends from ForeignCorp, a company not resident in Australia, in respect of your shareholding in ForeignCorp.

The dividends paid to you are a distribution, per subsection 960-120(1), made by a company that is a foreign resident, per subsection 995-1(1), in respect of your equity interest in the company, per subsection 974-75(1). As such, the dividends are a foreign equity distribution.

As an Australian registered company, you are an Australian resident, per subsection 995-1(1) of ITAA 1997 and subsection 6(1) of ITAA 1936. You are also a corporate tax entity per section 960-115 of ITAA 1997.

Your direct control interest in ForeignCorp, per paragraph 350(1)(a) of ITAA 1936, is and was at the time of the distributions a minority share greater than 10% of both ordinary share capital and non-voting preference share capital, such that your total direct participation interest in ForeignCorp (if rights on winding-up were disregarded) at the time of the distributions is greater than 10%. As such, your combined shareholding satisfies the participation test in section 768-15, as per TR 2017/3.

You did not receive the distribution in the capacity of a trustee or in the capacity of a trustee of a public trading trust.

As these conditions have been satisfied, the dividends paid to you by ForeignCorp are NANE income under section 768-5(1).

Conclusion

The dividends paid to you by ForeignCorp between 17 October 2014 and 30 June 2016 are foreign equity distributions that are considered NANE income under Subdivision 768-A of the ITAA 1997.

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