Edited version of private advice

Authorisation Number: 1051821495171

Date of advice: 8 April 2021

Ruling

Subject: Foreign hybrid entity and foreign income tax offset

Question 1

Is the foreign country entity X treated as a company for the purposes of Australian income tax law as it is not a foreign hybrid under Division 830 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Is the rental income of the entity X treated as a dividend paid to you under section 44 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 3

Are you entitled to a foreign income tax offset (FITO) for the foreign country tax imposed on you personally in respect of the rental income of the entity X?

Answer

Yes

Question 4

Are you entitled to a FITO for the foreign country tax imposed on you personally in respect of the rental income of the entity X, up to the amount of the Australian income tax on the income, under the tax treaty?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

! July 20XX

Relevant facts and circumstances

You are a dual citizen of country A and B.

You are currently living in country B and are a resident of country B for tax purposes.

You have been granted an Australian visa.

You and your family expect to arrive in Australia to take up residence in Australia.

You will become a tax resident upon arrival.

You are the sole shareholder of entity X in country A.

The entity X owns a commercial rental property, and its income comprises the rental income of that property.

Entity X is a look through entity and itself is not liable for tax. The profits are determined, filed and verified at the level of the entity, but tax is imposed at the level of the partner or member.

The income subject to country A tax will be equal to the difference between the rental income received from the property by the entity and the total costs and charges paid by it.

The income is paid directly into your bank account and you treat it as your personal rental income in your county A tax return.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 830

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1936 Section 44

Income Tax Assessment Act 1997 Subsection 770-10(1)

Income Tax Assessment Act 1997 Section 770-15

Income Tax Assessment Regulations 1997 Reg 830-15.01

International Tax Agreements Act 1953

Reasons for decision

Question 1

Division 830 of the ITAA 1997 provides for foreign hybrids, that are treated as flow-through entities for the purposes of foreign tax, but treated as companies for Australian income tax purposes, to be treated as partnerships for the purposes of the Acts (section 830-1 of the ITAA 1997).

The expression 'foreign hybrid' is defined in section 830-5 of the ITAA 1997 to mean a foreign hybrid limited partnership or a foreign hybrid company.

Paragraphs 830-15(1)(a) to (d) of the ITAA 1997 set out the requirements for a company to qualify as a foreign hybrid company. It states that:

A company is a foreign hybrid company in relation to an income year if:

(a)  at all times during the income year when the company is in existence, the partnership treatment requirements for the income year in subsection (2) or (3) are satisfied; and

(b)  at no time during the income year is the company, for the purposes of a law of any foreign country that imposes foreign income tax (except credit absorption tax or unitary tax) on entities because they are residents of the foreign country, a resident of that country; and

(c)   at no time during the income year is the company an Australian resident; and

(d)  disregarding this Division, in relation to the same income year of another taxpayer:

                                      i.        the company is a CFC at the end of a statutory accounting period that ends in the income year; and

                                     ii.        at the end of the statutory accounting period, the taxpayer is an attributable taxpayer in relation to the CFC with an *attribution percentage greater than nil.

The company is required to meet, during the year it was in existence, the requirements of subsection 830-15(2) if it was formed in the USA or subsection 830-15(3) and (4) if it was formed in another foreign country.

Subsection 830-15(3) of the ITAA 1997 provides that where the company was formed in a foreign country (which may also include the USA), it will satisfy the first condition of being a foreign hybrid company if: (1) for the purposes of the foreign income tax laws of that country, the company is treated as a partnership; and (2) there are regulations in force setting out requirements which the company must meet, and those requirements are satisfied. Currently, these requirements are met only by companies that are limited liability partnerships for the purposes of the Limited Liability Partnerships Act 2000 (UK) (Income Tax Assessment Regulations 1997 reg 830-15.01).

In this case, the entity X is a fiscally transparent foreign entity, however, it does not meet the requirements of subsection 830-15(3). Therefore, it is not a foreign hybrid company.

Taxation Ruling TR 2009/6 Income tax: entitlement to foreign income tax offsets under section 770-10 of the Income Tax Assessment Act 1997 where income is derived from investing in fiscally transparent foreign entities states that where Division 830 does not apply, the fiscally transparent foreign entity continues to be treated as a company for the purpose of Australian income tax law.

Therefore, entity X is treated as a company for the purposes of Australian income tax law as it is not a foreign hybrid under Division 830 of the ITAA 1997.

Question 2

Under section 6-5 and 6-10 of the ITAA 1997 the assessable income of an Australian resident includes ordinary income and statutory income from all sources, whether in or out of Australia.

Subsection 44(1) of the ITAA 1936 provides that the assessable income of a resident shareholder in a company (whether the company is a resident or a non-resident) includes dividends that are paid to the shareholder by a company out of profits derived by it from any source and all non-share dividends paid to the shareholder by the company.

Subsection 6(1) of the ITAA 1936 defines 'dividend' to include:

(a)  any distribution made by a company to any of its shareholders, whether in money or other property; and

(b)  any amount credited by a company to any of its shareholders as shareholders;

but does not include:

(d)  moneys paid or credited by a company to a shareholder or any other property distributed by a company to shareholders (not being moneys or other property to which this paragraph, by reason of subsection (4), does not apply or moneys paid or credited, or property distributed for the redemption or cancellation of a redeemable preference share), where the amount of the moneys paid or credited, or the amount of the value of the property, is debited against an amount standing to the credit of the share capital account of the company; or

(e)  moneys paid or credited, or property distributed, by a company for the redemption or cancellation of a redeemable preference share if:

                                      i.        the company gives the holder of the share a notice when it redeems or cancels the share; and

                                     ii.        the notice specifies the amount paid-up on the share immediately before the cancellation or redemption; and

                                    iii.        the amount is debited to the company's share capital account;

except to the extent that the amount of those moneys or the value of that property, as the case may be, is greater than the amount specified in the notice as the amount paid-up on the share; or

(f)    a reversionary bonus on a life assurance policy.

In this case, entity X owns a commercial rental property and its income comprises the rental income of that property. As the sole shareholder, the profit is paid to you and you treat it as your personal rental income in your country A tax return. As entity X is treated as a company for the purposes of Australian income tax law, the income from entity X is treated as a dividend paid to you under section 44 of the ITAA 1936.

Question 3 and 4

Subsection 770-10(1) of the ITAA 1997 provides for a FITO for an income tax year for foreign income tax paid in respect of an amount that is included in assessable income.

Section 770-15 of the ITAA 1997 defines 'foreign income tax' to include a tax on income that is imposed by a law other than an Australian law. A note to section 770-15 of the ITAA 1997 points out that 'foreign income tax' includes only that which has been correctly imposed under the foreign law, and where the foreign jurisdiction has a tax treaty with Australia under the Agreements Act, foreign income tax includes only tax which has been correctly imposed under the treaty.

In determining liability to Australian tax, it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (the Agreements Act).

You state that under country A law, the income of entity X is treated as rental income and you include it as your personal income in your country A return.

Article C of the tax treaty provides that income from real property may be taxed in the country in which the relevant property is situated. This applies to income derived from the direct use, letting or use in any other form of real property. This article does not prevent Australia taxing income from real property located in country A received by Australian residents.

As the tax treaty allows country A to tax the income derived from the rental property, tax has been correctly imposed under the tax treaty.

Where country A correctly imposes tax under the tax treaty on the income, Article D of the tax treaty operates to require the country A tax paid to be allowed as a credit against Australian tax payable in respect of that income.

Consequently, you are entitled to a FITO for the full amount of the country A tax imposed on you personally in respect of the income of entity X (up to the amount of the Australian income tax on the income).

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