Edited version of your private ruling

Authorisation Number: 1012463298839

Ruling

Subject: Controlled Foreign Companies & Part IVA

Question 1

Are Company A and Company B residents of a listed country for the purposes of applying Part X of the Income Tax Assessment Act 1936?

Answer

Yes.

Question 2

Are Company A and Company B controlled foreign companies in which the Company X tax consolidated group has a 100% associate-inclusive control interest for the purposes of Part X of the Income Tax Assessment Act 1936?

Answer

Yes

Question 3

Will the income of Company A and Company B be treated as notional exempt income in applying Part X of the Income Tax Assessment Act 1936?

Answer

Yes

Question 4

Will the Commissioner be authorised to make a determination in relation to the transaction under section 177F of the ITAA 1936 that a tax benefit has or will be obtained by the Company X tax consolidated group in connection with a scheme to which Part IVA applies?

Answer

No

This ruling applies for the following periods:

XX/XX/2012 to XX/XX/2023

The scheme commences on:

XX/XX/2012

Relevant facts and circumstances

1. Company X is the head company of the Company X Australian Tax consolidated group (Company X TCG).

2. Company X sought to acquire assets offshore and established Company A and it's wholly owned subsidiary, Company B, which were incorporated in Country 1 (a listed country).

3. Company A is wholly owned by Company Z (a resident of Country 1), which is wholly owned by the Company X TCG.

4. A branch of Company B was established in Country 2 (an unlisted country) (Branch B).

5. Neither Company A or B carry on business in Australia and are centrally managed and controlled in Country 1.

6. Three Asset types were acquired:

§ Asset 1 was acquired by Company A for $xx

§ Asset 2 was acquired by Company B for $xx

§ Asset 3 was acquired by Branch B for $xx

7. Company A, Company B and Branch B will earn leasing, interest and service fee income and dividends.

8. Neither Company A or B will be an open ended investment company, nor will they elect to be taxed on a tonnage basis for the purposes of Country 1.

9. No subsidiary of Company A will own CGT assets that have the necessary connection with Australia.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1),

Income Tax Assessment Act 1936 Part IVA,

Income Tax Assessment Act 1936 section 177A,

Income Tax Assessment Act 1936 subsection 177A(1),

Income Tax Assessment Act 1936 subsection 177A(5),

Income Tax Assessment Act 1936 subsection 177C(1),

Income Tax Assessment Act 1936 paragraph 177D(b),

Income Tax Assessment Act 1936 section 177F,

Income Tax Assessment Act 1936 subsection 177F(1),

Income Tax Assessment Act 1936 Part X,

Income Tax Assessment Act 1936 section 317,

Income Tax Assessment Act 1936 section 320,

Income Tax Assessment Act 1936 section 332,

Income Tax Assessment Act 1936 subsection 332(2),

Income Tax Assessment Act 1936 section 340,

Income Tax Assessment Act 1936 subsection 349(1),

Income Tax Assessment Act 1936 section 350,

Income Tax Assessment Act 1936 subsection 385(1,)

Income Tax Assessment Act 1936 subsection 385(2),

Income Tax Assessment Act 1936 subparagraph 385(2)(a)(i),

Income Tax Assessment Act 1936 subparagraph 385(2)(a)(ii),

New International Tax Arrangements Act 2004

Reasons for decision

Question 1

Are Company A and Company B residents of a listed country for the purposes of applying Part X of the ITAA 1936?

Detailed reasoning

In order to be a resident of a listed country, a company must satisfy the requirements of section 332 of the ITAA 1936. The relevant conditions are set out in subsection 332(2) of the ITAA 1936, which states:

(a) the company is not a Part X Australian resident;

(b) the company is treated as a resident of the listed country for the purposes of the lax law of the listed country.

A Part X Australian resident is defined in section 317 of the ITAA 1936 to mean a resident within the meaning of section 6(1) of the ITAA 1936, excluding an entity that is a dual resident of Australia and a country with which Australia has a double tax agreement, under the provisions of which the entity is treated solely as a resident of the foreign country.

In order for a company to be a resident of Australia under section 6(1) of the ITAA 1936 it must either be incorporated in Australia or not being incorporated in Australia carry on business in Australia and have either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia.

Under section 320 of the ITAA 1936 and Schedule 10 of the Regulations to the ITAA 1936, the Country 1 is a listed country for the purposes of Part X the ITAA 1936.

Company A

You have stated that Company A is a corporation established under the laws applying to Country 1 and is a tax resident of Country 1.

You have stated that Company A does not carry on business in Australia, and is centrally managed and controlled in Country 1. The voting power of Company A is controlled by a company that is not a resident of Australia. On this basis Company A is not considered a resident of Australia under section 6(1) of the ITAA 1936 and therefore is not a Part X Australian resident.

Company B

You have stated that Company B is a corporation established under the laws applying to Country 1 and is a tax resident of Country 1.

You have stated that Company B does not carry on business in Australia, and is centrally managed and controlled in Country 1. The voting power of Company B is controlled by a company that is not a resident of Australia). On this basis Company B is not considered a resident of Australia under section 6(1) of the ITAA 1936 and therefore is not a Part X Australian resident.

Neither Company A nor Company B are Part X Australia residents but are both considered residents of Country 1 for the purposes of the tax law of the Country 1. On this basis they are considered residents of a listed country under section 332 of the ITAA 1936

Question 2

Are Company A and Company B controlled foreign companies in which the Company X tax consolidated group has a 100% associate-inclusive control interest for the purposes of Part X of the ITAA 1936?

Detailed reasoning

A company will be treated as a controlled foreign company (CFC) where it satisfies any one of the following three 'control tests' in section 340 of ITAA 1936:

A company is a CFC at a particular time if, at that time, the company is a resident of a listed country or of an unlisted country and any of the following paragraphs applies:

(a) at that time, there is a group of 5 or fewer Australian 1% entities the aggregate of whose associate-inclusive control interests in the company is not less than 50%;

(b) both of the following subparagraphs apply:

(i) at that time, there is a single Australian entity (in this paragraph called the "assumed controller'') whose associate-inclusive control interest in the company is not less than 40%;

(ii) at that time, the company is not controlled by a group of entities not being or including the assumed controller or any of its associates;

(c) at that time, the company is controlled by a group of 5 or fewer Australian entities, either alone or together with associates (whether or not any associate is also an Australian entity).

Under section 350 ITAA 1936 an entity will hold a direct control interest in a company at a particular time equal to the percentage that the entity holds, or is entitled to acquire, at that time of

(a) the total paid-up share capital of the company; or

(b) the total rights of shareholders to vote, or participate in any decision-making, concerning any of the following:

(i) the making of distributions of capital or profits of the company to its shareholders;

(ii) the constituent document of the company;

(iii) any variation of the share capital of the company; or

(c) the total rights to distributions of capital or profits of the company to its shareholders on winding-up; or

(d) the total rights to distributions of capital or profits of the company to its shareholders, otherwise than on winding-up;

or, if different percentages are applicable under the preceding paragraphs, the greater or greatest of those percentages.

You have stated that Company X tax consolidated group (Company X TCG) holds a 100% direct control interest (s350 of the ITAA 1936) in Company Z making it a CFC within the meaning of s340 of the ITAA 1936.

In turn Company Z holds a 100% direct control interest in Company A under section 350 of the ITAA 1936 on the basis that it holds 100% of the voting interests in Company A.

Inturn Company A holds a 100% direct control interest in Company B under section 350 of the ITAA 1936 on the basis that it holds 100% of the voting interests in Company B.

Section 349(1) of the ITAA 1936 provides that the associate-inclusive control interest that an entity has in a company or a trust at a particular time is arrived at by adding to the direct control interest that the entity has in the company or trust, the direct control interest that each associate of the entity has in the company or trust, as well as the indirect control interest that the entity has and the indirect control interest that each associate of the entity has in the company or trust.

On this basis the Company X TCG will hold a 100% associate-inclusive control interest in both Company A and Company B, making them both CFC's under section 340 of the ITAA 1936.

Question 3

Will the income of Company A and Company B be treated as notional exempt income in applying Part X of the ITAA 1936?

Detailed reasoning

You have stated that Company A and Company B, are residents of a listed country (Country 1)

Section 385(1) of the ITAA 1936 makes two assumptions when determining the notional assessable income of a listed country CFC. These are:

(a) that the only amounts included in notional assessable income are those set out in s385(2), and:

(b) all other income is notional exempt income.

Subsection 385(2) of the ITAA 1936 sets out the amounts which are notional assessable income of a listed country CFC, for the purpose of determining what amounts are attributable income under section 382 of the ITAA 1936.

Subparagraph 385(2)(a)(i) of the ITAA 1936

Subparagraph 385(2)(a)(i) of the ITAA 1936 relates to amounts that are eligible designated concession income.

Subparagraph 385(2)(a)(i) of the ITAA 1936 provides that if a CFC does not pass the active income test, its notional assessable income includes amounts that are both adjusted tainted income, and eligible designated concession income in relation to the listed country of which the CFC is a resident, or any other listed country.

This means that if an amount is not eligible designated concession income of any listed country, it will not be included in the notional assessable income and will therefore be treated as notional exempt income.

Eligible designated concession income is defined in s 317 to mean, in relation to a listed country, in relation to a particular period, designated concession income in relation to the listed country:

(a) that is not subject to tax in another listed country in a tax accounting period ending before the end of, or commencing during, the particular income period referred to, or

(b) that is subject to tax in another listed country in a tax accounting period as described in (a), and is designated concession income in relation to that other country.

Designated concession income is defined in s 317 to mean, in relation to a particular listed country:

(a) income or profits of a kind specified in the Regulations if either foreign tax imposed by a tax law of the listed country is not payable because of a particular feature, or foreign tax is payable but there is a feature in relation to that foreign tax, and in each case the feature is of a kind specified in the Regulations, and

(b) capital gains that would be made because of CGT event J1, if the assumptions in paras 383(a) to (c) applied. Basically the effect of those assumptions is that the company concerned is taken to be a taxpayer and a resident. Therefore, CGT event J1 may be taken to have happened. CGT event J1 is about companies ceasing to be related after a roll-over.

In relation to the items of income that are EDCI as specified in Schedule 9 of the Regulations to the ITAA 1936, you have told us that;

§ Neither Company A nor Company B will be an open ended investment company, nor will they elect to be taxed on a tonnage basis.

§ No subsidiaries of Company A will own CGT assets that have the necessary connection with Australia.

Subparagraph 385(2)(a)(ii) of the ITAA 1936

Subparagraph 385(2)(a)(ii) of the ITAA 1936 relates to amounts which are not eligible designated concession income of any listed country. Such amounts are included in the notional assessable income of a CFC if the requirements set out in subparagraph 385(2)(a)(ii) are satisfied.

One requirement is that the tax law of the listed country does not treat them as derived from sources in that country (sub-subparagraph 385(2)(a)(ii)(B) of the ITAA 1936).

Company A and Company B could have income which Country 1 does not treat as having a Country 1 source. In particular, Company B will derive income from Country 2 through its branch, and it is likely that all or part of this income will not have a Country 1 source for the purpose of Country 1 tax law.

However, subparagraph 385(2)(a)(ii) of the ITAA 1936 only applies to 'income or other amounts, of a kind specified in the regulations'. As yet there is no such income or other amounts specified in the regulations.

The phrase 'income or other amounts, of a kind specified in the regulations' was inserted in subparagraph 385(2)(a)(ii) of the ITAA 1936 by the New International Tax Arrangements Act 2004. The House of Representatives Explanatory Memorandum to that Act explains the operation of subparagraph 385(2)(a)(ii) prior to the amendment, and the purpose of the amendment, as follows:

3.9 If a CFC is resident in a broad-exemption listed country, a greater range of otherwise notional assessable income is exempt from attribution. One category of notional assessable income that remains subject to attribution relates to foreign source amounts that are not eligible designated concession income and pass certain tests, whether derived directly or through a partnership (subparagraphs 385(2)(a)(ii) and (d)(ii)).

Limiting the inclusion of foreign source amounts in attributable income

3.10 While these foreign source amounts can potentially give rise to attributable income in a wide range of circumstances, in practice this is unlikely to occur. For example, even where a CFC resident in a broad-exemption listed country derives a relevant foreign source amount, it is not attributable if subject to certain foreign taxes. However, taxpayers can still incur compliance costs to confirm that there is no such attributable income. The amendments remove the need for taxpayers to consider such amounts, except those, if any, specified in regulations. [Schedule 3, item 1, subparagraphs 385(2)(a)(ii) and (d)(ii)]

3.11 The ability to identify in regulations income amounts that should still be attributable is a revenue safeguard (e.g. in the case where a broad-exemption listed country changes its tax system in a way that opens up tax avoidance opportunities for Australian taxpayers). In most cases, though, income of concern is likely to be attributable under other provisions (e.g. as eligible designated concession income under subparagraphs 385(2)(a)(i) and (d)(i)).

However, as no relevant regulations have been enacted, subparagraph 385(2)(a)(ii) of the ITAA 1936 will not operate to include amounts in the notional assessable income of Company A or Company B.

Consequently, amounts derived by Company A and Company B which are not eligible designated concession income of any listed country are not required to be included in the notional assessable income of Company A and Company B under subsection 385(2) of the ITAA 1936.

On this basis the income of Company A and Company B will be notional exempt income in applying Part X of the ITAA 1936.

Question 4

Will the Commissioner be authorised to make a determination in relation to the transaction under section 177F of the ITAA 1936 that a tax benefit has or will be obtained by the Company X TCG in connection with a scheme to which Part IVA applies?

Detailed reasoning

Part IVA of the ITAA 1936 contains the general anti-avoidance rules regarding schemes to reduce income tax. The rules apply where the Commissioner makes a determination, based on an objective assessment of the relevant facts and circumstances that a taxpayer entered into or carried out a scheme for the dominant purpose of obtaining a tax benefit.

Based on the facts provided by the applicant, the Commissioner considers that the dominant purpose of entering into the scheme was not to obtain a tax benefit.

Note: As you know there is currently a Bill before Parliament that proposes to make amendments to Part IVA: Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013. The proposed amendments to Part IVA are proposed to apply in relation to all schemes except schemes that were entered into, or that were commenced to be carried out, on or before 15 November 2012: per Item 10 of Schedule 1 to the Bill.

Private Rulings can only be made in relation to the law as it exists at the time of making the Ruling. Accordingly, the above Private Ruling does not take account of proposed amendments to the law.

If Part IVA is amended, and you require further certainty about its application to your arrangement, you may apply for another Private Ruling