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Edited version of your written advice
Authorisation Number: 1012894196633
Date of advice: 20 October 2015
Ruling
Subject: Foreign sourced income
Question and Answer
Are the profits from a related foreign hybrid company whose shareholder is an Australian resident trust, to be included in your income where no trust distribution is made?
No
This ruling applies for the following period(s)
Year ended 30 June 2014
Year ended 30 June 2015
Year ended 30 June 2016
Year ended 30 June 2017
Year ended 30 June 2018
Year ended 30 June 2019
Year ended 30 June 2020
The scheme commences on
1 July 2013
Relevant facts and circumstances
You are the beneficiary of a trust.
The trust owns 100% of the shares in Foreign Company#1
Foreign Company#1 owns 100% of the shares in Foreign Company#2
Foreign Company#2 owns a rental property outside Australia.
The appropriate entity has reported an income in its relevant taxation jurisdiction.
The shares of Foreign Company#2 are owned by a trust to which you are a beneficiary.
Relevant legislative provisions
Section 6-5 of the Income Tax Assessment Act 1997
Section 6-10 of the Income Tax Assessment Act 1997
Section 15-2 of the Income Tax Assessment Act 1997
Section 830-15 of the Income Tax Assessment Act 1997
Summary
A foreign hybrid company is a foreign company which is taxed as an ordinary partnership, where using a flow-through method the shareholders and not the company are taxed.
The criteria for determining whether a company is a foreign hybrid company for Div 830 of the Income Tax Assessment Act 1997 purposes are set out in section 830-15 of the ITAA 1997. The provisions contain a general rule which applies to all foreign companies.
Foreign hybrids
The effect of section 830-20 of the ITAA 1997, is that the specified income tax provisions apply 'as if' the hybrid company were a (tax law) partnership; that is, the section has the purpose of applying a method of taxation in respect of foreign hybrid companies.
Thus, section 830-20 of the ITAA 1997 does not deem the hybrid company and its shareholders to have all the characteristics and relationships of a general law partnership.
In your circumstances the hybrid companies will be treated as partnerships and therefore the trust is treated as a partner and net losses or income are included as trusts income or loss.
While section 830-15 of the ITAA 1997 operates to make the income of the company the income of the trust, it does not mean the trust must distribute the income. Consequently, it does make the income assessable to the trust.
The effect of the division is to treat the trust as the partner therefore the net loss becomes the trust's loss. Until the loss is recouped, the trust will have no distributable income. When it does the normal trust rules apply
This means that when the trust has net income it will be assessable to either the trustee if not distributed or to the beneficiary if distributed.