Edited version of your written advice

Authorisation Number: 1051475557584

Date of advice: 22 January 2019

Ruling

Subject: Trusts

Application of Controlled Foreign Companies (CFC) rules contained in Part X of the Income Tax Assessment Act 1936 (ITAA 1936).

Question 1

Does Company A (Coy A) have an attribution percentage greater than nil in relation to the foreign subsidiaries of Trust under section 362 of the ITAA 1936?

Answer

No

Question 2

For the purposes of determining Coy A’s share of the trust net income, is Trust an attributable taxpayer, in relation to its foreign subsidiaries, as defined in section 361 of the ITAA 1936?

Answer

No

This ruling applies for the following periods:

A number of years

Relevant facts and circumstances

1. Coy A is an Australian incorporated and Australian tax resident company.

2. Coy B is an Australian tax resident company wholly owned company by Coy A.

3. Coy A and Coy B formed Australian Tax Consolidated Group with Coy A as the head entity.

4. Currently Coy B and its associates have interest in a Trust of less than 40%.

5. Company B acquired the interest in the Trust by subscribing to Trust’s units at the initial public offer (IPO) price and at the time of the IPO. Company B paid cash to acquire those units.

6. The Trust is a foreign trust created by a non-resident trustee (Trustee Co). The Trust is listed on a foreign Stock Exchange (SE).

7. The Trust is not a public unit trust as defined in section 329 of the ITAA 1936.

8. All key decisions for Trust are undertaken in a foreign country.

9. Trustee Co acts and operates in the foreign country as trustee to several unit trusts, custodian to several private pension funds and private equity funds and bond trustee to institutional and retail bond issues. It conducts all of its decision making activities in relation to its business in the foreign country.

10. The issue price for all units on the listing of the Trust was consistent for all unitholders. The issue price of the Trust units of IPO was based on two independent valuations of all of Trust’s underlying assets.

11. The Trust distribution is based on unit holders’ interest in the Trust.

12. The Trust has an interest in a number of wholly owned foreign subsidiaries. The foreign subsidiaries are residents of listed or unlisted countries.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 317

Income Tax Assessment Act 1936 section 318

Income Tax Assessment Act 1936 section 336

Income Tax Assessment Act 1936 section 338

Income Tax Assessment Act 1936 section 339

Income Tax Assessment Act 1936 section 340

Income Tax Assessment Act 1936 section 342

Income Tax Assessment Act 1936 section 348

Income Tax Assessment Act 1936 section 349

Income Tax Assessment Act 1936 section 351

Income Tax Assessment Act 1936 section 352

Income Tax Assessment Act 1936 section 357

Income Tax Assessment Act 1936 section 361

Income Tax Assessment Act 1936 section 362

Reasons for decision

All legislative references are to the ITAA 1936 unless otherwise indicated.

Question 1

Subsection 362(1) provides:

Subject to this section, the attribution percentage of an attributable taxpayer in relation to a CFC or CFT at a particular time is the sum of:

(a) the direct attribution interest in the CFC or CFT held by the taxpayer at that time; and

(b) the aggregate of the indirect attribution interests in the CFC or CFT held by the taxpayer at that time.

CFC

The term CFC or controlled foreign company has the meaning given by section 340.

A company is a CFC if at a particular time it is a resident of a listed or of an unlisted country that satisfies one of three control tests in section 340. The three control tests are the:

● strict control test (340(a))

● assumed controller test (340(b)), and

● de facto control test (340(c)).

A listed country is a foreign country that is declared by the regulations to be a listed country for the purposes of Part X. An unlisted county is a foreign country that does not consist of a listed country or countries (section 320 and reg19). All foreign subsidiaries are resident of either listed or unlisted countries.

Strict control test

A foreign company will be treated as a CFC under the strict control test if a group of five or fewer Australian '1% entities', together with their associates, owns or is entitled to acquire a control interest of at least 50% in the foreign company.

An Australian 1% entity is an Australian entity that, together with its associates, holds (direct or indirect) interest of at least 1% in the foreign company (sections 317 and 349). An Australian entity is an Australian partnership, an Australian trust, or an entity (other than a partnership or trust) that is a Part X Australian resident (section 336).

A Part X Australian resident is a resident of Australia who is not treated solely as a resident of another country under a double-taxation agreement between Australia and that country (section 317).

In this case, Coy B is an Australian resident company that holds less than 40% interest in the non-resident trust, which in turn owns various non-Australian tax resident companies.

For those non-Australian tax resident companies to be CFCs under the strict control test, Coy B will have to have an associate-inclusive control interest in those companies of not less than 50%.

Associates

The term ‘associate-inclusive control interest’ in a company or trust is defined in section 349 and, broadly, it is an aggregate of direct and indirect interest an entity and its associates have in an entity.

Relevantly, as the Trust is not a public unit trust, the associate of a trustee is any entity that benefits under the trust (subsection 318(3)).

As Coy B is a beneficiary of the Trust, the Trust and Coy B are associates. As the Trust wholly-owns foreign subsidiaries, the Trust interest in those subsidiaries is 100%. Accordingly, Coy B associate-inclusive control interest in those subsidiaries is also 100% (subsection 349(2)).

Therefore, Trust’s foreign subsidiaries are CFCs under paragraph 340(a).

Attributable taxpayer

Subsection 361(1) states that an entity will be an attributable taxpayer in relation to a CFC where the entity:

(a) is an Australian entity whose associate-inclusive control interest in the CFC is at least 10%; or

(b) all of the following apply:

(i) the CFC is a CFC only because of paragraph 340(c) of the ITAA 1936;

(ii) the CFC is controlled by any group of 5 or fewer Australian entities; and

(iii) is an Australian 1% entity and is included in the group of 5 or fewer Australian entities.

As discussed above, Coy B is an Australian entity that has an associate-inclusive control interest of 100% in the foreign subsidiaries, therefore it is an attributable taxpayer within the meaning of paragraph 361(1)(a).

Attribution percentage

Pursuant to section 362, the attribution percentage of an attributable taxpayer is the sum of the direct and indirect attribution interests held by the taxpayer in the CFC.

Coy B does not have a direct interest in any of the foreign subsidiaries and therefore nil direct attribution interest in those subsidiaries (section 356).

An indirect attribution interest that an entity holds in a CFC at a particular time is calculated in accordance with section 357. Subsection 357(2) states that an interposed entity is not to be taken into account in calculating an indirect attribution interest unless the entity is a CFE.

A CFE or controlled foreign entity has the meaning given by section 339 and relevantly includes a CFT (or controlled foreign trust).

Accordingly, to trace Coy B’s indirect interest in the foreign subsidiaries, the Trust will have to be a CFT.

CFT

A trust is a CFT at a particular time if, at that time, the trust is not an Australian trust and there is an eligible transferor in respect of the trust, or there is a group of 5 or fewer Australian 1% entities the aggregate of whose associate-inclusive control interests in the trust is not less than 50% (section 342). In addition, at the test time, the transferor entity is an Australian entity or a CFE.

Eligible transferor

In the case of a non-discretionary trust, section 348 specifies circumstances to qualify to be an eligible transferor:

An entity is an eligible transferor in relation to a non-discretionary trust or a public unit trust at a particular time (in this section called the ‘test time’) if:

(a) the transferor entity transferred property or services to the trust at or after the IP time and before the test time; and

(b) the underlying transfer was made for no consideration or for a consideration less than the arm's length amount in relation to the underlying transfer; and

(c) it is not the case that the sole purpose of the underlying transfer was the acquisition of units in the trust where the parties to the underlying transfer were at arm's length with each other in relation to the underlying transfer and the trust was a public unit trust at the test time;

and, at the test time, the transferor entity is an Australian entity or a CFE.

Subsection 348(2) defines an arm's length amount in relation to a transfer of property or services for the purposes of subsection (1) as the amount that the trustee of the trust would expect to pay to obtain the property or services from the transferor if both parties were engaged in an arm's length transaction.

Section 344 specifies particular transfers of property or services that are either specifically included in or excluded from the coverage of Subdivision C of Part X.

Section 344 states that a reference to transfer of property or services includes transfer by creation of trust (344(1)) and by application of property or services for the benefit or on direction of an entity. Section 345 deems certain entities, other than those that actually transfer property or services to a trust, to have made the transfer and therefore makes those entities possible eligible transferors.

Property includes money (section 343) and the term ‘services’ has been defined in section 102AAB and:

includes any benefit, right (including a right in relation to, and an interest in, real or personal property), privilege or facility and, without limiting the generality of the foregoing, includes a benefit, right, privilege, service or facility that is, or is to be, provided under:

(a) an arrangement for or in relation to:

(i) the performance of work (including work of a professional nature), whether with or without the provision of property; or

(ii) the provision of, or of the use of facilities for, entertainment, recreation or instruction; or

(iii) the conferring of benefits, rights or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar exaction; or

(b) a contract of insurance; or

(c) an arrangement for or in relation to the lending of money.

Based on the facts, there is no eligible transferor in relation to the Trust.

Is there a group of 5 or fewer Australian 1% entitles the aggregate of whose associate-inclusive control interests in the trust is not less than 50%?

Associate-inclusive control interest in a company or trust is defined in section 349 and direct control interest in a trust is defined in section 351. Indirect interest in a trust is defined in section 352.

Subsection 349(2) ensures that there is no double counting of the interests that entity holds in the trust and subsection 349(9) ensures that where two or more entities are deemed to have 100% interest, only one entity of those entities is deemed to hold a direct control interest of 100%.

Section 351 provides that a beneficiary in a trust holds a direct control interest in the trust at a particular time equal to:

(a) the percentage of the income of the trust represented by the share of the income to which the beneficiary is entitled, or that the beneficiary is entitled to acquire; or

(b) the percentage of the corpus of the trust represented by the share of the corpus to which the beneficiary is entitled, or that the beneficiary is entitled to acquire;

or, if those percentages differ, the greater of those percentages.

Subsection 351(2) enables a beneficiary's interest in the income or corpus of a trust to be measured as a percentage of the total entitlements to income or corpus of the trust at any particular time. This subsection enables the beneficiary's income rights (paragraph (2)(a)) or rights to corpus (paragraph (2)(b)) to be measured in percentage terms at the test time by reference to the rights at the end of the year.

The indirect control interest an entity holds in a company or trust is calculated by tracing through interposed entities that are CFEs (subsection 352(2)). That is, an Australian entity will not hold an indirect control interest in a foreign company or a trust if its indirect interest is held through a company that is not a CFC, a partnership that is not a CFP or a trust that is not a CFT.

As the interest held by Coy B in the Trust is less than 40%, the Trust is not a CFT under paragraph 342(b).

Conclusion

As the Trust is not a CFT, Coy B’s attribution percentage in the foreign subsidiaries is nil.

Question 2

Detailed reasoning

Subsection 361(1) states that an entity will be an attributable taxpayer in relation to a CFC where the entity:

(a) is an Australian entity whose associate-inclusive control interest in the CFC is at least 10%; or

(b) all of the following apply:

(i) the CFC is a CFC only because of paragraph 340(c) of the ITAA 1936;

(ii) the CFC is controlled by any group of 5 or fewer Australian entities; and

(iii) is an Australian 1% entity and is included in the group of 5 or fewer Australian entities.

The main requirement for an entity to be an attributable taxpayer is for that entity to be an Australian entity. Section 336 states that for the purposes of Part X an Australian entity is an Australian partnership, Australian Trust or an entity, other than a partnership or trust that is Part X Australian resident.

Section 338 specifies that for the purposes of Part X, a trust is an Australian trust if:

(a) at any time in the period of 12 months immediately before the test time:

(i) any trustee of the trust was a Part X Australian resident; or

(ii) the central management and control of the trust was in Australia; or

(b) the trust is a public trading trust for the purposes of Division 6C of Part III, in relation to the year of income of the trust in which the test time occurs.

Paragraph 338(b) is not relevant as the Trust is not a public trading trust.

Broadly, a Part X Australian resident means a resident within the meaning of section 6. Paragraph 6(1)(b) relevantly provides that:

a company which is incorporated in Australia, or which, not being incorporated in Australia carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia.

Based on the facts, Trustee Co does not carry on business in Australia and the trust’s central management and control is not in Australia, accordingly, the Trust is not an Australian trust and therefore cannot be an attributable taxpayer.

Conclusion

As the Trust is not an Australian trust, it cannot be an attributable taxpayer.