Edited version of private advice

Authorisation Number: 1052095482327

Date of advice: 10 March 2023

Ruling

Subject: Non-assessable non-exempt income

Question

Will the Australian Company be exempt from income tax in Australia on dividends received from the non-resident Company during the income years XXXX and XXXX due to these dividends being non-assessable non-exempt (NANE) income in accordance with section 768-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods:

Income year end XXXX to XXXX

The scheme commenced on:

XX Month XXXX

Relevant facts and circumstances

Company A was incorporated in Australia (Australian Company).

Company B was incorporated in a country other than Australia (Non-resident Company).

The principal business address of the Non-resident Company is in the country outside of Australia.

The Australian Company held XX% of the paid-up share capital in the Non-resident Company at the time when the dividend payments were made in the last FY XXXX and is expected to hold the same interest for all future dividend payments in the next FY XXXX.

The Australian Company does not act in the capacity of trustee for any entity.

The Non-resident Company does not act as a collective investment vehicle.

The Non-resident Company is not a Part X Australian resident within the meaning of Part X of the Income Tax Assessment Act 1936 (ITAA 1936).

The Non-resident Company had paid dividends to the Australia Company in the last FY XXXX.

The Non-resident Company has paid or will be paying further dividends in the next FY XXXX.

The dividends which were paid or will be paid to the Australian Company are in respect of the holding interest in ordinary shares in the Non-resident Company.

The Non-resident Company is not entitled to a foreign income tax deduction in relation to the dividends paid.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 768-A

Income Tax Assessment Act 1997 subsection 768-5(1)

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 subsection 960-120(1)

Income Tax Assessment Act 1997 subsection 974-75(1)

Income Tax Assessment Act 1997 subsection 995-1(1)

Income Tax Assessment Act 1936 section 6

Income Tax Assessment Act 1936 section 317

Reasons for decision

All references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated.

Summary

The dividends paid to the Australia Company by the Non-resident Company are foreign equity distributions that are considered non-assessable non-exempt (NANE) income in accordance with subsection 768-5(1) of the ITAA 1997.

Detailed reasoning

Under Subdivision 768-A, 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 NANE 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

(c) the entity:

(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; and

(d) the distribution is not one to which section 768-7 (which is about foreign income tax deductions) applies.

Each of the requirements in subsection 768-5(1) is considered as set out below.

Foreign equity distribution

'Foreign equity distribution' is defined in section 768-10 as a distribution or non-share dividend made by a company that is not a Part X Australian resident (within the meaning of Part X of the Income Tax Assessment Act 1936) 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'.

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'.

'Part X Australian resident' is defined in section 317 of ITAA 1936 as a resident within the meaning of section 6 of ITAA 1936 but excluding a dual resident entity that is deemed by a tie-breaker provision in a DTA to be a resident solely of the other country.

Article 4(1) of the relevant Double Tax Agreement (DTA) states that, in the case of the Contracting State, an entity is a resident of that Contracting State if the entity is incorporated, created, or organised in that Contracting State. Furthermore, Article 4(5) of the relevant DTA states that if a person other than an individual is a resident of both Contracting States, then it will be deemed to be a resident solely of the Contracting State in which it is incorporated, created, or organised.

As the Non-resident Company was incorporated in the country outside of Australia, it is a resident of that country. It is not required to consider in which jurisdiction the central management and control of the Non-resident Company is or whether it is a dual resident.

The Non-resident Company is therefore not a Part X Australian resident for the purposes of ITAA 1936.

The dividend payments made and expected to be made by the Non-resident Company are in respect of equity interest held and expected to be held by the Australia Company in the Non-resident Company.

Therefore, the dividend payments are foreign equity distributions for the purposes of subsection 768-5(1).

The entity is an Australian resident and a corporate tax entity

The term 'Australian resident' is defined under subsection 995-1(1) as a person who is a resident of Australia for the purposes of the ITAA 1936.

Under section 960-115, an entity is a 'corporate tax entity' at a particular time if the entity is a company at that time.

Company A is a proprietary company limited by shares and incorporated in Australia.

Therefore, Company A is an Australian resident and a corporate tax entity.

The entity satisfies the participation test in section 768-15 in relation to the company that made the distribution at the time the distribution is made

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.

Taxation Ruling 2017/3

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.

Satisfying the participation test

The Australia Company held direct ownership interest of paid-up share capital in the Non-resident Company of XX.X% at the time of the dividend payments were made in the last FY XXXX. The Australian Company is expected to hold the same interest for all dividend payments made or to be made in the next FY XXXX.

The Australia Company satisfies the participation test as it is or is expected to be the registered holder of at least 10% participation interest in the Non-resident Company at the commencement of the day the relevant distributions were or are expected to be made.

The entity does not receive the distribution in the capacity of a trustee

The Australian Company did not receive the dividend payments in the capacity of a trustee.

The distribution is not one to which section 768-7 applies

Subsection 768-7(1) states that this section applies to a foreign equity distribution if:

(a)  all or part of the distribution gives rise to a foreign income tax deduction; and

(b)  the exception in subsection (2) does not apply to the distribution

The exception in subsection 768-7(2) relates to collective investment vehicles. The distribution is not one to which section 768-7 applies as the Non-resident Company is not a collective investment vehicle and the dividends paid do not give rise to a foreign income tax deduction.

Conclusion

The dividends paid or will be paid to the Australian Company by the Non-resident Company in the relevant period are foreign equity distributions that are considered NANE income under subdivision 768-A.