Edited version of private advice

Authorisation Number: 1052330224365

Date of advice: 27 November 2024

Ruling

Subject: NANE income under Subdivision 768-A

Question 1

Are dividends received by XY as a subsidiary member of the YZ multiple entity XY consolidated (MEC) group from Foreign Company A during the income years ending XX December XXXX and XX December XXXX, non-assessable and non-exempt income in accordance with subsection 768-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes.

Question 2

Are dividends received by XY as a subsidiary member of the YZ MEC group from Foreign Company B during the income year ending XX December XXXX, non-assessable and non-exempt income in accordance with subsection 768-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 2

Yes.

This ruling applies for the following periods:

Income year end XX December XXXX to XX December XXXX

The scheme commenced on:

XX December XXXX

Relevant facts and circumstances

Australian company

1.              XY is an Australian registered company incorporated on XX December XXX and is a resident of Australia for tax purposes.

2.              XY is part of the YZ multiple entity XY consolidated (MEC) group.

3.              YZ has a substituted accounting period balance date of XX December.

Foreign company A

4.              Foreign Company A is a company that was incorporated in Foreign Country on XX June XXX and is a resident of the Foreign Country for tax purposes.

5.              Foreign Company A made the following dividend payments to XY:

6.              At the time the dividends were paid, XY Company held XX.XX% of the paid-up share capital in Foreign Company A.

7.              Foreign Company A does not act as a collective investment vehicle.

8.              Foreign Company A is not entitled to a foreign income tax deduction in relation to the dividends paid.

9.              Foreign Company A does not carry on any business activities in Australia.

10.          Foreign Company A's central management and control is in the Foreign Country.

11.          XY did not receive the dividends from Foreign Company A in the capacity of a trustee.

Foreign company B

12.          Foreign Company B is a company that was incorporated in Foreign Country on XX February XXXX and is a resident of the Foreign Country for tax purposes.

13.          On XX November XXXX, Foreign Company B made a dividend payment of USD$XX,XX to XY.

14.          At the time the dividend was paid, XY directly held XX.XX% of the paid-up share capital in Foreign Company B.

15.          Foreign Company B does not act as a collective investment vehicle.

16.          Foreign Company B is not entitled to a foreign income tax deduction in relation to the dividends paid.

17.          Foreign Company B does not carry on any business activities in Australia.

18.          Foreign Company B's central management and control is in the Foreign Country.

19.          XY did not receive the dividend from Foreign Company B in the capacity of a trustee.

Other information

20.          XY treated the dividends from Foreign Company A and Foreign Company B as non-assessable non-exempt income for Australian income tax purposes.

21.          The dividends from Foreign Company A and Foreign Company B were treated as conduit foreign income (CFI) and were included in the CFI balance of the YZ MEC group.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 subsection 768-7(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 995-1(1)

Income Tax Assessment Act 1936 section 317

Reasons for decision

Question 1

Are dividends received by XY as a subsidiary member of the YZ multiple entitXYnsolidated (MEC) group from Foreign Company A during the income years ending XX December XXXX and XX December XXXX, non-assessable and non-exempt income in accordance with subsection 768-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

The dividends received by XY from Foreign Company A during the income years ending XX December XXXX and XX December XXXX will be NANE income in accordance with subsection 768-5(1) of the ITAA 1997.

Detailed reasoning

Under Subdivision 768-A of the ITAA 1997, 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 XX% in the foreign company, the distribution is NANE income for the Australian corporate tax entity.

In order for the dividend to be classified as NANE income it must meet the requirements of subsection 768-5(1) of the ITAA 1997.

Foreign equity distribution

Foreign Company A was incorporated in the Foreign Country and is a resident of the Foreign Country. It does not meet the definition of a resident under section 6 of the ITAA 1936 as it does not carry on any business activities in Australia and its central management and control is in the Foreign Country.

Therefore, it is considered that Foreign Company A is not a Part X Australian resident for the purposes of the Income Tax Assessment Act 1936 having regard to section 768-10 of the ITAA 1997 and is a resident of the Foreign Country under the Double Tax Agreement between Foreign Country and Australia.

The dividend payments made by Foreign Company A during the relevant years were in respect of equity interests held by XY in accordance with Item 1 of subsection 974-75(1) of the ITAA 1997.

Therefore, the dividend payments are foreign equity distributions for the purposes of subsection 768-5(1) of the ITAA 1997.

The entity is an Australian resident and a corporate tax entity

XY is a proprietary XY company limited by shares and incorporated in Australia. Therefore, XY is an Australian resident and a corporate tax entity in accordance with subsection 995-1(1) and section 960-15 of the ITAA 1997.

The entity satisfies the participation test in section 768-15 of the ITAA 1997

XY held direct ownership interest of paid-up share capital in Foreign Company A of XX.XX% at the time of the dividend payments on XX June XXXX and XX June XXXX which satisfies the participation test in section 768-15 of the ITAA 1997 as it was the registered holder of at least 10% participation interest in Foreign Company A at the commencement of the days the dividends were made.

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

XY did not receive the dividend payments from Foreign Company A in the capacity of a trustee.

Section 768-7 of the ITAA 1997 does not apply to the distributions

It is considered that section 768-7 of the ITAA 1997 does not apply to the dividends as Foreign Company A is not a collective investment vehicle and the dividends paid did not give rise to a foreign income tax deduction.

Conclusion

The dividends paid to XY Company by Foreign Company A on XX June XXXX and XX June XXXX met the requirements of subsection 768-5(1) of the ITAA 1997 and therefore are foreign equity distributions that are considered NANE income under subsection 768-5(1) of the ITAA 1997.

Income tax consolidation

For Australian income tax purposes, XY is a subsidiary member of YZ MEC group. The dividends received by XY Company from Foreign Company A are considered NANE income in accordance with section 768-5 of the ITAA 1997 and will be treated as NANE income of YZ as the provisional head company of the MEC group in accordance with section 701-1 of the ITAA 1997.

Question 2

Is the dividend received by XY as a subsidiary member of the YZ MEC group from Foreign Company B during the income year ending XX December XXXX, non-assessable and non-exempt income in accordance with subsection 768-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

The dividend received by XY from Foreign Company B during the income year ending XX December XXXX will be NANE income in accordance with subsection 768-5(1) of the ITAA 1997.

Detailed reasoning

Under Subdivision 768-A of the ITAA 1997, 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 XX% in the foreign company, the distribution is NANE income for the Australian corporate tax entity.

In order for the dividend to be classified as NANE income it must meet the requirements of subsection 768-5(1) of the ITAA 1997.

Foreign equity distribution

Foreign Company B was incorporated in the Foreign Country and is a resident of the Foreign Country. It does not meet the definition of a resident under section 6 of the ITAA 1936 as it does not carry on any business activities in Australia and its central management and control is in the Foreign Country.

Therefore, it is considered that Foreign Company B is not a Part X Australian resident for the purposes of the Income Tax Assessment Act 1936 having regard to section 768-10 of the ITAA 1997 and is a resident of the Foreign Country under the Double Tax Agreement between Foreign Country and Australia.

The dividend payment made by Foreign Company B on XX November XXXX was in respect of equity interests held by XY in accordance with Item 1 of subsection 974-75(1) of the ITAA 1997.

Therefore, the dividend payment was a foreign equity distribution for the purposes of subsection 768-5(1) of the ITAA 1997.

The entity is an Australian resident and a corporate tax entity

XY is a proprietary XY company limited by shares and incorporated in Australia. Therefore, XY is an Australian resident and a corporate tax entity in accordance with subsection 995-1(1) and section 960-15 of the ITAA 1997.

The entity satisfies the participation test in section 768-15 of the ITAA 1997

XY held direct ownership interest of paid-up share capital in Foreign Company B of XX.XX% at the time of the dividend payment on XX November XXXX which satisfies the participation test in section 768-15 of the ITAA 1997 as it was the registered holder of at least XX% participation interest in Foreign Company B at the commencement of the days the dividend was made.

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

XY did not receive the dividend payment from Foreign Company B in the capacity of a trustee.

Section 768-7 of the ITAA 1997 does not apply to the distributions

It is considered that section 768-7 of the ITAA 1997 does not apply to the dividend as Foreign Company B is not a collective investment vehicle and the dividend paid did not give rise to a foreign income tax deduction.

Conclusion

The dividend paid to XY by Foreign Company B on XX November XXXX met the requirements of subsection 768-5(1) of the ITAA 1997 and therefore is a foreign equity distribution that is considered NANE income under subsection 768-5(1) of the ITAA 1997.

Income tax consolidation

For Australian income tax purposes, as XY is a subsidiary member of YZ MEC group. The dividend received by XY Company from Foreign Company B is considered NANE income in accordance with section 768-5 of the ITAA 1997 and will be treated as NANE income of YZ as the provisional head company of the MEC group in accordance with section 701-1 of the ITAA 1997.