Abbreviations
Some abbreviations used in this publication without accompanying explanation are:
CFC |
controlled foreign company |
CFE |
controlled foreign entity |
CFP |
controlled foreign partnership |
CFT |
controlled foreign trust |
DTA |
double taxation agreement |
DWT |
dividend withholding tax |
EDCI |
eligible designated concession income |
FIF |
foreign investment fund |
FTC |
foreign tax credit |
FTCS |
foreign tax credit system |
ITAA 1936 |
Income Tax Assessment Act 1936 |
ITAA 1997 |
Income Tax Assessment Act 1997 |
NFI |
net foreign income |
P/Y loss |
previous years losses |
Glossary
Accruals taxation
Accruals taxation is the taxation of Australian residents on profits derived through a foreign company or trust as they are earned by the company or trust. Normally, the profits would not be taxed in Australia until they are distributed to the taxpayer as a dividend or trust distribution.
Act
In this guide, the term 'the Act' means the Income Tax Assessment Act 1936, as amended.
Active income test
The active income test ensures that small amounts of tainted income derived by a CFC are exempt from accruals taxation. An exemption is provided from accruals taxation for most amounts derived by a CFC if the test is satisfied.
Adjusted net foreign income
In relation to foreign tax credits, adjusted net foreign income is net foreign income adjusted for apportionable deductions.
Adjusted tainted income
Adjusted tainted income comprises passive, tainted sales and tainted services income.
Apportionable deductions
In relation to foreign tax credits, apportionable deductions are those deductions of a concessional nature which do not relate directly to income-producing activities - for example, gifts.
Arm's length amount
This expression means, in relation to an actual transfer of property or services to a non-resident trust estate, the amount that the trustee of the non-resident trust might reasonably be expected to pay to the transferor for the property or services if the property or services had been transferred under an arrangement between independent parties dealing at arm's length with each other.
Associates
There are four parts to determining who are the associates of an entity. They deal with:
- associates of an individual
- associates of a company
- associates of a trustee
- associates of a partnership.
Part 1 - Associates of an individual
The associates of an individual - other than an individual acting in the capacity of a trustee - are:
- Relatives of the individual - that is, the parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of the individual or of his or her spouse; and the spouse of the individual or of any other person mentioned above
- A partner of the individual or a partnership of which the individual is a partner
- The spouse, including de facto spouse, or child of a partner, where the partner is also an individual - other than an individual acting in the capacity of a trustee
- The trustee of a trust, where the individual or another entity that is an associate by virtue of this part benefits under the trust
- A company where that company is sufficiently influenced by:
- the individual
- another entity that is an associate of the individual because of the rules in this part or
- another company which is sufficiently influenced by the individual or
- two or more of the above entities, or
- A company where the capacity to cast or control greater than 50% of the maximum votes at a general meeting of the company is held by:
- the individual
- associates of the individual under the rules in this part
- the individual and the associates.
Part 2 - Associates of a company
Part 2 deals with the associates of a company - called company A. The associates of company A include:
- A partner of company A
- A partnership of which company A is a partner
- Where a partner of company A is an individual otherwise than in the capacity of a trustee, the spouse or child of the partner
- The trustee of a trust where company A, or an entity that is an associate of company A, benefits under the trust
- An entity (entity B) that exerts sufficient influence over company A or holds a majority voting interest in company A. The influence may be exerted by entity B alone or together with other entities. The majority interest may be held by entity B alone or together with entities that would be associates of entity B if it were treated as company A
- A company (company C) that is sufficiently influenced by company A or in which company A holds a majority voting interest. The influence may be exerted by company A alone or together with other entities that are sufficiently influenced by company A or in which company A holds majority voting interests. The majority voting interests may be held by company A alone or together with entities that are associates of company A
- Any other entity (entity D) that would be an associate of a third entity (entity E) which would be an associate of company A if the associates of entity E were determined by treating it as company A.
Majority voting interest
An entity holds a majority voting interest in a company if the following shareholdings amount to 50% or more of the maximum number of votes that can be cast at a general meeting of the company:
- the entity's direct shareholding in the company, and
- the entity's indirect shareholding in the company - for example, through a subsidiary.
An example is where a company has a wholly owned subsidiary that has a 75% voting interest in another company. Both the parent and subsidiary would be associates of the third company because the subsidiary has a majority voting interest in the third company and the parent has a majority voting interest in the subsidiary.
Sufficient influence
An entity is sufficiently influenced by a second entity or other entities if the entity is accustomed, under an obligation or might reasonably be expected to act in accordance with directions, instructions or wishes of the second entity or other entities.
Part 3 - Associates of a trustee
The associates of a trustee are:
- any entity that benefits under the trust
- any entity that is an associate of an individual who benefits under the trust or
- where a company is an associate of the trustee under either of the two above dot points, an entity that is an associate of the company.
Rules relating to public unit trusts
In applying the tests for associates, the trustee of a public unit trust is treated as if it were a company. Special rules apply to determine whether a public unit trust is sufficiently influenced by another entity or whether an entity has a majority voting interest in the public unit trust.
Generally, a public unit trust will be sufficiently influenced by another entity or entities where the trust is accustomed to act or is under an obligation to act or might reasonably be expected to act in accordance with the directions, instructions or wishes of the entity or entities.
The concept of a majority voting interest in relation to a public unit trust is determined by reference to the capital or income of the trust. If an entity is entitled to, or is entitled to acquire, 50% or more of the income or capital of the trust, the entity is considered to hold a majority voting interest in the public unit trust. Corresponding rules apply to test whether a group of entities have a majority voting interest in the trust.
Part 4 - Associates of a partnership
The associates of a partnership are:
- a partner in the partnership
- where the partner is an individual, any entity that would be an associate of the individual or
- where the partner is a company, any entity that would be an associate of the company.
Attributable income
Amounts taxed on an accruals basis under the CFC, transferor trust or FIF measures.
Attributable taxpayer
An attributable taxpayer is an Australian entity that is liable to pay tax on attributable income.
Attribution
The process by which income is taxed on an accruals basis under the CFC, transferor trust or FIF measures.
Attribution percentage
The attribution percentage is the pro rata share of a CFC's attributable income that will be attributed to a particular taxpayer's assessable income.
Australian 1 per cent entity
An Australian 1 per cent entity, in relation to a company or trust, is an Australian entity whose associate inclusive control interest in the company or trust is at least 1%.
Australian entity
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.
Australian partnership
An Australian partnership is a partnership of which at least one of the partners is an Australian entity.
Australian tax payable
In relation to foreign tax credits, Australian tax payable is the product of the average rate of Australian tax and adjusted net foreign income less any rebates which are applicable to that income.
Australian trust
An Australian trust is a trust which at a particular time - or at a time in the 12 months before that time - has a trustee who is a Part X Australian resident or has its central control and management in Australia. It includes a corporate unit trust and a public trading trust as defined in the Act.
Average rate of Australian tax
In relation to foreign tax credits, average rate of Australian tax is gross tax on taxable income - less certain rebates - divided by taxable income.
Branch
Broad-exemption listed country
A country listed in the Income Tax Regulations as a broad-exemption country. The list of broad-exemption countries will be used for the purposes of exemptions from accruals taxation under the CFC and transferor trust measures. These countries are also treated as listed for the purposes of concessions under the Foreign Tax Credit System.
Broad-exemption listed country trust estate
A non-resident trust estate is a broad-exemption listed country trust estate in an income year if all of the income or profits derived by the trust estate during that income year are either:
- subject to tax in one or more broad-exemption listed countries in a tax accounting period ending before the end of, or commencing during, the income year or
- designated concession income in relation to any broad-exemption listed country.
A non-resident trust estate could be treated as a resident of a non-broad-exemption listed country under that country's tax laws - for example, the trustee may be a resident of that country. However, for the purposes of the transferor trust measures, the trust would be treated as a broad-exemption listed country trust estate if all of the trust's income is derived from one or more broad-exemption listed countries and is subject to tax in those countries.
CFC measures
The CFC measures deal with the accruals taxation of Australian residents that have a controlling interest in a foreign company.
Controlled foreign company
Broadly, a controlled foreign company (CFC) is a company that is not a resident of Australia and is controlled by five or fewer residents.
Creditable taxes
Creditable taxes are, broadly, foreign taxes which are equivalent in nature to Australian income tax - for example, a tax on net income or capital gains - including tax imposed on attributed income.
Designated concession income
Designated concession income is income or profits of a kind that are specified in Part 8A of the Income Tax Regulations. Broadly, it refers to income or profits which are subject to a tax concession in a broad-exemption listed country. Details of the particular types of income or profits are set out in appendix 1 of this guide.
Discretionary trust estate
A discretionary trust estate is a trust estate for which:
- Both of the following conditions are satisfied:
- a person - including the trustee - has a power of appointment or other discretion and
- the exercise of, or the failure to exercise, the power or discretion has the effect of determining, to any extent, either or both of the following:
- the persons who may benefit under the trust
- how the beneficiaries are to benefit under the trust
OR
- One or more of the beneficiaries under the trust have a contingent or defeasible interest in some or all of the capital or income of the trust estate
OR
- The trustee of another trust estate that satisfies both conditions in the first dot point above benefits or is capable of benefiting under the first-mentioned trust estate.
Double taxation agreement
A double taxation agreement (DTA) is an agreement made between the Australian Government and another State under the International Tax Agreements Act 1953.
Eligible designated concession income
Eligible designated concession income is designated concession income, in relation to a particular broad-exemption listed country, derived by an entity in an income year and that is not subject to tax in another broad-exemption listed country in a tax accounting period that ends before the end of, or commences during, the income year.
The expression also includes designated concession income in relation to a particular broad-exemption listed country that is subject to tax in another broad-exemption listed country but is also designated concession income in relation to that other listed country.
Eligible transferor
For the purposes of accruals taxation under the CFC measures, an eligible transferor is an Australian entity or a controlled foreign entity that has transferred property or services in certain specified circumstances to a non-resident trust.
If the transfer was to a trust which is a discretionary trust before the IP time, the transferor will be an eligible transferor if he or she was able to control the trust at any time after the IP time and before the transfer. The IP time is 7.30pm by standard time in the Australian Capital Territory on 12 April 1989.
An exception is made where the transfer was an ordinary business transaction for full value. If the transfer was made after the IP time, the transferor will be an eligible transferor unless the transfer was for full value and the transferor did not have control of the trust after the transfer.
If the transfer was made after the IP time to a trust that is a non-discretionary trust or a public unit trust at the test time, the transferor will be an eligible transferor if the transfer was made for no consideration or for inadequate consideration.
Exempting profits
The total of the exempting receipts held as distributable profits by a company resident in an unlisted country.
Exempting receipt
Exempting receipts are, generally, amounts earned by a company resident in an unlisted country that can be distributed as non-assessable non-exempt dividends.
FIF measures
The FIF measures deal with the accruals taxation of Australian residents that have a non-controlling interest in a foreign company or foreign trust.
Financial intermediary business
A banking business or a business whose income is principally derived from the lending of money.
Foreign investment fund
A foreign investment fund (FIF) is any foreign company or foreign trust - other than a deceased estate.
Foreign tax credit system
Under the foreign tax credit system (FTCS) , foreign source income derived by Australian residents - apart from certain salary and wage income - is generally subject to Australian tax. A credit for foreign tax paid is allowed against the Australian tax payable, up to the amount of the Australian income tax referable to the foreign income.
Income year
An income year - or year of income - is, in effect, a 12-month period ending on 30 June, or a 12-month period ending on another date where the Commissioner has approved that other date under section 18 of the Act.
Limited-exemption listed country
A country listed in the Income Tax Regulations as a limited-exemption country. These countries will basically comprise the original list of countries in Schedule 10 of the Income Tax Regulations, excluding broad-exemption listed countries. The list has been updated by adding the Czech Republic and Vietnam and removing countries that no longer exist.
Listed country
A country listed for the purposes of dividend and branch profit concessions under the foreign tax credit system. Countries on either the broad-exemption or limited-exemption list are treated as listed countries.
Net income
In relation to a non-resident trust estate, net income essentially means the total assessable income of the trust estate, worked out as though the trustee were an Australian resident and a taxpayer in respect of that income, less all allowable deductions, as provided by section 95 of the Act.
Net foreign income
In relation to foreign tax credits, net foreign income is gross assessable foreign income less:
- allowable deductions relating exclusively to foreign income
- any domestic loss carried forward that you have elected to use against foreign income and
- deductions allowed by the Commissioner as being appropriately related to foreign income.
Non-broad-exemption listed country
A country that is either a limited-exemption listed country or an unlisted country.
Non-broad-exemption listed country trust estate
A non-broad-exemption listed country trust estate is a non-resident trust estate which is not a broad-exemption listed country trust estate.
Non-discretionary trust estate
A non-resident trust estate is a non-discretionary trust estate if it is not a discretionary trust estate.
Non-portfolio dividends
Broadly, non-portfolio dividends are dividends paid to a company where that company has a 10% or greater voting interest in the company paying the dividend.
Non-resident trust estate
A non-resident trust estate is trust other than an Australian resident trust.
An Australian resident trust is:
- a trust estate which, at any time during an income year, has a trustee who is a resident of Australia or has its central management and control in Australia
- a corporate unit trust or public trading trust which is taxed in the same way as a company or
- a superannuation fund, approved deposit fund or pooled superannuation trust within the meaning of Part IX of the Act.
Notional accounting period
A notional accounting period is the period used to determine the attributable income of a FIF or a foreign life assurance policy (FLP).
Notional assessable income
The assessable income of a CFC for the purposes of determining the CFC's attributable income.
Offshore banking income
In relation to foreign tax credits, offshore banking income includes interest, fees, commissions or similar income derived from offshore banking transfers and dividends paid by a company out of profits derived from offshore banking transfers.
Other income
In relation to foreign tax credits, other income is income other than passive income, offshore banking income or certain lump sum payments from a foreign non-complying superannuation fund which are assessable under section 27CAA. It includes income from normal commercial activities, salary and wages and most pensions.
Part X Australian resident
A Part X Australian resident is a resident of Australia who is not treated solely as a resident of a treaty partner country under a double taxation agreement between Australia and that country.
Passive income
Passive income includes certain types of dividend, interest, royalty, annuity and rental income (section 446). It also includes gains on the disposal of assets that produce passive income or that are not used solely in carrying on a business.
Permanent establishment
A permanent establishment is widely defined in subsection 6(1). Generally, it can be described as a place through or at which an entity in Australia conducts its business in another country. A permanent establishment has been referred to as a branch in this Guide.
Property
This term includes money, a chose in action, any trust estate and interest, right or power, whether at law or in equity, in or over property.
Related foreign companies
Generally, an Australian company is related to a foreign company for the purposes of the FTCS when:
- the companies are both group companies, and
- the Australian company has, either directly or indirectly, a voting interest of at least 5% in the foreign company (section 160AFB).
For these purposes, a company is a group company when the Australian parent has a voting interest of at least 10% in the foreign company. If the foreign company has an equivalent interest in a second foreign company, then that second foreign company will also be a group company. This result will continue to apply through any number of tiers of companies.
Services
This term includes any benefit, right, privilege or facility. Services include a right in relation to real or personal property as well as an interest in real or personal property. Services also include a right, benefit, privilege, service or facility that is provided or is to be provided:
- under an arrangement for or in relation to:
- the performance of work, whether or not property was also provided as part of the work performed
- the provision of entertainment, recreation or instruction or the use of facilities for entertainment, recreation or instruction or
- the conferring of benefits, rights or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar payment
- under a contract of insurance, including life assurance or
- under an arrangement for, or in relation to, the lending of money.
Statutory accounting period
A statutory accounting period is the period used to determine the attributable income of a CFC.
Tainted income
Tainted income includes passive income, tainted sales income and tainted services income.
Tainted rental income
Tainted rental income includes rental income of a CFC where:
- land is leased to an associate or the rent is paid by an associate or
- land is leased by a company not resident in the same country.
It can also include rental income from particular leases on ships, aircraft or cargo containers.
Tainted sales income
Tainted sales income is income of a CFC from the sale of goods purchased from or sold to:
- an associate who is an Australian resident, or
- an associate who is not an Australian resident but carries on business in Australia through a permanent establishment.
Tainted services income
Tainted services income is income derived from the provision of services by a CFC:
- to an associate of the CFC
- to a resident of Australia, or
- in connection with a permanent establishment in Australia.
Tax sparing
Tax sparing deems tax foregone by a foreign country in providing a specified concession to an Australian resident to be foreign tax paid for the purposes of Australia's foreign tax credit rules. The Australian resident may therefore be entitled to claim a credit for the tax foregone by the foreign country.
Transfer
Transfer is defined in broad terms. In relation to the transfer of property, it includes a disposal of property by assignment, creation of a trust or any other manner or the provision of property. For the transfer of services, it includes such concepts as allow, confer, give, grant, perform or provide.
Transfer pricing rules
Transfer pricing rules are contained in Division 13 of Part III of the Act. This Division seeks to impose 'arms-length' consideration on agreements for the sale of property between Australians and non-residents when the agreement effectively shifts profits from Australia.
Transferor trust
A non-resident trust to which a resident has made, or is deemed to have made, a transfer of property or services (Division 6AAA of Part III).
Transferor trust measures The transferor trust measures deal with the accruals taxation of Australian residents who have directly or indirectly transferred value to a non-resident trust. Broadly, the rules operate to accruals tax the undistributed income of the trust.
Underlying tax
Underlying tax refers to the tax paid on the taxable profits of a company.
Unlisted country
An unlisted country means a foreign country which is not a listed country.