Section 3 - Modifications to the treatment of capital gains and losses

The operation of the capital gains tax provisions of the Tax Acts is modified for working out the attributable income for a controlled foreign company (CFC).

Assets included in the calculation

Capital gains and losses taken into account in working out attributable income for a CFC are those arising on:

• the disposal of non-taxable Australian assets for the purposes of Part IIIA of the Income Tax Assessment Act 1936 (ITAA 1936), and
• 'non-CGT assets having the necessary connection with Australia' for the purposes of Subdivision 136A of Chapter 3 of the Income Tax Assessment Act 1997 (ITAA 1997).

(A capital gain or loss on the disposal of a taxable Australian asset or a CGT asset having the necessary connection with Australia will be taken into account in working out the real assessable income of the CFC as a non-resident taxpayer and is therefore excluded from the calculation of the CFC's attributable income. Note: This exclusion applies even where the relevant asset is not subject to capital gains tax because it was acquired before 20 September 1985.)

What is a taxable Australian asset and a CGT asset having the necessary connection with Australia?

In determining whether an asset is a taxable Australian asset or a CGT asset having the necessary connection with Australia, the assumption that the CFC is a resident of Australia is ignored. In almost all cases, however, the residency assumption will make no difference.

Broadly, a taxable Australian asset or a CGT asset having the necessary connection with Australia is:

• land or buildings in Australia
• assets used in carrying on business through a permanent establishment in Australia
• a share, or an interest in a share, in a company which was a resident private company in the income year in which the disposal took place
• a share, or an interest in a share, of a company which was an Australian resident and not a private company and at any time in the preceding five years a taxpayer or an associate, alone or together, owned 10% of the issued capital of the company
• an interest in an Australian resident trust
• a unit in a unit trust which was an Australian resident where, at any time in the preceding five years, a taxpayer or an associate, alone or together, owned 10% of the units in the unit trust
• an option or right to acquire an asset referred to above
• certain assets that have been transferred under the rollover provisions
• certain rights that have a connection with Australia.

Note: The specific list of CGT assets having the necessary connection with Australia is set out in section 136-25 of ITAA 1997.

Assets used to produce notional exempt income

In working out taxable income, the capital gains tax provisions do not normally apply to the disposal of assets used solely for the production of exempt income. However, in working out attributable income, capital gains or losses on the disposal of assets used to derive notional exempt income can be taken into account.

Removal of exemption of pre-20 September 1985 assets

When applying the capital gains tax provisions in working out attributable income, all non-taxable Australian assets and non-CGT assets having the necessary connection with Australia that a CFC owned at 30 June 1990 are deemed to have been acquired by the CFC on 30 June 1990 regardless of the date the asset was acquired.

Cost base of assets for companies which become CFCs after 30 June 1990

The cost base of assets owned by a company that became a CFC after 30 June 1990 is market value of those assets at the time the company became a CFC.