Meaning of passive income
Dividends
Passive income includes all dividends. The term dividend includes:
- unit trust dividends received from a corporate unit trust or a public trading trust
- a distribution made by a liquidator which is deemed to be a dividend.
Interest income
Passive income includes tainted interest income, which is all interest income except for interest derived through an offshore banking unit. It also specifically includes:
- amounts in the nature of interest - for example, discounts
- income earned from hire purchase and other property financing transactions
- accrued interest on discounted and other deferred interest securities issued after 16 December 1984
- interest deemed to be derived where a CFC assumes the rights of a lender through the purchase of securities through a secondary market
- factoring income.
Tainted rental income
There are three categories of tainted rental income.
- Rent from associates
- Income from any leases between a CFC and an associate and any income that arises where rent is paid to the CFC by an associate.
- Lease of land
- Income from related party lease transactions and income from leases of land - including all fixtures - except where the land is located in the same country as the CFC is resident. The income from the lease of the land will not be tainted if the CFC provides labour-intensive property management by directors or employees of the CFC.
- Ships and aircraft
- Income from the lease of ships or aircraft, cargo containers for use on ships or aircraft or plant or equipment for use on board ships, unless the income relates to the provision of operating crew in relation to ships and aircraft or maintenance or management services by the CFC's directors or employees.
Excluded rental income
An amount of rental income will not be treated as tainted if the following three requirements are satisfied:
- the amount is derived from an associated CFC resident in the same country
- the amount is subject to the normal company rate of tax in that country, and
- the payment of the amount did not wholly or partly give rise to a notional allowable deduction for the associated CFC.
The second requirement is based on whether an amount has been subject to the normal company rate of tax in a country. For an amount to be treated as taxed at a country's normal company rate, the amount must be taxed at the same rate applicable to the company's other income or at a higher rate. In addition, there can be no entitlement to a credit, offset or tax concession in the taxation of the amount.
For the third requirement, it is assumed that the associated CFC failed the active income test. The requirement will not be satisfied if a payment would have resulted in a notional allowable deduction for an associated CFC if the CFC had been required to work out its attributable income.