Chapter 4: Taxation of foreign investment fund (FIF) interests

Overview

This chapter explains the tax treatment of Australian residents when they receive distributions from a FIF, or dispose of their interests in a FIF, if they had previously been subject to accruals taxation on their FIF interest.

The FIF measures have been repealed and do not apply to taxpayers from the 2010-11 income year. Further details of the FIF measures in earlier income years are provided in the FIF Guide for those years.

The FIF measures applied to income and gains accumulating in foreign companies that were not controlled by Australians and foreign trusts that, broadly speaking, fell outside the scope of the deemed present entitlement and transferor trust measures. The FIF measures also applied when working out the income of controlled foreign companies (CFCs) with FIF interests and to certain foreign life policies (FLPs) that had an investment component (such as life bonds).

Taxpayers are no longer subject to accruals taxation on income and gains accumulating in FIFs. As FIF income is no longer attributable, any unapplied previous FIF losses can not be used to reduce future FIF income.

If you have an interest in a FIF, you will be subject to the tax rules applicable to your circumstances. For example, if you have an interest in a foreign trust, you will be subject to the general tax rules relating to trust income (Division 6 of Part III) and may be subject to the transferor trust provisions (Division 6AAA of Part III). For more information, see Chapter 2 of this guide.

If you have an interest in a foreign company to which the CFC measures do not apply, you will be subject to the general tax rules relating to dividend income and shares. For more information, see our publication You and your shares.

Certain aspects of the FIF measures have been retained to ensure that you are not subject to double taxation when you receive a distribution or other attribution account payment from a FIF, or dispose of an interest in a FIF.

Double taxation is avoided through the maintenance of FIF attribution accounts. FIF attribution accounts record the income attributed or distributed to you from each of your interests in a FIF or a FLP. They allow you to claim exemptions for FIF income previously attributed to you when you receive a distribution from a FIF or dispose of an interest in a FIF. This is only relevant for taxpayers who have a post FIF attribution surplus in respect of their FIF interest.

Exemptions

Exemption of distributions

A dividend or other FIF attribution account payment you receive from a FIF attribution account entity may be treated as non-assessable non-exempt income. (section 23AK).

The amount of the FIF attribution account payment that will be non-assessable non-exempt income when you receive the payment will be determined by the post FIF abolition surplus in the attribution account of the FIF making the distribution. If the payment is more than the attribution surplus, only the part of the payment equal to the surplus will be non-assessable under section 23AK.

FIF attribution accounts are explained in detail in the section FIF attribution accounts.

Exemption of distributions derived through a partnership or trust

If you receive the distribution from a FIF or FLP through an interposed partnership or trust, the amount will be treated as non-assessable non-exempt income where:

• after the distribution of an amount from the FIF to the partnership or trust, you would be required to include an amount in respect of the trust or partnership in your assessable income, and
• at the time of that distribution, you had a post FIF abolition surplus in relation to the FIF or FLP.

The distribution to the partnership or trust will still be included when working out the net income of the trust or partnership. However, once your share of that net income is determined, an amount equal to your attribution surplus will be non-assessable non-exempt income.

Reduction of disposal consideration if FIF attributed income is not distributed

The disposal of an interest in a FIF attribution account entity is normally taken into account in working out your assessable income under the existing provisions of the ITAA 1936. For example, either as income under section 6-5 of the ITAA 1997, or under the capital gains tax provisions in Part 3-1 of the ITAA 1997.

To avoid double taxation, the consideration received on the disposal of an interest in a FIF attribution account entity, which is to be taken into account for the purposes of the relevant assessment provision, will be taken to be reduced by any amount previously attributed to you that has not been distributed to you (the post FIF abolition surplus) - paragraph 23B(1)(c). A post FIF abolition debit for the same amount arises at the time you dispose of the FIF interest - paragraphs 23B(1)(d) and (e).

If you dispose of only part of an interest in a FIF attribution account entity, your post FIF abolition surplus that can be used to reduce the consideration on disposal is reduced proportionately - paragraphs 23B(1)(c) and (e) and subsection 23B(2).

FIF attribution accounts

FIF attribution accounts record the income attributed and distributed to you from each of your interests in a FIF or a FLP. Attribution accounts operate on the basis of credits and debits.

In the FIF measures:

• a credit was previously referred to as a FIF attribution credit and is now referred to as a post FIF abolition credit
• a debit was referred to as a FIF attribution debit and is now referred to as a post FIF abolition debit.

To correctly maintain attribution accounts and claim exemptions for FIF income previously attributed to you, you need to keep records of:

• income attributed to you from a FIF or a FLP
• income distributed to you by a FIF or a FLP either directly or through interposed FIF attribution account entities, and
• the amount of any reduction of consideration you can claim on disposal of an interest in the FIF or FLP

Where the amount of credits in an attribution account exceeds the amount of debits, the excess is referred to as a post FIF abolition surplus. The following section explains these concepts.

FIF attribution account entity

A FIF attribution account entity is:

• a company that is not a resident of Australia
• a partnership
• a trust, or
• a FLP.

(former section 601)

FIF attribution account payments

A FIF attribution account payment occurs when a FIF in which you have an interest makes a payment to you or to another FIF in which you also have an interest.

FIF attribution account payments include:

• a dividend paid by a company to a shareholder
• an amount of interest paid to the holder of a convertible note
• a partner's share of the net income of a partnership for the income year
• a beneficiary's share of the net income of a trust estate for the income year
• an amount included in the assessable income of a beneficiary under section 99B during the income year for a distribution made by a trust estate
• an amount of net income of a trust estate on which the trustee would be assessable under section 99 or 99A
• a payment made by the entity which issued a FLP to a person who has an interest in the FLP
• superannuation, termination of employment and similar payments included in your assessable income under Division 82, 301, 302, 304 or 305 of the ITAA 1997 or Division 82 of the Income Tax (Transitional Provisions) Act 1997. (former section 603).

Post FIF abolition surplus

The surplus in a FIF attribution account, at the time that a FIF attribution account payment is made, is the amount by which the total FIF attribution credits and post FIF abolition credits are more than the total FIF attribution debits and post FIF abolition debits - subsection 23AK(5).

Where an attribution account has a surplus, it generally means that a greater amount of income from a FIF has accrued to you than has been distributed to you.

Post FIF abolition credit

6. the repeal of the FIF measures, a FIF attribution credit will only occur where you maintain attribution accounts for two FIFs and one FIF makes a distribution (that is, an attribution account payment) to the second FIF - subsection 23AK(6).
20. post FIF abolition credit arises when the attribution account payment is made - subsection 23AK(8).
20. amount of the post FIF abolition credit is equal to the amount of the post FIF abolition debit for the FIF attribution account entity making the distribution - subsection 23AK(7).

Post FIF abolition debit

A post FIF abolition debit will occur when the FIF in which you have an interest makes a distribution to you. Post FIF abolition debits trace the movements of profits included in your assessable income under the FIF measures and prevent that income, where it has been attributed to you, from being taxed again.

You will have a post FIF abolition debit for a FIF attribution account entity where:

• the entity makes a FIF attribution account payment to you or to a FIF attribution account entity in which you have an interest, and
• immediately before the payment is made, the entity making the FIF attribution account payment has a FIF attribution surplus in relation to you - subsection 23AK(2).

The post FIF abolition debit arises when the FIF attribution account payment is made - subsection 23AK(4).

The amount of the post FIF abolition debit is the lesser of the post FIF abolition surplus and:

• if the FIF attribution account payment was made to you, the FIF attribution account payment
• in any other case, your FIF attribution account percentage for the FIF that receives the FIF attribution account payment - subsection 23AK(3).

The post FIF abolition debit may be reduced if a first tier FIF was previously a CFC under Part X. The current post FIF abolition debit may be reduced only where an attribution debit under the CFC measures was recorded for the entity when it was a CFC. The reduction for the current post FIF abolition credit is equal to the CFC attribution credit recorded when the FIF was a CFC. This allows the FIF attribution credit to be deferred until the attribution surplus for the CFC is used - subsection 23AK(3).

A post FIF abolition debit will also arise where you dispose of a FIF interest and the consideration or capital proceeds from the disposal are reduced. See section on disposal of interests.

FIF attribution account percentage

Your FIF attribution account percentage in relation to a FIF attribution account entity is the interest you hold, directly or indirectly through one or more interposed FIF attribution account entities, in the income or profits of the entity (former section 602).

Example 1
Attribution accounts

Beryl, a resident individual, has an interest in a foreign company (Forco) that is not a CFC. Forco's notional accounting period ends on 30 June, as does Beryl's income year. In the year ended 30 June 2010, she had FIF income in respect of Forco of $5,000. The $5,000 would have been included in her assessable income under section 529.

In this case, she will treat the next $5,000 of dividends paid by Forco as non-assessable non-exempt income under section 23AK. To achieve this, Beryl would credit the FIF attribution account for Forco with the $5,000 at the end of Forco's notional accounting period as follows:

In the year ended 30 June 2011, Beryl does not have FIF income because the FIF measures have been repealed. On 31 December 2010, Forco paid her a dividend of $3,000.

The dividend is a post FIF abolition account payment. Beryl would debit her FIF attribution account with the $3,000 at the time the dividend was paid as follows:

The $3,000 dividend that Beryl received would be non-assessable non-exempt income under section 23AK, and Beryl would have a post FIF abolition surplus of $2,000. If on 31 December 2011, Forco paid Beryl a dividend of $7,000, Beryl would debit the FIF attribution account with $2,000 (the lesser of the dividend and the surplus in the account) at the time the dividend was paid.

Beryl would include in her assessable income the amount of the dividend that is more than the amount debited to the FIF attribution account (that is, $5,000). The remainder of the attribution account payment (that is, $2,000) would be non-assessable non-exempt income under section 23AK.

Note: The foreign income tax offset (FITO) rules have replaced the foreign tax credit system. For further information about the FITO rules, refer to Guide to foreign income tax offset rules.