Foreign branch income of a resident company that is not assessable
Which resident companies qualify?
Two broad groups qualify to have certain branch profits treated as non-assessable non-exempt income. These are resident companies that either:
- carry on business through a permanent establishment, for example, a branch, or
- are partners of a partnership or are presently entitled beneficiaries of a trust, and that partnership or trust carries on business through a permanent establishment.
Non-assessable non-exempt income treatment does not apply to resident taxpayers, other than companies, with foreign permanent establishments.
What is a permanent establishment?
A permanent establishment includes a fixed place of business. The term ‘permanent establishment’ is defined in section 6 of the Act.
If the country in which an Australian company has a permanent establishment is one with which Australia has a double-taxation agreement, the meaning of the term permanent establishment is determined by the agreement.
Permanent establishments are referred to as branches in this part.
What income is non-assessable non-exempt?
Whether branch profits are treated as non-assessable non-exempt income depends on whether the branch is in a listed or unlisted country.
Non-assessable non-exempt income treatment
Branches in listed countries
In general, non-assessable non-exempt income treatment is available for income derived by a resident company through a branch in a listed country if:
- the income is from carrying on a business in the listed country, and
- the branch satisfies an active income test.
Non-assessable non-exempt income treatment is not available for income derived through a branch in a listed country if:
- the branch does not satisfy the active income test, and
- the income is both adjusted tainted income and eligible designated concession income.
You must test each item of income individually against these criteria to see if it is non-assessable non-exempt income.
Branches in unlisted countries
Non-assessable non-exempt income treatment may be available for income derived by a resident company through a branch in an unlisted country if:
- the income is from carrying on a business in the unlisted country, and
- the branch satisfies an active income test.
Non-assessable non-exempt income treatment is not available for income derived through a branch in an unlisted country if:
- the branch does not satisfy the active income test, and
- the income is adjusted tainted income.
The same concept of adjusted tainted income is used for this purpose as that used in determining the attributable income of a CFC. However, the following modifications apply in determining the adjusted tainted income of a branch:
- the passive income of a branch conducting life assurance activities is not reduced under subsection 446(2)
- a branch and its Australian head office are treated as separate legal entities for the purpose of determining whether the branch has derived tainted sales income, and
- branches of Australian financial institutions are provided with an exemption for banking income broadly consistent with the exclusion from accruals taxation available under the CFC measures for Australian financial institution’s subsidiaries.
An active income test concession is provided to allow branches in both listed and unlisted countries to derive up to 5% of gross turnover as tainted income, and still obtain non-assessable non-exempt income treatment under section 23AH for income amounts.
Broadly, this active income test is the same as that for CFCs: the following modifications are made to the test for branches:
- the only amounts taken into account are those derived through the branch
- the income year of the company with the branch is used for the purposes of the test
- those conditions of the active income test relating to the existence and residency of a CFC do not apply because they are not relevant to branches, and
- the modifications to the adjusted tainted income of a branch referred to above also apply in determining the adjusted tainted income of the branch for the purposes of the active income test.
What branch capital gains are non-assessable non-exempt income?
Permanent establishment in a listed country
A resident company includes in the calculation of its net capital gains any capital gain or capital loss as a result of a capital gains tax (CGT) event happening in relation to a tainted asset that is used in carrying on a business through a permanent establishment in a listed country if:
- the gain is also eligible designated concession income, or
- there is a loss, but there would have been eligible designated concession income if the loss had instead been a gain.
Permanent establishment in an unlisted country
A resident company includes in the calculation of its net capital gains any capital gain or capital loss arising as a result of a CGT event happening in relation to a tainted asset that is used in carrying on a business through a permanent establishment in an unlisted country.
Effect of non-assessable non-exempt income treatment on a resident company’s deductions, losses and foreign income tax offsets
A deduction is not allowable for:
- outgoings or expenses incurred in producing branch income and gains that are non-assessable non-exempt income
- capital losses on the disposal of a branch asset if, had there been a profit on the disposal, the profit would have been non-assessable non-exempt income.
Current year losses or carried forward losses of a resident company are not reduced by branch income or gains that are non-assessable non-exempt income.
Foreign income tax offsets are not allowed for foreign taxes paid on branch income that is non-assessable non-exempt income.