About this guide
The Foreign income return form guide contains an explanation of measures relating to the taxation of foreign income derived by, or attributed to, Australian residents.
For 2010–11 and later income years, the Foreign Investment Fund (FIF) and deemed present entitlement rules (sections 96B and C of the Income Tax Assessment Act 1936 (ITAA 1936) have been repealed. In relation to these measures, this guide deals only with aspects of ongoing relevance: for example, relief to prevent double taxation where FIF attribution has previously occurred.
For an explanation of the foreign income tax offset (FITO) measures, see the Guide to foreign income tax offset rules. The chapters in this guide are:
Attribution of the current year profits of a controlled foreign company (CFC) |
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Transferor trust and related measures |
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Taxation of foreign dividends and branch profits |
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Taxation of foreign investment fund (FIF) interests |
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Proving your assessment |
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Consolidation (consolidated income tax treatment for groups of entities) |
Summary sheets at the end of this guide provide a quick reference to assist you in determining if the measures apply to you, and to what extent. Where necessary, worksheets have also been provided to help you work out your tax liability.
Although the guide is detailed, it may not cover all the qualifications and conditions contained in the law that relate to your circumstances: for example, it does not discuss the special rules in Subdivision F of Division 8 of Part X of the ITAA 1936 that apply in working out attributable income for companies conducting banking or insurance activities.
If you are not sure about the application of the law, phone 13 28 66.
Under our tax treaties, the Australian Taxation Office (ATO) regularly receives information from foreign tax authorities regarding foreign source income paid to Australian resident taxpayers (and tax withheld from such payments). We are making increasing use of information-matching technology to verify the correctness of tax returns. You should ensure that all information is fully and correctly declared in the relevant tax return.
Unless otherwise stated, references in this guide to provisions of the law are to provisions of the ITAA 1936.
Abbreviations and glossary
Abbreviations
Some abbreviations used in this publication without accompanying explanation are:
CGT |
capital gains tax |
CFC |
Controlled foreign company |
Commissioner |
Commissioner of Taxation |
EDCI |
eligible designated concession income |
FIF |
foreign investment fund |
FLP |
foreign life assurance policy |
ITAA 1936 |
Income Tax Assessment Act 1936 |
ITAA 1997 |
Income Tax Assessment Act 1997 |
MEC group |
Multiple entry consolidated group |
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 a trust distribution.
Act
In this guide, the term ‘the Act’ means the Income Tax Assessment Act 1936, as amended. Unless specified otherwise, all references to legislation are to the ITAA 1936.
Active income test
The active income test ensures that small amounts of tainted income derived by a CFC mainly engaged in carrying on an active business 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 tainted income
Adjusted tainted income comprises passive, tainted sales and tainted services income.
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 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
- 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, or
- the individual and the associates.
Part 2 – Associates of a company
Part 2 deals with the associates of a company, called company A:
- a partner of company A
- a partnership of which company A is a partner
- the spouse or child of the partner, where a partner of company A is an individual otherwise than in the capacity of a trustee
- 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, and
- 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 (the first entity) is sufficiently influenced by an entity (the second entity), or other entities, if the first entity or its directors are:
- accustomed to, or
- under a formal or informal obligation to (whether formal or informal), or
- reasonably expected to
act in accordance with directions, instructions or wishes of the second entity or of the 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
- an entity that is an associate of a company, where the company is an associate of the trustee under either of the two bullet points above.
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
- any entity that would be an associate of an individual, where the partner is an individual, or
- any entity that would be an associate of a company, where the partner is a company.
Attributable income
Amounts taxed on an accruals basis under the CFC or transferor trust measures.
Attributable taxpayer
An attributable taxpayer is an Australian entity that has an associate-inclusive control interest in a CFC of not less than the specified level.
Attribution
The process by which income is taxed on an accruals basis under the CFC or transferor trust 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% entity
An Australian 1% 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. A foreign hybrid limited partnership with at least one Australian resident partner, and a foreign hybrid company with at least one Australian resident shareholder, may also qualify as an Australian partnership.
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.
Branch
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 (CFC)
Broadly, a controlled foreign company is a company that is not a resident of Australia and is controlled by five or fewer Australian entities.
Designated concession income
Designated concession income is income or profits of a kind specified in the Income Tax Assessment (1936 Act) Regulation 2015. Broadly, it refers to income or profits that are subject to a tax concession in a listed country. Details of the specified types of income and profits are set out in Appendix 1: Foreign income regulations 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 is an agreement made between the Australian Government and another government under the International Tax Agreements Act 1953.
Eligible designated concession income (EDCI)
Eligible designated concession income is designated concession income, in relation to a particular listed country, derived by an entity in an income year:
- that is not subject to tax in another listed country in a tax accounting period that ends before the end of, or commences during, that income year, or
- is subject to tax in another listed country in a tax accounting period that ends before the end of, or commences during, that income year, 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 and was made before the IP time, the transferor will be an eligible transferor if the transferor was able to control the trust at any time after the IP time and before the test time. An exception is made where the transfer was an ordinary business transaction for full value. The IP time is 7.30pm, by standard time in the Australian Capital Territory, on 12 April 1989.
If the transfer was made at or after the IP time, the transferor will be an eligible transferor unless the transfer was for full value.
If the transfer was made at or 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.
Exemption for foreign equity distributions on participation interests
The exemption for foreign equity distributions on participation interests applies where a foreign resident company makes a foreign equity distribution to an Australian corporate tax entity under Subdivision 768-A in the ITAA 1997.
Financial intermediary business
A financial intermediary business is a banking business or a business whose income is principally derived from the lending of money.
Foreign equity distribution
A foreign equity distribution is a distribution or non-share dividend, made by a company that is a foreign resident, for an equity interest in the company.
Foreign investment fund (FIF)
A foreign investment fund was defined under the FIF rules as any foreign company or foreign trust, other than a deceased estate. The FIF rules have now been repealed.
Foreign life assurance policy (FLP)
An FLP was defined for the purposes of the FLP rules as a life assurance policy issued by an entity that was not a resident of Australia at any time in the income year.
The FIF measures applied only to certain life assurance policies, and did not include:
- a policy issued in Australia, provided that the entity that issued the policy was authorised under the Life Insurance Act 1995 to carry on life insurance business in Australia when it issued the policy
- policies that provided for payment of money only on death, or on death or permanent disability, and for which the premiums or premium instalments are calculated solely by reference to the period for which the life concerned was expected to continue, or within which the life concerned was expected to terminate
- policies issued before 1 July 1992 that cannot, after that date, be cancelled, surrendered or redeemed, and for which the terms have not been materially altered
- a contract of reinsurance of pure life cover between a resident insurer and a non-resident reinsurer (former section 482).
The FLP rules have now been repealed.
FIF measures
The FIF measures dealt with the accruals taxation of Australian residents that have a non-controlling interest in a foreign company or foreign trust.
Income year
An income year (or year of income) is a 12-month period ending on 30 June, or a 12-month period ending on another date, where the Commissioner of Taxation (Commissioner) has approved that other date under section 18 of the Act.
Life assurance policy
A life assurance policy was defined for the purposes of the FLP rules as a policy that provided for the payment of money:
- upon death, other than death by accident or specified sickness only, or
- on the happening of a specified event which related to the ending or continuing of a human life.
The FLP rules have now been repealed.
A life assurance policy also included an instrument securing the grant of an annuity for a term dependent upon a human life (former subsection 482(2)).
Listed country
A foreign country that is declared by the Income Tax Assessment (1936 Act) Regulation 2015 to be a listed country for the purposes of the CFC rules: see Attachment A.
Net income
In relation to a non-resident trust estate, net income in section 95 of the Act broadly means the total assessable income of the trust estate less all allowable deductions, worked out as though the trustee were an Australian resident and a taxpayer.
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 a trust other than a resident trust.
Notional allowable deduction
Notional allowable deduction is the allowable deduction of a CFC for the purposes of determining the CFC’s attributable income.
Notional assessable income
Notional assessable income is the assessable income of a CFC for the purposes of determining the CFC’s attributable income.
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, the term refers to a place through, or at which, a resident of one country conducts its business in another country. A permanent establishment is also referred to as a ‘branch’ in this publication.
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.
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.
Spouse
Your 'spouse' includes another person (whether of the same sex or opposite sex) who:
- you were in a relationship with that was registered under a prescribed state or territory law
- although not legally married to you, lived with you on a genuine domestic basis in a relationship as a couple.
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 lessor company not resident in the same country as the land is located, or
- the land is leased by a lessor company which is resident in the same country as the land, and the lessor does not carry out substantial management activities in relation to the leased land.
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 and the goods are purchased or sold in the course of that business.
Tainted services income
Tainted services income is, in very broad terms, income derived from the provision of services by a CFC:
- to an Australian resident, or
- in connection with a permanent establishment in Australia.
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 now in Subdivisions 815-B to 815-D of the ITAA 1997. Under these rules an entity must calculate their Australian tax position as though arm’s length conditions had operated, instead of the actual conditions which gave rise to a transfer pricing benefit.
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.
Unlisted country
An unlisted country means a foreign country which is not a listed country (for Listed countries see attachment A of appendix 1).