Working out the calculated profit or loss of the FIF

To determine the calculated profit or calculated loss of a FIF, first work out the notional income of the FIF.

The second step is to work out the notional deductions for that notional income. If the notional income is greater than the notional deductions, the difference is the calculated profit of the FIF for the notional accounting period. If the notional income is less than the notional deductions, the difference is the calculated loss of the FIF for the notional accounting period. [section 559]

Step 1: Determining the notional income of a FIF - box A

The notional income of a FIF takes into account the gross income and profits or gains of a capital or revenue nature that the FIF derives during its notional accounting period. [subsection 560(1) and section 566]

It includes:

• amounts grossed up for foreign or Australian taxes paid by the FIF
• net income from partnerships
• discounted amounts or deferred interest from securities treated as derived in the FIF accounts
• income, profits or gains reinvested, accumulated, capitalised, carried to a reserve, sinking fund, insurance fund or similar fund on behalf of the FIF. [sections 560 to 566]

Profits of a revenue nature and gains of a capital nature are included in notional income when 'derived' by the FIF, usually as a net amount. The net amount does not include any amount previously taken or subsequently to be taken into account because an amount cannot be deducted twice. [subsections 560(2) and 574(2)]

If a first tier FIF has an interest in another FIF or an FLP - a second tier FIF - during the notional accounting period of the first tier FIF that ended in your income year, an amount of second tier FIF income will be included in the notional income of the first tier FIF. [section 576]

When applying the FIF measures to the second tier FIF, you can elect to use the calculation method to determine its FIF income only if you have elected to use the calculation method for the first tier FIF. The income for the second tier FIF is worked out as though the first tier FIF were a resident but with only the exemption for interests in certain FIFs resident in the United States being granted. No other exemptions available to Australian residents are allowed. [section 575]

If you do not make an election to use the calculation method for the second tier FIF, you must work out the FIF income arising from the second tier FIF using the market value method or the deemed rate of return method. [section 535]

If you elect to use the calculation method for a second tier FIF, the notional income of the second tier FIF will include FIF income from a FIF or an FLP - third tier FIF - in which the second tier FIF has an interest. [section 579]

However, you cannot use the calculation method for a third tier FIF. The notional income of the second tier FIF includes FIF income from a third tier FIF using either the market value method or the deemed rate of return method. [subsection 577(2)]

The notional income of a FIF for a notional accounting period which ended during the income year does not include any dividend or distribution paid to the FIF by another FIF. [section 564]

Step 2: Determining the notional deductions - box B

Most expenses of a FIF are deductible in a notional accounting period in which they are incurred, provided that those expenses relate to income and profits or gains of a revenue or capital nature that has been included when working out the notional income of the FIF. [sections 567 to 574]

Notional deductions include:

• expenditure in acquiring trading stock except acquisition costs of securities, interest in shares, trusts or partnerships which are brought to account on a revenue basis
• the FIF's share of a partnership loss where the FIF was a partner at the end of the partnership's accounting period that ends in the notional accounting period of the FIF
• calculated unapplied losses of the FIF for previous periods used in the order in which they were incurred
• Australian and foreign taxes paid by the FIF that relate to the notional income of the FIF
• amortisation of acquisition costs of plants and articles and industrial properties based on the effective life of such items but only if such an amount is included in the FIF's accounts
• net capital losses but not
  • amounts previously allowed as a notional deduction
  • amounts that would have been allowed as a notional deduction if the calculation method had been applied but was not because, for example, an exemption applied.
   

Notional deductions do not generally include:

• acquisition costs - other than for incidental costs and trading stock
• debt repayments
• expenditure previously allowed as a notional deduction
• amortisation of acquisition of property except plant and equipment, licences and patents.

Working out the attribution percentage for interests in a FIF

Your assessable income must include your attribution percentage of a FIF's calculated profit.

Attribution percentage for interests in a foreign company - boxes E and G

The attribution percentage for your FIF interest is equal to the percentage that you hold or were entitled to acquire at the end of the notional accounting period in:

• the total paid-up share capital of the company
• the total rights to vote or to participate in decision making in relation to
  • distributions of profit or capital of the company
  • the constituent document of the company
  • a variation to the share capital of the company, or
   
• the total rights to distributions of profit or capital on winding-up, or at any other time.

The FIF attribution percentage will be the greatest of the percentages if different percentages arise under the different types of rights described above. [section 581]

Where Australian residents hold or were entitled to acquire attribution percentages which together are greater than 100% for a particular FIF, the total percentage is reduced to 100% and each individual taxpayer's attribution percentage is reduced proportionately. [subsection 581(4)]

Attribution percentage for interests in a foreign trust - boxes E and G

When all the income, profits or gains - referred to below as income - derived by a foreign trust during a notional accounting period consist of either or both:

• income to which beneficiaries were presently entitled
• income to which beneficiaries were not presently entitled, but which was distributed to beneficiaries during, or within two months after the end of, the notional accounting period,

then the attribution percentage is the percentage of the total income derived by the trust to which you were presently entitled or were not presently entitled but which was distributed to you during, or within two months after the end of, the notional accounting period.

If the income, profits or gains of a foreign trust are not fully distributed or allocated to beneficiaries, your attribution percentage will be equal to the greater of the percentages of your interest in or entitlement to acquire:

• the income of the trust, or
• the capital of the trust. [subsection 582(7)]

Where the total of all Australian residents' attribution percentages is greater than 100%, each individual taxpayer's attribution percentage is reduced proportionally so that the total is 100%. [subsection 582(6A)]

Working out the amount to include in assessable income

To work out the FIF income, multiply the calculated profit of a FIF for a notional accounting period by your attribution percentage in the FIF at the end of that period. [sections 580 and 582]

Taxpayer's share of FIF income = calculated profit × attribution percentage

The FIF income is included in your assessable income subject to reduction by certain assessable distributions from the FIF. See Chapter 6: Avoiding double taxation for more information.

Part-year holding

The calculation method allows for an interest in a FIF that you acquired during a notional accounting period. Modify the above formula by multiplying it by the proportion of the number of days throughout the period in which you held the interest.