Methods of taxation applicable to FLPs

You must work out FIF income for an interest in a FLP using either:

• the deemed rate of return method, or
• the cash surrender value method.

Choosing the taxation method

The deemed rate of return method is applied to your interest in a FLP unless you elect to use the cash surrender value method. [subsections 536(1) and (2)]

If you elect to use the cash surrender value method, you must also elect to use a notional accounting period for the FLP that coincides with the period for which the cash surrender values are available. [section 487 and subsection 536(3)]

An election to apply the cash surrender value method is irrevocable. [subsections 487(3) and 536(5)]

Deemed rate of return method

The deemed rate of return method for FLPs is similar to the deemed rate of return method for FIFs. Four steps are used to work out your FIF income.

The following information will help you to complete Worksheet 4: Deemed rate of return method for FLPs.

Step 1: Interests in a FLP

Determine whether you have one or more interests in the FLP during a notional accounting period.

If you acquired interests in the same FLP at different times during a notional accounting period, you must apply the deemed rate of return method separately for each interest for the period from when you acquired it. [section 585]

Step 2: Working out the opening value - box A

This step decides the opening value of the FLP.

If you had the interest in the FLP at the beginning of a notional accounting period, the opening value is the value on the day before the first day of the period.

Opening value where the deemed rate of return method has been applied in the previous year

If you used the deemed rate of return method in the immediately preceding notional accounting period, work out the opening value as follows.

• Determine the deemed value of the FLP at the commencement of the preceding notional accounting period.
• Add the FIF income of the FLP for its preceding notional accounting period.
• Add the value of any premiums paid during the preceding notional accounting period.
• Take away any distributions the FLP made in the preceding notional accounting period. [sections 586 and 590]

Opening value where the interest is acquired during the notional accounting period

If you acquired the interest in the FLP during a notional accounting period, the opening value is its cost if you paid the full consideration. In any other case, the opening value is the amount of the first premium paid. [paragraph 586(b) and section 591]

Note:

• There are special rules for working out the opening value in the first operative year of the measures - that is, 1 January 1993 to 30 June 1993. [section 588]
  
• There are also special rules when reverting to the deemed rate of return method following the application of the cash surrender method. [subsections 536(8) to (9)]

Step 3: Working out the movement in the value of the FLP - box C

Once you have determined the opening deemed value, work out the FIF amount - that is, the movement in the value of the FLP - by applying the following formula. [section 592]

Opening value × deemed rate of return × (number of days held ÷ 365)

Opening value is the amount determined in step 2.

Deemed rate of return is the same interest rate as the 'basic statutory interest rate' plus 4%. [subsection 592(2)]

The basic statutory interest rate is the monthly average yield of the 90-day bank accepted bill rate [section 214A of ITAA 1936 and subsection 8AAD(2) of the Taxation Administration Act 1953]. The interest rate is published by the Reserve Bank of Australia every quarter. If two or more rates apply in the relevant income year, use the weighted average of those rates.

Number of days held is the number of days in the notional accounting period in which you had the interests in the FLP.

Step 4: Working out the amount to include in assessable income - box D

The final step in applying the deemed rate of return method is to convert the FIF amount to Australian currency.

Use the rate of exchange that applied at the end of the notional accounting period to convert each FIF amount in box C to FIF income in Australian currency. [sections 593 and 594]

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