Where a taxpayer that makes an election for this new calculation method treatment in relation to a foreign company is an Australian financial institution the rules now provide that the foreign company will be treated as an Australian financial institution subsidiary for the purposes of working out the notional income and deductions [paragraph 559A(3)(c)]
This ensures the CFC rules concerning Australian financial institution subsidiaries may then apply in determining attributable income of the company if the foreign company is carrying on a banking business whose income is principally derived from the lending of money.
The rule to treat the FIF as an Australian financial institution subsidiary applies to both first-tier and second-tier FIFs.[paragraph 559A(3)(c) and (8)(a)] Consistent with the current FIF calculation method rules, it is not possible for a third-tier FIF to be treated as an Australian financial institution subsidiary.
As a consequence of these foreign companies being afforded treatment as an Australian financial institution subsidiary, an amendment has been made to the participation exemption rules in Subdivision 768-G of the ITAA 1997. This amendment provides for similar 'active' treatment in relation to the assets of the foreign company.
The approach of 'superimposing' the controlled foreign company calculation of attributable income on the foreign investment fund calculation method means that the foreign company is not actually a CFC as defined in Part X of the ITAA 1936. Therefore, if a taxpayer chooses to use the CFC rules within the FIF calculation method, the equity interest in the FIF will not be a 'controlled foreign equity entity' for thin capitalisation purposes under Division 820 of the ITAA 1997.
Example
Oz Bank, an Australian financial institution, holds a 20% FIF interest in Sing Co which in turn holds a 50% interest in Malay Hold Co, which in turn holds a 100% interest in Malay Co.
Oz Bank makes a choice under section 559A of the ITAA 1936 in relation to its interest in Sing Co. As Oz Bank is an Australian financial institution, Sing Co is treated as an Australian financial institution subsidiary for the purposes of working out its notional income and notional deductions.
Oz Bank's attribution percentage in relation to Malay Hold Co is 10%, therefore the choice to apply the CFC rules can also be made by Sing Co in relation to Malay Hold Co.
Malay Hold Co itself is treated as an Australian financial institution subsidiary for the purposes of working out its notional income and notional deductions.
Although Oz Bank has an attribution percentage of 10% in Malay Co, as Malay Co is a third-tier FIF a choice to use the calculation method cannot be made by Malay Hold Co. [subparagraph 579(b)(ii)]
For further information about how to calculate attributable income using the CFC rules, refer to Foreign income return form guide 2008–09.