Market value method

Overview

Under the market value method, the amount of FIF income is decided in two steps. The first step works out the movement in the market value of the FIF interest, generally between two annual reporting dates. The second step allows for the deduction of any previous year's FIF losses if the losses have not been used in an earlier year. Working through these steps gives you the amount of FIF income to include in your assessable income.

The following information will help you to complete Worksheet 1 Market value method.

Step 1 - Working out the movement in the market value [SECTION 538]

Box A

Insert the market value of your interests in the FIF on the last day of the notional accounting period.

Box B

Insert the total value of distributions to you by the FIF during the notional accounting period for the interests held on the last day of the notional accounting period. Where you dispose of an interest in a FIF during the notional accounting period, also include the value of distributions made by the FIF before disposal.

Box C

Insert the opening market value at the beginning of the notional accounting period of the interests held on the last day of the notional accounting period.

Box D

Insert the total cost of any interests in the FIF which you acquired during the notional accounting period and held on the last day of that period.

Usually, you must express the amounts in boxes B, C and D in the currency you used for the amount in box A. [SUBSECTION 538(3)]

However, the market value method provides you with an irrevocable election to use Australian currency in working out all your FIF income. This brings to account currency exchange gains and losses at the time the transactions and values relevant to the determination of FIF income occurred. If you make the election, you must express the amounts in boxes A to D in Australian currency. [SUBSECTIONS 538(4) and (5)]

Exchange rates for FIF values

Use exchange rates applicable on the following days for the market value method	when converting the following to Australian currency
Last day of each relevant notional accounting period for each FIF interest	market value of a FIF interest
Day of each distribution made by a FIF	distribution made by a FIF
Day you acquired the FIF interest	acquisition value of a FIF
Last day of the notional accounting period of the FIF for the relevant income year	excess of FIF income over FIF losses
Last day of the notional accounting period of the FIF in which the loss occurred	FIF loss
Last day of the notional accounting period of the FIF	FIF losses to the same currency as the gross FIF income-not necessarily Australian currency

Box E

Take away the sum of C and D from the sum of A and B. This is the FIF amount.

• Gross FIF income

If the FIF amount is positive, that amount represents the gross FIF income of the FIF as it relates to you. [SECTION 540]

• FIF loss

If the FIF amount is negative, a FIF loss has occurred. This FIF loss may be used to offset your assessable income, but only to the extent that you have previously been subject to FIF taxation from that FIF-that is, to the extent that you have a FIF attribution surplus in relation to that FIF.

Where there is no FIF attribution surplus the FIF loss must be carried forward to be applied against future gross FIF income of that FIF. You cannot use a FIF loss in relation to one FIF to reduce the gross FIF income of another FIF. [SECTIONS 532 and 541]

Step 2 - Working out the amount to include in assessable income

Box F

Insert the total of any unapplied previous FIF losses. [SUBSECTION 542(2)]

If it is not already the case, you must convert the unapplied previous FIF loss to the same currency as the gross FIF income-that is, the amount in box E. [SUBSECTION 542(8)]

Unapplied previous FIF loss

An unapplied previous FIF loss is the amount by which the undeducted amount of a foreign investment fund loss is more than the sum of any gross FIF income from your interest in a particular FIF. [SUBSECTION 542(6)]

The undeducted amount of a FIF loss referred to above is the amount of a FIF loss that has not been allowed as a deduction from your assessable income. [SECTION 532 and SUBSECTION 542(6)]

You may include losses that arose in relation to the FIF even though one of the following FIF exemptions applied:

• an attributable taxpayer
• a foreign company engaged in active business
• a foreign bank
• a life insurance company
• a general insurance company
• certain companies engaged in commercial activities associated with real property
• small investors
• employer-sponsored superannuation.

Once you have used a FIF loss to work out if there was, for any notional accounting period, an unapplied previous FIF loss, you cannot use that loss again in later notional accounting periods. [SUBSECTION 542(7)]

In working out your unapplied previous FIF losses, apply only that gross FIF income accruing after the notional accounting period in which you incurred the loss and before the current notional accounting period in which you have a gross FIF income. [SUBSECTION 542(5)]

Box G

Take away the amount in F from the amount in E. This gives you your FIF income.

Box H

Convert your FIF income to Australian dollars at the rate of exchange applying at the end of the relevant notional accounting period. Insert the converted amount at H.

The amount at H is your FIF income. Include it in your assessable income after allowing for a reduction for assessable distributions from the FIF. Read chapter 6 Avoiding double taxation for more information.

Boxes I, J and K

If any of the distributions referred to above are dividends, interest payments or trust distributions, or your FIF interest relates to shares acquired under an employee acquisition scheme - see Reduction of FIF income for FIF interests acquired under an employee share scheme - use I, J and K to arrive at the amount to include in your assessable income. [SECTIONS 530, 530A and 603]

If you are entitled to a reduction of FIF income, add the amount of the reduction to any amount at J.

Determining market value

You determine market value by referring to the quoted market values for the FIF interests. Only quotations from an approved stock exchange will be accepted. See appendix 1 Approved stock exchanges. [SECTION 539]

For FIFs that are not listed on an approved stock exchange, you may use

• a buy-back, offer or redemption price, or
• the price of an offer to purchase a particular FIF by an associate of that FIF.

The buy-back, offer or redemption price must be:

• publicly available
• offered to all persons having an interest of that class in the FIF
• worked out by reference to the market value of the assets of the company or trust
• of an amount that independent parties would accept.

Worksheet 1 Market value method will help you to understand the following examples.

 

Deemed rate of return method

You may use this method where you cannot apply the market value method.

The following four steps will help you to complete Worksheet 2 Deemed rate of return method for FIFs.

Step 1 - Group your interests

Apply the deemed rate of return method separately to each group of interests. Determine the group or groups of interests you hold in a FIF at the end of the FIF's notional accounting period. [SECTION 544]

Meaning of a group of interests in a FIF

If you had only one interest in a FIF during the notional accounting period, that interest is a group. [SUBSECTION 544(2)]

Interests in a FIF that are of the same class-for example, two parcels of class A shares-and which you held during the same period, are treated as a group of interests. However, if interests are of different classes-for example, class A and B shares with different rights-you would treat each class as a separate group. Shares of the same class which are not held for the same period during the FIF's notional accounting period also form different groups. If you had two or more interests in a FIF that are not of the same group of interests, apply the deemed rate of return method separately to each group. [SUBSECTIONS 544(3), (4) and (5)]

Step 2 - Working out the opening value-box A

This step determines the opening value of your interest in the FIF at the beginning of the notional accounting period.

Opening value where the interests in a FIF were acquired during a notional accounting period

If you acquired the interests in a FIF during the notional accounting period, the opening value of the interests is the consideration you paid or gave for the acquisition. [SECTION 554]

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

Where you applied the deemed rate of return method to a group of FIFs in the immediately previous notional accounting period, work out the opening value of the FIF for the current period as follows:

• use the opening value of the group of FIFs at the beginning of the previous period
• add the FIF income for the previous notional accounting period
• take away any distributions made by the FIF in the previous notional accounting period. [SECTION 551]

Distributions include any amount paid or credited or property distributed to you by the FIF, either as income or capital. They include the issue to you of further interests in the FIF in lieu of your entitlement to a payment by the FIF.

Distributions do not include the issue to you of further interests where you do not pay consideration or forgo payment in exchange for those further interests. [SECTION 474]

Opening value where the market value method applied in the previous year

If the market value method applied in the immediately previous notional accounting period, the opening value for the current year is the market value of the interest in the FIF at the end of that period. [SECTION 553]

Opening value where the calculation method or an exemption applied in the previous year

Where the calculation method or an exemption from FIF taxation applied or the operative provision did not apply in the immediately previous notional accounting period, use one of the following methods to decide the opening value for the current period.

• Where the FIF interest was quoted on an approved stock exchange at any time during the immediately previous notional accounting period, use the quoted price for the latest day of that period as the opening value for the current period.
• If the FIF interest was not quoted on an approved stock exchange on the last day of the previous notional accounting period, begin with the original consideration paid and apply the deemed rate of return notionally to every notional accounting period, from the date of acquisition up to the immediately previous notional accounting period. This determines an opening value for the current period. [SECTION 552]

Previous year losses

When you switch to the deemed rate of return method, the legislation does not allow you to apply previous year FIF losses that you accumulated under either the calculation method or the market value method.

Step 3 - Working out the FIF amount-box C

Once the opening deemed value has been decided, the FIF amount-that is, the movement in the value of the FIF during the notional accounting period-is worked out by applying the following formula.

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

Opening value means the amount worked out in Step 2 above.

Deemed rate of return is the same interest rate as the 'basic statutory interest rate' plus 4% [section 555(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 section 8AAD(2) of TAA 1953].

The interest rate is published by the Reserve Bank of Australia every quarter. If 2 or more rates apply in the 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 group.

Step 4 - Determining the amount of FIF income to include in assessable income

The final step in applying the deemed rate of return method is to convert the FIF amount to Australian currency. [SECTIONS 556 and 557]

Use the rate of exchange that applied at the end of the notional accounting period to convert the FIF amount worked out in step 3 for each group of interests to the corresponding amount in Australian currency. If there is only one group of interests, the FIF income will be the amount converted into Australian currency. If there is more than one group, the FIF income will be the total of the FIF amounts. [SECTION 556]

Include the FIF income in your assessable income subject to reduction by certain assessable distributions from the FIF. [SECTIONS 529 and 557] See Reduction of FIF income for distributed profits for more information.

Calculation method

Overview

This method requires you to work out the calculated profit or calculated loss of a FIF for a notional accounting period. You will need access to detailed information about your FIF interest. The calculation method uses a simplified version of our taxation law to work out the profit of your FIF which is then attributed to you and included in your assessable income. The calculation method applies to foreign companies and foreign trusts. [SECTIONS 580 and 582]

If there is a calculated loss, you may carry your share forward and take it into account for subsequent notional accounting periods. If there is a calculated profit, you must determine your share. You do this by multiplying the calculated profit of the FIF for the notional accounting period by your percentage interest in the FIF at the end of that period. Work out the calculated profit or loss in the currency of the FIF accounts and then convert the amount to Australian currency at the exchange rate that applies for the last day of the notional accounting period. Include the resulting amount in your assessable income for the income year in which the notional accounting period of the FIF ends. [SECTIONS 572, 558 and 559]

Worksheet 3 Calculation method will help you to work out your calculated profit or loss.

Election to use the calculation method

You can use the calculation method only if you elect to do so. You must then apply it to all interests in a particular FIF. If you subsequently use another method for the same FIF interests, you cannot use the calculation method again for that FIF or any interests you acquire in that FIF in the future. [SECTION 535]

Where you make an election to use the calculation method, you must also elect to use the period for which the FIF makes out its accounts as its notional accounting period. [SUBSECTIONS 486(3) and 535(5)]

The first notional accounting period of the FIF for which you use the calculation method may be for a shorter period than the period for which the FIF makes out its accounts. In this case, you will work out FIF income for the entire period for which the FIF makes out its accounts and apportion the resulting FIF income on a time basis.

Working out the calculated profit or loss of the FIF

In determining the calculated profit or calculated loss of a FIF, you must 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]

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:

• 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)]

Where a FIF-first tier FIF-has an interest in another FIF or a FLP-second tier FIF-an amount of second tier FIF income will be included in the notional income of the first tier FIF. [SECTION 576]

In applying the FIF measures to the second tier FIF, you can elect to use the calculation method to determine its FIF income. 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]

Where 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 a FLP-third tier FIF-in which the second tier FIF has an interest. [SECTION 579]

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]

Where you elect to use the calculation method for a second 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. You cannot use the calculation method for a third tier FIF. [SUBSECTION 577(2)]

Determining the notional deductions-box B

Certain 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 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
• calculated unapplied losses of the FIF for previous periods used in the order in which they were incurred
• taxes paid by 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 brought to account as incurred
• 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.

Where different percentages arise under the different types of rights described above, the FIF attribution percentage will be the greatest of these percentages. [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, then 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
• the capital of the trust.

Where the total of all Australian residents' attribution percentages are 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.