Cash surrender value method

Overview

The cash surrender value method of working out FIF income applies only to FLPs. This method decides whether any FIF income accrues to you from an interest in a FLP by taking into account changes over a 12-month period in the cash surrender value of your interest in the FLP.

Under the cash surrender value method, the amount of the FIF income is decided in two steps. The first step works out the movement in the cash surrender value of the FLP, generally between two annual reporting dates. The second step allows an adjustment for losses of prior years. The result of these calculations is the amount of foreign investment fund income that you must include in your assessable income.

The following information will help you to complete Worksheet 5 Cash surrender value method for FLPs.

Step 1 - Working out the movement in the cash surrender value-boxes A to F

The movement in the cash surrender value of your interests in the FLP which have a cash surrender value at the end of the notional accounting period is worked out as follows. [SECTION 596]

Use the same currency in boxes B to G as you use for the cash surrender value in box A. [SUBSECTION 596(3)]

Box A

Insert the cash surrender value of your interests in the FLP on the last day of the notional accounting period.

Box B

Insert the value of distributions the FLP made to you during the notional accounting period for those interests held on the last day of the notional accounting period.

Boxes C and D

If you disposed of an interest in the FLP during the notional accounting period, insert:

• the amount you received for the disposal, and
• the value of distributions the FLP made to you for that disposed interest.

Box E

Insert the opening cash surrender value of the interest at the commencement of the notional accounting period.

If you used the deemed rate of return method for the same interest in the immediately preceding notional accounting period, use the value determined by that method for the last day of that period.

Box F

Insert the amount you paid or gave for contributions to the interest in the FLP during the notional accounting period.

Box G

Take away the sum of E and F from the sum of A to D. This gives you the FIF amount.

• Gross FIF income

If the FIF amount is positive, it is your gross FIF income from the FLP. [SECTION 598]

• FIF loss

If the FIF amount is negative, a FIF loss has occurred. In certain circumstances, you may use this FIF loss to offset your assessable income in later income years. See chapter 6 Avoiding double taxation. [SECTIONS 533 and 599]

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

This step works out the amount of FIF income. [SECTION 600]

Box H

Insert the total of any unapplied previous FIF losses for your FLP. [SUBSECTION 600(2)]

If it is not already the case, convert the unapplied previous FIF loss to the same currency as the gross FIF income in box G. [SUBSECTION 600(8)]

Unapplied previous FIF losses

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 applying to your interest in a FLP. This is so even if the operative provision did not apply because of any of the exemptions listed on pages 14–15. [SUBSECTION 600(5)]

In working out the unapplied previous FIF losses, the undeducted amount of a FIF loss is that part of a FIF loss that has not been allowed as a deduction from your assessable income in a previous income year. [SUBSECTION 600(6)]

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 600(7)]

Also, in determining the gross FIF income to use to work out the 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 600(5)]

Box I

Take away the amount in H from the amount in G. This will give you your FIF income.

Box J

Convert your FIF income to Australian dollars at the rate of exchange that applies at the end of the relevant notional accounting period. Insert the converted amount at J. [SUBSECTION 600(8)]

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

Boxes K, L and M

If any of the distributions referred to above are payments made by the entity which issued the FLP to you, use K, L and M to arrive at the amount to include in your assessable income.

You must read the next chapter, Avoiding double taxation, as the reduction of your FIF income cannot be more than the total of your FIF income for the current income year. [SECTIONS 530 and 603]