Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 3 - Attributable income of controlled foreign companies
Outline of chapter
3.1 Schedule 3 to this bill amends Part X of the ITAA 1936 to better target those amounts that are included in the notional assessable income of a CFC resident in a broad-exemption listed country. Certain amounts will no longer be included in a CFC's notional assessable income, unless the amounts are also of a kind specified in the regulations. This chapter explains the amendments. Context of amendments
3.2 The CFC rules include in the taxable income of an Australian taxpayer, the taxpayer's share of specified income of non-resident companies in which they have a controlling interest. The income that is targeted for attribution to taxpayers is income that can readily be shifted by taxpayers to non-resident companies to take advantage of any lower overseas taxation.
3.3 For CFCs resident in broad-exemption listed countries (currently Canada, France, Germany, Japan, New Zealand, the United Kingdom, and the United States of America) a narrower range of income is attributable. These countries have comparable income tax regimes to Australia, which significantly reduces the scope to avoid tax.
3.4 While a narrower range of income is attributable for CFCs in broad-exemption listed countries, various general categories of income (e.g. royalties and certain foreign source amounts) remain attributable subject to the application of various tests. These categories and tests were introduced in 1991, when the number of countries treated like broad-exemption listed countries was over 60. The large number of countries made precise identification of attributable income difficult.
3.5 As part of the Government's response to the Board of Taxation's report to the Treasurer, the Government will amend the ITAA 1936 and the Income Tax Regulations 1936 to further reduce the categories of income attributable in respect of CFCs resident in broad-exemption listed countries. This will be done by more precisely identifying the types of income that give rise to significant revenue risk. While this will primarily be achieved by future changes to the regulations (not covered in this bill), the amendments in Schedule 3 complement those intended changes. The changes will reduce compliance costs and improve the commercial flexibility of CFCs resident in broad-exemption listed countries. Summary of new law
3.6 The amendments in this Schedule reduce the scope of income attributable in respect of CFCs resident in broad-exemption listed countries, subject to a safeguard that allows amounts to remain attributable if identified in the regulations.
3.7 The amendments apply to statutory accounting periods of CFCs beginning on or after 1 July 2004.
| New law | Current law |
|---|---|
| The notional assessable income of a CFC resident in a broad-exemption listed country is calculated taking into account certain foreign source amounts only if those amounts are of a kind specified in regulations. | The notional assessable income of a CFC resident in a broad-exemption listed country is calculated taking into account certain foreign source amounts. |
Detailed explanation of new law
3.8 A CFC's attributable income is calculated on a notional basis using the rules for calculating the taxable income of an Australian resident company, subject to some modifications and exemptions. The notional assessable income of a CFC depends on whether the CFC is resident in a broad-exemption listed country or elsewhere.
3.9 If a CFC is resident in a broad-exemption listed country, a greater range of otherwise notional assessable income is exempt from attribution. One category of notional assessable income that remains subject to attribution relates to foreign source amounts that are not eligible designated concession income and pass certain tests, whether derived directly or through a partnership (subparagraphs 385(2)(a)(ii) and (d)(ii)).
Limiting the inclusion of foreign source amounts in attributable income
3.10 While these foreign source amounts can potentially give rise to attributable income in a wide range of circumstances, in practice this is unlikely to occur. For example, even where a CFC resident in a broad-exemption listed country derives a relevant foreign source amount, it is not attributable if subject to certain foreign taxes. However, taxpayers can still incur compliance costs to confirm that there is no such attributable income. The amendments remove the need for taxpayers to consider such amounts, except those, if any, specified in regulations. [Schedule 3, item 1, subparagraphs 385(2)(a)(ii) and (d)(ii)]
3.11 The ability to identify in regulations income amounts that should still be attributable is a revenue safeguard (e.g. in the case where a broad-exemption listed country changes its tax system in a way that opens up tax avoidance opportunities for Australian taxpayers). In most cases, though, income of concern is likely to be attributable under other provisions (e.g. as eligible designated concession income under subparagraphs 385(2)(a)(i) and (d)(i)).
Application and transitional provisions
3.12 The amendments apply to statutory accounting periods of CFCs beginning on or after 1 July 2004. [Schedule 3, item 2]
3.13 The statutory accounting period of a CFC is, in general, each 12-month period ending 30 June. However, a CFC can elect for its statutory accounting period to end on a different date. The attributable income of a CFC, in respect of a particular statutory accounting period, is included in the assessable income of relevant Australian taxpayers in the year of income in which the statutory accounting period ends.