Explanatory Memorandum
(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)Reduction of FIF Income for Distributed Profits
Overview
This Chapter will describe how the amount of FIF income to be included in a taxpayer's assessable income for a notional accounting period of a FIF will be reduced to take account of a distribution of income made by the FIF to that taxpayer during that notional accounting period.
Background
Where a FIF makes a distribution of income during a notional accounting period of the FIF, the attributable taxpayer would, in the absence of specific rules to provide relief, be taxable on the taxpayer's share of the distribution as well as on a share of the FIF income. Section 530 ensures that such double taxation will not arise by reducing the amount of the attributable income of the FIF for that period.
Explanation
The amount of FIF income for a notional accounting period of the FIF that is to be included in the assessable income of a taxpayer under the FIF measures for a year of income is to be reduced by the amount of income distributed by the FIF to the taxpayer during the notional accounting period. The amount to be included under the FIF measures is to be reduced to the extent that the payment was included in the taxpayer's assessable income or was exempt under section 23AJ [subsection 530(1)]. The amount of the reduction of FIF income which is available under subsection 530(1) cannot exceed the amount which would otherwise be included in the taxpayer's assessable income under section 529.
Example
A taxpayer, Ms Thompson, had an interest in a FIF at the end of her year of income and her interest was not exempt from the FIF measures. Ms Thompson used the market value method to determine the amount to be included in her assessable income under the FIF measures for the notional accounting period of the FIF that ended in her year of income. The FIF income calculated under that method was $20,000. The FIF paid an assessable dividend of $10,000 to her on the last day of the FIF's notional accounting period.
Normally, Ms Thompson's FIF income would be $20,000. However, because of subsection 530(1), her FIF income is reduced by the amount of the dividend - that is, from $20,000 to $10,000. The $10,000 dividend would also be included in her assessable income.
A reduction will also be made where the taxpayer has had an amount included in assessable income under section 457. This only applies where the FIF was previously a CFC (refer to Chapter 26 for a description of the operation of 457). [Subsection 530(2)]