House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)

Attribution accounts - General

Overview

This chapter deals with the prevention of potential Australian double taxation that could arise where, after having been subject to FIF taxation under these measures, a taxpayer later:

eceives a distribution of income and/or gains from a FIF of FLP; or

isposes of the interest in a FIF or FLP.

The system of attribution accounts described in this chapter is similar in its operation to the CFC attribution accountsystem in Divisions 4 and 5 of Part X of the Principal Act.

The Chapter does not deal with cases where the FIF measures apply in the calculation of the attributable income of a CFC under existing Part X, or the calculation of the net income of a foreign trust for the purposes of the existing Division 6 or Division 6AAA of the Principal Act. These cases are dealt with in Chapters 25, 26 and 27.

Background to the taxation of distributions

Taxation of dividends received from foreign companies

Under the Principal Act, a dividend paid by a foreign company directly to a resident taxpayer is generally included in the assessable income of the taxpayer. The three exceptions to this rule are:

ividends paid to any taxpayer where the dividend is paid out of profits that have been previously attributed to that taxpayer under the CFC measures;

ividends paid by a company resident in a listed country to an Australian company that has a non-portfolio interest (with at least 10 per cent of the voting interest) in the foreign company; and

ividends paid by a company resident in an unlisted country to an Australian company that has a non-portfolio interest in the foreign company. This applies only to the extent that the dividend is paid out of profits that have been taxed in Australia or are comparably taxed in a listed country.

Taxation of distributions from foreign trusts

Under the Principal Act, the foreign income and gains of a foreign trust may be taxed when:

taxpayer is presently entitled to a share of the net income of the trust estate; or

n amount is paid to the taxpayer or applied for the benefit of the taxpayer out of certain income of the trust of the current, or a previous, year of income that has not been subject to Australian tax by assessment.

Objectives of the legislation

Relief from double taxation

(i) Exemption of distributions

A distribution made by a FIF or FLP to a taxpayer will be exempt to the extent that the distribution was paid out of profits which were previously attributed to the taxpayer.

(ii) Reduction of consideration on disposal of a FIF interest

The disposal consideration of a taxpayer's interest in a FIF or FLP will be reduced by the amount of any profits retained in the FIF or FLP at the time of disposal that have been previously included in the assessable income of the taxpayer under the FIF measures.

(iii) Adjustments in relation to FIF losses that have been used to reduce other assessable income

The amount of the previously taxed profits of a FIF or FLP that are available to exempt distributions from the FIF or FLP or to adjust the consideration on disposal the FIF or FLP interest are to be reduced to the extent that any FIF or FLP losses were used by the taxpayer to offset other assessable income.

FIF attribution accounts

For the purposes of (i), (ii) and (iii) above, a taxpayer will need to keep records of:

ncome attributed to the taxpayer from a FIF or FLP;

ncome distributed to the taxpayer by a FIF or FLP either directly or through interposed entities;

he amount of any reduction of consideration the taxpayer can claim on disposal of an interest in the FIF or FLP; and

he amount of any deduction the taxpayer claims because of a FIF loss.

These records are called " FIF attribution accounts".

FIF attributed tax accounts

In addition to FIF attribution accounts, taxpayers who have claimed a foreign tax credit at the attribution stage (only certain taxpayers using the calculation method to determine the FIF income of a FIF will be able to do this) for tax paid by the FIF will need to maintain " FIF attributed tax accounts". These accounts are maintained in order that the foreign tax credit that is normally allowed on a distribution of profits which have been subject to tax under the FIF measures is reduced by the tax credit which the taxpayer was able to claim when those profits were attributed to the taxpayer.

Explanation

Terminology

Explanations of the terms " FIF attribution accountpayment", " FIF attribution surplus", " FIF attribution credit", " FIF attribution debit" and " FIF attribution accountpercentage" used in relation to FIF attribution accounts are given below.

FIF attribution accountpayments

FIF attribution accountpayments include:

a)

dividend paid by a company to a shareholder;

b)

n amount of interest paid to the noteholder on a convertible note;

c)

partner's share of the net income of a partnership of the year of income;

d)

beneficiary's share of the net income of a trust estate of the year of income;

e)

n amount included in the assessable income of a beneficiary under section 99B during the year of income in relation to a distribution made by a trust estate;

f)

n amount of the income, profits or gains of the trust estate on which the trustee would be assessable under section 99 or 99A; and

g)

payment made by the person who issued a FLP to a person who has an interest in the FLP. [Section 603]

When are FIF attribution accountpayments made?

To calculate the taxpayer's exemption, the taxpayer will also need to know when the FIF attribution accountpayments are taken to have been made. The following table sets out:

he types of FIF attribution accountpayments that can occur along the chain of entities between the FIF and the taxpayer;

he entities that are treated as making and receiving a FIF attribution accountpayment; and

he time when the payment is taken to be made.

Timing of FIF attribution payments

FIF attribution surplus

The surplus in a FIF attribution accountat the time of a FIF attribution accountpayment is the excess of the credits (called ' FIF attribution credits') over the debits (called ' FIF attribution debits') in that account. [Section 604]

FIF attribution credits

A FIF attribution credit arises for a taxpayer if an amount is included in the taxpayer's assessable income under the FIF measures in relation to a FIF or FLP.

A FIF attribution credit will also arise for a FIF attribution account entity (that is, a company that is not a resident of Australia, a partnership, a trust or a FLP [section 601] ) in relation to a taxpayer if it receives a FIF attribution accountpayment which gives rise to a FIF attribution debit for another FIF attribution account entity in relation to the taxpayer. [Paragraph 605(1)(d)]

Normally, the amount of the FIF attribution credit is equal to the amount included in the assessable income of the taxpayer under the FIF measures or the amount of the FIF attribution debit which arises for the other FIF attribution account entity [subsection 605(2)]. Special rules apply for determining the amount of the FIF attribution credit which arises where the taxpayer holds an interest in a FIF or FLP through an Australian partnership or Australian trust or if the taxpayer uses the calculation method to determine the foreign investment fund income of a FIF which has an interest in another FIF or FLP. These special rules are discussed later.

FIF attribution debits

A FIF attribution debit arises for a FIF attribution account entity in relation to a taxpayer where:

he entity makes a FIF attribution account payment to the taxpayer or to a FIF attribution account entity in which the taxpayer has an interest; and

mmediately before the payment is made, the entity making the FIF attribution accountpayment has a FIF attribution surplus in relation to the taxpayer. [Subsection 606(1)]

The FIF attribution debit arises when the FIF attribution accountpayment was made [subsection 606(3)]. The amount of the FIF attribution debit is the lesser of the FIF attribution surplus and:

f the FIF attribution accountpayment was made to the taxpayer, the FIF attribution accountpayment; or

n any other case, the taxpayer's FIF attribution accountpercentage of the FIF attribution accountpayment. [Subsection 606(2)]

FIF attribution accountpercentage

A taxpayer's FIF attribution accountpercentage in a FIF attribution account entity is the interest the taxpayer has directly or indirectly through one or more interposed FIF attribution accountentities in the income or profits of the entity. [Section 602]

FIF attribution accounts specific to each taxpayer

The FIF attribution accountmaintained by the taxpayer for a FIF or FLP is specific to the taxpayer. For instance, if a taxpayer sells the shares comprising the taxpayer's interest in a FIF, the taxpayer cannot transfer the FIF attribution accountsurplus to the purchaser of the shares. Consequently, the purchaser of the shares cannot use the vendor's FIF attribution surplus to receive exempt distributions from the FIF.

Examples showing the operation of FIF attribution accounts where a taxpayer holds an interest in a FIF directly

Example 1

Assume that a resident individual (Ms Smith) has an interest in a foreign company (Forco) that is not a CFC. Forco's notional accounting period ends on 30 June, as does the taxpayer's year of income. In the year ended 30 June 1994, Ms Smith had FIF income in respect of Forco of $5,000. The $5,000 would be included in Ms Smith's assessable income under section 529.

In this case, Ms Smith will be exempt in respect of the next $5,000 of dividends paid by Forco. To achieve this, Ms Smith would credit the FIF attribution accountin respect of Forco with the $5,000 at the end of the notional accounting period of Forco as follows:

Ms Smith's FIF attribution account(Forco)
	30.6.94 Attribution $5,000

Example 2

Assume that in the year ended 30 June 1995, Ms Smith's FIF income in respect of the interest in Forco was $4,000 and that on 31 December 1994, Forco paid a dividend of $3,000 to Ms Smith.

The dividend is a FIF attribution accountpayment at the time the dividend is paid. Ms Smith would debit the FIF attribution accountin respect of Forco with the $3,000 at the time the dividend was paid as follows:

Ms Smith's FIF attribution account(Forco)
31.12.94 Dividend $3,000	30.6.94 Attribution $5,000

The $3,000 dividend received by Ms Smith would be exempt income. The $4,000 FIF income in respect of Ms Smith's interest in the FIF would be included in her assessable income under section 529. Ms Smith would credit the FIF attribution accountin respect of Forco with $4,000 at the end of the notional accounting period of Forco as follows:

Ms Smith's FIF attribution account(Forco)
31.12.94 Dividend $3,000	30.6.94 Attribution $5,000
	30.6.95 Attribution $4,000

Example 3

Assume that on 30 June 1996, Forco paid a dividend to Ms Smith of $7,000 and that there was no FIF income in that year. Ms Smith would debit the FIF attribution accountwith $6,000 (the lesser of the dividend and the surplus in the account) at the time the dividend was paid.

Ms Smith's FIF attribution account(Forco)
31.12.95 Dividend $3,000	30.6.94 Attribution $5,000
balance $6,000	30.6.95 Attribution $4,000
30.6.96 Dividend $6,000	31.12.95 Surplus $6,000

The excess of the amount of the dividend over the amount debited to the FIF attribution account($1,000) would be included in Ms Smith's assessable income.

Attribution to an Australian partnership or trust

It could also be the case that the taxpayer was a beneficiary of an Australian trust or a partner in an Australian partnership and the FIF income was attributed indirectly to the taxpayer because of the interest in the partnership or trust.

As mentioned, the FIF attribution accounts are specific to a particular taxpayer. In line with this treatment, where the FIF or FLP attribution is to an Australian partnership or an Australian trust, the FIF attribution credit does not attach to the partnership or the trust. Instead, the FIF attribution credit attaches to the person paying the tax - that is, the partner, the beneficiary or the trustee (as the case may be). Where there are multiple trusts or a chain of partnerships and trusts, the credit attaches to the person who ultimately pays the tax. [Subsection 605(8)]

This is achieved using the concept of a 'tax detriment'. A tax detriment is the effect on the assessable income of a person of the inclusion of an amount in the net income of an Australian partnership or an Australian trust. [Section 478]

Where there is such a tax detriment, a FIF attribution credit that arises because of FIF or FLP attribution does not arise to the Australian partnership or the Australian trust [subsection 605(8)]. The credit will instead arise to the partner, beneficiary or trustee and it will arise at the same time that the credit would have arisen to the partnership or trust. [Paragraph 605(8)(d)]

The above treatment does not apply to:

a)

esident public unit trusts; and

b)

esident trusts that are not subject to the general trust provisions in Division 6 of the Principal Act - that is, corporate unit trusts, public trading trusts and eligible entities within Part IX of the Act.[Subsection 605(11)]

For these trusts, the trustee receives the FIF attribution credit rather than the beneficiaries.

When the FIF or FLP subsequently makes a distribution to the Australian partnership or Australian trust, the taxpayer debits the FIF attribution accountby the taxpayer's share of that distribution. That share is worked out by multiplying the amount of the distribution by the taxpayer's FIF attribution percentage in the Australian partnership or trust receiving the distribution. The FIF attribution percentage is the percentage of the taxpayer's entitlement to the income or profits of the Australian partnership or Australian trust.

FIF Attribution credits for partners and beneficiaries

Example of the operation of FIF attribution accounts where a taxpayer holds an interest in a FIF through a trust

Example 4

Assume two residents, Mr and Mrs Smith, are equal beneficiaries in a trust (Austrust) that is a resident of Australia. The trust deed gives the beneficiaries present entitlement, in equal proportions, to Austrust's income. Assume that Austrust has an interest in a foreign company (Forco) that is not a CFC. Forco's notional accounting period ends on 30 June, as do Austrust's and Mr and Mrs Smith's years of income. In the year ended 30 June 1994, Austrust had FIF income in respect of Forco of $5,000, plus other income of $2,000. The trust incurred no expenses. In addition to the $2,000 other income, the $5,000 FIF income from Forco would be included in the calculation of Austrust's net income under section 95 of the Principal Act. The assessable income of each of Mr and Mrs Smith would include $3,500 in respect of Austrust, being half of the net income of $7,000. There is a tax detriment for Mr and Mrs Smith by virtue of FIF income being included in the calculation of Austrust's net income.

In this case, Mr and Mrs Smith will each be exempt in respect of the next $2,500 of dividends paid by Forco. There would be no FIF attribution credit for Austrust in respect of the FIF.

In order to gain the exemption for subsequent distributions, Mr Smith would credit his FIF attribution accountin respect of Forco with the $2,500 as follows:

Mr Smith's FIF attribution account(Forco)
	30.6.94 Attribution $2,500
(Note that a similar set of accounts would be kept by Mrs Smith.)

Assume that in year two, Austrust had no FIF income and that during the second notional accounting period, Forco paid a dividend of $3,000 to Austrust on 31 December 1994. The trust had no other income or deductions.

The dividend would give rise to a FIF attribution accountpayment at the time the dividend is paid. Mr Smith would debit the FIF attribution accountin respect of Forco with his share of the dividend - that is, the amount calculated by multiplying the dividend paid by Forco by Mr Smith's FIF attribution accountpercentage in Austrust. The result will be a debit of $1,500 (50% x $3,000) as follows:

Mr Smith would also open a FIF attribution accountfor Austrust as follows:

In calculating the net income of Austrust, the dividend would be included in that calculation - that is, the net income of Austrust would be $3,000 (assuming that it did not derive any other income).

Mr Smith's share of that net income would be $1,500. This amount is a FIF attribution accountpayment from Austrust to Mr Smith. Therefore, Mr Smith would, at the end of the Austrust's year of income, debit his FIF attribution accountfor Austrust by the lesser of the payment and the surplus as follows:

In determining the amount to be included in Mr Smith's assessable income, the share of the net income of Austrust ($1,500) would be reduced by the amount of the debit to his FIF attribution accountfor Austrust ($1,500). In respect of Austrust, no amount would be included in assessable income.

FIF attribution credit for FIF income where a FIF has an interest in another FIF

Under the calculation method, an interest held by a FIF (the interposed FIF) in another FIF or FLP is taken into account when calculating the notional income of the interposed FIF. A FIF attribution credit may arise for an interposed FIF in relation to a taxpayer because an amount of FIF income is included in a taxpayer's assessable income under section 529. To the extent that the credit arises as a result of the interposed FIF's interest in another FIF or a FLP, the credit will be made to the FIF attribution accountof the other FIF or the FLP [subparagraph 605(1)(b) and subsection 605(3)]. The credit will arise at the end of the notional accounting period of the other FIF or the FLP. [Paragraph 605(7)(b)]

A formula is provided for determining the amount of the FIF attribution credit which will arise for the FIF or FLP (the "eligible entity") held by the interposed entity under paragraph 605(1)(b) [subsection 605(3)]. The formula helps to determine how much of the FIF income included in a resident taxpayer's assessable income comes from the lower tier FIF or FLP. The formula is as follows:

(FIF income x Section 529 amount) / Notional income
In the formula:

' FIF income' means the amount of the foreign investment fund income of a FIF which is referable to an interest held in the eligible entity;

'Section 529 amount' means the amount included in the taxpayer's assessable income under the FIF measures in relation to the FIF which has an interest in the eligible entity;

' Notional income' means the notional income of the FIF which has an interest in the eligible entity.

The above formula is to be applied to each FIF or FLP in which the interposed FIF has an interest. Further, the FIF attribution credit which would otherwise arise for the interposed FIF under paragraph 605(1)(a) is to be reduced by the sum of the amounts of the FIF attribution credits which arise under subsection 605(3) for FIFs and FLPs in which the interposed FIF has an interest. [Subsection 605(5)]

Example 5

A resident company taxpayer (Ausco) has a 10 per cent interest in FIF1 and FIF1 has a 25 per cent interest in FIF2.

Assume that Ausco uses the calculation method to determine the FIF income of FIF1. Under that method, FIF1 is calculated to have derived $50,000 profits, not including an increase in the unrealised value of its shares in FIF2 of $100,000. Assuming Ausco uses the market value method to calculate FIF1's interest in FIF2, the FIF income of FIF1 will be $150,000 ($50,000 + $100,000).

Consequently, Ausco will be taxed under the FIF measures on its share of the $150,000 profits of FIF1, that is, $15,000 (10% x $150,000).

Calculation of the FIF attribution credit which arises for FIF2

The FIF attribution credit which arises for FIF2 in relation to the Ausco is calculated as follows:

$100,000 (FIF2 income) x $15,000 (Section 529 amount) / $150,000 (Notional income) = $10,000


This formula is used to calculate how much of the amount included in Ausco's assessable income because of its interest in FIF1 is referable to FIF1's interest in FIF2.

Calculation of the FIF attribution credit which arises for FIF 1

The FIF attribution credit which arises for FIF1 in relation to Ausco would be $15,000 if not for the FIF attribution credit which arises for FIF2. However, FIF1's FIF attribution credit is to be reduced by the amount of the credit which arose for FIF2. Consequently, only a FIF attribution credit of $5,000 (that is, $15,000 - $10,000) will arise for FIF1 in relation to Ausco.

FIFs held by a second tier FIF

Separate FIF attribution accounts are required to be maintained by a taxpayer for each FIF or FLP held by the taxpayer through a second tier FIF if the calculation method is used to determine the attributable income of the second tier FIF.

These accounts are required to allocate the FIF income that was included in the taxpayer's assessable income to the different FIFs or FLPs in the chain of FIFs and FLPs.

An attribution credit will arise for a FIF or FLP (referred to in section 605 as the "eligible entity") if all of the following conditions are satisfied:

i)

n amount was included in a taxpayer's assessable income under section 529 ("the section 529 amount") in relation to a FIF ("the first tier FIF"); [Subparagraph 605(1)(c)(i)]

ii)

hat amount is referable to another amount which was included in the notional income of the first tier FIF under section 576 because the first tier FIF had an interest in another FIF attribution account entity ("the second tier FIF"); [Subparagraph 605(1)(c)(ii)]

iii)

he section 576 amount was calculated by reference to an amount that under section 579 ("the section 579 amount") was included in the notional income of the second tier FIF because the second tier FIF had an interest in the eligible entity (that is, the FIF or FLP for which the FIF attribution credit will arise under paragraph 605(1)(c)). [Subparagraph 605(1)(c)(iii)]

The diagram on the next page illustrates the entities in a chain of FIFs to which the terms used in paragraph 605(1)(c) relate.

Amount of credit arising for the eligible entity

The following formula is to be used to determine the amount of the FIF attribution credit which will arise for the eligible entity under paragraph 605(1)(c): [Subsection 605(4)]

FIF income x Section 529 amount / Notional income of the first tier FIF
In the formula:

" FIF income" means the amount worked out using the formula:

Section 579 amount x Section 576 amount / Notional income of the second tier FIF
where:

"Section 579 amount" means the amount included in the notional income of the second tier FIF under section 579 because of an interest it holds in the eligible entity;

"Section 576 amount" means the amount included in the notional income of the first tier FIF under section 576 because of the interest it holds in the second tier FIF;

"Notional income of the second tier FIF" means the notional income of the second tier FIF for the notional accounting period of the second tier FIF that was used in calculating the section 576 amount;

"The section 529 amount" means the amount included in the taxpayer's assessable income under section 529 because the taxpayer has an interest in the first tier FIF;

"Notional income of the first tier FIF " means the notional income of the first tier FIF for the notional accounting period of the first tier FIF which ends during the taxpayer's year of income.

This formula will apply to each FIF or FLP in which the second tier FIF has an interest. Further, the FIF attribution credit which would otherwise arise for the second tier FIF under paragraph 605(1)(b) is to be reduced by the sum of the FIF attribution credits which arise for the entities in which it has an interest. [Subsection 605(6)]

Example 6

Assume that a resident taxpayer (Ms Gray) has a 5 per cent interest in a first tier FIF ( FIF1) which has a 25 per cent interest in a second tier FIF ( FIF2) which in turn has an interest in another FIF ( FIF3). The calculation method is used for FIF1 and FIF2.

During the relevant period, FIF1 does not derive any income whereas FIF2 derives $10,000 income. In addition, under the market value method, FIF2 is taken to have derived $20,000 FIF income from FIF3. Also assume that FIF2 has a past calculated loss of $10,000.

(i) Calculation of the amount to be included in Ms Gray's assessable income because of her interest in FIF 1

FIF2 has notional income of $30,000 (that is, $10,000 + $20,000 (section 579 amount)). FIF2's calculated profit would be $20,000 (that is, $30,000 less its past calculated loss of $10,000).

FIF1's notional income will include $5,000 (25% x $20,000) FIF income under section 576, being its share of FIF2's calculated profit. The calculated profit of FIF1 would be $5,000.

Ms Brown's assessable income would include an amount of $250 (that is, 5% x $5,000) under the FIF measures as a result of her interest in FIF1.

(ii) FIF attribution credits FIF 3

FIF3's " FIF income" (a component used in the formula for determining the FIF attribution credit which arises for FIF3 in relation to Ms Gray) would be calculated using the following formula:

Section 579 amount x Section 576 amount / Notional income of the second tier FIF
FIF3's "FIF income" = ($20,000 x $5,000) / $30,000 = $3,333.33


This result indicates that of the $5000 of FIF2's income that is included in FIF1's income, $3,333.33 is referable to FIF2's interest in FIF3.

The FIF attribution credit which would arise for FIF3 in relation to Ms Gray is calculated using the following formula:

FIF income x Section 529 amount / Notional income of the first tier FIF


This formula is used in calculating the part of the FIF income included in Ms Gray's assessable income that can be attributed to FIF3.

FIF3's FIF attribution credit = ($3,333.33 x $250) / $5,000 = $166.66


FIF 2

If FIF2's notional income was $30,000 without including FIF3's income, the FIF attribution credit which would arise for FIF2 in relation to Ms Brown would be calculated using the formula:

FIF2 income included in FIF income x Section 529 amount / Notional income of FIF1
= ($5,000 x $250) / $5,000 = $250


This amount must be reduced by the amount of the FIF attribution credit which would arise for FIF3. Consequently, a FIF attribution credit of $83.34 ( that is, $250 - $166.66) would arise for FIF2 in relation to Ms Gray.

FIF1

Normally a FIF attribution credit of $250 would arise for FIF1 in relation to Ms Gray. However, this credit must be reduced by the amount of the unmodified credit which would arise for FIF2 [subsection 605(3)] . Consequently, the FIF attribution credit which arises for FIF1 is nil (that is, $250 - $250).

FIF attributed tax accounts

Overview

FIF attributed tax accounts ensure that a credit a taxpayer can claim for foreign tax paid by a FIF when an amount is included in the taxpayer's assessable income under the FIF measures cannot be claimed again by the taxpayer when the taxpayer receives a distribution from the FIF. In other words, they ensure that a taxpayer cannot claim a foreign tax credit twice in relation to the same amount of foreign tax paid by a FIF.

Broadly, the circumstances where a taxpayer will need to maintain FIF attributed tax accounts are where:

he taxpayer uses the calculation method for determining the amount to be included in the taxpayer's assessable income under the FIF measures; and

either:

he FIF is a company which is related to the company taxpayer [Section 160AFCE/Section 160AFCF] ; or

he taxpayer is a beneficiary of a FIF which is a trust estate [Section 160AFCG/Section 160AFCH] .

The system for the maintenance of FIF attributed tax accounts parallels that for FIF attribution accounts described earlier in this Chapter. When income which has been previously attributed is distributed to a taxpayer, the foreign tax credit the taxpayer can claim is initially calculated on the basis that no foreign tax credit was allowed for foreign tax paid on the attributed income at the time it was attributed. The foreign tax credit calculated in this way is then reduced by the foreign tax credit allowed at the time the attributable income of the FIF was included in the assessable income of the taxpayer.

The FIF attributed tax accounts trace the foreign tax credit that was allowed at the attribution stage so that this reduction may be made. The purpose of FIF attributed tax accounts is to determine the formula component "AT" in section 160AFCJ (refer to the notes on section 160AFCJ in chapter 22). Formula component "AT" is deducted from the foreign tax credit referable to the distribution of profits which have been subject to tax under the FIF measures.

Where a taxpayer's share of the attributable income of a FIF is attributed to the taxpayer and credited ( FIF attribution credit) to the taxpayer's FIF attribution accountfor the FIF, the FIF attributed tax account for that FIF is also credited with a corresponding amount of foreign tax if the taxpayer can claim a credit in relation to the amount attributed.

When the FIF makes a FIF attribution accountpayment, the payment is debited ( FIF attribution debit) to the relevant FIF attribution account, and the corresponding FIF attributed tax account is debited with an amount representing the foreign tax attributable to the FIF attribution debit.

As in the case of FIF attribution accounts, the amount of the debit to a FIF attributed tax account cannot exceed the amount standing to the credit of the account (referred to as the FIF attributed tax account surplus) at the time of the FIF attribution accountpayment. The surplus represents, at a particular time, the maximum amount of foreign tax that relates to the income already attributed to the taxpayer.

FIF attributed tax account surplus

An attributed tax account surplus will exist at a particular time for a FIF if the total of the FIF attributed tax account credits for the FIF to that time exceed the total of the FIF attributed tax account debits for the FIF up to that time. [Section 608]

FIF attributed tax account credit

This provision is required to ensure that a taxpayer cannot claim a foreign tax credit twice in respect of the same amount of foreign tax paid by a FIF.

A FIF attributed tax account credit arises for a FIF in relation to a taxpayer where:

company is taken under section 160AFCE or section 160AFCF to have paid and to have been personally liable for an amount of foreign tax paid by a related company FIF on an amount included in the company's assessable income under the FIF measures; or

taxpayer is taken under section 160AFCG or section 160AFCH to have paid and to have been personally liable for an amount of foreign tax paid by a trust estate on an amount included in the taxpayer's assessable income under the FIF measures. [Subsections 609(1) and 610(1)]

A FIF attributed tax account credit only arises for the foreign tax paid by the FIF and not for Australian tax paid.

The amount of the FIF attributed tax account credit that arises for a FIF is equal to the amount of foreign tax that the taxpayer is taken to have paid under section 160AFCE, 160AFCF, 160AFCG or 160AFCH [subsections 609(2) and 610(2)] . The FIF attributed tax account credit arises for a FIF at the end of the FIF's notional accounting period. [Subsections 609(3) and 610(3)]

FIF attributed tax account credit flowing through more than one FIF

A FIF attributed tax account credit will arise for a FIF attribution account entity which receives a FIF attribution accountpayment from another FIF attribution account entity. The amount of the FIF attributed tax account credit is to equal the FIF attributed tax account debit which arises for the other FIF attribution account entity as a result of making the relevant FIF attribution accountpayment. [Section 611]

Attributed tax account debit

A FIF attributed tax account debit may arise for a FIF in relation to a taxpayer where:

he FIF makes a FIF attribution accountpayment to the taxpayer or to a FIF attribution account entity; and

he FIF attribution accountpayment gives rise to a FIF attribution debit for the FIF in relation to the taxpayer. [Subsection 612(1)]

The FIF attributed tax account debit is calculated by using the following formula:

(FIF attribution debit x FIF attributed tax account surplus) / FIF attribution surplus
[Subsection 612(2)]Where:

FIF attribution debit means the amount of the FIF attribution debit which arises for the FIF on making the FIF attribution accountpayment.

FIF attribution surplus means the amount of the FIF attribution surplus for the FIF making the FIF attribution accountpayment in relation to the taxpayer immediately before the FIF attribution debit arises for the FIF.

FIF attributed tax account surplus means the FIF attributed tax account surplus of the FIF in relation to the taxpayer.

The FIF attributed tax account debit arises when the FIF attribution accountpayment was made by the FIF.[Subsection 612(3)]

Relief from double taxation

Exemption of distributions to a taxpayer

A FIF attribution accountpayment received by a taxpayer from a FIF attribution account entity may be exempt from tax. [Section 23AK]

The amount of the FIF attribution accountpayment that will be exempt when received by a taxpayer will be determined by the FIF attribution surplus in the FIF attribution accounts of the FIF making the distribution in relation to the taxpayer. If the payment exceeds the surplus, the part of the payment equal to the surplus will be exempt.

Exemption under section 23AK for previously attributed FIF income derived through a partnership or trust

Where the distribution from a FIF or FLP is received through an interposed partnership or trust, the exemption will operate where:

he taxpayer, after the distribution of an amount from the FIF to the partnership or trust, would be required to include an amount in respect of the trust or partnership in the taxpayer's assessable income; and

t the time of that distribution, the taxpayer had a FIF attribution surplus in relation to the FIF.

The distribution to the partnership or trust will still be included in the calculation of the net income of the trust or partnership. However, once the taxpayer's share of that net income is determined, the amount will be exempt to the extent of the attribution surplus.

Reduction of disposal consideration if FIF attributed income not distributed

The disposal of an interest in a FIF attribution account entity will normally be taken into account in the calculation of a taxpayer's assessable income under the existing provisions of the Principal Act either as income under subsection 25(1) or under the capital gains tax provisions in Part IIIA. Further, the disposal consideration of a FLP is used to determine the amount to be included in a taxpayer's assessable income under the FIF measures in the year of disposal of the FLP. To avoid double taxation, the consideration received on the disposal of an interest in a FIF attribution account entity which is to be taken into account for the purposes of the relevant assessment provision will be deemed to be reduced by any amount previously attributed to a taxpayer that has not been distributed to the taxpayer.

The amount which will be taken into account in determining the assessable income of a taxpayer on the disposal of an interest in a FIF attribution account entity cannot exceed the disposal consideration. [Paragraph 613(1)(c)]

Where a taxpayer disposes of only part of an interest in a FIF attribution account entity, the taxpayer's FIF attribution surplus in relation to the FIF that can be used to reduce the consideration on disposal is reduced proportionately. [Subsection 613(3)]

Broadly, the disposal of an interest in a FIF attribution account entity will be treated in the same way as a FIF attribution accountpayment made directly to the taxpayer who holds that interest. Consequently, a FIF attribution debit is taken to arise at the time of the disposal of the taxpayer's interest in the FIF attribution account entity. [paragraph 613(1)(d)] The amount of the FIF attribution debit is the amount of the FIF attribution surplus that was taken into account in reducing the consideration received on disposal of the FIF interest. [Paragraph 613(1)(e)]

FIF attribution debit for amount of loss used to reduce assessable income

A FIF or FLP loss that arises under the market value method in the case of a FIF or the cash surrender value method in the case of a FLP can be used to reduce a taxpayer's assessable income to the extent that there is a FIF attribution surplus for the FIF or FLP in relation to the taxpayer [section 532 / section 533] . Where the amount of a loss is used to offset assessable income, a FIF attribution debit arises for that amount in relation to the FIF or FLP. [Section 607]

Example of the operation of FIF attribution accounts

The following example shows how FIF attribution credits, FIF attribution debits and FIF attribution surpluses may arise over a number of income years where a taxpayer has a direct interest in a FIF. In this example, the taxpayer is using the market value method to calculate the amount to be included in the taxpayer's assessable income under the FIF measures.

FIF Attribution accounts

During the 1992/93 income year and before the end of the notional accounting period of the FIF, there was a distribution of $10,000, being profits arising before the current notional accounting period. As there was no FIF attribution credit available in the FIF attribution accountat the time of distribution the taxpayer is assessed on the distribution. The taxpayer is also assessed on the FIF income of $10,000 (that is, the FIF income calculated using the market value method {$110,000 (closing value) + $10,000 (distribution) - $100,000 (opening value)} less $10,000 (assessable distribution [subsection 530(1)] )). This gives rise to a FIF attribution credit of $10,000.

During the 1993/94 income year there was a distribution of $10,000 which is made against a FIF attribution accountbalance of $10,000. The FIF income of $11,000 (that is, {$111,000 (closing value) + $10,000 (distribution) - $110,000 (opening value)} - nil (assessable distribution)) would be included in the assessable income of the taxpayer. This gives rise to a corresponding FIF attribution credit of $11,000. The FIF attribution accountbalance then stands at $11,000.

During the 1994/95 income year there was a distribution of $20,000, of which $11,000 is made against the FIF attribution accountbalance of $11,000. The balance of the distribution of $9,000 is assessed to the taxpayer. The FIF income was $2,000 (that is, {$102,000 (opening value) + $20,000 (distribution) - $111,000 (opening value)} - $9,000 (assessable distribution)) which would be included in the assessable income of the taxpayer. This gives rise to a corresponding FIF attribution credit of $2,000. The FIF attribution surplus then stands at $2,000. Thus, the taxpayer will be assessed on $11,000 for the year being the FIF income of $2,000 and assessable distribution of $9,000.

During the 1995/96 income year a FIF loss of $10,000 is computed. A deduction from the assessable income of the taxpayer is available for the loss to the extent of the FIF attribution surplus, that is, $2,000. A FIF attribution debit arises to the extent of the deduction which is available.

During the 1996/97 income year the taxpayer disposed of the entire interest in the FIF for $120,000. There will be no FIF income in the year in which the disposal occurs. Assuming the sale is within Part IIIA and the indexed cost base of the FIF interest was $105,000, the disposal would give rise to a capital gain of $15,000 (that is, ($120,000 (disposal consideration) - nil ( FIF attribution surplus)) - $105,000 (indexed cost base)).

Clauses making the amendment

Clause 5: Inserts section 23AK to exempt from taxation a distribution received by a taxpayer out of previously attributed FIF income.

Clause 27: Inserts Part XI which contains the provisions giving effect to the FIF attribution accountsystem.