Explanatory Memorandum
(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)Foreign Source Income Amendments
Amendment to limit the clawback provision in subsection 47A(13)
Summary of proposed amendments
Purpose of amendment: To provide, in certain cases, a sunset clause for subsection 47A(13) so that a group of companies is not locked into a given company structure indefinitely for fear of triggering the provision in that subsection that creates a tax liability.
Date of Effect: 3 June 1990
In broad terms, section 47A treats certain benefits provided to a shareholder of an unlisted country ' CFC' ( CFC), or to an associate of the shareholder, as a dividend paid to the shareholder or associate. The amount of the deemed dividend is limited to the profits of the CFC at the time the benefit was provided. Benefits which may give rise to these deemed dividends are called "eligible benefits".
The main provisions of the Income Tax Assessment Act which include such dividends in the assessable income of an Australian taxpayer are sections 44, 458, and 459.
Broadly:
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- section 44 will apply if the unlisted country CFC pays the deemed dividend to an Australian taxpayer;
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- section 458 will apply where the deemed dividend is paid to a listed country CFC and that CFC holds a 10 percent or greater voting interest in the unlisted country CFC which paid the dividend;
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- section 459 will apply where the deemed dividend is paid to a listed country CFC and that CFC does not have a 10 percent or greater voting interest in the unlisted country CFC which paid the dividend.
These provisions may also apply where such dividends are paid to a partnership or trust.
Under subsection 47A(8), a CFC which acquires shares in another company or units in a unit trust is taken to have provided an eligible benefit to the company or unit trust from which those shares or units were acquired.
Subsection 47A(9) provides an exception to the circumstances where subsection 47A(8) applies.
Broadly, the exception operates in situations where the shareholder, or an associate of that shareholder, of an unlisted country CFC which provides an eligible benefit to a listed country CFC (or an Australian company) is not, at the same time, a shareholder of the listed country CFC or Australian company which received the benefit. In other words, the exception will not operate where the shareholder, or an associate of that shareholder, of the unlisted country CFC which provided the legible benefit is also a shareholder of the listed country CFC or Australian company which received the benefit.
Subsection 47A(13) provides a clawback to the exception provided by subsection 47A(9). Subsection 47A(13) provides that if, at a later time, circumstances change such that subsection 47(9) would not apply, then subsection 47A(9) is deemed to have never applied. Consequently, the taxpayer's assessments for previous years would be required to be amended to include any amounts which were previously excluded from the taxpayer's assessable income because of the operation of subsection 47A(9).
Presently, the clawback under subsection 47A(13) may still operate even though the shares or units originally acquired may have been redeemed or bought back prior to the breach of the conditions in subsection 47A(13).
Explanation of proposed amendments
The proposed amendment will limit the operation of the clawback provision in subsection 47A(13) so that it will not apply where, prior to the breach of the conditions in subsection 47A(13), the shares or units which gave rise to the eligible benefit under subsection 47A(8) are redeemed or bought back by the recipient of that benefit for consideration equal to or greater than the arm's length value of the share or unit [Paragraph 47A(13)(ba)] .
The "arm's length value" in relation to the redemption or buy-back of a share in a company or a unit in a unit trust is the amount that the company or trustee could reasonably be expected to have been required to pay to obtain the redemption or buy-back of the share or unit under a transaction where the parties to the transaction are dealing with each other at arm's length [Subsection 47A(21)] .
Amendment to limit the clawback provision in subsection 47A(14)
Summary of proposed amendments
Purpose of amendment: The amendment will limit the clawback provision in subsection 47A(14) so that it will not apply to an acquisition of shares or the payment of calls made before 13 September 1990 unless the Commissioner of Taxation is of the opinion that this had the effect of enabling any taxpayer to avoid tax.
Date of Effect: 3 June 1990
The notes on the amendments to subsection 47A(13) explain the general effect of section 47A.
Under subsection 47A(8), a CFC which acquires shares in another company or units in a unit trust is taken to have provided an eligible benefit to the company or unit trust from which those shares or units were acquired. Under subsection 47A(11), an eligible benefit arises where funds are transferred to a company by an unlisted country CFC to pay for call on partly paid up shares.
Subsections 47A(9) and 47A(12) provide exceptions to the circumstances where subsections 47A(8) and Subsections 47A(9) and 47A(12) provide exceptions to the circumstances where subsections 47A(8) and Subsections 47A(9) and 47A(12) provide exceptions to the circumstances where subsections 47A(8) and Subsections 47A(9) and 47A(12) provide exceptions to the circumstances where subsections 47A(8) and Subsections 47A(9) and 47A(12) provide exceptions to the circumstances where subsections 47A(8) and 47A(11), respectively apply. Broadly, the exceptions operate in situations where the shareholder, or an associate of that shareholder, of an unlisted country CFC which provides an eligible benefit to a listed country CFC (or an Australian company) is not, at the same time, a shareholder of the listed country CFC or Australian company which received the benefit. In other words, the exception will not operate where the shareholder, or an associate of that shareholder, of the unlisted country which provides the eligible benefit is also a shareholder of the listed country or Australian company which receives the benefit.
Subsection 47A(14) operates as a clawback to the exception provided by subsections 47A(9) or 47A(12). Subsection 47A(14) will apply if the recipient of the eligible benefit (the first eligible benefit) provides an eligible benefit (the second eligible benefit) to:
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- the company which provided the first eligible benefit; or
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- an associate of the company which provided the first eligible benefit; or
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- an associate of the company which received the first eligible benefit,
and the first eligible benefit facilitated, directly or indirectly, the provision of the second eligible benefit.
If subsection 47A(14) applies, the taxpayer's assessments for previous years are to be amended to include any amounts which were previously excluded because of the operation of subsection 47A(9) or 47A(12) in relation to the provision of the first eligible benefit.
Section 47A of the first draft Bill on the Controlled Foreign Income measures (Taxation of Foreign Source Income, December 1989) included provisions along the lines of subsections 47A(8) and 47A(11) but did not include provisions along the lines of subsections 47A(9), 47A(12), or 47A(14).
A press release issued on 3 June 1990 announced that there would be changes to the original draft Bill and that these changes would be incorporated in a second draft Bill. In the second draft Bill (Taxation of Foreign Source Income, June 1990), section 47A was modified to include provisions along the lines of subsections 47A(9) and 47A(12).
There was no indication, until the Bill was introduced into Parliament on 13 September 1990, that there would be a clawback provision as currently provided in subsection 47A(14). This clawback provision operated from 3 June 1990, the commencement of section 47A.
The proposed amendment is intended to provide relief from the retrospective application of subsection 47A(14) to eligible benefits covered by subsection (8) or (11) made during the period 3 June 1990 to 12 September 1990 where those benefits do not have the effect of avoiding Australian tax.
Explanation of the proposed amendments
The clawback provision in subsection 47A(14) will be amended so that it will not apply to an acquisition of shares or the payment of calls made before 13 September 1990 unless the Commissioner of Taxation is of the opinion that this had the effect of enabling any taxpayer to avoid tax [Paragraph 47A(14)(ca)] .
The clawback provision in subsection 47A(14) may be applied at any time by the Commissioner of Taxation if the Commissioner is of the opinion that the relevant acquisition of shares or the payment of calls made during the period 3 June 1990 to 12 September 1990 had, or would be likely to have, the effect of enabling any taxpayer to avoid tax [Paragraph 47A(14)(e)] .
Offset of Carry Forward Primary Production Losses Against Foreign Income
Summary of proposed amendments
Purpose of amendment: To enable taxpayers who have carry forward domestic primary production losses to choose whether to offset those losses against their assessable foreign income.
Date of effect: The election will be available to taxpayers in respect of assessments for the 1991-92 and subsequent years of income.
Prior to the 1989-90 income year, the carry forward of general domestic losses was limited to seven years. However, due to the particular circumstances of primary producers, primary production losses could be carried forward indefinitely. This was achieved by section 80AA.
The decision to allow the indefinite carry forward of all domestic losses from the 1989-90 year of income meant that it was not longer necessary to deal with the carry forward of domestic primary production losses on a different basis to general domestic losses. Consequently, section 79E which deals with the carry forward of general domestic losses incurred from the 1989-90 income year also applies to primary production losses incurred from the 1989-90 income year. Thus, section 80AA only applies to primary production losses incurred prior to the 1989-90 income year.
Section 80AA does not contain equivalent provisions to subsections 79E(5)-(7) or subsections 80(2B)-(2D) (section 80 deals with the carry forward of general domestic losses incurred prior to the 1989-90 income year). Consequently, unlike general domestic losses or primary production losses incurred form the 1989-90 income year, taxpayer's must offset their pre-1989-90 carry forward domestic primary production losses against their assessable foreign income. In other words, such taxpayers are unable to choose whether or not to deduct their carry forward domestic primary production losses from their assessable foreign income.
Explanation of proposed amendments
The proposed amendment will, from the 1991-92 year of income, enable taxpayers who have carry forward domestic primary production losses to which section 80AA applies, to elect whether to offset those losses against their assessable foreign income. This will be achieved by the insertion of subsections (5A), (5B), (5C) and (5D) into section 80AA.
Subsection 80AA(5A) will ensure that carry forward domestic primary production losses under section 80AA will only be offset against a taxpayer's assessable foreign income to the extent that the taxpayer elects to offset those losses under subsection 80AA(5B).
Subsection 80AA(5C) defines 'assessable foreign income' to have the same meaning as in section 160AFD. 'Assessable foreign income' as defined in section 160AFD comprises two kinds of amounts derived by a taxpayer. First, it encompasses amounts that are foreign income within the meaning of section 6AB. The term also includes a capital gain or a profit from a source in a foreign country to the extent that the profit or gain is included in the taxpayer's assessable income for the year of income. However, it does not include that part of a profit or gain which is included in the taxpayer's assessable income under Part IIIA (i.e., the capital gains tax provisions).
Subsection 80AA(5D) provides that an election by a taxpayer to offset domestic primary production losses against assessable foreign income must be made within 6 months after the commencement of subsection 80AA(5D) (i.e., within 6 months from when this Bill receives Royal Assent) or when the taxpayer lodges an income tax return for a year of income to which the election relates. An election may also be made within such further period as the Commissioner of Taxation allows.