Foreign income return form guide 2013

Some abbreviations used in this publication without accompanying explanation are:

Accruals taxation

Accruals taxation is the taxation of Australian residents on profits derived through a foreign company or trust as they are earned by the company or trust. Normally, the profits would not be taxed in Australia until they are distributed to the taxpayer as a dividend or a trust distribution.

Act

In this guide, the term 'the Act' means the Income Tax Assessment Act 1936 , as amended. Unless specified otherwise, all references to legislation are to the ITAA 1936.

Active income test

The active income test ensures that small amounts of tainted income derived by a CFC mainly engaged in carrying on an active business are exempt from accruals taxation. An exemption is provided from accruals taxation for most amounts derived by a CFC if the test is satisfied.

Adjusted tainted income

Adjusted tainted income comprises passive, tainted sales and tainted services income.

Arm's-length amount

This expression means, in relation to an actual transfer of property or services to a non-resident trust estate, the amount that the trustee of the non-resident trust might reasonably be expected to pay to the transferor for the property or services if the property or services had been transferred under an arrangement between independent parties dealing at arm's-length with each other.

Associates

There are four parts to determining who are the associates of an entity. They deal with:

1. associates of an individual
2. associates of a company
3. associates of a trustee
4. associates of a partnership.

The associates of an individual (other than an individual acting in the capacity of a trustee) are:

• relatives of the individual, that is, the parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of the individual or of his or her spouse; and the spouse of the individual or of any other person mentioned above
  
   
• a partner of the individual, or a partnership of which the individual is a partner
  
   
• the spouse, including de facto spouse, or child of a partner, where the partner is also an individual (other than an individual acting in the capacity of a trustee)
  
   
• the trustee of a trust, where the individual or another entity that is an associate by virtue of this part benefits under the trust
  
   
• a company where that company is sufficiently influenced by
  • the individual, or
  • another entity that is an associate of the individual because of the rules in this part, or
  • another company which is sufficiently influenced by the individual, or
  • two or more of the above entities, or
• a company where the capacity to cast or control greater than 50% of the maximum votes at a general meeting of the company is held by
  • the individual
  • associates of the individual under the rules in this part, or
  • the individual and the associates.

Part 2 deals with the associates of a company, called company   A. The associates of company   A include:

• a partner of company A
  
   
• a partnership of which company A is a partner
  
   
• where a partner of company A is an individual otherwise than in the capacity of a trustee, the spouse or child of the partner
  
   
• the trustee of a trust where company A, or an entity that is an associate of company   A, benefits under the trust
  
   
• an entity (entity B) that exerts sufficient influence over company   A or holds a majority voting interest in company   A. The influence may be exerted by entity   B alone or together with other entities. The majority interest may be held by entity B alone or together with entities that would be associates of entity   B if it were treated as company   A
  
   
• a company (company C) that is sufficiently influenced by company   A or in which company   A holds a majority voting interest. The influence may be exerted by company   A alone or together with other entities that are sufficiently influenced by company   A or in which company A holds majority voting interests. The majority voting interests may be held by company   A alone or together with entities that are associates of company   A, and
  
   
• any other entity (entity D) that would be an associate of a third entity (entity   E) which would be an associate of company A if the associates of entity   E were determined by treating it as company   A.

Majority voting interest

An entity holds a majority voting interest in a company if the following shareholdings amount to 50% or more of the maximum number of votes that can be cast at a general meeting of the company:

• the entity's direct shareholding in the company, and
• the entity's indirect shareholding in the company, for example, through a subsidiary.

An example is where a company has a wholly owned subsidiary that has a 75% voting interest in another company. Both the parent and subsidiary would be associates of the third company because the subsidiary has a majority voting interest in the third company and the parent has a majority voting interest in the subsidiary.

Sufficient influence

An entity is sufficiently influenced by a second entity or other entities if the entity is accustomed, under an obligation, or might reasonably be expected to act in accordance with directions, instructions or wishes of the second entity or other entities.

The associates of a trustee are:

• any entity that benefits under the trust
• any entity that is an associate of an individual who benefits under the trust, or
• an entity that is an associate of a company, where the company is an associate of the trustee under either of the two bullet points above.

Rules relating to public unit trusts

In applying the tests for associates, the trustee of a public unit trust is treated as if it were a company. Special rules apply to determine whether a public unit trust is sufficiently influenced by another entity, or whether an entity has a majority voting interest in the public unit trust.

Generally, a public unit trust will be sufficiently influenced by another entity or entities where the trust is accustomed to act, or is under an obligation to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of the entity or entities.

The concept of a majority voting interest in relation to a public unit trust is determined by reference to the capital or income of the trust. If an entity is entitled to, or is entitled to acquire, 50% or more of the income or capital of the trust, the entity is considered to hold a majority voting interest in the public unit trust. Corresponding rules apply to test whether a group of entities have a majority voting interest in the trust.

The associates of a partnership are:

• a partner in the partnership
• any entity that would be an associate of an individual, where the partner is an individual, or
• any entity that would be an associate of a company, where the partner is a company.

Attributable income

Amounts taxed on an accruals basis under the CFC or transferor trust measures.

Attributable taxpayer

An attributable taxpayer is an Australian entity that has an associate inclusive control interest in a CFC of not less than the specified level.

Attribution

The process by which income is taxed on an accruals basis under the CFC or transferor trust measures.

Attribution percentage

The attribution percentage is the pro rata share of a CFC's attributable income that will be attributed to a particular taxpayer's assessable income.

Australian 1% entity

An Australian 1% entity, in relation to a company or trust, is an Australian entity whose associate inclusive control interest in the company or trust is at least   1%.

Australian entity

An Australian entity is an Australian partnership, an Australian trust, or an entity (other than a partnership or trust) that is a Part   X Australian resident.

Australian partnership

An Australian partnership is a partnership of which at least one of the partners is an Australian entity. A foreign hybrid limited partnership with at least one Australian resident partner, and a foreign hybrid company with at least one Australian resident shareholder, may also qualify as an Australian partnership.

Australian trust

An Australian trust is a trust which at a particular time (or at a time in the 12   months before that time) has a trustee who is a Part   X Australian resident or has its central control and management in Australia. It includes a corporate unit trust and a public trading trust as defined in the Act.

Branch

For the purposes of accruals taxation under the CFC measures, an eligible transferor is an Australian entity or a controlled foreign entity that has transferred property or services in certain specified circumstances to a non-resident trust.

If the transfer was to a trust which is a discretionary trust before the IP time, the transferor will be an eligible transferor if the transferor was able to control the trust at any time after the IP time and before the test time. An exception is made where the transfer was an ordinary business transaction for full value. The IP time is 7.30pm, by standard time in the Australian Capital Territory, on 12   April 1989.

If the transfer was made at or after the IP time, the transferor will be an eligible transferor unless the transfer was for full value.

If the transfer was made after the IP time to a trust that is a non-discretionary trust or a public unit trust at the test time, the transferor will be an eligible transferor if the transfer was made for no consideration or for inadequate consideration.

Financial intermediary business

A financial intermediary business is a banking business or a business whose income is principally derived from the lending of money.

Foreign investment fund (FIF)

A foreign investment fund was defined under the FIF rules as any foreign company or foreign trust, other than a deceased estate. The FIF rules have now been repealed.

Foreign life assurance policy (FLP)

An FLP was defined for the purposes of the FLP rules as a life assurance policy issued by an entity that was not a resident of Australia at any time in the income year.

The FIF measures applied only to certain life assurance policies, and did not include:

• a policy issued in Australia, provided that the entity that issued the policy was authorised under the Life Insurance Act 1995 to carry on life insurance business in Australia when it issued the policy
  
   
• policies that provided for payment of money only on death, or on death or permanent disability, and for which the premiums or premium instalments are calculated solely by reference to the period for which the life concerned was expected to continue, or within which the life concerned was expected to terminate
  
   
• policies issued before 1   July 1992 that cannot, after that date, be cancelled, surrendered or redeemed, and for which the terms have not been materially altered
  
   
• a contract of reinsurance of pure life cover between a resident insurer and a non-resident reinsurer (former section 482 ).

The FLP rules have now been repealed.

FIF measures

The FIF measures dealt with the accruals taxation of Australian residents that have a non-controlling interest in a foreign company or foreign trust.

Income year

An income year (or year of income) is a 12-month period ending on 30   June, or a 12-month period ending on another date, where the Commissioner of Taxation (Commissioner) has approved that other date under section   18 of the Act.

Life assurance policy

A life assurance policy was defined for the purposes of the FLP rules as a policy that provided for the payment of money:

• upon death, other than death by accident or specified sickness only, or
• on the happening of a specified event which related to the ending or continuing of a human life.

The FLP rules have now been repealed.

A life assurance policy also included an instrument securing the grant of an annuity for a term dependent upon a human life (former subsection 482(2) )

Listed country

A permanent establishment is widely defined in subsection 6(1). Generally, the term refers to a place through, or at which, a resident of one country conducts its business in another country. A permanent establishment is also referred to as a 'branch' in this publication.

Property

This term includes money, a chose in action, any trust estate and interest, right or power, whether at law or in equity, in or over property.

Section 404 country

Tainted income includes passive income, tainted sales income and tainted services income.

Tainted rental income

Tainted rental income includes rental income of a CFC where:

• land is leased to an associate or the rent is paid by an associate, or
• land is leased by a lessor company not resident in the same country as the land is located, or
• the land is leased by a lessor company which is resident in the same country as the land, and the lessor does not carry out substantial management activities in relation to the leased land.

It can also include rental income from particular leases on ships, aircraft or cargo containers.

Tainted sales income

Tainted sales income is income of a CFC from the sale of goods purchased from or sold to:

• an associate who is an Australian resident, or
• an associate who is not an Australian resident but carries on business in Australia through a permanent establishment.

Tainted services income

Tainted services income is, in very broad terms, income derived from the provision of services by a CFC:

• to an Australian resident, or
• in connection with a permanent establishment in Australia.

Transfer

Transfer is defined in broad terms. In relation to the transfer of property, it includes a disposal of property by assignment, creation of a trust or any other manner, or the provision of property. For the transfer of services, it includes such concepts as allow, confer, give, grant, perform or provide.

Transfer pricing rules

Transfer pricing rules are contained in section 136AD of the Act, the associated enterprises articles in Australia's tax treaties and in Subdivision 815-A of the ITAA 1997. Where an agreement to acquire or supply property (including services and the right to use intangible property) is between parties who are not at arm's-length, Section 136AD enables 'arm's-length' consideration to be substituted for the amount actually agreed.

Transferor trust

A non-resident trust to which a resident has made, or is deemed to have made, a transfer of property or services (Division   6AAA of Part   III).

Transferor trust measures

The transferor trust measures deal with the accruals taxation of Australian residents who have directly or indirectly transferred value to a non-resident trust. Broadly, the rules operate to accruals tax the undistributed income of the trust.

Underlying tax

Underlying tax means the amount by which the section   23AI part of a non-portfolio dividend would have been greater if no foreign tax had been paid by the company paying the dividend on the profits out of which that dividend is paid.

Unlisted country