Foreign investment funds guide

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About this guide

Foreign investment funds guide 2007-08

Our commitment to you

We are committed to providing you with guidance you can rely on, so we make every effort to ensure that our publications are correct.

If you follow our guidance in this publication and it turns out to be incorrect, or it is misleading and you make a mistake as a result, we must still apply the law correctly. If that means you owe us money, we must ask you to pay it but we will not charge you a penalty. Also, if you acted reasonably and in good faith we will not charge you interest.

If you make an honest mistake in trying to follow our guidance in this publication and you owe us money as a result, we will not charge you a penalty. However, we will ask you to pay the money, and we may also charge you interest.

If correcting the mistake means we owe you money, we will pay it to you. We will also pay you any interest you are entitled to.

If you feel that this publication does not fully cover your circumstances, or you are unsure how it applies to you, you can seek further assistance from us.

We regularly revise our publications to take account of any changes to the law, so make sure that you have the latest information. If you are unsure, you can check for a more recent version on our website at www.ato.gov.au or contact us.

This publication was current at May 2008.

How self-assessment affects you

Self-assessment means the Tax Office uses the information you give on your tax return and any related schedules and forms to work out your refund or tax liability. We do not take any responsibility for checking the accuracy of the details you provide, although our system automatically checks the arithmetic.

Although we do not check the accuracy of your tax return at the time of processing, at a later date we may examine the details more thoroughly by reviewing specific parts, or by conducting an audit of your tax affairs. We also have a number of audit programs that are designed to continually check for missing, inaccurate or incomplete information.

What are your responsibilities?

It is your responsibility to lodge a tax return that is signed, complete and correct. Even if someone else - including a tax agent - helps you to prepare your tax return and any related schedules, you are still legally responsible for the accuracy of your information.

What if you lodge an incorrect tax return?

If you become aware that your tax return is incorrect, you must contact us straight away.

Initiatives to complement self-assessment

There are a number of systems and entitlements that complement self-assessment, including:

• the private ruling system (see below)
• the amendment system (if you find you have left something out of your tax return)
• your entitlement to interest on early payment or over-payment of a tax debt.

Do you need to ask for a private ruling?

If you are uncertain about how a tax law applies to your personal tax affairs, you can ask for a private ruling. To do this, complete a Private ruling application form (not for tax professionals) (NAT 13742) or Private ruling application form (tax professionals) (NAT 13043), or contact us.

Lodge your tax return by the due date, even if you are waiting for the response to your application. You may need to request an amendment to your tax return once you have received the private ruling.

We publish all private rulings on our website. (Before we publish we edit the text to remove information that would identify you.)

Do you need to use this guide?

Did you have interests in a foreign company, a foreign trust or a foreign life assurance policy? (Read Chapter 2: Key concepts of the FIF measures and Chapter 5: Foreign life assurance policies.)

No	The foreign investment fund (FIF) measures do not apply to you. You do not need to use this guide.
Yes	Read on.

If you were a resident at any time during the income year, did you:

• have an interest in a FIF at the end of the income year, or
• have an interest in a foreign life assurance policy (FLP) at any time during the income year? (Read Chapter 2: Key concepts of the FIF measures and Chapter 5: Foreign life assurance policies.)

No	The FIF measures do not apply to you. You do not need to use this guide.
Yes	Read on.

Does an exemption apply to your interest in a FIF or FLP? (Read Chapter 3: Exemptions.)

No	Read on.
Yes	Do not include any amount in your assessable income from the interests in that FIF or FLP. Read Chapter 8: Record keeping to work out the records that you need to keep, then read on.

Foreign investment funds guide 2008

This guide will help you work out how to include your FIF income in your assessable income. It does not include all the qualifications and conditions of the FIF measures that may affect how you work out the amount of FIF income to include in your assessable income for a particular year.

If you need more information, phone the Personal Infoline on 13 28 61 or consult a registered tax adviser.

Abbreviations

CFC	controlled foreign company
CFT	controlled foreign trust
FIF	foreign investment fund
FLP	foreign life assurance policy
ITAA 1936	Income Tax Assessment Act 1936
ITAA 1997	Income Tax Assessment Act 1997
MEC group	multiple entry consolidated group

Note: Unless indicated otherwise, throughout this guide all sections and subsections in square brackets refer to the Income Tax Assessment Act 1936 (ITAA 1936).

Determining the amount of FIF income to include in your assessable income

There are three methods for working out taxation for an interest in a FIF and two methods for an interest in a FLP, depending on your access to certain information on the FIF or FLP.

Interest in a FIF - read Chapter 4: Methods of FIF taxation

• Most taxpayers liable to tax under the FIF measures will use the market value method.
• Use the deemed rate of return method if you are unable to establish a market value for your FIF interest and you have not elected to use the calculation method.
• Use the calculation method if you have access to the financial accounts of the FIF and you are able to determine the FIF's calculated profit or calculated loss.

Interest in a FLP - read Chapter 5: Foreign life assurance policies

If you have invested in a FLP, you can use:

• the deemed rate of return method, or
• the cash surrender method.

Chapter 1: Introduction

Timeline:

1987-88	The foreign tax credit system begins.
1990-91	The foreign source income measures relating to controlled foreign companies (CFCs) and transferor trusts are set up.
1993	The FIF measures, introduced by the Income Tax Assessment Amendment (Foreign Investment) Act 1992, begin operation.

Since the foreign tax credit system was introduced in 1987-88, most foreign income derived by Australian residents has been taxed in Australia, with a credit for foreign tax paid.

The foreign source income measures introduced in 1990-91 aim to tax substantial investments or involvement by Australians in foreign companies and foreign trusts able to shelter low-taxed income.

The FIF measures introduced in 1993 reduce the extent to which Australian residents can defer Australian tax where they hold interests in foreign entities.

The FIF measures apply to income and gains accumulating in foreign companies that are not controlled by Australians or foreign trusts that fall outside the scope of the foreign source income measures.

The FIF measures also apply when working out the income of CFCs and controlled foreign trusts (CFTs), and to certain FLPs that have an investment component (such as life bonds).

Chapter 2: Key concepts of the FIF measures

What is a foreign investment fund (FIF)?

A FIF is any foreign company or foreign trust. [subsection 481(1)]

A foreign company is a company that is not resident in Australia, according to the definition of a 'resident of Australia' in subsection 6(1) of the ITAA 1936 and the residency provisions of any relevant double taxation agreement. [subsection 481(2)]

A trust estate is a foreign trust if it:

• is not an Australian trust, an Australian superannuation fund, a complying approved deposit fund or a pooled superannuation trust, and
• did not result from
  • a will, a codicil or a court order that varied or modified a will or a codicil, or
  • intestacy or a court order that varied or modified the application of the law relating to the distribution of the estates of persons who die without leaving a will. [subsection 481(3)]

What is a foreign life assurance policy (FLP)?

A FLP is 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 apply only to certain life policies, and do 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 provide for payment of benefits 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 is expected to continue, or within which the life concerned is 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. [section 482]

What is an interest in a FIF?

Foreign companies

An interest in a foreign company that is a FIF includes:

• a share other than an eligible finance share in the company
  
   
  
  A share includes any interest in the capital of the company in the nature of a share or stock. Examples include ordinary, preference, bonus and redeemable preference shares, as well as shares with deferred rights.
  
   
• a legal document that confers an entitlement to acquire such a share including an entitlement arising from an option or convertible note. [subsection 483(1)]

Even if your name does not appear on a share certificate or share register of the foreign company as the legal owner of those shares, you are still held to have an interest in the FIF if you have a beneficial interest in that FIF (without the legal title to it). [section 488]

Eligible finance share

A share in a company is an eligible finance share if:

• the shareholder is an Australian financial institution (AFI) or AFI subsidiary
• the share was issued to the shareholder by the company in the ordinary course of business carried on by the shareholder
• the shareholder is not an associate of the company, and
• payments of dividends on the share may reasonably be regarded as equivalent to the payment of interest on a loan. [section 327]

Foreign trusts

An interest in a FIF that is a foreign trust is:

• an interest in the capital or income of the trust - including a unit in a unit trust, or
• a legal document that confers an entitlement to acquire such an interest including an entitlement arising from an option or convertible note. [subsection 483(2)]

What is an interest in a FLP?

You have an interest in a FLP if you have the legal title to the FLP. [subsection 483(3)]

Interests in a FIF or a FLP subject to the FIF measures

The FIF measures apply to your interest in a FIF for the FIF's notional accounting period that ended in your income year if:

• you had an interest in a FIF at the end of the income year, and
• you were a resident of Australia at any time in that income year. [subsection 485(3)]

The measures do not apply to an interest in a FIF that you dispose of on or before 30 June of that income year. However, you may be subject to other Australian tax on the interest in the FIF - for example, capital gains tax.

The FIF measures apply to your interest in a FLP for the FLP's notional accounting period that ended in your income year if you:

• had an interest in a FLP at any time during that year, and
• you were a resident of Australia at any time in that year. [subsection 485(4)]

The FIF measures will not apply to a dual resident of Australia and another country where Australia has agreed, in a tax treaty, to treat that resident solely as a resident of the other country.

Election to exclude an interest in a foreign hybrid from the FIF measures

If at the end of an income year you have an interest in a FIF that is a corporate limited partnership for the purposes of Division 5A of Part III of the ITAA 1936, you may elect to exclude the FIF measures from applying to that interest. [subsection 485AA(1)].

In order to make the election, the limited partnership must satisfy the requirements contained in paragraphs 830-10(1)(a) to (d) of the Income Tax Assessment Act 1997 (ITAA 1997). These conditions include:

• the entity must not be an Australian resident
• it must be treated as a partnership under the tax laws of its country of formation, and
• must not be treated as a resident entity by any foreign country. [subsections 485AA(1) and (2)]

If at the end of an income year you have an interest in a FIF that is a foreign hybrid company under the provisions of section 830-15 of the ITAA 1997, you may elect to exclude the FIF measures from applying to that interest. [subsection 485AA(2)]

If you choose to make an election under subsection 485AA(1) or (2) you must do so on or before lodgment of the tax return for the income year (subject to any deferrals allowed by the Commissioner) so that no income is attributed from the FIF under Part XI of the ITAA 1936. The election is irrevocable and applies to that income year and all future income years during which you have the FIF interest.

The effect of the election is not to attribute any income from your interest in the FIF to you for that and future income years. [subsection 485AA(5)] Because of this election, the interest in the limited partnership or company becomes an interest in a foreign hybrid. [subsections 830-10(2) and 830-15(5) of the ITAA 1997] However, the election in relation to a particular interest by a taxpayer does not have any effect, including for the purposes of Part XI of the ITAA 1936, in relation to any other interest of the taxpayer or any other taxpayer in a FIF. [subsection 485AA(6)]

For more information on how the foreign hybrid rules affect your interest in a FIF see the publication Foreign hybrids - information guide (NAT 11619) available on our website

Notional accounting period of a FIF

The FIF measures apply to a FIF's notional accounting period - this generally coincides with your income year.

The notional accounting period provides a measurement point for the application of the FIF provisions and is referred to for a variety of purposes including the application of the various methods of determining FIF income and for some of the exemptions.

Important: You must return attributable income from the FIF for the notional accounting period which ends in your income year.

If the period for which a FIF prepares its accounts is different from your income year, and this period is not more than 12 months, you may elect for the notional accounting period of the FIF to coincide with the period for which the accounts of the FIF are prepared. This election cannot be revoked for as long as you have the FIF interest. [subsections 486(3) and (4)]

Example: Election to align notional accounting period

Gary acquires an interest in a FIF on 1 March 2003. The FIF prepares its annual accounts for the accounting period 1 April to 31 March and Gary elects to align the notional accounting period with the accounting period of the FIF.

He needs to include attributable income from the FIF for the period 1 March 2003 (the date of acquisition) to 31 March 2003 (the end of the elected notional period) in his tax return for the income year ended 30 June 2003. This is because the notional accounting period of the FIF ended during the income year for which Gary is lodging his tax return.

If the FIF prepared its annual accounts for the accounting period 1 January to 31 December each year and Gary elected to align the notional accounting period with the accounting period of the FIF, he would have to include attributable income from the FIF for the period 1 March 2003 (the date of acquisition) to 31 December 2003 (the end of the elected notional accounting period) in his return for the income year ended 30 June 2004 as that is the income year in which the notional accounting period ended.

Notional accounting period of a FLP

The notional accounting period of a FLP is generally each period of 12 months ending on 30 June. [subsection 487(2)]

If the cash surrender values of your interest in a FLP are available on a day during the same month in each calendar year ('the relevant day'), you can elect that the notional accounting period of the FLP be determined under subsection 487(5). For example, if the relevant day is in February, you may elect that the accounting period begins in March (the month after the first relevant day) and ends at the end of February in the following year (in which the next relevant day occurs).

This election cannot be revoked for as long as you have an interest in the FLP. [subsection 487(4)]

Direct investments

The FIF legislation refers to an interest that is generally:

• a share in a foreign company
• an interest in the capital or income of a foreign trust, or
• the holding of the legal title of a foreign life assurance policy.

If you, as an Australian resident, personally and directly own foreign investments (not through a company or a trust), the FIF legislation does not apply as it does not cover direct interests in physical assets such as land, livestock, plant and debt instruments. Other provisions of the income tax law apply to such investments.

Bare trustee or nominee arrangements

Where a trustee holds an interest in a FIF or FLP on behalf of a beneficiary who is absolutely entitled to the interest in the FIF or FLP, the beneficiary will be taken to hold the interest under the FIF measures. [subsection 484(1)]

Deceased estates

Foreign trusts that are deceased estates are excluded from the FIF measures. For more information, see What is a foreign investment fund (FIF)? in this chapter.

Note: Other trust provisions of the ITAA 1936 may apply to deceased estates.

Chapter 3: Exemptions

To allow the FIF measures to focus on cases that provide the greatest opportunity for deferral of Australian tax, there are a number of exemptions from FIF taxation:

• attributable taxpayers under the CFC or the transferor trust measures
• an interest in an active business
• an interest in a foreign bank
• an interest in a foreign holding company of a foreign bank
• an interest in a foreign life insurance company
• an interest in a foreign holding company of a foreign life insurance company
• an interest in a foreign general insurance company
• an interest in a foreign holding company of a foreign general insurance company
• an interest in a foreign company engaged in certain real property activities
• an interest in a foreign holding company of a foreign company engaged in certain real property activities
• an interest of $50,000 or less
• temporary residents
• an interest in an employer-sponsored foreign superannuation fund
• an interest in a FIF that is trading stock
• an interest in a foreign company principally engaged in several activities
• an interest in a foreign holding company of a foreign mixed activity company
• an interest in a premium trust fund by an underwriting member of Lloyd's
• a balanced investment portfolio in FIFs
• an interest in certain FIFs resident in the United States
• complying Australian superannuation entities and interests in certain assets of life insurance companies and certain fixed trusts.

Exemption for attributable taxpayers

Apart from the FIF regime, there are two other components of the foreign source income attribution regime:

• the CFC measures, and
• the transferor trust measures.

These measures attribute specified income and gains of foreign companies and trusts to certain Australian residents - known as attributable taxpayers.

If the FIF measures overlap with the other components of the foreign source income regime, the CFC or transferor trust measures apply and, in general, the FIF measures will not apply. However, if a CFC, either directly or through a CFT or transferor trust, holds an interest in a FIF, the FIF measures do apply in working out the attributable income of those entities. [sections 492, 493 and 494]

Exemption for active business

The active business exemption exempts you from taxation under the FIF measures for interests you have in foreign companies principally engaged in certain active businesses, known as eligible activities. [section 497]

This exemption also applies when working out:

• the net income of a trust estate where the trust invests directly in a foreign company engaged in an active business, and
• the FIF income of a CFC or a CFT - because the income of a CFC or CFT is worked out as though they were a resident taxpayer.

This exemption does not apply to an interest in a non-resident trust.

What are eligible activities?

To be eligible for the active business exemption, you must establish that the foreign company was principally engaged in one or more eligible activities. [sections 496 and 497]

All business activities (including the provision of services) that are not named in Schedule 4 of the ITAA 1936 are eligible activities (for a complete list, see Appendix 2: Business activities that are not eligible activities). For example, mining, agriculture and the management of funds are eligible activities. However, some of those activities listed in Schedule 4 as not eligible may still be exempt by virtue of another specific exempting provision - see Appendix 2 for more information.

There are two methods for establishing whether a foreign company is principally engaged in eligible activities:

• the stock exchange listing method, and
• the balance sheet method.

If both of the methods can be applied, you may choose which one to use. [section 498]

The stock exchange listing method

You can use the stock exchange listing method to decide whether a FIF is principally engaged in one or more eligible activities.

Your interest in the FIF must be included in a class of interests quoted on a stock market of an approved stock exchange. See Appendix 1: Approved stock exchanges for more information. [section 499]

Under this method, your interests in the FIF will be exempt if you can establish that the foreign company FIF is included in a class of companies classified or designated as engaged in an eligible activity on either:

• an approved stock exchange, or
• an approved international sectoral classification system. See Appendix 3: Approved international sectoral classification systems for more information.

The balance sheet method

The balance sheet method tests whether a foreign company was principally engaged in eligible activities by reference to its balance sheet and, if appropriate, the balance sheets of its subsidiaries. [subsection 500(1)]

A company is principally engaged in eligible activities if 50% or more of the gross value of the company's assets were for use in eligible activities - the '50% assets test'. [subsection 500(2)]

This percentage is worked out as follows:

Gross value of the company's assets used in eligible activities Gross value of all of the company's assets

X

100 1

The gross value of an asset is its value shown in the company's balance sheet prepared for reporting to the shareholders on an annual basis.

The balance sheet test cannot be used if the balance sheet for the company was not prepared in accordance with commercially accepted accounting principles or if it does not give a true and fair view of the financial position of the company. [subsection 500(9)]

Balance sheet method and lower tier companies

An offshore holding company may not satisfy the active business exemption in its own right under the balance sheet test if the company does not have any active business of its own. To prevent this, the active business exemption allows the first-tier foreign holding company to look through to the underlying assets of certain subsidiaries.

This look-through rule is available if a holding company owns 50% or more of the paid-up share capital of another company, either directly, indirectly or in a combination of these.

Companies that satisfy this requirement are referred to as subsidiaries of the holding company. [subsection 500(3)]

The holding company treats its share of the underlying assets of its subsidiaries as its own in using the balance sheet method to claim the active business exemption. [subsection 500(3)]

There is no limit to the number of tiers of companies a holding company may look through, provided the holding company has an indirect ownership interest of 50% or more in the lowest tier company being tested. [sections 501 and 500]

Whenever the look-through rule applies, any intercompany indebtedness in relation to the holding company and its subsidiaries is not taken into account when working out the percentage of the holding company's assets used in eligible activities. Shares held by the holding company or its subsidiaries in subsidiaries of the holding company are also not taken into account. [subsection 500(5)]

Exemption for an interest in a foreign bank

You can get an exemption for your interest in a foreign bank if the following requirements are satisfied:

• Approved stock exchange

You must hold shares in the bank of a class listed on a stock exchange approved in regulation 152I, Schedule 12 of the Income Tax Regulations 1936 (the Regulations). See Appendix 1: Approved stock exchanges for more information. Unlisted shares issued by some banks as a substitute for deposits with the bank would not satisfy this criterion.

• Trading requirement

The class of shares you hold in the bank must be widely held and actively traded on a regular basis on a stock market of an approved stock exchange during the period for which you are seeking the exemption.

• Authorised to carry on banking business

The bank must be authorised under the law of its place of residence to carry on banking business.

• Principally engaged in the banking business

The bank must be principally engaged in the active carrying on of banking business. [section 503]

Exemption for an interest in a foreign holding company of a foreign bank

Some banking businesses are structured so that shares in the licensed bank are held by a holding company. Members of the public invest in the bank by acquiring publicly listed shares in the holding company.

To allow for this, the exemption for certain shares in a publicly listed foreign bank is extended to an interest that an Australian resident holds in a holding company with a wholly owned subsidiary that is a foreign bank. [section 504]

A company will qualify for the exemption from the FIF measures as a holding company of a bank if the following requirements are satisfied:

• Approved stock exchange

You hold shares in the holding company of a class listed on any stock market of a stock exchange approved in regulation 152I, Schedule 12 of the Regulations. See Appendix 1: Approved stock exchanges for more information.

• Designated a bank

The holding company is included in a class of companies designated as a bank or engaged in banking on either:

• an approved stock exchange, or
  
   
• an approved international sectoral classification system.

See Appendix 3: Approved international sectoral classification systems for more information.

• Trading requirement

The class of shares you have in the holding company must be widely held and actively traded on a regular basis on a stock market of an approved stock exchange during the period in which the exemption applies.

• Subsidiaries principally engaged in banking business

If the holding company has only one wholly owned subsidiary, that subsidiary must be authorised under the law of its place of residence to carry on banking business and have been principally engaged in the active carrying on of a banking business.

If the holding company has more than one wholly owned subsidiary, the principal activities of the wholly owned subsidiaries in the group, considered together, must be the active carrying on of a banking business. At least one of the wholly owned subsidiaries must be authorised under the law of its place of residence to carry on a banking business.

Exemption for an interest in a foreign life insurance company

This exemption allows you to invest in a foreign life insurance company without attracting FIF taxation. [section 506]

A foreign company is considered to be engaged in life insurance business (as defined in the Life Insurance Act 1995) only if:

• the company is authorised in its country of residence to carry on life insurance business, and
• the balance sheet of the company shows that at least 50% of the gross value of the company's assets were for use in carrying on life insurance business. [section 507 and definition of 'life insurance business' in section 470]

The look-through rule

If the foreign life insurance company has an interest in a subsidiary company, the foreign life insurance company can look through to a 50% owned subsidiary. The look-through rule allows the subsidiary's assets to be looked at to decide whether the foreign life insurance company passes the 50% assets test. [subsections 507(3) to (11)]

Exemption for an interest in a foreign holding company of a foreign life insurance company

A company qualifies for this exemption if the following requirements are satisfied:

• Approved stock exchange

You must hold shares in the holding company of a class listed on any stock market of a stock exchange approved in regulation 152I, Schedule 12 of the Regulations. See Appendix 1: Approved stock exchanges for more information.

• Designated a life insurance company

The holding company is included in a class of companies designated as engaged in life insurance on either:

• an approved stock exchange, or
  
   
• an approved international sectoral classification system.
  
   

See Appendix 3: Approved international sectoral classification systems for more information.

 

• Trading requirement

The class of shares you have in the holding company must be widely held and actively traded on a regular basis on a stock market of an approved stock exchange during the period in which the exemption applies.

• Subsidiaries principally engaged in life insurance business

If the holding company has only one wholly owned subsidiary, that subsidiary must be authorised under the law of its place of residence to carry on life insurance business, and have been principally engaged in the active carrying on of life insurance business.

If the holding company has more than one wholly owned subsidiary, the principal activities of the wholly owned subsidiaries in the group, considered together, must be the active carrying on of life insurance business. At least one of the wholly-owned subsidiaries must be authorised under the law of its place of residence to carry on life insurance business.

Whether the subsidiary or subsidiaries were principally engaged in the active carrying on of life insurance business is decided by a balance sheet test. This test requires that at least 50% of the gross value of the subsidiary company's assets were for use in carrying on life insurance business as defined in section 11 of the Life Insurance Act 1995. [section 507A and definition of 'life insurance business' in section 470]

Exemption for an interest in a foreign general insurance company

Australian residents with shares in a publicly listed general insurance company can get this exemption if the following requirements are satisfied:

• Approved stock exchange

Shares you hold in the company must be of a class listed on any stock market of a stock exchange approved in regulation 152I, Schedule 12 of the Regulations. See Appendix 1: Approved stock exchanges for more information.

• Trading requirement

The class of shares you hold in the company must be widely held and actively traded on a regular basis on a stock market of an approved stock exchange during the period in which the exemption applies.

• Authorised to carry on general insurance business

The general insurance company must be authorised under the law of its place of residence to carry on general insurance business. This requirement ensures that the company meets regulatory requirements for general insurance businesses in its country of residence.

• Principally engaged in general insurance business

The general insurance company must also be principally engaged in the active carrying on of general insurance business during the period in which the exemption applies. [section 509]

Exemption for an interest in a foreign holding company of a foreign general insurance company

A company will qualify for this exemption if the following requirements are satisfied:

• Approved stock exchange

The shares you have in the holding company must be of a class listed on any stock market of a stock exchange approved in regulation 152I, Schedule 12 of the Regulations. See Appendix 1: Approved stock exchanges for more information.

• Designated a general insurance company

The holding company is included in a class of companies designated as engaged in general insurance on either:

• an approved stock exchange, or
  
   
• an approved international sectoral classification system.
  
   

See Appendix 3: Approved international sectoral classification systems for more information.

 

• Trading requirement

The class of shares you have in the holding company must be widely held and actively traded on a regular basis on a stock market of an approved stock exchange.

• Subsidiaries principally engaged in general insurance business

If the holding company has only one wholly owned subsidiary, that subsidiary must be authorised under the law of its place of residence to carry on general insurance business, and be principally engaged in the active carrying on of general insurance business.

If the holding company has more than one wholly owned subsidiary, the principal activities of the wholly owned subsidiaries in the group, considered together, must be the active carrying on of general insurance business. At least one of the wholly owned subsidiaries must be authorised under the law of its place of residence to carry on general insurance business. [section 509A]

Exemption for an interest in a foreign company engaged in certain activities connected with real property

You can qualify for this exemption if you have an interest consisting of shares in a publicly listed company whose activities are connected with commercial real property. The following requirements must be satisfied:

• Approved stock exchange

You hold shares in the company of a class listed on any stock market of a stock exchange approved in regulation 152I, Schedule 12 of the Regulations. See Appendix 1: Approved stock exchanges for more information.

• Trading requirement

The class of shares you hold in the foreign company must be widely held and actively traded on a regular basis on a stock market of an approved stock exchange during the period in which the exemption applies. [section 511]

• A foreign company principally engaged in real property activities

The foreign company must be principally engaged in actively carrying on one or more activities connected with real property.

The specified activities are:

• construction
• development of real property through capital improvement
• receipt of rental income from commercial real property owned by the foreign company where the management, maintenance and security services for the commercial property are principally provided by directors or employees of the foreign company or by a wholly owned subsidiary that is principally engaged in providing those services through its directors and employees
• provision of management services in respect of real property through directors or employees of the foreign company
• acting as agent for the sale or purchase of commercial real property. [subparagraph 511(b)(ii)]

Exemption for an interest in a foreign holding company of a foreign real property company

A company will qualify for the exemption from the FIF measures as a holding company of a real property company if the following requirements are satisfied:

• Approved stock exchange

You hold shares in the holding company of a class listed on any stock market of a stock exchange approved in regulation 152I, Schedule 12 of the Regulations.

See Appendix 1: Approved stock exchanges for more information.

• Designated a real property company

The holding company is included in a class of companies designated as engaged in one or more of the specified activities mentioned above on either:

• an approved stock exchange, or
  
   
• an approved international sectoral classification system.
  
   

See Appendix 3: Approved international sectoral classification systems for more information.

 

• Trading requirement

The class of shares you have in the holding company must be widely held and actively traded on a regular basis on a stock market of an approved stock exchange.

• Subsidiaries principally engaged in real property activities

If the holding company has only one wholly owned subsidiary, that subsidiary must be principally engaged in the active carrying on of one or more of the activities mentioned above that are connected with real property.

If the holding company has more than one wholly owned subsidiary, the principal activities of the wholly owned subsidiaries in the group, considered together, must be the active carrying on of one or more of the activities mentioned above. [section 511A]

Exemption for an interest of A$50,000 or less

Individuals (other than trustees) with small levels of offshore investments can qualify for an exemption. You may qualify for this exemption in one of two ways:

• If the total of your interests and your associates' interests in foreign companies, trusts and life policies does not exceed A$50,000, the FIF taxation provisions will not apply to your investments. [subsection 515(1)]
  
   
• If the total of your interests and your associates' interests in foreign companies, trusts and life policies and interests in resident public unit trusts does not exceed A$50,000, the FIF taxation provisions will not apply in calculating your share of net income of the resident public unit trust. [subsection 96A(2)]

Associates

Your associates include:

• your spouse, but does not include your spouse who, although legally married to you, has been living separately and apart from you for at least 12 months
• your child, whether or not the child lives with you
• your stepchild who lives with you
• your partner in a partnership and a spouse or child of the partner
• a trustee of a trust, other than a public unit trust or an eligible Part IX entity - for example, a superannuation fund, an approved deposit fund or a pooled superannuation trust - if you or an associate benefit under the trust, and
• a company in which you and your associates have a majority voting interest or which is sufficiently influenced by you and your associates.

If you are under 18 years of age, your associates include, in addition to the above:

• your parents, and
• your brother or sister. [section 491]

Direct interests in FIFs and FLPs

If you and your associates' direct interests in FIFs and FLPs are A$50,000 or less, the FIF taxation provisions do not apply. [subsection 515(1)]

Direct interests in resident public unit trusts

This test measures you and your associates' interests in Australian resident public unit trusts, FIFs and FLPs.

If the total of these interests is A$50,000 or less, your share of the net income of the resident public unit trust will not include any amount included in the net income of the trust under the FIF measures because of the FIF interests held by the trust.

If the interests are more than A$50,000 under both tests, you do not qualify for the exemption. The example below sets out how the exemption applies. [subsection 96A(2)]

Example: Exemption for interests of A$50,000 or less

A	B
Direct interests of taxpayer and associates in FIFs and FLPs	Direct interests of taxpayer and associates in resident public unit trusts	Total (A + B)	Does small investor exemption apply to direct interests in FIFs and FLPs?	Does small investor exemption apply to direct interests in resident public unit trusts?
$30,000	$15,000	$45,000	Yes	Yes
$26,000	$25,000	$51,000	Yes	No - therefore taxpayer's share of net income of resident public unit trust includes amounts which relate to FIF income of the trust.
$50,000	$1,000	$51,000	Yes	No - therefore taxpayer's share of net income of resident public unit trust includes amounts which relate to FIF income of the trust.
$1,000	$60,000	$61,000	Yes	No - therefore taxpayer's share of the net income of the resident public unit trust includes those amounts which relate to FIF income of the trust.
$60,000	$60,000	$120,000	No	No - therefore taxpayer's share of the net income of the resident public unit trust includes those amounts which relate to FIF income of the trust.

Exemption for temporary residents

From 1 July 2006, if you are a temporary resident at the end of an income year the FIF provisions will not apply to an interest you hold in a FIF or FLP for the notional accounting period that ends in that income year, in accordance with section 768-965 of the ITAA 1997.

You will qualify as a temporary resident under the definition of that term in subsection 995-1(1) of the ITAA 1997 if you meet all of the following conditions:

• you hold a temporary visa granted under the Migration Act 1958
• you are not an Australian resident within the meaning of the Social Security Act 1991, and
• your spouse (if applicable) is not an Australian resident within the meaning of the Social Security Act 1991.

However, if you are an Australian resident for tax purposes but not a temporary resident on or after 6 April 2006 you will not be entitled to the temporary resident exemptions from that time, even if you later hold a temporary visa.

For further information, see the electronic publications Foreign income exemption for temporary residents - introduction or Foreign income exemption for temporary residents - general questions.

Exemption for employer-sponsored foreign superannuation

If you are a natural person with an interest in a FIF that is an employer-sponsored superannuation fund, you may qualify for this exemption.

The FIF must be a superannuation fund maintained by your employer, or an associate of your employer, for the benefit of their employees. Also, you must be an employee or former employee of the employer. [section 519]

Exemption for an interest in a FIF that is trading stock

If an interest in a FIF forms part of your trading stock and you elect, under subsection 70-70(2) of the ITAA 1997 to bring those interests to account at market value, you are not subject to FIF taxation on income accruing from that interest. [section 521]

If you bring an interest in a FIF to account as trading stock but do not make the election to use market value, you must value your interest at the FIF cost for the purposes of the trading stock provisions in the ITAA 1997 [section 70-70 of the ITAA 1997].

This exemption is not available to a CFC that has an interest in a FIF as part of its trading stock. This is because a CFC cannot elect to value its trading stock at anything but cost when working out its attributable income under Part X of the ITAA 1936. For more information, see Taxation Determination TD 96/39 - Income tax: foreign income: can a controlled foreign company (CFC) obtain the benefit of the trading stock exemption under section 521 of the Income Tax Assessment Act 1936?. [section 397]

Exemption for an interest in a foreign company principally engaged in several activities

Your interest in a multi-industry foreign company is exempt from FIF taxation if the foreign company is principally engaged in two or more of the following activities:

• construction
• development of real property through capital improvement
• receipt of rental income from commercial real property owned by the company where the management, maintenance and security services for the property are principally provided by the directors or employees of the company or by a wholly owned subsidiary that is principally engaged in providing those services through the directors and employees of that subsidiary
• provision of management services for real property by the directors or employees of the company
• acting as agent in connection with the sale or purchase of commercial real property
• general insurance business of a kind that the company was authorised to carry on under the law of its place of residence
• life insurance business of a kind that the company was authorised to carry on under the law of its place of residence
• activities that allow an exemption under the active business exemption. [subparagraph 523(b)(ii)]

The foreign company must also be listed on a stock market of any approved stock exchange. The class of shares you hold in the foreign company must be widely held and actively traded on a regular basis on a stock market of an approved stock exchange during the period in which the exemption applies to you. A list of approved stock exchanges is at Schedule 12 of the Regulations. See Appendix 1: Approved stock exchanges. [section 523]

Exemption for an interest in a foreign holding company of a foreign mixed activity company

Your FIF interest will qualify for the exemption from the FIF measures as a holding company if the following requirements are satisfied [section 523A]:

• Approved stock exchange

Your shares in the holding company are of a class listed on any stock market of a stock exchange approved in Schedule 12 of the Regulations. See Appendix 1: Approved stock exchanges.

• Trading requirement

The class of shares you have in the holding company must be widely held and actively traded on a regular basis on a stock market of an approved stock exchange.

• Subsidiaries principally engaged in two or more specified activities

If the holding company has only one wholly owned subsidiary, that subsidiary must have been principally engaged in actively carrying on two or more of the activities mentioned above or in subparagraph 523(b)(ii).

If the holding company has more than one wholly owned subsidiary, the principal activities of the wholly owned subsidiaries in the group, considered together, must be the active carrying on of two or more of the activities mentioned above or in subparagraph 523(b)(ii).

Exemption for an interest in a premium trust fund by an underwriting member of Lloyd's

If you are an underwriting member of Lloyd's and have an interest in assets that form part of a Lloyd's premium trust fund, you are exempt from taxation for FIF income from that interest. Funds that qualify as premium trust funds are referred to in section 83 of the Insurance Companies Act 1982 (UK). [section 527]

Exemption for a balanced investment portfolio in FIFs

An exemption is provided for investment in non-exempt FIF activities if their aggregate value is not more than 10% of the value of your total investments in FIFs.

For the purposes of this exemption, your total investments do not include your interests which, at the end of a notional accounting period, are excluded from the FIF measures because you:

• are an attributable taxpayer
• have an interest in an employer-sponsored superannuation fund.

You value your FIF interests at the end of the income year at cost or market value, whichever is the greater. [section 525]

There are no restrictions on the types of FIFs that are eligible for this balanced portfolio exemption. The FIFs may include non-exempt activities such as financial services and they may or may not be listed on any stock exchange, approved or otherwise. They may also include trusts.

In the example below, Marika's interests in FIFs are excluded from the FIF measures because her interests in non-exempt FIFs are not more than 10% of her total FIF interests.

The United Kingdom superannuation fund is not included when working out total FIF interests, as it is an employer-sponsored superannuation fund.

Example: Investments in FIFs

Marika's FIF interest	Amount invested in FIFs	Exempt FIFs: percentage of total investments	Non-exempt FIFs: percentage of total investments
Company X - exempt shares listed on Athens stock exchange	$25,000	($25,000/$166,000) x (100/1) = 15.1%
Foreign financial intermediation services company - non-exempt	$5,000		($5,000/$166,000) x (100/1) = 3.0%
Company Y - satisfies active business exemption	$60,000	($60,000/$166,000) x (100/1) = 36.1%
United Kingdom employer superannuation fund	$150,000	This is an amount under Division 11 of Part XI and is not included in the total of FIF investments
Bank of United States - satisfies bank exemption	$66,000	($66,000/$166,000) x (100/1) = 39.8%
Swedish Foreign Trust - non-exempt	$10,000		($10,000/$166,000) x (100/1) = 6.0%
Total	$166,000	91.0%	9.0%

Note: For assessments for income years beginning before 1 July 2003, the allowable value for non-exempt FIF activities to satisfy the balanced portfolio exemption was only 5%.

Exemption for interests in certain FIFs resident in the United States

An exemption is available for your FIF interests in:

• an entity that is treated as a corporation and is subject to tax on its worldwide income, and
• a company or trust that is treated as a regulated investment company or real estate investment trust

for the purposes of the United States Internal Revenue Code 1986.

Subject to the conditions outlined below, an exemption is also available for your FIF interests in:

• a limited partnership or a limited liability company formed under a United States law or United States state law, and
• a common trust fund recognised under the United States Internal Revenue Code 1986. [subsection 513(2)]

Note: 'Entity' in the following text refers to limited partnerships, limited liability companies and common trust funds.

Your FIF interests in the entity are exempt if:

• your interest in the entity is held for the sole purpose of investing in
  • a business conducted in the USA, or
  • real property located in the USA, and
• the entity does not
  • have an interest in income or gains from non-USA sources
  • hold an interest in a FIF not resident in the USA, or
  • hold real property outside the USA. [subsection 513(3)]

Alternatively, your FIF interests in the entity are exempt where:

• the total value of the entity's interests in
  • income or gains from non-USA sources
  • non-USA FIFs, and
  • non-USA real property

does not exceed 5% of the total value of all interests held by the entity in other entities, and

• the value of assets held by the entity that
  • produce income from sources outside the USA, or
  • if disposed of would give rise to a gain from a source outside the USA

does not exceed 5% of the value of assets held by the entity. [subsection 513(4)]

Use the entity's accounting records to determine the values of FIF interests and assets when considering whether this condition for exemption is satisfied. [subsection 513(5)]

Exemption for complying superannuation entities, certain assets of life insurance companies and certain fixed trusts [Division 11A]

Complying superannuation entities

If you are the trustee of a complying superannuation entity, you are exempt from taxation under the FIF rules. Complying superannuation entities include complying superannuation funds, complying approved deposit funds and pooled superannuation trusts (PSTs) which take their meaning from the Superannuation Industry (Supervision) Act 1993.

If you are a superannuation entity that becomes non-complying, the exemption will not be available for each year that you are non-complying. Whether you are non-complying is to be determined in accordance with the Superannuation Industry (Supervision) Act 1993.

Virtual PST assets or segregated exempt assets of life insurance companies

If you have an interest in a FIF that is a virtual PST asset or a segregated exempt asset of a life insurance company, you are exempt from taxation under the FIF rules for that interest. Broadly, virtual PST assets are assets that support the complying superannuation business of life insurance companies. Income derived on virtual PST assets is concessionally taxed. Segregated exempt assets are assets that support the immediate annuity and current pension business of life insurance companies. Income derived on those assets is not taxed. [paragraph 519A(a) and subsection 519B(1)]

Fixed trusts

If you are the trustee of a fixed trust where all the fixed entitlements to shares of the income and capital of the trust at the end of the income year are held by trustees of complying superannuation entities, virtual PST assets or segregated exempt assets of life insurance companies, you are exempt from taxation under the FIF rules. This exemption may also apply to a chain of fixed trusts. [paragraph 519B(3)(a)]

The purpose of this exemption is to ensure that if complying superannuation entities pool their investments through a fixed trust, the investment will not be subject to the FIF rules.

There is a limited concession that allows the FIF exemption to continue to apply to the trust if a complying superannuation entity becomes non-complying. If a complying superannuation entity becomes non-complying, the FIF exemption may continue to be available to the trust provided:

• the non-complying superannuation entity was a complying superannuation entity when it became a beneficiary of the trust, and
• the entitlements of all non-complying superannuation entities are not more than 5% of the market value of the trust.

In relation to the first point, it does not matter if a complying superannuation entity is later notified that it was non-complying for the year in which it became a beneficiary of the trust.

In relation to the second point, if the interests of the beneficiaries that are non-complying superannuation entities exceed the 5% threshold, the exemption will not apply to the trust in each year that the threshold is exceeded. In these circumstances, all beneficiaries (including complying and non-complying superannuation entities) will effectively become liable to tax on any FIF income of the trust. [paragraphs 519B(4) (a) and (c)]

Will this exemption apply to a chain of trusts?

This exemption can apply to a chain of fixed trusts. A fixed trust whose only beneficiary is a fixed trust that qualifies for the FIF exemption will also qualify for the FIF exemption. A fixed trust whose beneficiaries comprise fixed trusts that qualify for the FIF exemption, complying superannuation entities (and potentially non-complying superannuation entities entitled to not more than 5% of the assets of the fixed trust), virtual PST assets and segregated exempted assets will also qualify for the exemption.

Note: This exemption applies only to assessments for income years beginning on or after 1 July 2003.

Chapter 4: Methods of FIF taxation

You must work out the FIF or FLP income accruing to you separately for each FIF or FLP in which you hold an interest or interests.

Use one of the following methods to decide the amount of FIF income accruing to you from a FIF company or trust during a notional accounting period:

• market value method
• deemed rate of return method
• calculation method.

Where practical, taxpayers liable to pay tax under the FIF measures may use the market value method to work out the FIF income to include in their assessable income.

Use the deemed rate of return method where you are unable to establish a market value for your FIF interest and you have not elected to use the calculation method.

Alternatively, you may elect to use the calculation method if you have access to the financial accounts of the FIF and are able to determine your share of the FIF's calculated profit or calculated loss.

If you use the calculation method for a FIF you must also elect the 12-month accounting period used by that FIF as its notional accounting period. [subsections 486(3) and 535(5)]

There are two methods for determining the amount of FIF income that accrues from an interest in a FLP:

• the deemed rate of return method, and
• the cash surrender value method. [section 536]

The method you adopt will depend on the access you have to information on the company or trust in which you hold an interest. You will need to satisfy certain conditions to elect to use the cash surrender value method.

Part-year resident

If you are a resident of Australia for a part or parts of an income year in which a notional accounting period of a FIF or a FLP ended, the amount of FIF income assessable to you is worked out using the following formula:

FIF income

X

Number of days of residence Total number of days

FIF income means the amount of FIF income that accrued to you from the FIF or the FLP during the notional accounting period that was calculated using any one of the methods for working out FIF income.

Number of days of residence means the number of days in the notional accounting period of the FIF or FLP that you were a resident of Australia.

Total number of days means the total number of days in the notional accounting period. [paragraph 529(2)(b)]

Value for the acquisition or disposal of an interest in a FIF or FLP

In determining FIF income, if you acquire or dispose of interests in a FIF or a FLP for no consideration, or you are not dealing at arm's length and you acquire or dispose of FIF or FLP interests for inadequate or excessive consideration, you must value the interests at market value. The valuation is to occur at the time of acquisition or disposal of the interests. [section 490]

Market value method

Overview

Under the market value method, the amount of FIF income is decided in two steps.

1. Step 1 works out the movement in the market value of the FIF interest, generally between two annual reporting dates.
2. Step 2 allows for the deduction of any previous year's FIF losses if the losses have not been used in an earlier year.

Working through these steps gives you the amount of FIF income to include in your assessable income.

The following information will help you to complete Worksheet 1: Market value method.

Step 1: Working out the movement in the market value [section 538]

Box A

Write the market value of your interests in the FIF on the last day of the notional accounting period at A.

Box B

Write the total value of distributions to you by the FIF during the notional accounting period for the interests held on the last day of the notional accounting period at B.

If you disposed of an interest in a FIF during the notional accounting period, also include the value of distributions made by the FIF before disposal.

Box C

Write the opening market value (at the beginning of the notional accounting period) of the interests you held on the last day of the notional accounting period at C.

If you used the deemed rate of return method to value your interests in the previous notional accounting period, use that method to determine the opening value of your interests for the notional accounting period. Write this amount at C.

Box D

Insert the total cost of any interests in the FIF that you acquired during the notional accounting period and held on the last day of that period.

Usually, you must write the amounts at B, C and D in the currency you used for the amount at A. [subsection 538(3)] However, the market value method gives you an irrevocable election to use Australian currency in working out all your FIF income.

This brings to account currency exchange gains and losses at the time the transactions and values relevant to the determination of FIF income occurred.

If you make the election, you must write the amounts at A, B, C and D in Australian currency. [subsections 538(4) and (5)]

Exchange rates for FIF values
Use exchange rates applicable on the following days for the market value method	when converting the following to Australian currency
Last day of each relevant notional accounting period for each FIF interest	Market value of a FIF interest
Day of each distribution made by a FIF	Distribution made by a FIF
Day you acquired the FIF interest	Acquisition value of a FIF
Last day of the notional accounting period of the FIF for the relevant income year	Excess of FIF income over FIF losses
Last day of the notional accounting period of the FIF in which the loss occurred	FIF loss
Last day of the notional accounting period of the FIF	FIF losses to the same currency as the gross FIF income - not necessarily Australian currency

Box E

Take away the sum of C and D from the sum of A and B. This is the FIF amount.

Gross FIF income

If the FIF amount is positive, that amount represents the gross FIF income of the FIF as it relates to you. [section 540]

FIF loss

If the FIF amount is negative, the amount is a FIF loss.

This FIF loss may be used to offset your assessable income but only to the extent that you have previously been subject to FIF taxation from that FIF - that is, to the extent that you have a FIF attribution surplus in relation to that FIF.

Where there is no FIF attribution surplus the FIF loss must be carried forward to be applied against future gross FIF income of that FIF. You cannot use a FIF loss in relation to one FIF to reduce the gross FIF income of another FIF. [sections 532 and 541]

Step 2: Working out the amount to include in assessable income

Box F

Write the total of any unapplied previous FIF losses at F. [subsection 542(2)]

If it is not already the case, you must convert the unapplied previous FIF loss to the same currency as the gross FIF income - that is, the amount at E. [subsection 542(8)]

Unapplied previous FIF loss

An unapplied previous FIF loss is the amount by which the undeducted amount of a FIF loss is more than the sum of any gross FIF income from your interest in that particular FIF. [subsection 542(5)]

The undeducted amount of a FIF loss is the amount of a FIF loss that has not been allowed as a deduction from your assessable income. [section 532 and subsection 542(6)]

If, in respect of a particular notional accounting period, you are entitled to an exemption under Divisions 2 to 9 and 11 to 15 of the ITAA 1936, the loss must be reduced by the gross FIF income calculated as if the exemptions did not apply for that particular notional accounting period. [subsection 542(5)]

Once you have used a FIF loss to work out if there was, for any notional accounting period, an unapplied previous FIF loss, you cannot use that loss again in later notional accounting periods. [subsection 542(7)]

In working out your unapplied previous FIF losses, apply only that gross FIF income accruing after the notional accounting period in which you incurred the loss and before the current notional accounting period in which you have a gross FIF income. [subsection 542(5)]

Box G

Take away the amount at F from the amount at E. This gives you your FIF income.

Box H

Convert your FIF income to Australian dollars at the rate of exchange applying at the end of the relevant notional accounting period. Write the converted amount at H.

The amount at H is your FIF income. Include it in your assessable income after allowing for a reduction for assessable distributions from the FIF. Read Chapter 6: Avoiding double taxation for more information.

Boxes I, J and K

If any of the distributions referred to above are dividends, interest payments or trust distributions, or your FIF interest relates to shares acquired under an employee acquisition scheme - see Reduction of FIF income for FIF interests acquired under an employee share scheme in chapter 6 - use I, J and K to arrive at the amount to include in your assessable income. [sections 530, 530A and 603]

If you are entitled to a reduction of FIF income, add the amount of the reduction to any amount at J.

Determining market value

You determine market value by referring to the quoted market values for the FIF interests. Only quotations from an approved stock exchange will be accepted. See Appendix 1: Approved stock exchanges. [section 539]

If you have interests in certain FIFs that are not listed on an approved stock exchange, you may be able to use:

• a buy-back, offer or redemption price, or
• the price of an offer to purchase a particular FIF by an associate of that FIF.

The buy-back, offer or redemption price must be:

• publicly available
• offered to all persons having an interest of that class in the FIF
• worked out by reference to the market value of the assets of the company or trust, and
• representing an arm's length valuation of the interest on that day. [subsection 539(3)]

Worksheet 1: Market value method will help you to understand the following examples. The letters in brackets refer to the boxes on worksheet 1.

Example: FIF income included in assessable income

The opening value of a FIF interest at 1 July 2005 was HK$50,000 (C).

At the end of the notional accounting period, 30 June 2005, the closing value of the interest was HK$53,000 (A).

There were no brought forward losses or acquisitions or disposals during the notional accounting period (D).

On 30 April 2005, during the notional accounting period, there was a distribution - an interim dividend - of HK$1,000 (B).

The FIF amount, as worked out in step 1 is:

[HK$53,000 (A) + HK$1,000 (B)] - [HK$50,000 (C) - nil (D)] = HK$4,000 (E)

This amount is converted to Australian currency, using the rate of exchange that applied at the end of the notional accounting period (30 June 2005). Assuming that the exchange rate is A$1.00 = HK$5.00, the FIF income is A$800 - that is, HK$4,000 divided by five.

The distribution of HK$1,000 = A$200 and is assessable under section 44 of the ITAA 1936.

Because the distribution received was a distribution to which subsection 530(1) applies, the FIF income of A$800 (H) is reduced by the amount of the distribution: A$200 (J). Therefore, your assessable income would include A$600 FIF income. Write the dividend amount (A$200) at (J). Subtract (J) from (H) and write the answer at (K).

Example: Unapplied previous FIF loss

The opening value of a FIF interest was HK$50,000 (C) and at the end of the notional accounting period (30 June) the closing value of the interest was HK$45,000 (A).

There were no brought forward losses or acquisitions, disposals (D) or distributions (B) during the accounting period.

The decrease in market value - that is, the FIF amount - would be:

[HK$45,000 (A) + nil (B)] - [HK$50,000 (C) - nil (D)] = - HK$5,000 (E)

This FIF loss of HK$5,000 may be used to reduce gross FIF income in later years.

Deemed rate of return method

You may use this method where you cannot apply the market value method and you do not elect to use the calculation method.

The following four steps will help you to complete Worksheet 2: Deemed rate of return method for FIFs.

Step 1: Group your interests

Apply the deemed rate of return method separately to each group of interests. Determine the group or groups of interests you hold in a FIF at the end of the FIF's notional accounting period. [section 544]

Meaning of a group of interests in a FIF

If you had only one interest in a FIF during the notional accounting period, that interest is a group. [subsection 544(2)]

Interests in a FIF that are of the same class - for example, two parcels of class A shares - and that you held during the same period are treated as a group of interests. However, if interests are of different classes - for example, class A and B shares with different rights - treat each class as a separate group. Shares of the same class which are not held for the same period during the FIF's notional accounting period also form different groups. If you had two or more interests in a FIF that are not of the same group of interests, apply the deemed rate of return method separately to each group. [subsections 544(3), (4) and (5)]

Step 2: Working out the opening value

Box A

This step determines the opening value of your interest in the FIF at the beginning of the notional accounting period.

Opening value where the interests in a FIF were acquired during a notional accounting period

If you acquired the interests in a FIF during the notional accounting period, the opening value of the interests is the consideration you paid or gave for the acquisition. [section 554]

Opening value where the deemed rate of return method applied in the previous year

Where you applied the deemed rate of return method to a group of FIFs in the immediately previous notional accounting period, work out the opening value of the FIF for the current period as follows:

• use the opening value of the group of FIFs at the beginning of the previous period
• add the FIF income for the previous notional accounting period
• take away any distributions made by the FIF in the previous notional accounting period. [section 551]

Distributions include any amount paid or credited, or property distributed to you by the FIF, either as income or capital. They include the issue to you of further interests in the FIF in lieu of your entitlement to a payment by the FIF.

Distributions do not include the issue to you of further interests where you do not pay consideration or forgo payment in exchange for those further interests. [section 474]

Opening value where the market value method applied in the previous year

If the market value method was applied in the immediately previous notional accounting period, the opening value for the current year is the market value of the interest in the FIF at the end of that period. [section 553].

Opening value where the calculation method or an exemption applied in the previous year

Where the calculation method or an exemption from FIF taxation applied or the operative provision did not apply in the immediately previous notional accounting period, use one of the following methods to decide the opening value for the current period.

• Where the FIF interest was quoted on an approved stock exchange at any time during the immediately previous notional accounting period, use the quoted price for the latest day of that period as the opening value for the current period.
  
   
• If the FIF interest was not quoted on an approved stock exchange on the last day of the previous notional accounting period, begin with the original consideration paid and apply the deemed rate of return notionally to every notional accounting period, from the date of acquisition up to the immediately previous notional accounting period. This determines an opening value for the current period. [section 552]

Previous year losses

When you switch to the deemed rate of return method, you cannot apply previous year FIF losses that you accumulated under either the calculation method or the market value method.

Step 3: Working out the FIF amount

Box C

Once the opening deemed value has been decided, the FIF amount - that is, the movement in the value of the FIF during the notional accounting period - is worked out by applying the following formula.

Opening value x deemed rate of return

X

Number of days held 365

Opening value means the amount worked out in step 2 above.

Deemed rate of return is the 'base' interest rate plus 4%.

The base interest rate is the monthly average yield of the 90-day bank accepted bill rate [subsection 8AAD(2) of the Taxation Administration Act 1953]. The interest rate is published by the Reserve Bank of Australia every quarter. If two or more rates apply in the income year, use the weighted average of those rates.

Number of days held is the number of days in the notional accounting period in which you had the interests in the group.

Step 4: Determining the amount of FIF income to include in assessable income

The final step in applying the deemed rate of return method is to convert the FIF amount to Australian currency. [sections 556 and 557]

Use the rate of exchange that applied at the end of the notional accounting period to convert the FIF amount worked out in step 3 for each group of interests to the corresponding amount in Australian currency. If there is only one group of interests, the FIF income will be the amount converted into Australian currency. If there is more than one group, the FIF income will be the total of the FIF amounts. [section 556]

Include the FIF income in your assessable income subject to reduction by certain assessable distributions from the FIF. [sections 529 and 557] See Reduction of FIF income for distributed profits in chapter 6 for more information.

Example: FIF income using deemed rate of return method

On 1 January 2007, Harold acquired 2000 Class A shares and 1000 Class B shares in a Hong Kong company. Each class of shares is a different group.

The parcel of Class A shares had a value of HK$200,000 and the parcel of Class B shares had a value of HK$100,000. Harold worked out his FIF income under the deemed rate of return method as follows:

Opening value x 9.62%* x (number of days held/365)

Class A shares:	HK$200,000 x 9.62% x (181/365)
FIF amount:	HK$9,541
Class B shares:	HK$100,000 x 9.62% x (181/365)
FIF amount:	HK$4,770

The FIF amounts for the groups are HK$9,541 and HK$4,770, respectively.

The opening deemed values for the following notional accounting period would be HK$209,541 for the Class A shares and HK$104,770 for the Class B shares.

* 9.62% = weighted average of two quarterly rates

[(9.63 x 90/181) + (9.61 x 91/181)]

Harold acquired 1000 Class C shares on 1 October 2005, 92 days into the FIF's notional accounting period, for HK$240,000. He applied the deemed rate of return method for the group constituted by the Class C shares as follows:

Opening value x 9.62%** x (number of days held/365)

Class C shares:	HK$240,000 x 9.62% x (273/365)
FIF amount:	HK$17,269

Assume that the exchange rate is A$1.00 = HK$5.00. The FIF income for the three groups of A, B and C class shares is the sum of:

Class A shares:	HK$9,541/5	A$1,908
Class B shares:	HK$4,770/5	A$954
Class C shares:	HK$17,269/5	A$3,454
Total FIF income:		A$6,316

Harold included A$6,316 in his assessable income. [section 529]

** 9.62% = weighted average of three quarterly rates

[(9.62 x 92/273) + (9.63 x 90/273) + (9.61 x 91/273)]

Calculation method

Overview

To use the calculation method, you must work out the calculated profit or calculated loss of a FIF for a notional accounting period.

You will need access to detailed information about your FIF interest. The calculation method uses a simplified version of Australian taxation law to work out the profit of your FIF which is then attributed to you and included in your assessable income. The calculation method applies to foreign companies and foreign trusts. [sections 580 and 582]

If there is a calculated loss, you may carry your share forward and take it into account for subsequent notional accounting periods.

If there is a calculated profit, you must determine your share. Do this by multiplying the calculated profit of the FIF for the notional accounting period by your percentage interest in the FIF at the end of that period. Work out the calculated profit or loss in the currency of the FIF accounts and then convert the amount to Australian currency at the exchange rate that applies for the last day of the notional accounting period. Include the resulting amount in your assessable income for the income year in which the notional accounting period of the FIF ends. [sections 558, 559 and 572]

Worksheet 3: Calculation method will help you to work out your calculated profit or loss.

Election to use the calculation method

You can use the calculation method only if you elect to do so. You must then apply it to all interests in a particular FIF. If you subsequently use another method for the same FIF interests, you cannot use the calculation method again for that FIF or any interests you acquire in that FIF in the future. [section 535]

If you make an election to use the calculation method, you must also elect to use the period for which the FIF makes out its accounts as its notional accounting period. [subsections 486(3) and 535(5)]

The first notional accounting period of the FIF for which you use the calculation method may be for a shorter period than the period for which the FIF makes out its accounts. In this case, you would work out FIF income for the entire period for which the FIF makes out its accounts and apportion the resulting FIF income on a time basis.

Working out the calculated profit or loss of the FIF

To determine the calculated profit or calculated loss of a FIF, first work out the notional income of the FIF.

The second step is to work out the notional deductions for that notional income. If the notional income is greater than the notional deductions, the difference is the calculated profit of the FIF for the notional accounting period. If the notional income is less than the notional deductions, the difference is the calculated loss of the FIF for the notional accounting period. [section 559]

Step 1: Determining the notional income of a FIF

Box A

The notional income of a FIF takes into account the gross income and profits or gains of a capital or revenue nature that the FIF derives during its notional accounting period. [subsection 560(1) and section 566]

It includes:

• amounts grossed up for foreign or Australian taxes paid by the FIF
• net income from partnerships
• discounted amounts or deferred interest from securities treated as derived in the FIF accounts, and
• income, profits or gains reinvested, accumulated, capitalised, carried to a reserve, sinking fund, insurance fund or similar fund on behalf of the FIF. [sections 560 to 566]

Profits of a revenue nature and gains of a capital nature are included in notional income when 'derived' by the FIF, usually as a net amount. The net amount does not include any amount previously taken, or subsequently to be taken, into account because an amount cannot be deducted twice. [subsections 560(2) and 574(2)]

If a first tier FIF has an interest in another FIF or a FLP - a second tier FIF - during the notional accounting period of the first tier FIF that ended in your income year, an amount of second tier FIF income will be included in the notional income of the first tier FIF. [section 576]

When applying the FIF measures to the second tier FIF, you can elect to use the calculation method to determine its FIF income only if you have elected to use the calculation method for the first tier FIF. The income for the second tier FIF is worked out as though the first tier FIF were a resident but with only the exemption for interests in certain FIFs resident in the United States being granted. No other exemptions available to Australian residents are allowed. [section 575]

If you do not make an election to use the calculation method for the second tier FIF, you must work out the FIF income arising from the second tier FIF using the market value method or the deemed rate of return method. [section 535]

If you elect to use the calculation method for a second tier FIF, the notional income of the second tier FIF will include FIF income from a FIF or a FLP - a third tier FIF - in which the second tier FIF has an interest. [section 579]

However, you cannot use the calculation method for a third tier FIF. The notional income of the second tier FIF includes FIF income from a third tier FIF using either the market value method or the deemed rate of return method. [subsection 577(2)]

The notional income of a FIF for a notional accounting period which ended during the income year does not include any dividend or distribution paid to the FIF by another FIF. [section 564]

Step 2: Determining the notional deductions

Box B

Most expenses of a FIF are deductible in the notional accounting period in which they are incurred, provided that those expenses relate to income and profits or gains of a revenue or capital nature that has been included when working out the notional income of the FIF. [sections 567 to 574]

Notional deductions include:

• expenditure in acquiring trading stock except acquisition costs of securities, interest in shares, trusts or partnerships which are brought to account on a revenue basis
• the FIF's share of a partnership loss where the FIF was a partner at the end of the partnership's accounting period that ends in the notional accounting period of the FIF
• calculated unapplied losses of the FIF for previous periods used in the order in which they were incurred
• Australian and foreign taxes paid by the FIF that relate to the notional income of the FIF for the relevant period
• amortisation of acquisition costs of plants, articles and industrial properties based on the effective life of such items, but only if such amounts are included in the FIF's accounts
• net capital losses but not
  • amounts previously allowed as a notional deduction
  • amounts that would have been allowed as a notional deduction if the calculation method had been applied but was not because, for example, an exemption applied.

Notional deductions do not generally include:

• acquisition costs - other than for incidental costs and trading stock
• debt repayments
• expenditure previously allowed as a notional deduction, and
• amortisation of acquisition of property except plant and equipment, licences and patents.

Working out the attribution percentage for interests in a FIF

Your assessable income must include your attribution percentage of a FIF's calculated profit.

Attribution percentage for interests in a foreign company

Boxes E and G

The attribution percentage for your FIF interest is equal to the percentage that you hold or were entitled to acquire at the end of the notional accounting period in:

• the total paid-up share capital of the company
• the total rights to vote or to participate in decision making in relation to
  • distributions of profit or capital of the company
  • the constituent document of the company
  • a variation to the share capital of the company, or
• the total rights to distributions of profit or capital on winding-up, or at any other time.

The FIF attribution percentage will be the greatest of these percentages if different percentages arise under the different types of rights described above. [section 581]

Where Australian residents hold or were entitled to acquire attribution percentages which together are greater than 100% for a particular FIF, the total percentage is reduced to 100% and each individual taxpayer's attribution percentage is reduced proportionately. [subsection 581(4)]

Attribution percentage for interests in a foreign trust

Boxes E and G

When all the income, profits or gains - referred to below as income - derived by a foreign trust during a notional accounting period consist of either or both:

• income to which beneficiaries were presently entitled, and
• income to which beneficiaries were not presently entitled, but which was distributed to beneficiaries during, or within two months after the end of, the notional accounting period,

then the attribution percentage is the percentage of the total income derived by the trust to which you were presently entitled or were not presently entitled but which was distributed to you during, or within two months after the end of, the notional accounting period.

If the income, profits or gains of a foreign trust are not fully distributed or allocated to beneficiaries, your attribution percentage will be equal to the greater of the percentages of your interest in or entitlement to acquire:

• the income of the trust, or
• the capital of the trust. [subsection 582(7)]

Where the total of all Australian residents' attribution percentages is greater than 100%, each individual taxpayer's attribution percentage is reduced proportionately so that the total is 100%. [subsection 582(6A)]

Working out the amount to include in assessable income

To work out the FIF income, multiply the calculated profit of a FIF for a notional accounting period by your attribution percentage in the FIF at the end of that period. [sections 580 and 582]

Taxpayer's share of FIF income

=

calculated profit

X

attribution percentage

The FIF income is included in your assessable income subject to reduction by certain assessable distributions from the FIF. See Chapter 6: Avoiding double taxation for more information.

Part-year holding

The calculation method allows for an interest in a FIF that you acquired during a notional accounting period. Modify the above formula by multiplying it by the proportion of the period (in days) that you held the interest.

Example: Use of the calculation method for a part-year holding

Agostino acquired a 1% interest in a FIF on 1 January 2007. He uses the calculation method and accordingly elects for the notional accounting period of the FIF to be the same as the period for which the FIF makes out its accounts - that is, 1 July to 30 June each year. The calculated profit of the FIF for the period 1 July 2006 to 30 June 2007 is A$10 million. Agostino would include A$49,589 in his assessable income, worked out as follows:

A$10 million x 1% x (181/365) = A$49,589

Chapter 5: Foreign life assurance policies

This chapter explains the application of the FIF measures to taxpayers who have an interest in a FLP. It explains:

• what a FLP is
• when a taxpayer is considered to have an interest in a FLP
• the period where the interest in the FLP is taxable
• what a FLP's notional accounting period is, and
• the two methods of taxation that are used to determine FIF income in relation to an interest in a FLP.

Meaning of a FLP

Your FLP for an income year is a life assurance policy issued by an entity that was not a resident at any time in that income year.

A life assurance policy is one that provides for the payment of benefits:

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

A life assurance policy also includes an instrument that grants an annuity for a term dependent upon a human life. [subsection 482(2)]

The FIF measures do not apply to the following four categories of life policies:

• an Australian policy, provided that the entity which 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 provide for payment of benefits 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 is expected to continue, or within which the life concerned is 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, after that date, been materially altered, or
• a contract of reinsurance between a resident insurer and a non-resident reinsurer for life assurance policies that provide only life cover. [paragraphs 482(2)(e) and (f)]

You have an interest in a FLP if you have legal title to the FLP. [subsection 483(3)]

Interest in a FLP subject to taxation

Your assessable income for an income year includes FIF income if:

• you had an interest in a FLP at any time during the FLP's notional accounting period that ends in your income year, and
• you were a resident of Australia at any time in that income year. [subsection 485(4)]

Notional accounting period of a FLP

The FIF income that is included in your assessable income is calculated for a 'notional accounting period' of the FLP.

A notional accounting period of your FLP will generally coincide with your income year - that is, a 12-month period ending 30 June each year.

If the FLP existed before 1 January 1993, the first notional accounting period of the FLP commences on 1 January 1993 and ends on 30 June 1993. If the policy came into existence on or after 1 January 1993, the first notional accounting period commences on the day that it came into existence and ends on the following 30 June. [subsection 487(7)]

Electing a notional accounting period

You may elect a different notional accounting period if a cash surrender value of your FLP is available on a day in the same month of each calendar year ('the relevant day'). This election is irrevocable for as long as you hold an interest in that particular FLP.

If you elect a different notional accounting period, your FLP's new notional accounting period will begin on the first day of the month following the last day of the month in which the relevant day occurs, and ends at the end of the month in which the next relevant day occurs.

Example: Election of notional accounting period for a FLP

The current notional accounting period of Judith's FLP is 1 July to 30 June each year. In November of each year a cash surrender value becomes available for her FLP. In September 2006 she elected to use a different notional accounting period for her FLP. The new notional accounting period will begin on the first day of the month following November - that is, 1 December - and end 12 months later on 30 November each year.

However, the first new notional accounting period of Judith's FLP did not begin in the December following the election (December 2006) but in the December before the election was made (December 2005). Therefore, the first new notional accounting period for Judith's FLP was 1 December 2005 to 30 November 2006.

The months between the start of her old notional accounting period (1 July 2005) and the start of her new notional accounting period (1 December 2005) are also a notional accounting period - that is, 1 July 2005 to 30 November 2005. [section 487]

Judith's FIF income for the period 1 July 2005 to 30 November 2005 was returned in the 2005-06 income year. Her FIF income for the period 1 December 2005 to 30 November 2006 was included in the 2006-07 income year.

Methods of taxation applicable to FLPs

You must work out FIF income for an interest in a FLP using either:

• the deemed rate of return method, or
• the cash surrender value method.

Choosing the taxation method

The deemed rate of return method is applied to your interest in a FLP unless you elect to use the cash surrender value method. [subsections 536(1) and (2)]

If you elect to use the cash surrender value method, you must also elect to use a notional accounting period for the FLP that coincides with the period for which the cash surrender values are available. [section 487 and subsection 536(3)]

An election to apply the cash surrender value method is irrevocable. [subsections 487(3) and 536(5)]

Deemed rate of return method

The deemed rate of return method for FLPs is similar to the deemed rate of return method for FIFs. Four steps are used to work out your FIF income.

The following information will help you to complete Worksheet 4: Deemed rate of return method for FLPs.

Step 1: Interests in a FLP

Determine whether you have one or more interests in the FLP during a notional accounting period.

If you acquired interests in the same FLP at different times during a notional accounting period, you must apply the deemed rate of return method separately for each interest for the period from when you acquired it. [section 585]

Step 2: Working out the opening value

Box A

This step decides the opening value of the FLP.

If you had the interest in the FLP at the beginning of a notional accounting period, the opening value is the value on the day before the first day of the period.

Opening value where the deemed rate of return method has been applied in the previous year

If you used the deemed rate of return method in the immediately preceding notional accounting period, work out the opening value as follows.

• Determine the deemed value of the FLP at the commencement of the preceding notional accounting period.
• Add the FIF income of the FLP for its preceding notional accounting period.
• Add the value of any premiums paid during the preceding notional accounting period.
• Take away any distributions the FLP made in the preceding notional accounting period. [sections 586 and 590]

Opening value where the interest is acquired during the notional accounting period

If you acquired the interest in the FLP during a notional accounting period, the opening value is its cost if you paid the full consideration. In any other case, the opening value is the amount of the first premium paid. [paragraph 586(b) and section 591]

Note: There are also special rules when reverting to the deemed rate of return method following the application of the cash surrender method. [subsections 536(8) to (9)]

Step 3: Working out the movement in the value of the FLP

Box C

Once you have determined the opening deemed value, work out the FIF amount - that is, the movement in the value of the FLP - by applying the following formula. [section 592]

opening value

X

deemed rate of return

X

number of days held 365

Opening value is the amount determined in step 2.

Deemed rate of return is the 'base interest rate' plus 4%.

The base interest rate is the monthly average yield of the 90-day bank accepted bill rate [subsection 8AAD(2) of the Taxation Administration Act 1953]. The interest rate is published by the Reserve Bank of Australia every quarter. If two or more rates apply in the relevant income year, use the weighted average of those rates.

Number of days held is the number of days in the notional accounting period in which you had the interests in the FLP.

Step 4: Working out the amount to include in assessable income

Box D

The final step in applying the deemed rate of return method is to convert the FIF amount to Australian currency.

Use the rate of exchange that applied at the end of the notional accounting period to convert each FIF amount at C to FIF income in Australian currency. [sections 593 and 594]

The FIF income at F is included in your assessable income, subject to reduction by certain assessable distributions from the FLP. Chapter 6: Avoiding double taxation has more information.

Example: Use of the deemed rate of return method for FIF income from a FLP

Lal acquires a FLP on 1 January 2003 for HK$250,000.

For the first year, under the deemed rate of return method, he multiplies the opening value by the deemed rate of return as follows:

HK$250,000 x 8.79%* x (181/365)

FIF income = HK$10,897

Lal includes the FIF income in his assessable income after converting it to Australian dollars using the exchange rate applicable on 30 June.

* 8.79% = weighted average of two quarterly rates

[(8.84 x 90/181) + (8.75 x 91/181)]

Cash surrender value method

Overview

The cash surrender value method of working out FIF income applies only to FLPs.

This method decides whether any FIF income accrues to you from an interest in a FLP by taking into account changes in the cash surrender value of your interest in the FLP over a 12-month period.

Under the cash surrender value method, the amount of the FIF income is calculated in two steps:

1. The first step works out the movement in the cash surrender value of the FLP, generally between two annual reporting dates.
2. The second step allows an adjustment for losses of prior years.

The result of these calculations is the amount of foreign investment fund income that you must include in your assessable income.

The following information will help you to complete Worksheet 5: Cash surrender value method for FLPs.

Step 1: Working out the movement in the cash surrender value

The movement in the cash surrender value of your interests in the FLP which have a cash surrender value at the end of the notional accounting period is worked out as follows. [subsection 596(2)]

Use the same currency at B to G as you use for the cash surrender value at A. [subsection 596(3)]

Box A

Write the cash surrender value of your interests in the FLP on the last day of the notional accounting period at A.

Box B

Write the value of distributions the FLP made to you during the notional accounting period for those interests held on the last day of the notional accounting period at B.

Boxes C and D

If you disposed of an interest in the FLP during the notional accounting period, write:

• the value of distributions the FLP made to you for that disposed interest at C, and
• the amount you received for the disposal at D.

Box E

Insert the opening cash surrender value of the interest at the commencement of the notional accounting period.

If you used the deemed rate of return method for the same interest in the immediately preceding notional accounting period, use the value determined by that method for the last day of that period.

Box F

Insert the amount you paid or gave in respect of contributions to the interest in the FLP during the notional accounting period.

Box G

Subtract the sum of E and F from the sum of A to D. This gives you the FIF amount.

• Gross FIF income

If the FIF amount is positive, it is your gross FIF income from the FLP. [section 598]

• FIF loss

If the FIF amount is negative, a FIF loss has occurred. In certain circumstances, you may use this FIF loss to offset your assessable income in later income years. See Chapter 6: Avoiding double taxation. [sections 533 and 599]

Step 2: Working out the amount to include in assessable income

In this step you calculate the amount of FIF income by subtracting the total of any 'unapplied previous FIF losses' from the gross FIF income calculated in step 1. [section 600]

Unapplied previous FIF losses

An unapplied previous FIF loss represents an amount equal to the losses you have incurred from the FLP for previous notional accounting periods that exceed the gross FIF income from the FLP for those periods.

When working out the unapplied previous FIF losses, the undeducted amount of a FIF loss is that part of a FIF loss that has not been allowed as a deduction from your assessable income in a previous income year. [subsection 600(6)]

If, for a particular notional accounting period, you are entitled to an exemption for a FLP interest of $50,000 or less, the loss must be reduced by the gross FIF income calculated as if the exemption did not apply for that particular notional accounting period. [subsection 600(5)]

Once you have used a FIF loss to work out if there was, for any notional accounting period, an unapplied previous FIF loss, you cannot use that loss again in later notional accounting periods. [subsection 600(7)]

Also, in determining the gross FIF income to use to work out the unapplied previous FIF losses, apply only that gross FIF income accruing after the notional accounting period in which you incurred the loss and before the current notional accounting period in which you have a gross FIF income. [subsection 600(5)]

Box H

Insert the total of any unapplied previous FIF losses for your FLP. [subsection 600(2)]

If it is not already the case, use the exchange rate that applied at the end of the notional accounting period to convert the unapplied previous FIF loss to the same currency as the gross FIF income at G. [subsection 600(8)]

Box I

Subtract the amount at H from the amount at G. This will give you your FIF income.

Box J

Convert your FIF income to Australian dollars at the exchange rate that applied at the end of the relevant notional accounting period. Insert the converted amount at J. [subsections 600 (3) & (4)]

The amount at J is your FIF income. Include it in your assessable income after allowing for a reduction for certain assessable distributions from the FLP. Read chapter 6 for more information.

Boxes K, L and M

If any of the distributions referred to at B, C and D above are payments made by the entity which issued the FLP to you, use K, L and M to arrive at the amount to include in your assessable income.

You must read chapter 6 because the reduction of your FIF income cannot be more than the total of your FIF income for the current income year. [sections 530 and 603]

Example: Increase in cash surrender value

The opening cash surrender value of an interest in a FLP at 1 July was HK$50,000 (E).

At the end of the notional accounting period, 30 June, the closing value of the interest was HK$53,000 (A).

There were no brought forward losses and no acquisitions, disposals or distributions (B, C, D and F) during the notional accounting period.

The increase in cash surrender value, the FIF amount, is HK$3,000, worked out as follows:

[HK$53,000 (A) + nil (B) + nil (C) + nil (D)] - [HK$50,000 (E) - nil (F) = HK$3,000 (G)]

Chapter 6: Avoiding double taxation

The foreign investment fund (FIF) measures have a number of mechanisms to prevent double taxation of a FIF's profits.

Reduction of FIF income for distributed profits

The amount of FIF income for a notional accounting period of the FIF or FLP that you are to include in your assessable income for an income year is reduced by amounts of income that a FIF or FLP distributes to you during that notional accounting period - for example, an interim dividend.

You reduce the FIF income to be included in your assessable income by the amount that was distributed to you by the FIF or the FLP to the extent it was:

• included in your assessable income (such as interest or a dividend)
• included in your assessable income in the income year immediately preceding the year in which the FIF or FLP income is assessed
• a non-assessable non-exempt non-portfolio dividend paid to an Australian resident company [section 23AJ], or
• notional exempt income of a CFC under section 23AJ or section 404. [section 530]

The Foreign income return form guide has more information about exempt income of a CFC.

The amount of the reduction of FIF income that is available cannot be more than the amount you would otherwise have included in your assessable income for the current income year for that particular FIF or FLP. [section 529 and subsection 530(1)]

Example: Market value method

Fiona had an interest in a FIF at the end of her income year (30 June) and her interest was not exempt from the FIF measures. She used the market value method to decide the amount to include in her assessable income under the FIF measures for the notional accounting period 1 July to 30 June. The FIF income worked out under that method was A$20,000.

On 25 June, the FIF paid her an assessable dividend of A$10,000.

Normally, Fiona's FIF income would be A$20,000. However, because of subsection 530(1), her FIF income is reduced by the amount of the assessable dividend - that is, from A$20,000 to A$10,000.

Example: Cash surrender value method

At the end of his income year, Ken held a FLP that was subject to the FIF measures.

He elected to use the cash surrender value method to calculate the amount to include in his assessable income under the measures.

He also elected to use a notional accounting period of 1 January to 31 December, as this was when the cash surrender value was available. The FIF income worked out under this method for the notional accounting period 1 January 2005 to 31 December 2005 was A$15,000.

The entity which issued the FLP made a payment of A$5,000 on 10 January 2005. Ken included this payment in his assessable income in 2004-05.

Normally, his FIF income for 2005-06 would be A$15,000. However, because of subsection 530(1), he can reduce his FIF income by the payment made and assessed in the previous income year that related to his 2005-06 FIF income. Therefore, Ken's FIF income for 2005-06 will be reduced from A$15,000 to A$10,000 because the A$5,000 was assessed in 2004-05.

Reduction of FIF income for FIF interests acquired under an employee share scheme

Overview

The FIF measures include rules that prevent double taxation by reducing FIF income by the amount which will be taxed under the employee share scheme arrangements. [section 530A]

Are you entitled to a reduction of FIF income?

You may be entitled to a reduction of FIF income if you acquired a share or right in a FIF under an employee share scheme.

Under the employee share scheme arrangements, you must normally include in your assessable income a discount you received on a share or right issued under an employee share acquisition scheme. You cannot reduce your FIF income if you included the discount in your assessable income at the time the share or right was issued.

However, sometimes you can defer the taxation of a discount on a share or right until a later time. In these cases, you can reduce your FIF income by the amount of unrealised gains on a share or right that accrues before the discount becomes assessable.

To work out the reduction of FIF income, you need to work out whether the discount on a share or right has become assessable. If the discount is not assessable until after the end of a notional accounting period of a FIF, your FIF income is reduced to zero to the extent that it relates to the share or right. [subsection 530A(1A)]

If the discount became assessable during the notional accounting period, your FIF income is reduced only by the increase in the market value of the share or right from the beginning of the period until the time the discount became assessable. [subsection 530A(1)] You cannot reduce your FIF income if the discount was assessable before the beginning of a notional accounting period. Work out the market value of a share or right on a particular day using the rules provided in the employee share scheme arrangements.

For further information on the rules, phone the Personal Tax Infoline on 13 28 61.

Using the worksheets to work out FIF income

Record the reduction of FIF income in the relevant worksheet at the label dealing with a reduction for distributions of the type to which subsection 530(1) applies. If you have already shown an amount at the label referred to, add the amount of the reduction you can claim to that amount.

Use Worksheet 1, part 3, box J - if you are using the market value method.

Use Worksheet 2, part 4, box G - if you are using the deemed rate of return method.

Use Worksheet 3, part 6, box L - if you are using the calculation method.

Use Worksheet 4, part 4, box G - if you are using the deemed rate of return method for FLPs.

Use Worksheet 5, part 3, box L - if you are using the cash surrender value method for FLPs.

Attribution accounts

Overview

FIF attribution accounts record the income attributed or distributed to you from each of your interests in a FIF or a FLP. They allow you to claim exemptions for FIF income previously attributed to you. Therefore, they operate to prevent double taxation where, after being subject to FIF taxation under the FIF measures, you later:

• receive a distribution of income or gains from a FIF or a FLP [section 23AK]
• dispose of the interest in a FIF or a FLP [section 613]
• use a FIF loss to reduce assessable income [sections 532 and 533], or
• transfer your interest in a foreign non-complying superannuation fund to a complying Australian superannuation fund and choose to have the assessable component of the transferred amount treated as assessable income of the complying superannuation fund. [section 533B]

Keep records of:

• income attributed to you from a FIF or a FLP
• income distributed to you by a FIF or a FLP either directly or through interposed FIF attribution account entities - defined below under Terminology
• the amount of any reduction of consideration you can claim on disposal of an interest in the FIF or FLP, and
• the amount of any deduction from assessable income you claim because of a FIF loss.

Attribution accounts operate on the simple basis of credits and debits.

In the FIF measures:

• a credit is referred to as a FIF attribution credit
• a debit is referred to as a FIF attribution debit.

Where the amount of FIF attribution credits in an attribution account exceeds the amount of FIF attribution debits, the excess is referred to as a FIF attribution surplus. This section explains these concepts and the way in which double taxation is avoided.

Attribution accounts enable you to keep track of amounts attributed to you under the FIF measures and amounts distributed to you from the FIF or FLP out of those attributed amounts. You must maintain attribution accounts if you wish to prevent double taxation under the FIF measures.

Terminology

To help you to understand how FIF attribution accounts operate, the terms are explained below. You must keep attribution accounts for each FIF or FLP interest that you hold directly or indirectly.

FIF attribution account entity

A FIF attribution account entity is:

• a company that is not a resident of Australia
• a partnership
• a trust, or
• a FLP.

[section 601]

FIF attribution account payments

A FIF attribution account payment occurs when a FIF in which you have an interest makes a payment to you or to another FIF in which you also have an interest.

FIF attribution account payments include:

• a dividend paid by a company to a shareholder
• an amount of interest paid to the holder of a convertible note
• a partner's share of the net income of a partnership for the income year
• a beneficiary's share of the net income of a trust estate for the income year
• an amount included in the assessable income of a beneficiary under section 99B of the ITAA 1936 during the income year for a distribution made by a trust estate
• an amount of the income, profits or gains of a trust estate on which the trustee would be assessable under section 99 or 99A of the ITAA 1936
• a payment made by the entity which issued a FLP to a person who has an interest in the FLP
• superannuation, termination of employment and similar payments included in your assessable income under Subdivision AA of Division 2 of Part III of the ITAA 1936. [section 603]

FIF attribution surplus

The surplus in a FIF attribution account at the time a FIF attribution account payment is made is the amount by which the total FIF attribution credits are more than the total FIF attribution debits. [section 604]

Where an attribution account has an attribution surplus, it generally means that a greater amount of income from a FIF has accrued to you than has been distributed to you.

FIF attribution credit

Your FIF will have a FIF attribution credit recorded in its attribution account in one of two ways:

1. Your FIF will have a FIF attribution credit recorded in its attribution account if an amount of FIF income is included in your assessable income under the FIF measures under section 529 of the ITAA 1936. In this case, the attribution credit arises at the end of the relevant notional accounting period. [subsection 605(1), paragraphs 605(7)(a), (b) and (c)]
   
    
2. A FIF attribution credit will also occur where you maintain attribution accounts for two FIFs and one FIF makes a distribution - that is, an attribution account payment - to the second FIF.

You should record a FIF attribution credit for the FIF receiving the distribution or other attribution account payment in its attribution account. The FIF making the distribution or other attribution account payment will have recorded a FIF attribution debit in its attribution account. In this case, the FIF attribution credit is recorded at the time the FIF makes the distribution or other attribution account payment. [paragraphs 605(1)(d) and 605(7)(d)]

In either case, the amount of the FIF attribution credit is equal to the amount included in your assessable income or the amount of the FIF attribution debit which arises for the FIF attribution account entity making the distribution. [subsection 605(2)]

FIF attribution debit

You will record a FIF attribution debit when the FIF in which you have an interest makes a distribution to you. FIF attribution debits trace the movements of profits included in your assessable income under the FIF measures and prevent that income, where it has been attributed to you, from being taxed again.

You will have recorded a FIF attribution debit for a FIF attribution account entity where:

• the entity makes a FIF attribution account payment to you or to a FIF attribution account entity in which you have an interest, and
• immediately before the payment is made, the entity making the FIF attribution account payment has a FIF attribution surplus in relation to you. [subsection 606(1)]

Your attribution account entity will record a FIF attribution debit at the time it makes an attribution account payment. [subsection 606(3)]

The amount of the FIF attribution debit is the lesser of the FIF attribution surplus and:

• if the FIF attribution account payment was made to you, the FIF attribution account payment
• in any other case, your FIF attribution account percentage for the FIF that receives the FIF attribution account payment. [subsection 606(2)]

The FIF attribution debit may be reduced if a first tier FIF was previously a CFC under Part X of the ITAA 1936. The current FIF attribution debit may be reduced only where an attribution debit under the CFC measures was recorded for the entity when it was a CFC. The reduction for the current FIF attribution credit is equal to the CFC attribution credit recorded when the FIF was a CFC. This allows the FIF attribution credit to be deferred until the attribution surplus for the CFC is used.

In addition, a FIF attribution debit also arises where the whole or part of an unapplied FIF loss for a notional accounting period is an allowable deduction from your assessable income. In this case the amount of the FIF attribution debit is the amount of the deduction and the debit arises at the end of the notional accounting period of the FIF. The debit is only allowed for an unapplied FIF loss worked out under:

• the market value method, for a FIF (company or trust), or
• the cash surrender value method, for a FLP. [section 607]

A FIF attribution debit can also arise on the assessable component of an interest you transfer from a foreign non-complying superannuation fund (the FIF) to a complying Australian superannuation fund. This occurs where you have previously been subject to FIF taxation on your interest in the FIF and you choose to have the assessable component of the transferred amount (otherwise assessable to you under section 305-70 of the ITAA 1997) treated as assessable income of the Australian superannuation fund. The amount of the attribution debit is the lesser of the attribution surplus of the FIF or the assessable component of the transferred amount that you chose to be treated as assessable income of the Australian superannuation fund. [section 607AA]

FIF attribution account percentage

Your FIF attribution account percentage in a FIF attribution account entity is the interest you hold, directly or indirectly, through one or more interposed FIF attribution account entities in the income or profits of the entity. [section 602]

FIF attribution credit to an Australian partnership or trust or where a FIF has an interest in another FIF

Special rules apply for determining the amount of the FIF attribution credit which arises where:

• you hold an interest in a FIF or FLP through an Australian partnership or Australian trust, or
• you use the calculation method to decide the foreign investment fund income of a FIF which has an interest in another FIF or FLP.

Interest held through interposed partnership or trust

If the FIF attribution account payment is to an Australian partnership or an Australian trust, a FIF attribution credit does not arise for the partnership or trust. Instead, it arises for the person paying tax - that is, the partner, the beneficiary or the trustee. [subsection 605(8)]

Where there are multiple trusts or a chain of partnerships and trusts, the credit arises for the person who ultimately pays the tax. [subparagraph 605(9)(a)(ii)]

This is achieved by using a tax detriment. A tax detriment is the effect on the assessable income of a person as a result of the inclusion of an amount in the net income of an Australian partnership or an Australian trust.

The tax detriment is the increase in assessable income or reduction of allowable deductions, or the sum of an increase or reduction, of the partner, beneficiary or trustee. [section 478]

Where there is such a tax detriment, a FIF attribution credit arises equal to the amount of the tax detriment. The credit is in relation to the partner, beneficiary or trustee who suffered the tax detriment and it will arise at the same time that the credit would have arisen to the partnership or trust. [subsection 605(8)]

The rules outlined above relating to attribution for interests held through interposed partnerships and trusts do not apply to:

• a corporate unit trust within the meaning of Division 6B of Part III of the ITAA 1936
• a public trading trust (see Division 6C of Part II)
• an eligible entity under Part IX of the ITAA 1936 - that is, an eligible approved deposit fund, eligible superannuation fund, or pooled superannuation trust, or
• a resident public unit trust - see subsection 96A(4) of the ITAA 1936.

For these entities the attribution credit attaches to the trust and does not flow through to the beneficiary of the trust. Instead, the trustee receives the FIF attribution credit. [subsection 605(11)]

FIF attribution credit for FIF income where a FIF has an interest in another FIF -diagram 1

Under the calculation method, an interest held by a FIF - the interposed FIF (FIF1 in diagram 1) - in another FIF or FLP (FIF2 in diagram 1) is taken into account when working out the notional income of the interposed FIF.

A FIF attribution credit may be recorded in the attribution accounts you keep for an interposed FIF because an amount of FIF income is included in your assessable income under the FIF measures through section 529 of the ITAA 1936. If the credit arises as a result of FIF1's interest in FIF2, the credit will be made to the FIF attribution account of FIF2. The credit will arise at the end of the notional accounting period of FIF2. [paragraph 605(1)(b), subsection 605(3) and paragraph 605(7)(b)]

The formula below is used to work out the amount of the FIF attribution credit which will arise for FIF2. It also works out how much of the FIF income included in a resident taxpayer's assessable income comes from FIF2. [subsections 605(1) and (3)]

FIF2 attribution credit

=

FIF income x section 529 amount notional income

FIF income is the amount of the foreign investment fund income of FIF1 which came from FIF2 - see diagram 1 below.

Section 529 amount is the amount included in your assessable income under the FIF measures in relation to FIF1. See diagram 1 below.

Notional income is the notional income of FIF1, including its income from FIF2.

You must apply the above formula to each FIF or FLP in which FIF1 has an interest. You must also reduce the FIF attribution credit which would otherwise arise for FIF1. Reduce FIF1 attribution credit by the sum of the amounts of the FIF attribution credits worked out under the formula for FIF2. [subsections 605(1), (3) and (5)]

Diagram 1: Flow of income where a FIF has an interest in another FIF

FIFs held by a second tier FIF - diagram 2

If you use the calculation method to work out the attributable income of the second tier FIF (FIF2 in diagram 2), you must maintain separate FIF attribution accounts for each FIF or FLP that you hold through a second tier FIF.

Use these accounts to prevent double taxation by allocating the FIF income that you included in your assessable income to the different FIFs or FLPs in the chain of FIFs and FLPs.

Use the following formula to work out the amount of the FIF attribution credit which will arise for the third- tier FIF eligible entity (FIF3). [paragraph 605(1)(c) and subsection 605(4)]

FIF3 attribution credit

=

FIF income x section 529 amount notional income of FIF1

FIF income is the amount worked out using the formula:

section 579 amount x section 576 amount notional income of FIF2

Section 579 amount is the amount included in the notional income of FIF2 from FIF3.

Section 576 amount is the amount included in the notional income of FIF1 from FIF2.

Notional income of FIF2 is its notional income for the notional accounting period of FIF1 worked out under the calculation method.

Section 529 amount is the amount included in your assessable income under the FIF measures because you have an interest in FIF1.

Notional income of FIF1 is FIF1's notional income for its notional accounting period worked out under the calculation method.

This formula will apply to each FIF or FLP in which FIF2 has an interest. In addition, the FIF attribution credit, which would otherwise arise for FIF2 under the first formula used in relation to diagram 1, is reduced by the sum of the FIF attribution credits that arise for entities that FIF2 has an interest in - for example, FIF3 in diagram 2. [subsection 605(6)]

Diagram 2: FIFs held by a second tier FIF

Example: Working out assessable income for three tiers of FIFs

Sharon, a resident taxpayer, has a 5% interest in a first tier FIF (FIF1) which has a 25% interest in a second tier FIF (FIF2). In turn, FIF2 has a 10% interest in another FIF (FIF3).

Working out the amount to be included in Sharon's assessable income because of her interest in FIF1 - diagram 3.

The calculation method is used for FIF1 and FIF2. It cannot be used to determine the FIF income of a third tier FIF (FIF3). The market value method must be used to determine the change in value of FIF3.

Each FIF has a notional accounting period ending 30 June 2004. During the relevant period, FIF1 does not derive any income. FIF2 derives $10,000 income. In addition, under the market value method, FIF2 is taken to have derived $20,000 FIF income from FIF3. FIF2 has a past calculated loss of $10,000.

FIF2 has notional income of $30,000 - section 579 amount $20,000 + $10,000 of derived income. 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 FIF income under section 576 (25% x $20,000), which is its share of FIF2's calculated profit. The calculated profit of FIF1 would be $5,000.

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

Diagram 3: Amount included in assessable income because of an interest in FIF1

Sharon's attribution accounts would look like this:

Sharon's attribution account - FIF1
Debit	Credit
	30/6/04	$0 ($250 - $250)

Sharon's attribution account - FIF2
Debit	Credit
	30/6/04	$83.34 ($250 - $166.66)

Sharon's attribution account - FIF3
Debit	Credit
	30/6/04	$166.66

The FIF attribution credit which would arise for FIF3 in relation to Sharon is worked out using the following formula:

FIF income x section 529 amount notional income of FIF1

This formula is used in working out the part of the FIF income included in Sharon's assessable income that can be attributed to FIF3.

FIF3

FIF3's 'FIF income' - a component used in the formula for determining the FIF attribution credit which arises for FIF3 in relation to Sharon - would be worked out using the following formula:

section 579 amount x section 576 amount notional income of FIF2
FIF income	=	$20,000 x $5,000        $30,000	=   $3,333.33

This result indicates that of the $5,000 of FIF2's income that is included in FIF1's income, $3,333.33 is referable to FIF2's interest in FIF3.

Substituting the relevant amounts in the first formula above, then:

FIF3's attribution credit

=

$3,333.33 x $250         $5,000

=    $166.66

FIF2

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 Sharon would be worked out using the formula:

FIF2 income included in FIF1 income x section 529 amount notional income of FIF1
FIF2's attribution credit	=	$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 ($250 - $166.66) would arise for FIF2 in relation to Sharon.

FIF1

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

Exemption of distributions

A dividend or other FIF attribution account payment you receive from a FIF attribution account entity may be treated as non-assessable non-exempt income. [section 23AK]

The amount of the FIF attribution account payment that will be non-assessable when you receive it will be determined by the FIF attribution surplus in the attribution accounts of the FIF making the distribution. If the payment is more than the attribution surplus, only the part of the payment equal to the surplus will be non-assessable under section 23AK of the ITAA 1936.

Non-assessable distributions under section 23AK for previously attributed FIF income derived through a partnership or trust

If you receive the distribution from a FIF or FLP through an interposed partnership or trust, the amount will be treated as non-assessable non-exempt income where:

• after the distribution of an amount from the FIF to the partnership or trust, you would be required to include an amount in respect of the trust or partnership in your assessable income, and
• at the time of that distribution, you had a FIF attribution surplus in relation to the FIF or FLP.

The distribution to the partnership or trust will still be included when working out the net income of the trust or partnership. However, once your share of that net income is determined, an amount equal to your attribution surplus will be non-assessable non-exempt income.

Reduction of disposal consideration if FIF attributed income is not distributed

The disposal of an interest in a FIF attribution account entity is normally taken into account in working out your assessable income under the existing provisions of the ITAA 1936, either - for example - as income under section 6-5 of the ITAA 1997, or under the capital gains tax provisions in Part 3-1 of the ITAA 1997.

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 you that has not been distributed to you.

The amount by which the disposal consideration will be reduced cannot exceed the lesser of either the disposal consideration or the attribution surplus of the FIF. An attribution debit for the same amount arises at the time you dispose of the FIF. [paragraph 613(1)(c)]

If you dispose of only part of an interest in a FIF attribution account entity, your FIF attribution surplus that can be used to reduce the consideration on disposal is reduced proportionately. [paragraphs 613(1)(c) and (e) and subsection 613(3)]

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

A FIF loss that arises under the market value method or a FLP loss that arises under the cash surrender value method can be used to reduce your assessable income where you have a FIF attribution surplus for the FIF or FLP. 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. [sections 532, 533, 533A and 607]

You can also reduce your assessable income where you have an interest in a FIF that is a foreign non-complying superannuation fund and an amount is transferred from that FIF to a complying Australian superannuation fund. The amount of your deduction is the lesser of the assessable component of the transferred amount that you chose to be treated as assessable income of the Australian superannuation fund or the attribution surplus that you have in relation to the FIF. [sections 533B and 607AA]

Example: Transfer of FIF interest to a complying Australian superannuation fund

Tim had an interest in a foreign non-complying superannuation fund (the FIF) from 1 July 2003 to 30 September 2007. During those years, Tim was subject to FIF taxation on the FIF of $20,000. As there were no other attribution account entries for that period, Tim had an attribution account surplus for the FIF of $20,000. On 30 September 2007 Tim transferred the value of his interest in the FIF to a complying Australian superannuation fund. He also chose to have the assessable component of the transferred amount ($30,000) treated as assessable income of the complying Australian superannuation fund. Tim is entitled to a deduction of $20,000 for the 2007-08 income year under section 533B, being the lesser of the assessable component of the transferred amount and the attribution account surplus for the FIF.

FIF losses are converted to Australian currency to work out the availability of a deduction under the market value or cash surrender value methods of working out FIF income. Use the rate of exchange applicable at the end of the notional accounting period in which the loss arose. [section 533A]

Note: Section 79D of the ITAA 1936, which operates to quarantine deductions where the income belongs to the passive class of foreign income, does not apply to deductions available under sections 532 and 533. [subsection 160AFD(9)]

Example: Attribution accounts

Beryl, a resident individual, has an interest in a foreign company - Forco - that is not a CFC. Forco's notional accounting period ends on 30 June, as does Beryl's income year. In the year ended 30 June 2006, she had FIF income in respect of Forco of $5,000. The $5,000 would be included in her assessable income under section 529.

In this case, she will treat the next $5,000 of dividends paid by Forco as non-assessable non-exempt income under section 23AK. To achieve this, Beryl would credit the FIF attribution account for Forco with the $5,000 at the end of Forco's notional accounting period as follows:

Beryl's FIF attribution account - Forco
Debit	Credit
	30/6/06	Attribution	$5,000

In the year ended 30 June 2007, Beryl's FIF income from her interest in Forco was $4,000. On 31 December 2006, Forco paid her a dividend of $3,000.

The dividend is a FIF attribution account payment. Beryl would debit her FIF attribution account with the $3,000 at the time the dividend was paid as follows:

Beryl's FIF attribution account - Forco
Debit			Credit
31/12/06	Dividend	$3,000	30/6/06	Attribution	$5,000

The $3,000 dividend that Beryl received would be non-assessable non-exempt income under section 23AK. The $4,000 FIF income for her interest in the FIF would be included in her assessable income under section 529. She would credit her FIF attribution account with $4,000 at the end of Forco's notional accounting period as follows:

Beryl's FIF attribution account - Forco
Debit			Credit
31/12/06	Dividend	$3,000	30/6/06	Attribution	$5,000
			30/6/07	Attribution	$4,000

On 30 June 2008, Forco paid Beryl a dividend of $7,000. There was no FIF income in that year. Beryl would debit the FIF attribution account with $6,000 - the lesser of the dividend and the surplus in the account - at the time the dividend was paid.

Beryl's FIF attribution account - Forco
Debit			Credit
31/12/07	Dividend	$3,000	30/6/06	Attribution	$5,000
	Balance	$6,000	30/6/07	Attribution	$4,000
30/6/08	Dividend	$6,000	31/12/07	Surplus	$6,000

Beryl would include in her assessable income the amount of the dividend that is more than the amount debited to the FIF attribution account - that is, $1,000. The remainder of the attribution account payment - that is, $6,000 - would be non-assessable non-exempt income under section 23AK of the ITAA 1936.

Chapter 7: Avoiding double taxation (calculation method)

This chapter applies only if you use the calculation method to decide the amount of FIF income to include in your assessable income.

Overview of the foreign tax credit system

Under the foreign tax credit system, foreign source income derived by Australian residents - apart from certain dividends and salary and wages - is generally subject to Australian income tax.

A credit for foreign tax paid, up to the amount of the Australian income tax applying to the foreign income, is allowed against the Australian tax payable. Credit is allowable for foreign taxes imposed by central, state and local governments, provided the taxes are equivalent in nature to Australia's income tax. [section 160AF and subsection 6AB(2)]

Resident taxpayers, whether corporate or non-corporate, who include in their assessable income the whole or part of a dividend from a non-resident company are entitled to a credit for the direct foreign tax paid on that dividend. For example, the foreign company may have paid a dividend withholding tax, in which case the Australian resident is entitled to credit for the withholding tax.

Non-portfolio dividends paid to resident corporate taxpayers by a foreign company that are non-assessable non-exempt income do not attract foreign tax credits. [section 23AJ]

Related companies

A foreign company is related to an Australian company if the Australian company has a direct voting interest of at least 10% of the voting power of the foreign company. This relationship could extend through any number of tiers of foreign companies if each company in the chain has at least a 10% voting interest in the company in the tier below, and the Australian company has a direct or indirect voting interest of at least 5% in the foreign company. [section 160AFB]

Market value and deemed rate of return methods

You cannot get credits for foreign taxes if the FIF income is worked out under the market value or deemed rate of return methods.

In these cases, credits for foreign tax will apply only when distributions are received from the FIF. The current foreign tax credit system rules, as outlined above, apply to these distributions.

Calculation method

A foreign tax credit is allowable for taxpayers who use the calculation method to work out the amount of FIF income to include in their assessable income. However, it is limited to situations where:

• the FIF is a company which is related to a company taxpayer [sections 160AFCE and 160AFCF]
• the taxpayer is a beneficiary of a FIF which is a trust estate. [sections 160AFCG and 160AFCH]

The foreign tax credit system - company FIFs

Credits on attribution from company FIFs

Under the foreign tax credit system, a foreign tax credit may be allowed for a share of the foreign tax paid by a first tier FIF on its income and gains where:

• a resident company and the FIF are related companies at the end of the FIF's notional accounting period, and
• the resident company has used the calculation method to work out the FIF income for the company's interest in the FIF.

In addition, a credit for tax paid by the second tier FIF may be given where the resident company:

• has used the calculation method to work out the FIF income of the second tier FIF
• the taxpayer and the first and second tier FIFs are companies, and
• the taxpayer is related to both the first and second tier FIFs at the end of the notional accounting period of the second tier FIF.

In this case, a foreign tax credit may be allowed in accordance with the foreign tax credit system for a share of the foreign tax paid by the second tier FIF on its income and gains.

A credit will be allowed only where the resident company and the FIF or FIFs are related companies.

Credits on distribution from corporate FIFs

The allowance of credits on distribution - that is, by way of a dividend - follows the credits allowed under the existing foreign tax credit system.

In addition, you are allowed a credit where the dividend is treated as non-assessable non-exempt income because the profits out of which the dividend has been paid have been subject to attribution in a previous year. The credit allowed is limited to the amount by which that dividend would have been greater if no foreign tax had been paid. [section 160AFCJ]

Further, the provisions of the ITAA 1936 which allow for excess foreign tax credits to be carried forward for up to five years apply where excess foreign tax credits arise in relation to an interest in a FIF and, where appropriate, an indirect interest in a second tier FIF. As under the existing foreign tax credit system, there is no carry-back of credits. [section 160AFE]

The foreign tax credit system - trust FIFs

Credits on attribution from trust FIFs

Under the foreign tax credit system, the treatment of foreign taxes paid by the trustee of a foreign trust is different from that of companies.

The beneficiary of the trust is deemed to have paid the foreign tax paid by the trustee. In general, this distinction is maintained for taxpayers with an interest in a trust FIF. [section 6AB]

Where the calculation method is used at the first tier

As for company FIFs, if you have used the calculation method to work out attributable income of a first tier trust FIF, a foreign tax credit is allowed for the foreign tax paid by the trustee of the trust on the income and gains of the trust FIF. The calculation is made in the same way as for a related company FIF. [section 160AFCG]

Where the calculation method is used at the second tier

If you used the calculation method for the second-tier trust FIF, a foreign tax credit is allowed for the foreign tax paid by the trustee of the trust on the income and gains of the trust FIF. The calculation is made in the same way as for a related company FIF. [section 160AFCH]

Credits on distribution from trust FIFs

The allowance of credits on distribution is similar to the credits under the existing foreign tax credit system.

Broadly, this means that, if the amount of the distribution is included in assessable income, both companies and other taxpayers are allowed a credit for foreign taxes paid:

• directly by the taxpayer - for example, a withholding tax on a dividend, and
• by the trustee of the trust - including accruals-type taxes in respect of lower tier entities.

In addition to the normal operation of the foreign tax credit system, you are allowed a credit where the trust distribution is treated as non-assessable non-exempt income because it has been subject to attribution of FIF income in a previous year. The credit allowed is limited to the amount by which that distribution would have been greater if no foreign tax had been paid. [section 160AFCJ]

FIF attributed tax accounts

FIF attributed tax accounts ensure that a credit you can claim for foreign tax paid by a FIF when an amount is included in your assessable income under the calculation method cannot be claimed again when you receive a distribution from the FIF. In other words, they ensure that you cannot claim a foreign tax credit twice for the same amount of foreign tax paid by a FIF. [sections 608 to 612]

There are no foreign tax credits for foreign taxes where FIF income is worked out under the market value and deemed rate of return methods. In practice, you will need to maintain FIF attributed tax accounts only where you use the calculation method for working out the amount to include in your assessable income under the FIF measures and either:

• the FIF is a company which is related to the company taxpayer [sections 160AFCE and 160AFCF], or
• you are a beneficiary of a FIF which is a trust estate. [sections 160AFCG and 160AFCH]

The system for the maintenance of FIF attributed tax accounts parallels that for FIF attribution accounts. That is, when income which has been previously attributed is distributed to you, the foreign tax credit you can claim is initially worked out 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 worked out in this way is then reduced by the foreign tax credit allowed at the time the attributable income of the FIF - that is, FIF income - was included in your assessable income.

The FIF attributed tax accounts trace the foreign tax credit that was allowed at the attribution stage so that this reduction may be made.

Chapter 8: Record keeping

You must support your assessment of or exemption from FIF taxation with records. The record keeping outlined in this chapter is a statutory requirement and there are prosecution provisions which may apply if you do not maintain the appropriate records.

You should also maintain attribution account records. For more information, read Chapter 6: Avoiding double taxation. If you do not keep these records, you will not be able to take advantage of:

• the exemption of distributions paid out of profits which were previously attributed to you [section 23AK] - see Exemption of distributions in chapter 6 for more information
• a reduction of the amount to include in your assessable income after the disposal of a FIF interest [section 613] - see Reduction of disposal consideration if FIF attributed income is not distributed in chapter 6
• the adjustments for FIF losses that have been used to reduce other assessable income [sections 532, 533 and 607] - see FIF attribution debit for amount of loss used to reduce assessable income in chapter 6.

Generally, you must keep records for five years after you prepared or obtained them, or after you completed the transactions or acts to which those records relate, whichever is the later. [section 262A]

The period in which the Commissioner may amend an assessment may be extended by an order of the Federal Court of Australia or with your consent. Where this occurs, you must keep your records for five years or to the end of the period during which the assessment may be amended, whichever is later. [section 170 and subsection 262A(4)]

You do not need to keep records where the Commissioner has notified you that retention of records is not required or if your company has gone into liquidation and finally dissolved. [subsection 262A(5)]

You must keep records in the English language or, if not in written form - for example, on magnetic tape or computer disk - in a form which can be readily accessed and translated into writing in English.

You must also keep records to allow your liability to tax to be readily worked out. [section 622]

What are the FIF record keeping provisions for?

The FIF record keeping provisions:

• set out the records that you have to keep to enable you to work out your liability to FIF taxation, and
• ensure that you have the necessary records to support the way you worked out your FIF income or loss or claim for exemption from FIF taxation.

Who must keep records?

If you are a resident of Australia at any time during an income year and have an interest in a FIF at the end of that year or an interest in a FLP during that year, you must make and keep records in Australia. This includes a foreign branch of an Australian company which has an interest in a FIF or FLP. [sections 485 and 614]

If you are an attributable taxpayer in respect of a CFC or CFT that holds an interest in a FIF or FLP, you are subject to similar record keeping requirements for the CFC or CFT. [Division 11 of Part X]

What records must you keep for FIFs and FLPs?

If you have an interest in a FIF or FLP, you must make and keep records of the acts, transactions and other circumstances that gave you that interest in the FIF at the end of an income year or in the FLP during the income year. You must keep these records whether or not the interest in the FIF or FLP is exempt for a particular notional accounting period.

Unless you are wholly exempt from taxation on your FIF interest, you must also keep records showing how you worked out your interest in the FIF or FLP for the notional accounting period which ended during your income year. [section 615]

Record keeping for each method of taxation

The records you must keep for your interest in a FIF or a FLP will depend on the method you use to work out the foreign investment fund income.

Market value method or cash surrender value

If you use the market value method or the cash surrender value method, make and keep records showing how you worked out:

• any FIF income that you accrued or FIF loss that you incurred from an interest in a FIF or a FLP for the current period
• any FIF loss that you incurred from the interest in the FIF or the FLP for the previous periods that has not been used to reduce income. [sections 616 or 619]

Also keep records relating to:

• the market value of your interest in the FIF on the last day of the notional accounting period or the cash surrender value of your interest in the FLP on the last day of the notional accounting period
• distributions received from the FIF or the FLP
• disposal of interests in a FIF or a FLP
• the market value of your interest in the FIF or the cash surrender value of your interest in the FLP at the commencement of the notional accounting period, and
• acquisition of interests in a FIF or a FLP.

You also need to keep details of how you worked out the market value or cash surrender value.

If you used the market value method, keep a record of the following.

• If the market value is based on a quoted value on a stock exchange, record the quoted price, the date quoted, the class of interest - share - and the name of the stock exchange.
• If the market value is based on a buy-back or redemption price, record details of the offer of the buy-back or redemption price.

Previous year losses

You may offset an unapplied FIF loss from an interest in a FIF or a FLP against assessable income for the part of the income from that interest that was taxed previously. You may also carry forward an unapplied FIF loss and offset it against any market value increase from the same FIF or FLP in subsequent periods. Keep records of these losses.

Deemed rate of return method

If you use the deemed rate of return method of taxation, keep records showing how you worked out the foreign investment fund income that accrued to you from the FIF or FLP. [sections 617 or 619]

The records are to include details of:

• the calculation of the opening value of the FIF or the FLP interest
• the acquisition and sale of interests in a FIF or a FLP, and
• the distributions received from a FIF or the FLP.

The calculation method

At the first tier

For the first tier FIF, keep records detailing how you worked out:

• the calculated profit or loss for the current notional accounting period
• any unapplied calculated losses of previous notional accounting periods
• the FIF income that accrued to you. [section 618]

At the second tier

Where a first tier FIF has an interest in another FIF - a second tier FIF - you may elect to use the calculation method at the second tier. If you make that election, you must keep the same records for the second tier FIF that you keep for the first tier FIF. [section 618]

In addition, you may also need access to the underlying accounts and accounting records of the FIF. On audit, these may be called for to support your calculations.

Exempt in a previous year

Where your interest in a FIF was exempt in a previous income year and you elect to use the calculation method for the current year, keep details of the losses from any previous years which are to be offset against FIF income in the current income year.

Exemptions from the FIF measures

If you have an interest in a FIF or a FLP which is wholly or partly exempt from FIF taxation for a notional accounting period ending in your income year, you must keep records showing why the exemption applied. These records should include details of any acts, transactions, calculations and other circumstances relevant to the application of the exemption. [section 620]

You must keep records for each interest in a FIF or a FLP for which you are claiming an exemption.

See Chapter 3: Exemptions for the conditions that relate to particular exemptions.

Additional records that you must keep for some of the exemptions are listed below.

Active business exemption

Stock exchange listing method

If you are claiming an exemption from the FIF measures under the active business exemption using the stock exchange listing method, keep records relating to:

• the name of the approved stock exchange in which the class of interests to which your FIF interest belongs was listed
• the class of the company designated by
  • the approved stock exchange, or
  • the approved international sectoral classification system
• the activities that the company is engaged in.

Balance sheet method

If you are claiming an active business exemption from the FIF measures using the balance sheet method, keep records of the gross value of all of the company's assets shown in the balance sheet and to what extent the assets are held at the balance date for use in eligible activities.

Where the foreign holding company is the direct or indirect owner of 50% or more of the paid-up share capital of another company - subsidiary - the holding company may use the gross value of the subsidiary's assets for the balance sheet method. Keep records of the subsidiary's assets as shown in its balance sheet and of the extent to which the assets are held at the balance date for use in eligible activities. For more information, read Appendix 2: Business activities that are not eligible activities.

Employer-sponsored foreign superannuation fund exemption

If you are claiming an employer-sponsored foreign superannuation fund exemption, keep details such as the name and location of the foreign superannuation fund and whether you are an employee or past employee, a director or an associate.

Exclusion of a FIF that is a CFC, CFT or a transferor trust

If you have an interest in a FIF, which is also a CFC or CFT to which Part X of the ITAA 1936 applies, Part X requires you to keep records for the CFC measures.

Other specific exemptions

Although some industries such as banking, insurance and real estate are listed as ineligible activities for the purposes of the active business exemption, there are specific exemptions for certain publicly listed and widely held investments in these industries. [Divisions 4 to 7] There is also an exemption for complying superannuation entities, certain assets of life insurance companies and certain fixed trusts. [Division 11A]

There are also specific exemptions for interests in FIFs that are trading stock and interests in FIFs that are multi-industry foreign companies, Lloyd's of London or resident in the United States. Another exemption may apply to your interests in FIFs, which would otherwise be caught and taxed under the measures, where the total value of your interest in those FIFs is 10% or less of the total value of all your FIF interests. [Divisions 8, 12 to 15]

If you are claiming an exemption under one or more of these provisions, keep records showing how the FIF interest satisfied the conditions of the particular exemption. Read Chapter 3: Exemptions for the conditions that relate to the particular exemption.

Small investor exemption

Direct interests in FIFs and FLPs

For the small investor exemption, keep a record of how you worked out your aggregate interests and those of your associates in foreign companies, foreign trusts and foreign life policies. The aggregate must show that the amount of those interests is A$50,000 or less at the end of the notional accounting period.

Direct interests in resident public unit trusts

Keep a record of how you and your associates worked out your aggregate interests in any FIFs, FLPs and resident public unit trusts. The aggregate must show that the amount of those interests is A$50,000 or less at the end of the notional accounting period.

Exemption for temporary residents

If you qualify as a temporary resident and get an exemption from the FIF measures, you must keep passport visa information and details of your date of arrival in Australia.

Elections

As a result of self-assessment, the majority of elections no longer have to be made in writing and lodged with the Commissioner of Taxation.

However, some elections and notifications that affect the taxation treatment of future transactions or events, or that cause the Commissioner to take some action in relation to an assessment, must be in writing and lodged with the Commissioner.

If you elect to use the calculation method, you do not have to lodge a written notice of the election. You should decide which provisions of the ITAA 1936 or ITAA 1997 to apply in working out a component of taxable income and keep a record that verifies the calculation. These records and the way you worked out taxable income on your tax return will show whether you have made an election.

Prosecution provisions

Why have prosecution provisions?

Prosecution provisions ensure compliance with the FIF record keeping measures. These provisions generally correspond with the prosecution provisions of the CFC measures. However, you cannot be prosecuted for failing to keep records before 18 December 1992.

The court may impose a maximum penalty of 30 penalty units if you are convicted of a breach of the FIF and FLP record keeping requirements. [section 621]

Section 4AA of the Crimes Act 1914 sets out the value of a penalty unit. In April 2007, one penalty unit equalled $110.

You must keep records of the information on which you based your calculation of FIF income. If you do not have access to full information relating to a FIF, do not use the calculation method. If you are prosecuted for failing to keep records of underlying accounts and accounting records in relation to the calculation method, you may rely, in certain circumstances, on a statutory defence. The defence may apply if you made reasonable efforts to obtain the required documents but were unable to get them and you based your calculation on information you believed to be contained in the accounts (other than published accounts). [section 623]

As a partnership is treated as a person under the record keeping provisions, the record keeping and related prosecution provisions apply to partnerships. An offence committed by the partnership is treated as having been committed by each of the partners. [subsections 624 (1) and (2)]

However, a partner prosecuted for such an offence may have a defence where it can be proved they were not knowingly involved in any way in the commission of the offence. [subsection 624(3)]

Chapter 9: Taxation of non-resident trusts

Overview

The foreign investment fund (FIF) amendments to the taxation of non-resident trusts, which began in the 1992-93 income year, supplemented the objective of the foreign source income measures in preventing the deferral of Australian tax.

The FIF measures tax Australian resident beneficiaries with an interest, or entitlement to acquire an interest, in the income or capital of a foreign trust on their share of the trust income. They are taxed on an accruals basis at the time the income is derived by the trust rather then when its income or capital is distributed.

You work out your share of the FIF income of a non-resident trust to which the FIF measures apply in the same way you would for other FIFs, such as foreign companies.

Where the FIF measures apply to a beneficiary of a non-resident trust estate, they will:

• ensure no amount is included in the assessable income of
  • an Australian beneficiary under section 97 of the ITAA 1936, or
  • a trustee, under subsections 98(1) or (2) of the ITAA 1936, on behalf of an Australian beneficiary under a legal disability
• set out the way in which the income of a non-resident trust estate is worked out and attributed to Australian beneficiaries [sections 531 to 600]
• exempt from FIF taxation the beneficiary's and associates' interests in FIFs, foreign life assurance policies (FLPs) and resident public unit trusts which do not exceed $50,000 at the end of an income year [sections 96A and 515]
• exempt an Australian beneficiary of a deceased estate from an interest charge on amounts that have been paid to or applied for the beneficiary's benefit within three years after the death of the person that gave rise to the estate [subsection 102AAM(1B)]
• exempt a beneficiary from an interest charge on an amount received or applied for the beneficiary's benefit from a public unit trust as defined under the transferor trust measures and which was not a controlled foreign trust under the CFC measures [subsection 102AAM(1C)]
• exempt a taxpayer from an interest charge on the distribution of an amount that was paid to or applied for the benefit of the beneficiary and which was paid out of accumulated profits that relate to income
  • that is not eligible designated concession income of a listed-country trust estate, or
  • that has been subjected to tax in any listed country. [sections 102AAE and 102AAM]

The listed countries are:

• Canada
• France
• Germany
• Japan
• New Zealand
• United Kingdom of Great Britain and Northern Ireland
• United States of America.

[Section 320 of the ITAA 1936, subregulation 152C(1) and Schedule 10 of the Income Tax Regulations 1936, and section 141 (transitional provision) of the New International Tax Arrangements (Participation Exemption and Other Measures) Act 2004]

Who do the FIF measures apply to?

The FIF measures apply to you for all or part of an income year in which you are an Australian resident. [section 485]

Even though you are an Australian resident you are not taxed under the FIF measures for an interest in a foreign trust that you dispose of during an income year - that is, before 30 June each income year. See Interests in a FIF or FLP subject to the FIF measures in chapter 2. If you dispose of an interest in a non-resident trust, other areas of the ITAA 1936 may apply. [section 485]

Trusts to which the FIF measures apply

The FIF measures will apply to you if you are a beneficiary of or have an interest in a foreign or non-resident trust.

A trust is a foreign trust if it is not:

• an Australian trust [sections 481 and 473]
• a public trading trust which is also a resident unit trust [sections 102G, 102H, 102J, 473 and 481]
• a corporate unit trust which is also a resident unit trust [sections 102J, 102H, 473 and 481]
• an Australian superannuation fund
• a complying approved deposit fund
• a pooled superannuation trust. [section 267]

A trust is an Australian trust if the trustee was a resident, or the central management and control of the trust was in Australia, for 12 months preceding the end of your income year. [sections 473, 481 and 485]

What is an interest in a foreign trust?

You will have an interest in a FIF that is a foreign trust if you have:

• an interest in the capital or income of the trust - including a unit in a unit trust, or
• an entitlement to acquire such an interest through an option, convertible note, or other instrument. [sections 470, 475 and 483]

Your entitlement to acquire an interest in the income or capital may be absolute or be contingent on some other event. It may arise through a document of a company or the exercise of a right or option or for any other reason. [section 475]

Taxpayers exempt from the FIF measures

You are exempt from the FIF measures if you are an Australian resident and are also:

• an attributable taxpayer of a transferor trust or CFT [section 493]
• a beneficiary of a deceased estate - see What is a foreign investment fund (FIF)? in chapter 2 [section 481]
• an exempt small investor - see Exemption for an interest of A$50,000 or less in chapter 3 [section 515]
• a temporary resident - see Exemption for temporary residents in chapter 3 [section 768-965 of the ITAA 1997]
• a member of an employer-sponsored foreign superannuation fund - see Exemption for employer-sponsored foreign superannuation in chapter 3 [section 519]
• a complying superannuation entity, a life insurance company (in regard to certain assets) and certain fixed trusts - see Exemption for complying superannuation entities, certain assets of life insurance companies and certain fixed trusts in chapter 3. [Division 11A]

Exempt attributable taxpayer

An attributable taxpayer of a transferor trust or CFT is not taxed under the FIF measures because they are attributed income from the foreign trust under other provisions of the ITAA 1936. See Exemption for attributable taxpayers in chapter 3. [sections 102AAA, 102 AAZG, 342, 348 and 493]

Small investor exclusion

Certain small investors are exempt from the FIF measures. See Exemption for an interest of A$50,000 or less in chapter 3 for more information.

Similarly, when working out a small investor's share of the net income of a resident public unit trust, FIF income is excluded from the trust estate's assessable income. This exclusion applies only to natural persons and will apply to you if the sum of your interests and those of your associates in FIFs, FLPs and resident public unit trusts at the end of the income year is $50,000 or less. [subsection 96A(2)]

In a subsequent year of income, you must work out the trust's net income by ignoring attribution credits which arose during income years when you were exempt because of this small investor's exemption. [paragraph 96A(2)(d)]

This means that you, as the beneficiary, will not benefit from:

• the exemption, which applies for amounts previously attributed under the FIF measures [section 23AK], or
• a reduction in the disposal consideration of the FIF interest because of an unused FIF attribution account surplus from income attributed but not distributed before disposal of the FIF interest. [section 613]

These two benefits arise because FIF income was included in the net income of the trust in a year when you, as a beneficiary of the public unit trust, were not taxed on that FIF income because of the small investor's exclusion. [paragraphs 96A(2)(d) to (e)]

Exempt beneficiaries of a foreign deceased estate

The measures do not apply to an Australian resident beneficiary of a foreign trust of a deceased estate.

The deceased estate is not covered by the FIF measures. The measures do not apply even if a court has made an order on the deceased estate. For more information, see What is a foreign investment fund (FIF)? in chapter 2. Also see Deceased estates later in this chapter.

Attribution of non-resident trust income under the FIF measures

Before the FIF measures began, the assessable income of an Australian beneficiary who was not under a legal disability included the share of the net income of a non-resident trust estate to which the beneficiary was presently entitled and which was attributed to a period when the beneficiary was a resident of Australia. [section 97]

Since the FIF measures began, your share of the income of a FIF which is a foreign trust is worked out in the same way as other FIFs - that is, by:

• the market value method
• the deemed rate of return method, or
• the calculation method.

Since the FIF measures began, if an amount is worked out in accordance with one of the above methods and included in the assessable income of the beneficiary as FIF income or loss, no amounts are included in the assessable income of an Australian beneficiary under the general trust provisions. [sections 96A, 97 and 529]

Attribution of non-resident trust income where the FIF measures do not apply

Since 1992-93, the share of the income of an Australian beneficiary of a non-resident trust who is not assessed under the FIF measures has been worked out by one of two methods. [sections 96B and 96C]

Method 1

This method is used where all the income, profits or gains derived by the non-resident trust estate during the income year consisted of either or both:

• income, profits or gains to which beneficiaries of the non-resident trust estate were presently entitled
• income, profits or gains to which beneficiaries of the non-resident trust estate were not presently entitled but which were distributed to the beneficiaries within two months after the end of the income year.

In the above cases, the beneficiaries are deemed to be presently entitled to a share of the net income of the non-resident trust estate equal to the percentage of the total income, profits or gains derived by the non-resident trust during a year of income.

This percentage is represented by the total of the amounts:

• to which the beneficiaries were presently entitled, or
• to which the beneficiaries were not presently entitled but which were distributed to the beneficiaries of the trust estate within two months after the end of the income year. [subsection 96C(1)]

Method 2

Where method 1 cannot be applied, a beneficiary's share of the net income of the trust estate is determined by:

• calculating the beneficiary's share of the net income of the trust estate that relates to interests the beneficiary held in the trust estate for the whole year
• calculating the beneficiary's share of the net income of the trust estate that relates to interests the beneficiary held in the trust estate for only part of the year, and
• adding these amounts to determine the beneficiary's total share of the net income of the trust estate that relates to all the interests the beneficiary held in the trust estate. [subsections 96C(2) to (5)]

If the aggregate of the Australian beneficiaries' present entitlement is more than 100% of the income of the non-resident trust estate, the total interests are reduced to 100% and each beneficiary's interests are reduced proportionally. [subsection 96C(6)]

Australian resident beneficiaries of a non-resident trust estate under a legal disability

Before the FIF measures began, the assessable income of a trustee included the share of the net income of a trust estate which related to a period when:

• a beneficiary under a legal disability was a resident of Australia, or
• a beneficiary who is deemed to be presently entitled to a share of the net income of the trust estate (because they had a vested and indefeasible interest in the income of the trust estate) was a resident of Australia. [subsections 95A(2), 98(1) and (2)]

Since the FIF measures began, a trustee is not assessed on behalf of a beneficiary of a non-resident trust estate where the beneficiary is under a legal disability because the beneficiary is deemed not to be under a legal disability.

However, the beneficiary is assessed under section 97 of the ITAA 1936 - the general assessing provision for trusts. The beneficiary's own share of the net income of the non-resident trust estate is now worked out under the provisions of section 96C of the ITAA 1936 - see Attribution of non-resident trust income where the FIF measures do not apply above on section 96C and the FIF measures. [subsections 96B(2), 98(1) and (2)]

Non-resident trusts exempt from interest charges

Public unit trusts

The transferor trust measures do not apply to arm's length transfers to non-resident public unit trusts. [sub-subparagraph 102AAT(1)(a)(i)(B)]

From the 1992-93 income year you have been exempt from an interest charge on amounts received, or which have been applied for your benefit, that are attributable to the income or profits of a non-resident trust estate which at all times during the year was:

• a public unit trust under the transferor trust measures [Division 6AAA], and
• not a CFT within the meaning of Part X. [subsection 102AAM(1C)]

A unit trust will be a public unit trust if, at any time during the year, any of the units in the unit trust were listed on a stock exchange in Australia or elsewhere or were offered to the public.

In addition, a unit trust will be a public unit trust if, at all times during the year, the units in the unit trust were held by 50 or more persons. A unit trust will not be treated as a public unit trust where 20 or fewer persons hold 75% or more of the beneficial interests of the income or property of the trust. [subsections 102AAF(2) and 102G(3)]

You must take the following into account when deciding whether a unit trust is a public unit trust at all times during the year of income:

• An entity and its associates are taken to be one person.
• Where units in the trust are held by the trustee of another trust estate that is a public unit trust at all times during the income year, a person who has a beneficial interest in the second trust estate is taken to hold those units. [subsection 102AAF(3)]

A public unit trust cannot also be a CFT. A trust estate will be a CFT if there is an eligible transferor in respect of the trust - that is, if an Australian entity or a controlled foreign partnership, CFT or CFC transferred value to the trust estate:

• in the case of a discretionary trust estate, at any time [section 347]
• in the case of a non-discretionary trust estate, after 12 April 1989 for non-arm's length consideration. [sections 342 and 348]

A trust estate will also be a CFT if there is a group of five or fewer Australian entities with a 1% interest in the trust estate totalling 50% or more. [section 342]

When you are working out if an Australian entity has a 1% interest in the trust, include the direct and indirect interests of the entity's associates in the same trust or trusts.

Deceased estates

Generally, where property of a trust estate is paid to or applied for the benefit of a beneficiary, an amount - unless it has already been taxed in the hands of the trustee or beneficiary - is included in the assessable income of that beneficiary. Under those circumstances, an interest charge usually applies to amounts that are included in the assessable income of that beneficiary. [sections 99B and 102AAM]

However, since the 1992-93 income year, a beneficiary has been exempt from the interest charge on amounts received from the estate of a deceased person where those amounts are paid to, or applied for the benefit of, the beneficiary within three years after the death of that person. [subsection 102AAM(1B)]

Amounts taxed at comparable rates

If a non-resident trust estate is a listed country trust estate - see the Overview earlier in this chapter - in an income year, only distributions from certain concessionally taxed income of the trust estate are subject to the interest charge under section 102AAM of the ITAA 1936.

Where a non-resident trust estate is not a listed country trust estate in an income year, distributions made from the income and profits of the trust estate for that year are subject to the interest charge if the amount has not been subject to tax in any listed country in a tax accounting period:

• ending before the end of the non-resident trust's income year, or
• beginning during the non-resident trust's income year. [paragraph 102AAM(1)(b)]

Before that amount can be exempt from the section 102AAM interest charge on distribution, you will have to show that an amount that was the property of a trust estate was paid to you or applied for your benefit out of accumulated profits that relate to:

• in the case of a listed-country trust estate, income other than eligible designated concession income, or
• in any other case, income that has been taxed in any listed country. [subsection 102AAM(1A)]

Chapter 10: Consolidation (consolidated income tax treatment for groups of entities)

Overview

For income tax purposes, consolidation is optional. However, if the head company of a wholly owned resident group decides to consolidate, all its wholly owned Australian resident group entities must become members of that consolidated group.

Once a group has consolidated the choice becomes irrevocable and the consolidated group is treated as a single entity for income tax purposes.

If a foreign company, either directly or through its wholly owned foreign group, has multiple entry points of investment into Australia through Australian resident companies, special multiple entry consolidated (MEC) group rules will apply to the wholly owned resident companies and their wholly owned resident subsidiary entities.

The following losses and tax attributes can generally be brought into a consolidated group (or MEC group) when the group forms or a subsidiary member joins the group which is used by the group's head company:

• losses (including foreign losses)
• franking credits
• foreign dividend account balances
• excess foreign tax credits
• attribution account surpluses, and
• attribution tax account surpluses.

Note: This chapter provides a summary of the provisions on the application of income attributed from FIFs and included in the assessable income of a head company of a consolidated group. Detailed information on the operation of consolidation is in the Consolidation reference manual, which provides information on the operation of consolidation, including its practical effects for business. The manual and legislation are available on our website.

If you have tax technical queries, phone the Business Infoline on 13 24 78 or email us at consolidation@ato.gov.au

Excess foreign tax credits

The consolidation regime (through the single entity rule) ensures that only the head company of a consolidated group includes the foreign income of the consolidated group (or MEC group) in its assessable income.

Once consolidated only the head company can use foreign tax credits to reduce its Australian tax liabilities to avoid double taxation.

The head company can claim a foreign tax credit against Australian tax payable on this income - using its own foreign tax credits, foreign tax credits of subsidiaries and excess foreign tax credits transferred into the group from joining entities.

Generally, the head company can only use those transferred excess credits at the end of the income year after the year the entity joined the group unless the member joins the group at the start of the head company's income year. However, transitional rules apply to groups that consolidated within the transitional period 1 July 2002 to 30 June 2004 to allow such groups ('transitional groups') to use a joining entity's excess foreign tax credits in the joining year, provided certain conditions are met.

Where an entity pays tax on foreign income, while it is a member of a consolidated group (or MEC group), the head company will be assessed on the foreign income and will be taken to have paid and been personally liable for the foreign tax paid by the subsidiary member.

When an entity leaves a consolidated group (or MEC group) it cannot take with it any excess foreign tax credits and it will only include foreign income in its assessable income for the period it is not a member of any consolidated group.

The date of effect of consolidation and the related provisions regarding excess foreign tax credits is 1 July 2002. These provisions are in the New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Act 2002.

FIF attribution account surpluses and FIF attributed tax account surpluses

Under consolidation, only the head company can operate FIF attribution accounts and FIF attributed tax accounts for the purposes of the FIF measures during the period of consolidation.

The pre-consolidation surplus balances of the FIF attribution accounts and FIF attributed tax accounts of subsidiary members of the group are transferred to the head company (or MEC group), at formation or when a subsidiary member joins the consolidated group (or MEC group). This ensures that distributions from FIFs are not taxed to the head company where the joining entity has already been subject to FIF taxation.

Once the account balances have been transferred to the head company of a consolidated group (or MEC group) the FIF attribution accounts and FIF attributed tax accounts of subsidiary members become inoperative during the period the entity is a member of the consolidated group (or MEC group).

When an entity with an interest in a FIF leaves a group, a proportion of the head company's FIF attribution account and FIF attributed tax account surpluses that the head company has in relation to the interests in the FIF that leaves the group with the leaving entity are transferred to the leaving entity.

The date of effect of consolidation and the related provisions regarding FIF attribution accounts and FIF attributed tax accounts is 1 July 2002. These provisions are in the New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Act 2002.

Choices

Section 715-660 of the ITAA 1997 overrides the entry history rule in section 701-5 of the ITAA 1997 to permit the head company of a consolidated group to remake certain normally irrevocable choices made by entities before they became subsidiary members of the group. These choices include all irrevocable declarations, elections, choices or selections provided for in Part XI of the ITAA 1936 and the election to value all items of trading stock that are interests in a FIF at market value (rather than cost) under section 70-70 of the ITAA 1997. Any such choice (or the absence of it) by a joining entity is ignored for the purposes of the head company's income tax affairs. The head company may make the choice, if it is eligible.

In the same way, section 715-700 of the ITAA 1997 overrides the exit history rule in section 701-40 of the ITAA 1997 to permit an entity leaving a consolidated group to remake similar choices made by the head company after the entity became a subsidiary member of the group. The head company's choice (or absence of it) is ignored for the purposes of the leaving entity's income tax affairs for income years ending after the leaving time. The leaving entity may make the choice, if it is eligible.

Appendixes

Appendix 1: Approved stock exchanges

Schedule 12 and regulation 152I of the Income Tax Regulations 1936 - approved stock exchanges under Part XI of the ITAA 1936

Argentina

Buenos Aires stock exchange

Córdoba stock exchange

La Plata stock exchange

Mendoza stock exchange

Rosario stock exchange

Australia

Australian Stock Exchange Limited

Bendigo Stock Exchange Limited

Stock Exchange of Newcastle Limited

Austria

Vienna stock exchange

Belgium

Antwerp stock exchange

Brussels stock exchange

Liège stock exchange

Bermuda

Bermuda stock exchange

Brazil

Belo Horizonte stock exchange

Curitiba stock exchange

Fortaleza stock exchange

Porto Alegre stock exchange

Recife stock exchange

Rio de Janeiro stock exchange

Salvador stock exchange

Santos stock exchange

São Paulo stock exchange

Canada

Calgary stock exchange

Montreal stock exchange

Toronto stock exchange

Vancouver stock exchange

Winnipeg stock exchange

Chile

Santiago stock exchange

Valparaiso stock exchange

China

Shanghai stock exchange

Shenzhen stock exchange

Colombia

Bogotá stock exchange

Denmark

Copenhagen stock exchange

Finland

Helsinki stock exchange

France

Bordeaux stock exchange

Lille stock exchange

Lyon stock exchange

Marseille stock exchange

Paris stock exchange

Germany

Berlin stock exchange

Düsseldorf stock exchange

Frankfurt stock exchange

Hamburg stock exchange

Hannover stock exchange

Munich stock exchange

Stuttgart stock exchange

Greece

Athens stock exchange

Hong Kong

Hong Kong stock exchange

Hungary

Budapest stock exchange

India

Bombay stock exchange

Calcutta stock exchange

Delhi stock exchange

Madras stock exchange

Indonesia

Jakarta stock exchange

Surabaya stock exchange

Ireland

Dublin stock exchange

Israel

Tel Aviv stock exchange

Italy

Bologna stock exchange

Florence stock exchange

Genoa stock exchange

Milan stock exchange

Naples stock exchange

Palermo stock exchange

Rome stock exchange

Trieste stock exchange

Turin stock exchange

Venice stock exchange

Jamaica

Jamaica stock exchange

Japan

Fukuoka stock exchange

Hiroshima stock exchange

Kyoto stock exchange

Nagoya stock exchange

Niigata stock exchange

Osaka stock exchange

Sapporo stock exchange

Tokyo stock exchange

Korea, Republic of

Seoul stock exchange

Luxembourg

Luxembourg stock exchange

Malaysia

Kuala Lumpur stock exchange

Mexico

Mexican stock exchange

Netherlands

Amsterdam stock exchange

New Zealand

New Zealand stock exchange

Nigeria

Nigerian stock exchange

Norway

Oslo stock exchange

Pakistan

Karachi stock exchange

Peru

Lima stock exchange

Philippines

Makati stock exchange

Manila stock exchange

Poland

Warsaw stock exchange

Portugal

Lisbon stock exchange

Oporto stock exchange

Singapore

Singapore stock exchange

Slovakia

Bratislava stock exchange

Slovenia

Ljubljana stock exchange

South Africa

Johannesburg stock exchange

Spain

Barcelona stock exchange

Bilbao stock exchange

Madrid stock exchange

Valencia stock exchange

Sri Lanka

Colombo stock exchange

Sweden

Stockholm stock exchange

Switzerland

Basel stock exchange

Geneva stock exchange

Zurich stock exchange

Taiwan

Taiwan stock exchange

Thailand

Thailand stock exchange

Trinidad and Tobago

Trinidad and Tobago stock exchange

Turkey

Istanbul stock exchange

United Kingdom

London stock exchange

United States

American stock exchange

Boston stock exchange

Cincinnati stock exchange

Midwest stock exchange

NASDAQ stock exchange

New York stock exchange

Pacific stock exchange

Philadelphia stock exchange

Uruguay

Montevideo stock exchange

Venezuela

Caracas stock exchange

Maracaibo stock exchange

Yugoslavia, Federal Republic of

Belgrade stock exchange

Zimbabwe

Zimbabwe stock exchange

Appendix 2: Business activities that are not eligible activities

Schedule 4 - Business activities that are not eligible activities under Division 3 of Part XI of the ITAA 1936

• Banking* and the provision of finance
• Financial intermediation services
• Investment in tainted assets, or tainted commodity investments, within the meaning of section 317* of the ITAA 1936
• Life insurance business*
• General insurance business*
• Certain activities in connection with real property other than in connection with construction*

*Although in this schedule banking, investment, life insurance business, general insurance business and activities in connection with real property are referred to as not being eligible activities, under subsection 496(2) the exemptions provided for by Divisions 4, 5, 6 and 7 of Part XI are not affected.

Note: This applies for assessments for notional accounting periods beginning on or after 1 July 2003. For earlier periods, 'management of funds' was included in the Schedule 4 list of business activities that are not eligible activities.

Appendix 3: Approved international sectoral classification systems

Schedule 13 and regulation 152J of the Income Tax Regulations 1936 - approved international sectoral classification systems under Part XI of the ITAA 1936

Bloomberg's Information Systems

Extel Financial Workstation

Financial Times-Actuaries World Index

International Finance Corporation Composite Index

Morgan Stanley Capital International Index

Salomon-Russell Global Equity Index

Standard and Poor's Composite Index (S&P 500)

Worksheets

Worksheet 1: Market value method

Complete the relevant parts of the worksheet for the interests you hold in the FIF.

Description of interests in the FIF ___________________________________________

Part 1
Express the amounts in B to D in the same currency as the amount in A. Alternatively, you may irrevocably elect to express the amounts in A to D in Australian currency. This will bring to account currency exchange gains and losses at the times the transactions and values relevant to the calculations occurred.
The market value of your interests held in the FIF on the last day of the notional accounting period (see chapter 2).	A	___________
The amount of all distributions you received from the FIF during the notional accounting period.	B	___________
The market value of the interest you held in the FIF on the day immediately before the first day of the notional accounting period for the interests in A.	C	___________
The amount you gave or paid for acquiring any interests in the FIF during the notional accounting period if that interest is included in A.	D	___________
Add C and D and take the total away from the sum of A and B.	E	___________
This is the FIF amount.
If the amount at E is negative, you have incurred a current year FIF loss. You may take this loss into account for future years as an unapplied previous FIF loss, but only for the same FIF.
If the amount at E is positive, go to part 2.
Part 2
Any unapplied previous FIF losses.	F	___________
Take the amount at F away from the amount at E.	G	___________
Convert to A$. If the amount at G is positive - that is, you have FIF income - and the amounts in part 1 were expressed in foreign currency, convert the amount at G to Australian currency and include it at H. Use the rate of exchange applying at the end of the notional accounting period. If the amount at G is in Australian currency, include the same amount at H. If the amount at G is negative, you can take that amount into account in future years as an unapplied previous FIF loss.	H	A$_________
Part 3
Did you receive any distributions from the FIF during the notional accounting period?
If No, then the amount at H is not reduced. Copy the amount from H to I. Include this amount in your assessable income.	I	___________
If Yes, insert the amount, if any, of the distributions that are of the type to which subsection 530(1) applies. Include any reductions of FIF income under J employee share acquisition schemes. See Reduction of FIF income for distributed profits in chapter 6.	J	___________
Take J away from H.	K	___________
If the amount at K is positive, include it in your assessable income.
If the amount at K is negative, do not include any amount in your assessable income under the FIF measures.
For details on how to complete your tax return, refer to the attributed foreign income question in TaxPack or the instruction guides for company, trust, partnership and superannuation fund tax returns.

Worksheet 2: Deemed rate of return method for FIFs

.

Complete the relevant parts of the worksheet for the interests you held in the FIF on the last day of the notional accounting period (see chapter 2). Interests in the FIF which you disposed of before the end of the notional accounting period are not taxed under FIF measures.

Part 1
Description of the group of interests in the FIF. _________________________________
Opening value.		A	___________
Multiply A by the deemed rate of return.		B	___________
Multiply B by	the number of days in the notional accounting period for which you held the interests in the group 365	C	___________
Part 2
Convert the amount at C to Australian currency at the rate of exchange applying at the end of the notional accounting period.		D	A$_________
Part 3
If you have more than one group of interests in the FIF and completed more than one part 1 and part 2, add the amounts in each box D and show the total amount at E.
If you had only one interest in the FIF, copy the amount from D to E.		E	___________
Part 4
Did you receive any distributions from the FIF during the notional accounting period? See chapter 6 for information about reductions of FIF income.
If No, then the amount at E is not reduced. Copy the amount from E to F. Include this amount in your assessable income.		F	___________
If Yes, insert the amount, if any, of the distributions that are of the type to which subsection 530(1) of the ITAA 1936 applies. Include any reductions of FIF income for employee share acquisition schemes - see chapter 6. [section 530A]		G	___________
Take G away from E.		H	___________
If the amount at H is positive, include it in your assessable income. If the amount at H is negative, do not include any amount in your assessable income under the FIF measures.
For details on how to complete your tax return, refer to the attributed foreign income question in TaxPack or the instruction guides for company, trust, partnership and superannuation fund tax returns.

Worksheet 3: Calculation method

Complete the relevant parts of the worksheet for those interests you held in the FIF on the last day of the notional accounting period (see chapter 2). Interests in the FIF that you disposed of before the end of the notional accounting period are not taxed under the FIF measures.

Description of interests in the FIF. ___________________________________________

Part 1 - Use the currency in which the accounts of the FIF are made out.
The notional income of the FIF for the notional accounting period.		A	___________
The notional deductions of the FIF for the notional accounting period.		B	___________
Take B away from A.		C	___________
If the amount at C is negative, the FIF has a calculated loss. This loss is allowed as a notional deduction for the same FIF in future years. If the amount at C is positive, the FIF has a calculated profit. Go to part 2.
Part 2
If the amount at C is positive, convert the amount to Australian currency at the rate of exchange applying at the end of the notional accounting period. Now complete parts 3 and 4, as appropriate.		D	A$_________
Part 3
Complete this part for interests you held in the FIF for the entire notional accounting period.
Your attribution percentage for your interest in the FIF held for the whole of the notional accounting period.		E	_________%
Multiply D by E.		F	___________
Part 4
Complete this part for interests in the FIF acquired throughout a particular part of the notional accounting period. Do not apply the calculation method for interests in the FIF which you dispose of before the end of the notional accounting period. These interests may be dealt with under other provisions of the taxation Acts - for example, the capital gains tax provisions. Repeat part 4 for interests in the FIF that you acquired at different times throughout the notional accounting period.
Your attribution percentage for interests in the FIF held throughout a particular part of the notional accounting period.		G	_________%
Multiply D by G.		H	___________
Multiply H by	the number of days in the notional accounting period for which you held the interests in the FIF the number of days in the notional accounting period (generally 365)	I	___________
Part 5
Add F and I, where applicable, to determine your FIF income.		J	___________
Now go to part 6.
Part 6
Did you receive any distributions from the FIF during the notional accounting period?
If No, then the amount at J is not reduced. Copy the amount from J to K.
Include this amount in your assessable income.		K	___________
If Yes, insert the amount, if any, of the distributions that are of the type to which subsection 530(1) of the ITAA 1936 applies. Include any reduction of FIF income resulting from employee share schemes. [section 530A] See chapter 6 for more information.		L	___________
Take L away from J		M	___________
If the amount at M is positive, include it in your assessable income. If the amount at M is negative, do not include any amount in your assessable income under the FIF measures. For details on how to complete your tax return, refer to the attributed foreign income question in TaxPack or the instruction guides for company, trust, partnership and superannuation fund tax returns.

Worksheet 4: Deemed rate of return method for FLPs

Complete the relevant parts of the worksheet for the interests you hold in the FLP. Read Deemed rate of return method in chapter 5 for more information.

Part 1
Description of the interests in the FLP. _________________________________
Opening value.		A	___________
Multiply A by the deemed rate of return.		B	___________
Multiply B by	the number of days you held the interest in the FLP during the notional accounting period 365	C	___________
Part 2
Convert the FIF amount at C to Australian currency at the rate of exchange applying at the end of the notional accounting period.		D	A$_________
Part 3
If you have more than one interest in the FLP and completed more than one part 1 and part 2, add the amounts in each box D and show the total amount at E.
If you had only one interest in the FLP, copy the amount from D to E.		E	___________
Part 4
Did you receive any distributions from the FLP during the notional accounting period? See chapter 6 for information about reductions of FIF income.
If No, then the amount at E is not reduced. Copy the amount from E to F. Include this amount in your assessable income.		F	___________
If Yes, insert the amount, if any, of the distributions that are of the type to which subsection 530(1) applies - see chapter 6.		G	___________
Take G away from E.		H	___________
If the amount at H is positive, include it in your assessable income. If the amount at H is negative, do not include any amount in your assessable income under the FIF measures.
For details on how to complete your tax return, refer to the attributed foreign income question in TaxPack or the instruction guides for company, trust, partnership and superannuation fund tax returns.

Worksheet 5: Cash surrender value method for FLPs

Complete the relevant parts of the worksheet for the interests you hold in the FLP. See Cash surrender value method in chapter 5 for more information.

Description of interests in the FLP. ___________________________________________

Part 1 - Express the amounts in B to G in the same currency as the amount in A.
The cash surrender value of your interests held in the FLP on the last day of the notional accounting period.	A	___________
The amount of distributions you received from the FLP during the notional accounting period for those interests you held on the last day of the period.	B	___________
Where you have disposed of interests in the FLP during the notional accounting period, write:
the amount of distributions you received for those interests from the FLP during the notional accounting period - if more convenient, include this amount at B - and	C	___________
the amount you received for the disposal of the interests in the FLP.	D	___________
The cash surrender value of the interests you held in the FLP on the day immediately before the first day of the notional accounting period or the deemed rate of return value for the same interests on the last day of the previous period where the deemed rate of return method was used for that period.	E	___________
The amount you paid for acquiring any interest in the FLP during the notional accounting period.	F	___________
Add E and F and take the total away from the sum of A to D.	G	___________
This is the gross FIF income amount. If the amount at G is negative, you have incurred a current year FIF loss. You may take this loss into account in future years as an unapplied previous FIF loss, but only for the same FLP.
If the amount at G is positive, go to part 2.
Part 2
Enter any unapplied previous FIF losses.	H	___________
Take away the amount at H from the amount at G.	I	___________
If the amount at I is positive - that is, you have FIF income - convert the amount to Australian currency at the rate of exchange applying at the end of the notional accounting period. If the amount at I is negative, you may use the amount in future years as an unapplied previous FIF loss.	J	A$_________
Part 3
Did you receive any distributions from the FLP during the notional accounting period?
If No, then the amount at J is not reduced. Copy the amount from J to K. Include this amount in your assessable income.	K	___________
If Yes, insert the amount, if any, of the distributions that are of the type to which subsection 530(1) applies - see chapter 6.	L	___________
Take away L from J.	M	___________
If the amount at M is positive, include it in your assessable income. If the amount at M is negative, do not include any amount in your assessable income under the FIF measures. For details on how to complete your tax return, refer to the attributed foreign income question in TaxPack or the instruction guides for company, trust, partnership and superannuation fund tax returns.

Last Modified: Tuesday, 24 June 2008

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