New International Tax Arrangements (Participation Exemption and Other Measures) Act 2004 (96 of 2004)

Schedule 2   Foreign branch income, non-portfolio dividends and listed countries

Part 1   Foreign branch income exemption

Income Tax Assessment Act 1936

1   Section 23AH

Repeal the section, substitute:

23AH Foreign branch income of Australian companies not assessable

Objects

(1) The objects of this section are:

(a) to ensure that active foreign branch income derived by a resident company, and capital gains made by a resident company in disposing of non-tainted assets used in deriving foreign branch income, are not assessable income or exempt income of the company; and

(b) to include in the assessable income of a resident company that part of its income and capital gains derived through a branch in a foreign country that is comparable to the amounts that would be included in an attributable taxpayer's assessable income for income and capital gains derived by a CFC resident in the same foreign country; and

(c) to get the same outcomes where one or more partnerships or trusts are interposed between a resident company and a foreign branch.

Foreign branch income not assessable

(2) Subject to this section, foreign income derived by a company, at a time when the company is a resident in carrying on a business, at or through a PE of the company in a listed country or unlisted country is not assessable income, and is not exempt income, of the company.

Foreign capital gains and losses disregarded

(3) Subject to this section, a capital gain from a CGT event happening to a CGT asset is disregarded for the purposes of Part 3-1 of the Income Tax Assessment Act 1997 if:

(a) the gain is made by a company that is a resident; and

(b) the company used the asset wholly or mainly for the purpose of producing foreign income in carrying on a business at or through a PE of the company in a listed country or unlisted country; and

(c) the asset does not have the necessary connection with Australia.

(4) Subject to this section, a capital loss from a CGT event happening to a CGT asset is disregarded for the purposes of Part 3-1 of the Income Tax Assessment Act 1997 if:

(a) the loss is made by a company that is a resident; and

(b) the company used the asset wholly or mainly for the purpose of producing foreign income in carrying on a business at or through a PE of the company in a listed country or unlisted country; and

(c) had the loss been a gain, it would be disregarded under subsection (3).

Exceptions: listed country PE

(5) Subsection (2) does not apply to foreign income derived by the company if:

(a) the PE is in a listed country; and

(b) the PE does not pass the active income test (see subsection (12)); and

(c) the foreign income is both:

(i) adjusted tainted income (see subsection (13)); and

(ii) eligible designated concession income in relation to a listed country.

(6) Subsection (3) or (4) does not apply to a capital gain or capital loss if:

(a) the PE is in a listed country; and

(b) for a capital gain - the gain is from a tainted asset and is eligible designated concession income in relation to a listed country; and

(c) for a capital loss - the loss is from a tainted asset and would be eligible designated concession income in relation to a listed country if it were a capital gain.

Exceptions: unlisted country PE

(7) Subsection (2) does not apply to foreign income derived by the company if:

(a) the PE is in an unlisted country; and

(b) the PE does not pass the active income test (see subsection (12)); and

(c) the foreign income is adjusted tainted income (see subsection (13)).

(8) Subsection (3) or (4) does not apply to a capital gain or capital loss if:

(a) the PE is in an unlisted country; and

(b) the gain or loss is from a tainted asset.

Income derived in disposing of a business

(9) This section applies to foreign income derived by an entity in the course of disposing, in whole or in part, of a business carried on in a listed country or unlisted country at or through a PE of the entity in the listed country or unlisted country as if the foreign income had been derived in carrying on that business.

Interposed partnerships or trusts

(10) This section applies to any indirect interest (through one or more partnerships or trust estates) of a company in foreign income derived by a partnership or trustee through a PE of the partnership or trustee in a listed country or unlisted country as if that indirect interest were foreign income derived by the company through a PE of the company in that country.

(11) This section applies to any indirect interest (through one or more partnerships or trust estates) of a company in a capital gain or capital loss made in relation to an asset of a partnership, or made by a trustee, in carrying on a business at or through a PE of the partnership or trustee in a listed country or unlisted country as if that indirect interest were a capital gain or capital loss made by the company through a PE of the company in that country.

Active income test

(12) A PE of an entity passes the active income test for a year of income if the entity would have passed the active income test in section 432 if:

(a) the assumptions in subsection (14) were made; and

(b) subsections 432(2) and (3) and 446(2) and paragraphs 432(1)(b) and (e) and 447(1)(b), (d) and (f) had not been enacted.

Adjusted tainted income

(13) For the purposes of this section, the adjusted tainted income of a PE of an entity is income or other amounts that would be adjusted tainted income of the entity for the purposes of Part X if:

(a) the assumptions in subsection (14) were made; and

(b) subsection 446(2) and paragraphs 447(1)(b), (d) and (f) had not been enacted.

Assumptions for subsections (12) and (13)

(14) The assumptions referred to in paragraphs (12)(a) and (13)(a) are:

(a) except in applying paragraphs 447(1)(a), (c) and (e) and 450(6)(c), (7)(d) and (8)(b), the only income or other amounts derived by the entity were the income derived in carrying on business at or through the PE; and

(b) the entity's statutory accounting periods were the same as the entity's years of income; and

(c) in applying paragraphs 447(1)(a), (c) and (e) and 450(6)(c), (7)(d) and (8)(b):

(i) the part of the entity's operations that consists of the business carried on at or through the PE were a company (the PE company ); and

(ii) the remaining part of the entity's operations were a separate company (the HQ company ); and

(iii) the PE company and the HQ company had carried out the transactions that they would have carried out if the PE company were engaged in the same or similar activities as the PE under the same or similar conditions as the PE and were dealing wholly independently with the HQ company; and

(iv) any income derived by the HQ company were disregarded; and

(d) if the entity is an AFI entity (within the meaning of subsection 326(2)) - the entity were an AFI subsidiary; and

(e) in applying paragraphs 447(1)(a), (c) and (e), the HQ company were an associate of the PE company.

Definitions

(15) In this section:

company does not include a company in the capacity of a trustee.

double tax agreement has the same meaning as in Part X.

eligible designated concession income has the same meaning as in Part X.

foreign income includes an amount that:

(a) apart from this section, would be included in assessable income under a provision of this Act other than Part 3-1 or 3-3 of the Income Tax Assessment Act 1997 (CGT); and

(b) is derived from sources in a listed country or unlisted country.

listed country has the same meaning as in Part X.

permanent establishment , or PE , in relation to a listed country or unlisted country:

(a) if there is a double tax agreement in relation to that country - has the same meaning as in the double tax agreement; or

(b) in any other case - has the meaning given by subsection 6(1).

statutory accounting period has the same meaning as in Part X.

tainted asset has the same meaning as in Part X.

unlisted country has the same meaning as in Part X.