Foreign investment funds guide

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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 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
• 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 .

Generally, you must keep records for a period of 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. [PARAGRAPH 170(2)(b), SUBSECTIONS 170(4A) and 170(4B)]

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. [SUB SECTION 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 converted into writing in English.

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

What is the purpose of the FIF record keeping provisions?

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.

In addition, you must 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.

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
• 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. [SECTIONS 617 or 619]

The records are to include details of:

• the calculation of the opening value of the FIF or FLP interest
• the acquisition and sale of interests in a FIF or FLP and
• the distributions received from a FIF or 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 FLP which is wholly or partly exempt from FIF taxation for a notional accounting period ending in your income year, keep records showing why the exemption applied. [SECTION 620]

In addition to the records indicated below, you must keep records for each interest in a FIF or FLP for which you are claiming an exemption.

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 per cent 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 Act applies, Part X requires you to keep records for the CFC measures.

Specific exemptions

Although some industries such as banking, insurance and real estate are listed as ineligible activities for the purposes of the active business test, there are specific exemptions for certain publicly listed and widely held investments in these industries. [DIVISIONS 4 to 7]

There are also specific exemptions for interests in FIFs that are trading stock, multi-industry foreign companies and Lloyd's of London. Your interests in FIFs which would otherwise be caught and taxed under the measures are exempt where the total value of those FIFs is 5 per cent or less of the total value of all your FIF interests. [DIVISIONS 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 on page 4 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 $A50 000 or less at the end of the notional accounting period.

Direct interests in resident public unit trusts

The small investor exemption does not include FIF income from the assessable income of a resident public unit trust. The exemption applies where you hold direct interests in resident public unit trusts and, at the end of your income year, your total interests and those of any of your associates in

• FIFs and FLPs and
• resident public unit trusts where, for that income year, the income of one or more of those resident public unit trusts includes any FIF income

are $A50,000 or less.

Keep a record of how you and your associates worked out your aggregate interests in any FIFs, FLPs and resident public unit trusts.

Exemption for visitors to Australia

If you are a short-term resident claiming exemption from the FIF measures as an exempt visitor, you must keep your contract of employment, 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 which affect the taxation treatment of future transactions or events, or which 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 will not have to lodge a written notice of the election. In making an election, you need to decide which provision of the Act to apply in working out a component of taxable income. You will also need to keep a record which 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 are required to 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.

A maximum penalty of $3000 may be imposed by the court if you are convicted of a breach of the record keeping requirements. [SECTION 621]

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 will apply if you made reasonable efforts to obtain the required documents but were unable to get them. [SECTION 623]

If you do not have access to full information relating to a FIF, do not use the calculation method. You must keep records of the information on which you based your calculation of FIF income. However, section 623 is intended to apply if you had access to the information provided by the FIF or a third party but, due to a change in circumstances, do not have sufficient control to access the underlying accounts of the FIF after making reasonable attempts to do so. You would not be expected to use this defence unless exceptional circumstances existed.

A partnership will be treated as a person under the record keeping provisions. This allows the record keeping and related prosecution provisions to apply to the partnership. Accordingly, 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)]

ATO references:
NO NAT 2130