Foreign income return form guide 2007

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Appendixes

Appendix 1 - Foreign income regulations

Introduction

Part 8A of the Income Tax Regulations 1936, and associated schedules, deal with the taxation of foreign source income. The provisions:

• declare those countries that are to be treated as listed, unlisted and section 404 countries
• provide that Swiss cantonal taxes are treated as if they were federal taxes
• contain rules for determining whether an amount is designated concession income
• specify when the capital gains are taken to have been subject to tax for the purpose of the CFC measures, the transferor trust measures, and the non-assessable non-exempt treatment of foreign branches of Australian companies, and
• set out the accruals taxation laws of other countries that are recognised for the purpose of providing relief from double accruals taxation.

Listed countries

The Regulations specify those countries that are listed countries and section 404 countries. These lists are reproduced in attachment A .

Designated concession income

Normally, amounts derived in a listed country are exempt from accruals taxation. This exemption does not apply to amounts of 'eligible designated concession income'. Broadly, an amount may be designated concession income if it is concessionally taxed in a listed country.

What kinds of income or profits are specified as designated concession income?

Income or profits are designated concession income only if:

• they are of a kind specified in the Regulations in relation to a particular listed country, and
• they are derived by an entity that is of a type specified in the Regulations.

The full list of designated concession income has been reproduced in attachment B .

Capital gains deemed subject to tax

Capital gains are defined (except for the purposes of regulation 152D) in the Regulations as gains or profits of a capital nature that arise from the sale or disposal of all or part of a CGT asset, other than gains or profits that would not be capital gains but for a provision of Australian tax law.

Regulation 152D provides that a capital gain (defined as gains or profits or other amounts of a capital nature) will be taken to be subject to tax in a listed country where the gain would have been subject to tax except for the operation of a rollover relief provision of a kind specified in the Regulations contained in the tax law of that country. Broadly, the types of rollover relief relate to the types of rollover relief provisions available for capital gains tax purposes under Australian tax law.

Attachment A

Listed countries

Canada

France

Germany

Japan

New Zealand

United Kingdom of Great Britain and Northern Ireland

United States of America

Section 404 countries

Argentina	Myanmar
Austria	Netherlands
Bangladesh	New Caledonia
Belgium	Norway
Brazil	Pakistan
Brunei	Papua New Guinea
Bulgaria	Philippines
China (except the Hong Kong Special Administrative Region)	Poland
Czech Republic	Portugal
Denmark	Romania
Fiji	Russian Federation
Finland	Saudi Arabia
French Polynesia	Singapore
Greece	Slovak Republic
Hungary	Solomon Islands
Iceland	South Africa
India	Spain
Indonesia	Sri Lanka
Iran	Sweden
Ireland	Switzerland
Israel	Taiwan
Italy	Thailand
Kenya	Tokelau
Kiribati	Tonga
Korea, Republic of	Turkey
Luxembourg	Tuvalu
Malaysia	Vietnam
Malta	Western Samoa
Mexico	Zimbabwe

Attachment B

Items of designated concession income

Country	Entity	Kind of income or profit	Feature of income or profit under tax law of the country
Canada	An entity that operates in Canada as an international banking centre under Canadian law	All passive income and tainted services income	Not subject to tax in Canada in a tax accounting period
Canada	A company that operates in Canada as an investment corporation or as a mutual fund corporation under Canadian tax law	All passive income	Not taxed in Canada at the normal company tax rate
France	A company that operates in France as a soci é t é d'investissement à capital variable (SICAV) under French law	All passive income	Not subject to tax in France in a tax accounting period
France	A company that is treated as a resident of France for the purposes of the tax law of France, and that has elected to be taxed on a tonnage basis rather than on income or profits	All income or profits	Not used as the basis for establishing the amount of taxable income, taxable profits, tax base or tax liability of the entity under the tax law of France
Germany	A company that is treated as a resident of Germany for the purposes of the tax law of Germany	All passive income in carrying on business outside Germany at or through a permanent establishment	Not subject to tax in Germany in a tax accounting period
Germany	Either: (a) a company that is treated as a resident of Germany for the purposes of the tax law of Germany, or (b) any company in carrying on business in Germany at or through a permanent establishment of the company in Germany	Capital gains in respect of shares in companies	Not taxed in Germany at the normal company tax rate
Germany	A company that is treated as a resident of Germany for the purposes of the tax law of Germany, and that has elected to be taxed on a tonnage basis rather than on income or profits	All income or profits	Not used as the basis for establishing the amount of taxable income, taxable profits, tax base or tax liability of the entity under the tax law of Germany
Japan	An entity in carrying on business in Japan at or through a permanent establishment of the entity in that country	All income or profits derived from Japanese governmental bonds	Not subject to tax in Japan in a tax accounting period
New Zealand	Either: (a) a company that is treated as a resident of New Zealand for the purposes of the tax law of New Zealand, or (b) any entity in carrying on business in New Zealand at or through a permanent establishment of the entity in New Zealand	Capital gains in respect of tainted assets	Not subject to tax in New Zealand in a tax accounting period
United Kingdom	A company that is treated as a resident of the United Kingdom for the purposes of the tax law of the United Kingdom	Capital gains in respect of shares in companies where: (a) the CGT assets of the companies; or (b) the underlying CGT assets of the companies held through one of more non-resident entities that are associates include CGT assets having the necessary connection with Australia	Not subject to tax in the United Kingdom in a tax accounting period as a consequence of the substantial shareholding exemption available under the tax law of the United Kingdom
United Kingdom	A company that is treated as a resident of the United Kingdom for the purposes of the tax law of the United Kingdom, and that has elected to be taxed on a tonnage basis rather than on income or profits	All income or profits	Not used as the basis for establishing the amount of taxable income, taxable profits, tax base or tax liability of the entity under the tax law of the United Kingdom
United Kingdom	An entity that operates in the United Kingdom as a open-ended investment company under the law of the United Kingdom	All passive income	Not taxed in the United Kingdom at the normal company tax rate
United States	Either: (a) a company that is treated as a resident of the United States for the purposes of the tax law of the United States, or (b) any entity in carrying on business in the United States at or through a permanent establishment of the entity in that country	All income or profits derived from tax-exempt governmental bonds	Not subject to tax in the United States in a tax accounting period
United States	An entity that operates in the United States as a regulated investment company under the tax law of the United States	All passive income	Not taxed in the United States at the normal company tax rate

Appendix 2 - Accruals taxation on the change of residence of a CFC from an unlisted country to a listed country or to Australia

The attributable taxpayers in relation to a CFC are taxed under section 457 on the amount that relates to the period until the change of residence. Non-portfolio dividends received by the CFC during the period are not included.

Change of residence of a CFC from an unlisted country to Australia

If a CFC changes residence from an unlisted country to Australia, a resident taxpayer who is an attributable taxpayer of the CFC is taxable on the taxpayer's attribution percentage of the adjusted distributable profits of the CFC. The amount of the distributable profits that is taxable to a resident taxpayer includes the adjusted tainted income of the CFC (excluding non-portfolio dividends) less any expenses relating to that adjusted tainted income.

Example 1

AustCo owns 75% of CFC1, a CFC that is resident in an unlisted country CFC1 becomes a resident of Australia on 30 September 2006. CFC1 has a statutory accounting period of 1 July-30 June. For the period 1 July - 30 September CFC1 earned the following amounts of income:

Portfolio dividends	$10,000
Non-portfolio dividends	$15,000
Tainted interest income	$12,000
Tainted services income	$23,000
	$60,000

CFC1's adjusted tainted income is $45,000. It incurs expenses of $5,000 in earning the adjusted tainted income.

CFC1's adjusted distributable profits are $40,000.

Therefore the amount attributable to AustCo under section 457 is 75% x $40,000 = $30,000.

Change of residence of a CFC from an unlisted country to a listed country

If a CFC changes residence from an unlisted country to a listed country, a resident attributable taxpayer has to include in assessable income a share of the adjusted distributable profits of the CFC.

The amount to be included is worked out in the same way as the amount that arises where an unlisted country CFC becomes a resident of Australia. However, a further adjustment is made to the CFC's distributable profits. The CFC is treated as having disposed of all of its tainted assets for their market value at the time it changed residence. Accordingly, the distributable profits also include a net profit arising on the deemed disposal of those assets.

Example 2

AustCo owns 75% of CFC2, a CFC that is resident in an unlisted country. CFC2 becomes a resident of a listed country on 30 September 2006. CFC2 has a statutory accounting period of 1 July-30 June. For the period 1 July - 30 September CFC2 earned the following amounts of income:

Portfolio dividends	$10,000
Non-portfolio dividends	$15,000
Tainted interest income	$12,000
Tainted services income	$23,000
	$60,000

CFC2's adjusted tainted income is $45,000. It incurs expenses of $5,000 in earning the adjusted tainted income. The net profit (deemed) arising on CFC2's tainted assets at 30 September is $100,000.

CFC2's adjusted distributable profits are $140,000.

Therefore the amount attributable to AustCo under section 457 is 75% x $140,000 = $105,000.

Treatment of residence changes arising from changes to the lists of countries

If an unlisted country CFC is treated as having changed residence to a listed country as a result of the unlisted country becoming listed, section 457 will not apply to this type of change in residence.

Appendix 3 - Summaries and worksheets

Overview

Section 1 of this appendix contains the following summary sheets that may be useful when preparing your tax return:

Summary sheet 1	attributed income
Summary sheet 2	working out your share of the attributable income of a CFC
Summary sheet 3	active income test.

Section 1 also contains the following worksheets:

• worksheet 1 - working out your control and attribution percentages
• worksheet 2 - working out the tainted income ratio for a CFC
• worksheet 3 - working out amounts from partnerships to be included in the tainted income ratio
• worksheet 4 - working out the attributable income of a CFC.

Section 2 contains a summary sheet for the transferor trust measures . Section 3 contains a summary sheet for working out the amount of foreign dividend income to include in your assessable income.

The summaries and worksheets are intended as guides only and may not cover all the qualifications and conditions contained in the law that may apply to a particular case.

Last Modified: Monday, 2 July 2007

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ATO references:
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