House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer,the Hon. J. Kerin, M.P.)

Chapter 21 Change of residence of a CFC from an unlisted country to Australia

[Clause: 80, 85]

Overview

Provides relief from the double taxation of profits that can occur when an Australian-controlled foreign company (CFC) changes its residence from an unlisted country to Australia. The relief will be granted by providing a tax exemption for distributions which represent income of the company that has previously been attributed to the company.

Summary of proposed amendments

21.1. The amendment relates to a CFC that has changed its residence from an unlisted country to Australia. A taxpayer may receive distributions of profits from the company after the change of residence to Australia. An unintended effect of the existing law is that double taxation may occur as a result of the change of residence. The proposed amendment ensures that the taxpayer will be exempt from tax on those distributions to the extent that the distributions represent income of the company that has been previously attributed to the taxpayer.

Background to the legislation

The current effects of the accruals tax measures

21.2. Dividends paid to a taxpayer out of income derived by a CFC that has been attributed to that taxpayer are exempt from tax under section 23AI of the Act. This avoids double taxation under the accruals tax measures. An anomaly has arisen, however, in the tax treatment of dividends paid after the CFC has changed residence to Australia. The current law is explained below.

21.3. To claim an exemption under section 23AI, the taxpayer is required to maintain an 'attribution account' in relation to the CFC which shows:

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the amount of the income attributed to the taxpayer (recorded as an 'attribution credit'); and

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amounts distributed to the taxpayer, eg, a dividend paid to the taxpayer by the CFC (recorded as an 'attribution debit').

21.4. Broadly, attribution credits arise in relation to a CFC if an amount is included in the assessable income of an Australian attributable taxpayer because:

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an amount of the CFC's income is attributed to the taxpayer (see section 456); or

•

the CFC has both:

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ceased to be a resident of an unlisted country; and

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become a resident of a listed country or Australia (see section 457); or

•

an unlisted country CFC paid a non-portfolio dividend to a listed country CFC (see section 458).

21.5. The amount of the dividend which may be exempted from tax under section 23AI cannot exceed the 'attribution surplus' in the account. The attribution surplus is the amount by which attribution credits exceed attribution debits.

21.6. Currently, there is a requirement that the company (known as an 'attribution account entity'), which makes the payment to the Australian taxpayer wishing to claim the exemption, be a non-resident company. If a CFC changes residence to Australia, it ceases to be a non-resident company and therefore ceases to be an 'attribution account entity'. Thus, when a CFC changes residence to Australia, the Australian attributable taxpayer in relation to that CFC cannot take advantage of the unused attribution credits.

Removing the unintended inequity

21.7. The amendment will provide that distributions made to a resident taxpayer by a CFC after it has become a resident company will also qualify for the exemption under section 23AI of the Principal Act. The distributions to a taxpayer will be exempt from tax up to the amount of the surplus in the attribution account for the CFC at the time it changes residence.

Explanation of the proposed amendments

21.8. The amendment will ensure that a taxpayer can obtain the benefit of the section 23AI tax exemption even after the CFC has changed its residence to Australia.

Intended purpose of attribution surplus

21.9. When the income of a CFC is attributed to a resident taxpayer, an attribution credit arises in the attribution account kept by the taxpayer for the CFC. The balance in this account is referred to as the attribution surplus. It shows the extent to which distributions made by the CFC to the taxpayer will be exempt from tax.

Effect of change of residence on an attribution account

21.10. When a CFC changes residence from an unlisted country to Australia, its distributable profits are attributed to attributable taxpayers of the CFC. This amount is limited to the profits which are not the exempting receipts or have not previously been attributed to a resident taxpayer (section 457). An attribution credit arises for the amount so attributed. The CFC may already have an attribution surplus, ie, unused attribution credits, in its attribution account which arose prior to its change of residence (under section 456 of the Act).

21.11. After a change of residence to Australia, the unused attribution surplus cannot be utilised because the foreign company, by becoming a resident company, ceases to be an 'attribution account entity'.

Providing exemption from tax for distributions made after the change of residence

21.12. Currently, a distribution made by a CFC is exempt from tax under section 23AI only if an attribution debit arises for the CFC when the distribution is made. However, an attribution debit can arise for a company only if it is a non-resident company.

21.13. Consequently, if a CFC becomes a resident company and then distributes its profits, an attribution debit cannot arise for the company because it is not an 'attribution account entity'. The amount distributed to a taxpayer will therefore not be exempt from tax even if the distribution is out of income previously attributed to the taxpayer.

21.14. The amendment deems a company which has changed its residence from an unlisted country to Australia to be an attribution account entity. Accordingly an attribution debit can arise for the company when it makes a distribution.

21.15. The result is that a taxpayer is then exempt from tax on the distribution to the extent that it does not exceed the attribution surplus in the attribution account maintained by the taxpayer for the company. The company is deemed to be an attribution account entity only for the purpose of granting this exemption.

Commencement date

21.16. The amendment applies to companies that change their residence to Australia on or after 1 July 1989. Its retrospective operation will provide relief to taxpayers.

Clauses involved in the proposed amendments

Clause 80: inserts a new subsection in section 363 of the Principal Act which provides for this change.

Subclause 85(18): provides that the amendments will take effect in relation to changes of residence that occur on or after 1 July 1989.