Explanatory Memorandum
(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)Record Keeping and Related Prosecution Provisions
Overview
Record keeping provisions are required in order to ensure the effectiveness of the FIF measures and to protect taxpayers on audit by ensuring that they have the necessary records to support their assessment of, or exemption from FIF taxation. However, as was stated on page 6 of the Information Paper "the Government recognises that Australian resident investors with non-controlling interests in offshore funds will generally have access to only a limited amount of information about the investment." The record keeping requirements are therefore less onerous than the requirements for controlled foreign companies and controlled foreign trusts in Division 11 of Part X.
Explanation
A taxpayer who has an interest in a FIF at the end of the year of income or an interest in a FLP during the year of income 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. [Section 614]
An attributable taxpayer in respect of a CFC or controlled foreign trust that holds an interest or interests in a FIF or FLP is subject to similar record keeping requirements in relation to the CFC or controlled foreign trust. These requirements are in Division 11 of Part X.
A taxpayer who has an interest or interests in a FIF or FLP must make and keep records of:
- he acts, transactions and other circumstances that resulted in the person having an interest in the FIF at the end of a year of income or an interest in the FLP during the year of income; and
- n the case of a taxpayer who is not wholly exempt from the FIF measures, the basis of the calculation of the taxpayer's interest or interests in the FIF or FLP for the notional accounting period which ended during the taxpayer's year of income. [Section 615]
Record keeping for the different methods of assessment for FIFs
The extent of the records required for a particular taxpayer in relation to amounts of foreign investment fund income included in assessable income, will depend on which method of assessment is used to determine the foreign investment fund income.
Where the market value method is used, the taxpayer is to make and keep records detailing the basis of the calculation of:
- i)
- ny foreign investment fund income that accrued to the taxpayer from an interest in the FIF for the current period and any unapplied previous foreign investment loss; or
- ii)
- ny foreign investment fund loss that was incurred by the taxpayer from the interest in the FIF for the current period. [Section 616]
Where the taxpayer has an unapplied foreign investment fund loss from an interest in a FIF, the unapplied loss may be carried forward to be offset against any market value increase from the same FIF in subsequent periods. Records of these losses should be made and kept.
Where the deemed rate of return method of taxation is used, the taxpayer is to create and maintain records detailing the basis of the calculation of the foreign investment fund income that accrued to the taxpayer from an interest in the FIF for the notional accounting period. [Section 617]
Taxpayer exempt from FIF measures in previous year
A taxpayer may have to apply the deemed rate of return method in the current year of income to an interest in a FIF that was exempt from taxation in the previous income year. In this case, the taxpayer will require certain records to determine the opening value of the interest for the current year. The opening value will be determined either by the market value at the end of the previous year or by notional application of the deemed rate of return method to the value at the beginning of the previous year [section 552]. Records must be made and kept in relation to these matters.
Special rules for the commencement of the FIF measures
It should be noted that special rules apply for the commencement of the FIF measures [sections 545-549] which may require different records to be made and kept from 1 January 1993.
No losses arise under the deemed rate of return method of taxation.
Calculation method at the first tier
A taxpayer who elects to use the calculation method for the taxpayer's interest in a FIF (a the first tier FIF) is to create and maintain records detailing the basis of the calculation of:
- i)
- ny first tier calculated profit for the notional accounting period and any unapplied first tier calculated losses of previous periods; and
- ii)
- ny foreign investment fund income that accrued to the taxpayer from an interest in a first tier FIF in respect of the first tier FIF's notional accounting period. [Section 618]
Calculation method at the second tier
Where a first tier FIF has an interest in another FIF (a second tier FIF) the taxpayer may elect to use the calculation method at the second tier. The taxpayer is to create and maintain records detailing the basis of the calculation of:
- i)
- ny calculated profit of the second tier FIF for the notional accounting period and any unapplied calculated losses of the second tier FIF of previous periods; and
- ii)
- ny foreign investment fund income that accrued to the taxpayer from the first tier FIF's interest in the second tier FIF in respect of the relevant period [section 618]. For the calculation of this FIF income it would be necessary to have details of FIF income from an indirect interest in a second tier FIF. Where there is an additional (third tier) level of investment, details of third tier FIF income will also be required for the calculations of second and first tier FIF income.
Examples of records required to be kept by taxpayers using the calculation method include:
- he basis of the calculated profit or loss in respect of the first tier FIF for the notional accounting period which ended during the year of income;
- opies of the published accounts used in these calculations; and
- record of the election(s) to use the calculation method.
In addition, the taxpayer will also need access to the underlying accounts and accounting records of the FIF. On audit these may be called for to support the amounts shown in the published accounts and any other amounts on which the taxpayer relied for the calculations.
Where a taxpayer's interest in a FIF was exempt in a previous year of income, and for the current year the taxpayer elects to use the calculation method, it is necessary for the taxpayer to have details of any previous years' losses which are to be offset against FIF income in the current year of income.
Previous year loss at the first tier
A calculated loss of a previous year is generally allowed as a notional deduction against notional income of the first tier FIF of the current period [subsection 572(1)]. A taxpayer who wishes to claim a loss against notional income of the first tier FIF is to keep a record of the calculation of that loss.
Previous year loss at the second tier
A calculated loss of a previous year of a second tier FIF is likewise allowed as a notional deduction against notional income of the second tier FIF of the current period [section 578]. A taxpayer who wishes to claim a loss against notional income of the second tier FIF is to keep a record of the calculation of that loss.
Exemption from FIF measures in the current year
Where a taxpayer's interest in a FIF is wholly or partly exempt from FIF taxation in the year of income, the taxpayer is to make and keep records in Australia containing details of the basis on which the exemption applied, including any acts, transactions, calculations and other circumstances relevant to the application of the exemption. [Section 620]
There are two methods of satisfying the active business exemption for a direct interest in a foreign company.
For taxpayers claiming an exemption from the FIF measures under the active business exemption using the stock exchange listing method, examples of records to be maintained include:
- he listing on a particular approved stock exchange of the class of interests to which the taxpayer's FIF interest belongs; and
- he stock exchange or international sectoral classification of the FIF under eligible business activities.
For taxpayers claiming an active business exemption from the FIF measures using the balance sheet method, records are to be kept, for example, 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. This does not include off balance sheet assets.
Foreign employer-sponsored superannuation fund exemption
A taxpayer claiming exemption from the FIF measures for the taxpayer's interest in an employer-sponsored foreign superannuation fund is to maintain details such as the name and location of the foreign superannuation fund, the relationship between taxpayer and the employer, that is, past employee, employee, director or associate.
Exclusion of a FIF that is a CFC, controlled foreign trust or a transferor trust
A taxpayer who has an interest in a FIF which is also a CFC or controlled foreign trust to which Part X of the Principal Act applies is required under Part X to keep records for the CFC measures.
Exemptions for certain interests in foreign banks, general insurance companies, life insurance businesses and real property companies, trading stock, foreign companies engaged in several activities, Lloyds of London etc
Although some industries such as banking, insurance and real estate are listed as ineligible activities for purposes of the active business test there are specific exemptions provided for certain publicly listed and widely held investments in these industries. [Divisions 4 to 7]
Specific exemptions are also provided for certain interests in FIFs that are trading stock, multi-industry foreign companies and Lloyd's of London. A taxpayer's interests in FIFs are exempt from the measures where the total value of the taxpayer's interests in FIFs is 5 per cent or less of the total value of the taxpayer's interests in FIFs. [Divisions 12 to 15]
Where a taxpayer claims exemption on the basis of one or more of these provisions records will need to be maintained of how the FIF interest satisfied the conditions of the particular exemption.
Those taxpayers claiming an exemption from the FIF measures for an interest in a country trust fund need to keep records of the interest in the specified trust fund.
For the small investor exemption, it is necessary to record the basis of the calculation of the aggregate interests of the taxpayer and associates in foreign companies, trusts and foreign life policies that shows that the aggregate amount of those interests is less than $50,000 at the end of taxpayer's year of income.
Exemption for certain visitors to Australia
A short term resident claiming exemption from the FIF measures as an exempt visitor is to maintain the contract of employment, passport and visa information, and details of the date of arrival in Australia.
Record keeping for FLPs
Where the cash surrender value method is used, the taxpayer is to make and keep records detailing the basis of the calculation of:
- i)
- ny foreign investment fund income that accrued to the taxpayer from an interest in the FLP for the current period and any unapplied previous foreign investment fund loss; or
- ii)
- ny foreign investment fund loss that was incurred by the taxpayer from the interest in the FLP for the current period. [Section 619]
Where the taxpayer has an unapplied foreign investment fund loss from an interest in a FLP from a previous notional accounting period, the unapplied loss may be carried forward to be offset against any increase in cash surrender value from the same FLP in subsequent periods. Records of these losses should be made and kept.
Where the deemed rate of return method of taxation is used, the taxpayer is to create and maintain records detailing the basis of the calculation of the foreign investment fund income that accrued to the taxpayer from an interest in the FLP for the notional accounting period. [Section 619]
Taxpayer's interest in a FLP exempt in previous year
A taxpayer may have to apply the deemed rate of return method in the current year of income to an interest in a FLP that was exempt from taxation in the previous income year. In this case, the taxpayer will require certain records to determine the opening value of the interest for the current year. The opening value will be determined either by the cash surrender value at the end of the previous year or by a notional application of the deemed rate of return method to the value at the beginning of the previous year. Records must be made and kept in relation to these matters.
Special rules for the commencement of the FIF measures
The special rules which apply for the commencement of the FIF measures, [sections 545-549] and which may require different records to be made and kept from 1 January 1993, will also apply in respect of FLPs.
No losses arise under the deemed rate of return method of taxation.
Exemption from FIF measures in the current year
Where a taxpayer's interest in a FLP is wholly or partly exempt from FIF taxation in the year of income, the taxpayer is to make and keep records in Australia containing details of the basis on which the exemption applied, including any acts, transactions, calculations and other circumstances relevant to the application of the exemption. [Section 620]
Elections
As a result of self assessment the majority of elections are no longer required to be made in writing and lodged with the Commissioner.
However, some elections and notifications affecting the taxation treatment of future transactions or events, or which cause the Commissioner to take some action in relation to an assessment, are still required to be in writing and lodged with the Commissioner.
A taxpayer electing to use the calculation method will not be required to lodge a written notice of the election with the Commissioner. The process of making an election will involve the taxpayer deciding which provision of the Principal Act is to be applied in calculating a component of taxable income and keeping a record which verifies the calculation. Whether or not a taxpayer has made an election will be evident from these records and in the calculation of taxable income as disclosed in the tax return.
The existing provisions will apply in relation to the retention of records subsections 262A(4) and (5). Records are generally to be kept for five years.
Records will be required to be made and kept:
- n the English language or if not in written form (e.g., magnetic tape or computer disc) in a form which is readily accessible and convertible into writing in English; and
- o as to allow the person's liability to tax to be readily ascertained. [Section 622]
Prosecution provisions are required to ensure compliance with the FIF record keeping measures. These provisions generally correspond with the record keeping provisions of the CFC measures. Like the CFC measures there is to be no retrospective application in a year of income before Royal Assent in relation to these measures.
A taxpayer who does not comply with the record keeping provisions may be prosecuted. A maximum penalty of $3000 may be imposed by the court on conviction for a breach of the record keeping requirements. [Section 621]
In a prosecution of a taxpayer who failed to keep records of underlying accounts and accounting records in relation to the calculation method the taxpayer may rely, in certain circumstances, on a statutory defence. The defence will apply to the taxpayer who has made reasonable efforts to obtain the required documents but cannot get them. [Section 623]
While a taxpayer who does not have access to the required information should not use the calculation method, section 623 is intended to apply to a taxpayer who has access to the information but it is provided by the FIF or a third party and the taxpayer has insufficient control to access the underlying accounts of the FIF after making reasonable attempts.
A partnership will be treated as a person for the purpose of the record keeping provisions. This allows the record keeping and the related prosecution provisions to apply to the partnership [subsection 624(1)]. Accordingly, an offence committed by the partnership is treated as having been committed by each of the partners [subsection 624(2)]. However, in a prosecution of a partner for an offence it is a defence if the partner proves that the partner did not aid, abet, counsel or procure the act or omission by which the offence was taken to have been committed and was not in any way knowingly concerned in the commission of the offence. [Subsection 624(3)]
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