Tax Laws Amendment (Loss Recoupment Rules and Other Measures) Act 2005 (147 of 2005)

Schedule 2   Foreign residents' income with an underlying foreign source

Part 1   Main amendment

Income Tax Assessment Act 1997

1   Before Division 820

Insert:

Division 802 - Foreign residents' income with an underlying foreign source

Table of Subdivisions

802-A Conduit foreign income

Subdivision 802-A - Conduit foreign income

Guide to Subdivision 802-A

802-5 What this Subdivision is about

A distribution that an Australian corporate tax entity makes to a foreign resident is not subject to dividend withholding tax, and is not assessable income, to the extent that the entity declares it to be conduit foreign income.

An Australian corporate tax entity has an amount that is non-assessable non-exempt income if it receives a distribution including conduit foreign income from another such entity and it makes a distribution including conduit foreign income.

This Subdivision sets out the method of working out an entity's conduit foreign income.

It also discourages streaming of distributions to entities that can take advantage of the receipt of conduit foreign income.

Table of sections

Operative provisions

802-10 Objects

802-15 Foreign residents - exempting CFI from Australian tax

802-20 Distributions between Australian corporate tax entities - non-assessable non-exempt income

802-25 Conduit foreign income of an Australian corporate tax entity

802-30 Foreign source income amounts

802-35 Capital gains and losses

802-40 Effect of foreign tax credits on conduit foreign income

802-45 Previous declarations of conduit foreign income

802-50 Receipt of an unfranked distribution from another Australian corporate tax entity

802-55 No double benefits

802-60 No streaming of distributions

Operative provisions

802-10 Objects

The objects of this Subdivision are:

(a) to encourage the establishment in Australia of regional holding companies for foreign groups; and

(b) to improve Australia's attractiveness as a continuing base for its multinational companies;

by providing relief from tax on *distributions by *Australian corporate tax entities to *members who are foreign residents or other Australian corporate tax entities if those distributions relate to *conduit foreign income.

802-15 Foreign residents - exempting CFI from Australian tax

(1) So much of the *unfranked part of a *frankable distribution made by an *Australian corporate tax entity that the entity declares, in its *distribution statement, to be *conduit foreign income:

(a) is not assessable income and is not *exempt income of a foreign resident; and

(b) is an amount to which section 128B (Liability to withholding tax) of the Income Tax Assessment Act 1936 does not apply.

(2) The declaration must be made on or before the day on which the *distribution is made.

Note: For a private company, this rule may bring forward the time at which the company is required to make its distribution statement: see section 202-75.

802-20 Distributions between Australian corporate tax entities - non-assessable non-exempt income

(1) An *Australian corporate tax entity (the receiving entity ) has an amount that is not assessable income and is not *exempt income for an income year if:

(a) it receives from another Australian corporate tax entity a *frankable distribution that has an *unfranked part; and

(b) the *distribution statement for the *distribution declares an amount (a received CFI amount ) of the unfranked part to be *conduit foreign income; and

(c) the receiving entity, after the start of the income year but before the due day for lodging its *income tax return for that income year:

(i) makes a frankable distribution that has an unfranked part; and

(ii) declares an amount (a declared CFI amount ) of the unfranked part to be conduit foreign income.

(2) The amount that is not assessable income and is not *exempt income is the lesser of:

(a) the sum of the received CFI amounts that the receiving entity receives during the income year (the total received CFI amounts ); and

(b) the amount worked out using this formula:

Total received CFI amount x (Total declared CFI amounts / (Total received CFI amounts - Related expenses))

where:

related expenses means the receiving entity's expenses that are reasonably related to the total received CFI amounts.

total declared CFI amounts means the sum of the declared CFI amounts in distributions made by the receiving entity before the due day for lodging its *income tax return for the income year.

Example: AusCo 1 and AusCo 2 are both Australian corporate tax entities.

AusCo 1 pays an unfranked dividend of $80 to AusCo 2. AusCo 1 declares all of the $80 to be its conduit foreign income (so the $80 is a received CFI amount).

AusCo 2 has $5 of deductible expenses relating to the $80 dividend.

AusCo 2 pays an unfranked dividend of $30. AusCo 2 declares $15 of the $30 to be conduit foreign income (so the $15 is a declared CFI amount).

The amount that is not assessable income and is not exempt income for AusCo 2 (assuming there are no other received CFI amounts or declared CFI amounts) is:

$80 x ($15 / $75) = $16

The remaining $64 is included in AusCo 2's assessable income and it can deduct $4 (the part of the expenses related to the $64).

(3) If the receiving entity's expenses that are reasonably related to the total received CFI amounts equal or exceed the total received CFI amounts for an income year, the total received CFI amounts is not assessable income and is not *exempt income of the receiving entity for the income year.

(4) If a declared CFI amount is taken into account in working out an amount of *non-assessable non-exempt income of an entity for an income year, that amount cannot be taken into account for the entity for a later income year.

(5) Work out how much *conduit foreign income in a *frankable distribution flows through a trust or a partnership in the same way that you work out the *share of a *franking credit on a *franked distribution that flows through a trust or a partnership. That amount is treated as a received CFI amount under this section.

Note: See sections 207-50, 207-55 and 207-57 for the share of a franking credit on a franked distribution that flows through a trust or a partnership.

802-25 Conduit foreign income of an Australian corporate tax entity

An *Australian corporate tax entity's conduit foreign income at a particular time (the relevant time ) is worked out by applying sections 802-30 to 802-55.

Note: Subdivision 715-U modifies the single entity and the entry history rule for the purposes of working out conduit foreign income for consolidated groups and MEC groups.

802-30 Foreign source income amounts

(1) Work out the amount of the entity's *ordinary income and *statutory income derived by the entity that has been, is or will be included in an income statement or similar statement of the entity or of another entity and that would not be included in the entity's assessable income if the entity:

(a) for a company or a *corporate limited partnership - were a foreign resident at the relevant time; or

(b) for a *corporate unit trust or *public trading trust - were not a *resident unit trust for the income year in which the relevant time occurs.

Note: Income statements are prepared under the Framework for the Preparation and Presentation of Financial Statements (which is referred to in the Australian Accounting Standards).

(2) Reduce the subsection (1) amount by any part of that amount that is or will be included in the entity's assessable income (apart from section 802-20).

(3) Add to the amount remaining after subsection (2) these amounts:

(a) if the entity receives from another *Australian corporate tax entity a *frankable distribution that has an *unfranked part - any amount declared in the *distribution statement for that *distribution to be *conduit foreign income;

(b) an amount that is treated as a received CFI amount for the purposes of section 802-20 because of subsection 802-20(5);

(c) an amount that is *non-assessable non-exempt income under section 23AJ of the Income Tax Assessment Act 1936 and that would be not be included under subsection (1).

(4) Reduce the amount remaining after subsection (3) by these amounts:

(a) an amount that is *non-assessable non-exempt income under section 23AI or 23AK of the Income Tax Assessment Act 1936;

(b) an amount that is not included in the entity's assessable income because of the operation of paragraph 99B(2)(e) of that Act;

(c) the amount worked out using the formula:

where:

available franking credit means any part of the amount remaining after subsection (3) to the extent to which a *franking credit arises or will arise for the entity.

(5) Reduce the amount remaining after subsection (4) by any of the entity's expenses that are reasonably related to that amount, except expenses the entity has deducted or can deduct under this Act. In applying this subsection to an amount covered by paragraph (3)(a), assume that amount is *non-assessable non-exempt income.

(6) The result is an amount included in the entity's conduit foreign income .

(7) This section applies to an entity as if it had derived an amount if the amount has been applied for its benefit (including by discharging all or part of a debt it owes) or as it directs.

802-35 Capital gains and losses

Capital gains

(1) The entity's conduit foreign income includes these amounts:

(a) the amount by which a *capital gain of the entity is reduced because of the operation of section 768-505;

(b) a capital gain that is disregarded because of the operation of subsection 23AH(3) of the Income Tax Assessment Act 1936;

(c) the amount of a capital gain that is disregarded as a result of the operation of an international tax sharing treaty (as defined in subsection 136AA(1) of the Income Tax Assessment Act 1936).

Capital losses

(2) The entity's conduit foreign income is reduced by these amounts:

(a) the amount by which a *capital loss of the entity is reduced because of the operation of section 768-505;

(b) a capital loss that is disregarded because of the operation of subsection 23AH(4) of the Income Tax Assessment Act 1936;

(c) the amount of a capital loss that is disregarded as a result of the operation of an international tax sharing treaty (as defined in subsection 136AA(1) of the Income Tax Assessment Act 1936).

Timing rule

(3) The adjustments are made under this section at the end of the income year in which the *CGT event occurred.

802-40 Effect of foreign tax credits on conduit foreign income

The entity's conduit foreign income includes an amount if a credit arose for the entity under section 160AF of the Income Tax Assessment Act 1936 for the income year immediately before the one in which the relevant time occurs. The amount is worked out using the formula:

Credit x ((1 - *General company tax rate) / General company tax rate)

802-45 Previous declarations of conduit foreign income

The entity's conduit foreign income is reduced if:

(a) the entity makes a *frankable distribution that has an *unfranked part; and

(b) the entity declares an amount of the unfranked part to be conduit foreign income.

The amount of the reduction is the amount so declared.

Note: If the amount declared is less than the amount available for declaration, the difference is available for a later declaration.

802-50 Receipt of an unfranked distribution from another Australian corporate tax entity

(1) The entity's conduit foreign income is reduced if:

(a) the entity (the receiving entity ) receives from another *Australian corporate tax entity a *frankable distribution that has an *unfranked part; and

(b) the *distribution statement for the *distribution declares an amount (the declared amount ) of the unfranked part to be conduit foreign income; and

(c) some or all of the declared amount is not *non-assessable non-exempt income under section 802-20.

(2) The amount of the reduction is the amount that is not *non-assessable non-exempt income under section 802-20 less any expenses reasonably related to that amount.

802-55 No double benefits

An amount cannot be both:

(a) an unfranked non-portfolio dividend credit for an entity under section 46FB of the Income Tax Assessment Act 1936; and

(b) counted towards:

(i) the entity's *conduit foreign income; and

(ii) the entity's *non-assessable non-exempt income under section 802-20.

802-60 No streaming of distributions

(1) Subsection (2) has effect if:

(a) an *Australian corporate tax entity makes one or more *frankable distributions in a *franking period; and

(b) at least one of the *distributions has an *unfranked part; and

(c) the entity declares an amount of the unfranked part to be *conduit foreign income.

(2) If the entity does not, for that *franking period, declare the same proportion of *conduit foreign income for all *membership interests and *non-share equity interests then, instead of the amount that it declared to be conduit foreign income on those *distributions, it is taken to have declared under section 802-45 the greater amount that it would have declared had it declared that same proportion on all those distributions.

Note: Breaching subsection (2) may make the entity subject to a penalty under section 288-80 in Schedule 1 to the Taxation Administration Act 1953 (about over declaring conduit foreign income).

Example: There are 10,000 membership interests in AusCo Limited, 7,500 held by foreign residents and 2,500 held by Australian residents. It has $1,800 of conduit foreign income.

AusCo makes an unfranked distribution of 50 cents per membership interest to all of its members. It declares $1,500 of the distribution to be conduit foreign income for its 7,500 foreign membership interests (20 cents per membership interest or 40% of each distribution) and none for its Australian membership interests.

AusCo is taken to have declared the same proportion (40% of each distribution) of conduit foreign income for its Australian membership interests (which amounts to $500 of conduit foreign income). It is therefore taken to have declared $2,000 of conduit foreign income. This is an over-declaration of $200 and a penalty under section 288-80 in Schedule 1 to the Taxation Administration Act 1953 will apply.

(3) For the purposes of subsection (2), ignore *membership interests and *non-share equity interests that do not carry a right to receive *distributions (other than distributions on winding up).

(4) Despite subsection (2), an entity that receives a *frankable distribution that has an *unfranked part is entitled to rely on the *distribution statement made by the entity that made the distribution.