Foreign income return form guide 2003

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Appendixes

Appendix 1 - Foreign income regulations

Introduction Part 8A of the regulations and associated schedules deal with the taxation of foreign source income. The provisions:

• declare those countries that are to be treated as broad-exemption or limited-exemption listed
• provide that Swiss Cantonal taxes are to be treated as Federal taxes
• specify when capital gains are taken to have been subject to tax for the purposes of the CFC measures, the transferor trust measures and the exemption for branches of Australian companies in listed countries
• contain rules for determining whether an amount is designated concession income
• set out the accruals taxation laws of other countries that are recognised for the purposes of providing relief from double accruals taxation.

Listed countries

The regulations specify those countries which are to be treated as broad-exemption and limited-exemption listed. These lists are reproduced at attach ment A .

Broad-exemption listed countries

The term 'broad-exemption' reflects that amounts taxed at full rates by countries on the list are generally exempt from both accruals taxation and taxation on repatriation to Australia.

Limited-exemption listed countries

The term 'limited-exemption' reflects that amounts which are taxed at full rates by countries on the list are generally exempt from tax on repatriation to Australia. An exemption from accruals taxation will not be available, however, on the basis that an amount has been taxed in a limited-exemption listed country.

Swiss Cantonal taxes

Swiss Cantonal tax is to be treated as if it were an additional federal foreign tax of Switzerland.

Capital gains deemed subject to tax

Broadly, a gain will be taken to be subject to tax in a listed country if the gain was not subject to tax because of a roll-over provision of a kind specified in the regulations. Roll-over relief provides for the deferral of tax on a capital profit arising from the disposal of an asset.

Designated concession income

Normally, amounts derived in a broad-exemption listed country are exempt from accruals taxation. The exemption does not apply, however, for amounts of eligible designated concession income. Broadly, an amount is treated as designated concession income if it is concessionally taxed in a broad-exemption listed country. The amount will be treated as eligible designated concession income if it is not subject to full tax in any broad-exemption listed country.

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

The following types of income or profits are designated concession income:

• capital gains which are exempt from tax in a broad-exemption listed country
• interest, royalties, shipping income or offshore income that is subject to a reduction of tax in a broad-exemption listed country
• income or profits derived by an entity, where the entity is of a type specified in the regulations. A list of these entities is shown at attachment B .

Capital gains which are exempt from tax in a broad-exemption listed country

Capital gains are defined in the regulations as gains or profits of a capital nature that arise from the sale or disposal of an asset.

A capital gain will not be treated as exempt from tax for this purpose if the gain would have been taxed in a listed country if not for roll-over provisions of a kind specified in the regulations.

Interest, royalties, shipping and offshore income

Definitions from the regulations

Interest income

This term refers to interest and amounts in the nature of interest - for example, discounts - and amounts that would be assessable income under Division 16E of Part III of the Act if the entity deriving the amount were a resident of Australia.

Royalties

The term royalties has the same meaning as it has in subsection 6(1) .

Shipping income

This term includes rental income from the leasing of ships and containers and income derived from normal shipping operations - that is, from the carriage of goods, passengers, mail and livestock.

Offshore income

This term is defined in the regulations as income derived by an entity from carrying on an:

• offshore banking business
• offshore financial business
• offshore insurance business
• offshore investment business or
• offshore re-insurance business.

When are interest, royalties and shipping income not treated as designated income?

Interest income and royalties are not to be regarded as designated concession income if they are taxed in a broad-exemption listed country on a withholding tax basis at the normal company tax rate that applies in the broad-exemption listed country.

Shipping income derived from sources outside a broad-exemption listed country is not designated concession income if it is taxed on a withholding tax type basis in the country where it originates at a rate which is not less than 5 per cent of the gross amount of shipping income.

Income or profits subject to a reduction of tax Amounts will be treated as subject to a reduction of tax if they are:

• exempt from tax
• subject to a concessional rate of tax
• not used as a basis for determining the taxable income, taxable profits or tax base, as the case may be, or in establishing the tax liability of an entity - for example, amounts derived by foreign sales corporations located in certain countries which are taxed on a cost-plus basis
• reduced other than for normal expenses or losses - for example, reduced on an arbitrary or notional basis in accordance with a statutory or administrative formula or
• subject to other tax benefits which would have the effect of reducing the amount of tax otherwise payable.

What does 'normal expenses and losses' mean?

Normal expenses and losses would include:

• capital or revenue amounts taxed in a broad-exemption listed country
• prior year capital or revenue expenses
• losses, incurred by a group company, which have been transferred to the CFC.

For the purposes of the above tests, a company is treated as belonging to the same company group as another company if one of the companies is a subsidiary of the other or if they are both subsidiaries of a third company. Broadly, a company is a subsidiary of another company if the other company holds 60 per cent or more of the total rights to distributions of profits from the company. Companies in a chain of subsidiary companies are treated as group companies.

A company which transfers losses to a CFC must also be a CFC and be resident in the same broad-exemption listed country as the CFC to which the losses were transferred. The following conditions must also be satisfied:

• the broad-exemption listed country must allow the transfer
• both companies must be CFCs
• the company that incurred the loss must have been a CFC in relation to the same attributable taxpayer during the period from when the loss was incurred until the end of the period in which the loss is offset.

Loss transfers from a group company to a branch of an Australian company in a broad-exemption listed country are also available if that country permits the loss transfer and the group company is a CFC resident in the broad-exemption listed country.

What are 'other tax benefits'?

A tax benefit includes a credit, rebate or other tax concession provided for income or profits, other than a credit or rebate for tax payable under a law of another country.

Attachment A

Broad-exemption countries

Canada

France

Germany

Japan

New Zealand

United Kingdom of Great Britain and Northern Ireland

United States of America

Limited-exemption countries

Argentina

Austria

Bangladesh

Belgium

Brazil

Brunei

Bulgaria

China (Except the Hong Kong special administrative region)

Czech Republic

Denmark

Fiji

Finland

French Polynesia

Greece

Hungary

Iceland

India

Indonesia

Iran

Ireland

Israel

Italy

Kenya

Kiribati

Korea, Republic of

Luxembourg

Malaysia

Malta

Myanmar

Netherlands

New Caledonia

Norway

Pakistan

Papua New Guinea

Philippines

Poland

Portugal

Romania

Saudi Arabia

Singapore

Slovakia

Solomon Islands

South Africa

Spain

Sri Lanka

Sweden

Switzerland

Taiwan

Thailand

Tokelau

Tonga

Turkey

Tuvalu

Vietnam

Western Samoa

Zimbabwe

Former list of countries

Austria

Bangladesh

Belgium

Brazil

Brunei

Bulgaria

Canada

China

Czechoslovakia

Denmark

Fiji

Finland

France

French Polynesia

German Democratic Republic

Germany, Federal Republic of

Greece

Hungary

Iceland

India

Indonesia

Ireland

Israel

Italy

Japan

Kenya

Kiribati

Korea, Republic of

Luxembourg

Malaysia

Malta

Myanmar

Netherlands

New Caledonia

New Zealand

Norway

Pakistan

Papua New Guinea

Philippines

Poland

Portugal

Romania

Saudi Arabia

Singapore

Solomon Islands

Spain

Sri Lanka

Sweden

Switzerland

Taiwan

Thailand

Tokelau

Tonga

Turkey

Tuvalu

Union of Soviet Socialist Republics

United Kingdom of Great Britain and Northern Ireland

United States of America

Vietnam

Western Samoa

Yugoslavia

Zimbabwe

Attachment B - Specific types of designated concession income

Amounts derived by the following entities are treated as designated concession income:

• an entity that operates in Canada as an international banking centre under a law of Canada
• an entity that operates in Canada as a non-resident owned investment corporation under a law of Canada
• an entity that operates in France as a headquarters or coordination entity, or as a logistics centre under a law of France or by virtue of an administrative arrangement with the French authorities
• an entity that operates in France as a soci é te d'investissement á capital variable (SICAV) or as a soci é te de capital risque (SCR) under a law of France
• an entity that operates in Germany as a headquarters or coordination entity under a law of Germany or by virtue of an administrative arrangement with the German authorities.

Amounts derived by the following entities and from the following activities are treated as designated concession income for statutory accounting periods of CFCs commencing before 1 July 1997.

Belgium

• Coordination centres
• Foreign sales corporations
• Distribution centres

Brazil

• Authorised investment funds

Bulgaria

• Entities in duty free zones

France

• Headquarters of foreign companies

Germany, Federal Republic of

• Management centres (Kontrollstellenerlass)

Greece

• Offshore companies

Hungary

• Banking activities of foreign financial institutions

Ireland, Republic of

• Income - including income from financial services and shipping - taxed at 10 per cent
• Headquarters operations

Israel

• Foreign international trade companies

Luxembourg

• Holding companies
• Re-insurance business
• Coordination centres

Malaysia

• Inward re-insurance business
• Offshore insurance income
• Operational headquarters

Malta

• Offshore activities

Netherlands

• Headquarters of foreign companies
• Foreign sales corporation

Pakistan

• Air transport operations

Philippines

• Regional headquarters of multinational companies
• Offshore banking units
• Foreign currency deposit units

Portugal

• Madeira and Azores tax free zones

Singapore

• Asian currency units
• Approved securities companies
• Insurance and Re-insurance of risks outside Singapore
• Gold bullion, gold features and financial futures
• Syndicated offshore credit and underwriting facilities
• Operational headquarters
• Offshore managed funds
• Oil futures concession

Solomon Islands

• Air transport operations
• Insurance business

Spain

• Headquarters of foreign companies
• Venture capital companies and funds

Sri Lanka

• Offshore banking services
• Income from services rendered outside Sri Lanka

Switzerland

• Holding companies
• Service or auxiliary companies
• Domiciliary companies
• * Participation exemption

Tonga

• Offshore banking

Turkey

• Export incentives, including international transport earnings

Western Samoa

• International offshore centres

Appendix 2 - Glossary of terms

A number of words and expressions used in this guide have special meanings. For ease of reference, these words and expressions are outlined below, together with an explanation of what they mean.

Accruals taxation

Accruals taxation is the taxation of Australian residents on profits derived through a foreign company or trust as they are earned by the company or trust. Normally, the profits would not be taxed in Australia until they are distributed to the taxpayer as a dividend or trust distribution.

Act

In this Guide, the term 'the Act' means the Income Tax Assessment Act 1936 , as amended.

Active income test

The active income test ensures that small amounts of tainted income derived by a CFC are exempt from accruals taxation. An exemption is provided from accruals taxation for most amounts derived by a CFC if the test is satisfied.

Adjusted net foreign income

In relation to foreign tax credits, adjusted net foreign income is net foreign income adjusted for apportionable deductions.

Adjusted tainted income

Adjusted tainted income comprises passive, tainted sales and tainted services income.

Apportionable deductions

In relation to foreign tax credits, apportionable deductions are those deductions of a concessional nature which do not relate directly to income-producing activities - for example, gifts.

Arm's length amount

This expression means, in relation to an actual transfer of property or services to a non-resident trust estate, the amount that the trustee of the non-resident trust might reasonably be expected to pay to the transferor for the property or services if the property or services had been transferred under an arrangement between independent parties dealing at arm's length with each other.

Associates

There are four parts to determining who are the associates of an entity. They deal with:

• associates of an individual
• associates of a company
• associates of a trustee
• associates of a partnership.

Part 1 - Associates of an individual

The associates of an individual - other than an individual acting in the capacity of a trustee - are:

• relatives of the individual - that is, the parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of the individual or of his or her spouse; and the spouse of the individual or of any other person mentioned above
• a partner of the individual or a partnership of which the individual is a partner
• the spouse, including de facto spouse, or child of a partner, where the partner is also an individual - other than an individual acting in the capacity of a trustee
• the trustee of a trust, where the individual or another entity that is an associate by virtue of this part benefits under the trust
• a company where that company is sufficiently influenced by:
  • the individual
  • another entity that is an associate of the individual because of the rules in this part or
  • another company which is sufficiently influenced by the individual or
  • two or more of the above entities or
• a company where the capacity to cast or control greater than 50 per cent of the maximum votes at a general meeting of the company is held by:
  • the individual
  • associates of the individual under the rules in this part
  • the individual and the associates.

Part 2 - Associates of a company

Part 2 deals with the associates of a company - called company A. The associates of company A include:

• a partner of company A
• a partnership of which company A is a partner
• where a partner of company A is a natural person otherwise than in the capacity of a trustee, the spouse or child of the partner
• the trustee of a trust where company A, or an entity that is an associate of company A, benefits under the trust
• an entity (entity B) that exerts sufficient influence over company A or holds a majority voting interest in company A. The influence may be exerted by entity B alone or together with other entities. The majority interest may be held by entity B alone or together with entities that would be associates of entity B if it were treated as company A
• a company (company C) that is sufficiently influenced by company A or in which company A holds a majority voting interest. The influence may be exerted by company A alone or together with other entities that are sufficiently influenced by company A or in which company A holds majority voting interests. The majority voting interests may be held by company A alone or together with entities that are associates of company A
• any other entity (entity D) that would be an associate of a third entity (entity E) which would be an associate of company A if the associates of entity E were determined by treating it as company A.

Majority voting interest

An entity holds a majority voting interest in a company where:

• the entity's direct shareholding in the company and
• the entity's indirect shareholding in the company - for example, through a subsidiary

amount to 50 per cent or more of the maximum number of votes that can be cast at a general meeting of the company. An example is where a company has a wholly owned subsidiary which has a 75 per cent voting interest in another company. Both the parent and subsidiary would be associates of the third company because the subsidiary has a majority voting interest in the third company and the parent has a majority voting interest in the subsidiary.

Sufficient influence

An entity is sufficiently influenced by a second entity or other entities if the entity is accustomed, under an obligation or might reasonably be expected to act in accordance with directions, instructions or wishes of the second entity or other entities.

Part 3 - Associates of a trustee

The associates of a trustee are:

• any entity that benefits under the trust
• any entity that is an associate of an individual who benefits under the trust or
• where a company is an associate of the trustee under either of the two above dot points, an entity that is an associate of the company.

Rules relating to public unit trusts

In applying the tests for associates, the trustee of a public unit trust is treated as if it were a company. Special rules apply to determine whether a public unit trust is sufficiently influenced by another entity or whether an entity has a majority voting interest in the public unit trust.

Generally, a public unit trust will be sufficiently influenced by another entity or entities where the trust is accustomed to act or is under an obligation to act or might reasonably be expected to act in accordance with the directions, instructions or wishes of the entity or entities.

The concept of a majority voting interest in relation to a public unit trust is determined by reference to the capital or income of the trust. If an entity is entitled to, or is entitled to acquire, 50 per cent or more of the income or capital of the trust, the entity is considered to hold a majority voting interest in the public unit trust. Corresponding rules apply to test whether a group of entities have a majority voting interest in the trust.

Part 4 - Associates of a partnership

The associates of a partnership are:

• a partner in the partnership
• where the partner is an individual, any entity that would be an associate of the individual or
• where the partner is a company, any entity that would be an associate of the company.

Attributable income

Amounts taxed on an accruals basis under the CFC, transferor trust or FIF measures.

Attributable taxpayer

An attributable taxpayer is an Australian entity that is liable to pay tax on attributable income.

Attribution

The process by which income is taxed on an accruals basis under the CFC, transferor trust or FIF measures.

Attribution percentage

The attribution percentage is the pro rata share of a CFC's attributable income that will be attributed to a particular taxpayer's assessable income.

Australian 1 per cent entity

An Australian 1 per cent entity, in relation to a company or trust, is an Australian entity whose associate inclusive control interest in the company or trust is at least 1 per cent.

Australian entity

An Australian entity is an Australian partnership, an Australian trust, or an entity - other than a partnership or trust - that is a Part X Australian resident.

Australian partnership

An Australian partnership is a partnership of which at least one of the partners is an Australian entity.

Australian tax payable

In relation to foreign tax credits, Australian tax payable is the product of the average rate of Australian tax and adjusted net foreign income less any rebates which are applicable to that income.

Australian trust

An Australian trust is a trust which at a particular time - or at a time in the twelve months before that time - has a trustee who is a Part X Australian resident or has its central control and management in Australia. It includes a corporate unit trust and a public trading trust as defined in the Act.

Average rate of Australian tax

In relation to foreign tax credits, average rate of Australian tax is gross tax on taxable income - less certain rebates - divided by taxable income.

Branch See Permanent establishment .

Broad-exemption listed country

A country listed in the Income Tax Regulations as a broad-exemption country. The list of broad-exemption countries will be used for the purposes of exemptions from accruals taxation under the CFC and transferor trust measures. These countries are also treated as listed for the purposes of exemptions under the Foreign Tax Credit System.

Broad-exemption listed country trust estate

A non-resident trust estate is a broad-exemption listed country trust estate in an income year if all of the income or profits derived by the trust estate during that income year are either:

• subject to tax in one or more broad-exemption listed countries in a tax accounting period ending before the end of, or commencing during, the income year or
• designated concession income in relation to any broad-exemption listed country.

A non-resident trust estate could be treated as a resident of a non-broad-exemption listed country under that country's tax laws - for example, the trustee may be a resident of that country. However, for the purposes of the transferor trust measures, the trust would be treated as a broad-exemption listed country trust estate if all of the trust's income is derived from one or more broad-exemption listed countries and is subject to tax in those countries.

CFC measures

The CFC measures deal with the accruals taxation of Australian residents that have a controlling interest in a foreign company.

Controlled foreign company

Broadly, a controlled foreign company (CFC) is a company that is not a resident of Australia and is controlled by 5 or fewer residents.

Creditable taxes

Creditable taxes are, broadly, foreign taxes which are equivalent in nature to Australian income tax - for example, a tax on net income or capital gains - including tax imposed on attributed income.

Designated concession income

Designated concession income is income or profits of a kind that are specified in Part 8A of the Income Tax Regulations. Broadly, it refers to income or profits which are subject to a tax concession in a broad-exemption listed country. Details of the particular types of income or profits are set out in app endi x 1 of this guide.

Discretionary trust estate

A discretionary trust estate is a trust estate for which:

• both of the following conditions are satisfied:
  • a person - including the trustee - has a power of appointment or other discretion and
  • the exercise of, or the failure to exercise, the power or discretion has the effect of determining, to any extent, either or both of the following:
    • the persons who may benefit under the trust
    • how the beneficiaries are to benefit under the trust or
• one or more of the beneficiaries under the trust have a contingent or defeasible interest in some or all of the capital or income of the trust estate or
• the trustee of another trust estate that satisfies both conditions in the first dot point above benefits or is capable of benefiting under the first-mentioned trust estate.

Double taxation agreement

A double taxation agreement (DTA) is an agreement made between the Australian Government and another State under the International Tax Agreements Act 1953 .

Eligible designated concession income

Eligible designated concession income is designated concession income, in relation to a particular broad-exemption listed country, derived by an entity in an income year and that is not subject to tax in another broad-exemption listed country in a tax accounting period that ends before the end of, or commences during, the income year.

The expression also includes designated concession income in relation to a particular broad-exemption listed country that is subject to tax in another broad-exemption listed country but is also designated concession income in relation to that other listed country.

Eligible transferor

For the purposes of accruals taxation under the CFC measures, an eligible transferor is an Australian entity or a controlled foreign entity that has transferred property or services in certain specified circumstances to a non-resident trust.

If the transfer was to a trust which is a discretionary trust before the IP time, the transferor will be an eligible transferor if he or she was able to control the trust at any time after the IP time and before the transfer. The IP time means 7.30 p. m. by standard time in the Australian Capital Territory on 12 April 1989.

An exception is made where the transfer was an ordinary business transaction for full value. If the transfer was made after the IP time, the transferor will be an eligible transferor unless the transfer was for full value and the transferor did not have control of the trust after the transfer.

If the transfer was made after the IP time to a trust that is a non-discretionary trust or a public unit trust at the test time, the transferor will be an eligible transferor if the transfer was made for no consideration or for inadequate consideration.

Exempting profits

The total of the exempting receipts held as distributable profits by a company resident in an unlisted country.

Exempting receipt

Exempting receipts are, generally, amounts earned by a company resident in an unlisted country that can be distributed as exempt dividends.

FIF measures

The FIF measures deal with the accruals taxation of Australian residents that have a non-controlling interest in a foreign company or foreign trust.

Financial intermediary business

A banking business or a business whose income is principally derived from the lending of money.

Foreign investment fund

A foreign investment fund (FIF) is any foreign company or foreign trust - other than a deceased estate.

Foreign tax credit system

Under the foreign tax credit system (FTCS) , foreign source income derived by Australian residents - apart from certain salary and wage income - is generally subject to Australian tax. A credit for foreign tax paid is allowed against the Australian tax payable, up to the amount of the Australian income tax referable to the foreign income.

Income year

An income year - or year of income - is, in effect, a 12-month period ending on 30 June, or a 12-month period ending on another date where the Commissioner has approved that other date under section 18 of the Act.

Limited-exemption listed country

A country listed in the Income Tax Regulations as a limited-exemption country . These countries will basically comprise the original list of countries in Schedule 10 of the Income Tax Regulations, excluding broad-exemption listed countries. The list has been updated by adding the Czech Republic and Vietnam and removing countries that no longer exist.

Listed country

A country listed for the purposes of dividend and branch profit exemptions under the foreign tax credit system. Countries on either the broad-exemption or limited-exemption list are treated as listed countries.

Net income

In relation to a non-resident trust estate, net income essentially means the total assessable income of the trust estate, worked out as though the trustee were an Australian resident and a taxpayer in respect of that income, less all allowable deductions, as provided by section 95 of the Act.

Net foreign income

In relation to foreign tax credits, net foreign income is gross assessable foreign income less:

• allowable deductions relating exclusively to foreign income
• any domestic loss carried forward that you have elected to use against foreign income and
• deductions allowed by the Commissioner as being appropriately related to foreign income.

Non-broad-exemption listed country

A country that is either a limited-exemption listed country or an unlisted country.

Non-broad-exemption listed country trust estate

An non-broad-exemption listed country trust estate is a non-resident trust estate which is not a broad-exemption listed country trust estate.

Non-discretionary trust estate

A non-resident trust estate is a non-discretionary trust estate if it is not a discretionary trust estate.

Non-portfolio dividends

Broadly, non-portfolio dividends are dividends paid to a company where that company has a 10 per cent or greater voting interest in the company paying the dividend.

Non-resident trust estate

A non-resident trust estate is trust other than an Australian resident trust.

An Australian resident trust is:

• a trust estate which, at any time during an income year, has a trustee who is a resident of Australia or has its central management and control in Australia
• a corporate unit trust or public trading trust which is taxed in the same way as a company or
• a superannuation fund, approved deposit fund or pooled superannuation trust within the meaning of Part IX of the Act.

Notional accounting period

A notional accounting period is the period used to determine the attributable income of a FIF or a foreign life assurance policy (FLP) .

Notional assessable income

The assessable income of a CFC for the purposes of determining the CFC's attributable income.

Offshore banking income

In relation to foreign tax credits, offshore banking income includes interest, fees, commissions or similar income derived from offshore banking transfers and dividends paid by a company out of profits derived from offshore banking transfers.

Other income

In relation to foreign tax credits, other income is income other than passive income, offshore banking income or certain lump sum payments from a foreign non-complying superannuation fund which are assessable under section 27CAA . It includes income from normal commercial activities, salary and wages and most pensions.

Part X Australian resident

A Part X Australian resident is a resident of Australia who is not treated solely as a resident of a treaty partner country under a double taxation agreement between Australia and that country.

Passive income

Passive income includes certain types of dividend, interest, royalty, annuity and rental income (section 446) . It also includes gains on the disposal of assets that produce passive income or that are not used solely in carrying on a business.

Permanent establishment

A permanent establishment is widely defined in subsection 6(1). Generally, it can be described as a place through or at which an entity in Australia conducts its business in another country. A permanent establishment has been referred to as a branch in this Guide.

Property

This term includes money, a chose in action, any trust estate and interest, right or power, whether at law or in equity, in or over property.

Related foreign companies

Generally, an Australian company is related to a foreign company for the purposes of the FTCS when:

• the companies are both group companies and
• the Australian company has, either directly or indirectly, a voting interest of at least 5 per cent in the foreign company ( section 160AFB) .

For these purposes, a company is a group company when the Australian parent has a voting interest of at least 10 per cent in the foreign company. If the foreign company has an equivalent interest in a second foreign company, then that second foreign company will also be a group company. This result will continue to apply through any number of tiers of companies.

Services

This term includes any benefit, right, privilege or facility. Services include a right in relation to real or personal property as well as an interest in real or personal property. Services also include a right, benefit, privilege, service or facility that is provided or is to be provided:

• under an arrangement for or in relation to:
  • the performance of work, whether or not property was also provided as part of the work performed
  • the provision of entertainment, recreation or instruction or the use of facilities for entertainment, recreation or instruction or
  • the conferring of benefits, rights or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar payment
• under a contract of insurance, including life assurance or
• under an arrangement for, or in relation to, the lending of money.

Statutory accounting period

A statutory accounting period is the period used to determine the attributable income of a CFC.

Tainted income

Tainted income includes passive income, tainted sales income and tainted services income.

Tainted rental income

Tainted rental income includes rental income of a CFC where:

• land is leased to an associate or the rent is paid by an associate or
• land is leased by a company not resident in the same country.

It can also include rental income from particular leases on ships, aircraft or cargo containers.

Tainted sales income

Tainted sales income is income of a CFC from the sale of goods purchased from or sold to:

• an associate who is an Australian resident or
• an associate who is not an Australian resident but carries on business in Australia through a permanent establishment.

Tainted services income

Tainted services income is income derived from the provision of services by a CFC:

• to an associate of the CFC
• to a resident of Australia or
• in connection with a permanent establishment in Australia.

Tax sparing

Tax sparing deems tax foregone by a foreign country in providing a specified concession to an Australian resident to be foreign tax paid for the purposes of Australia's foreign tax credit rules. The Australian resident may therefore be entitled to claim a credit for the tax foregone by the foreign country.

Transfer

Transfer is defined in broad terms.

In relation to the transfer of property, it includes a disposal of property by assignment, creation of a trust or any other manner or the provision of property.

For the transfer of services, it includes such concepts as allow, confer, give, grant, perform or provide.

Transfer pricing rules

Transfer pricing rules are contained in Division 13 of Part III of the Act. This Division seeks to impose 'arms-length' consideration on agreements for the sale of property between Australians and non-residents when the agreement effectively shifts profits from Australia.

Transferor trust

A non-resident trust to which a resident has made, or is deemed to have made, a transfer of property or services (Division 6AAA of Part III).

Transferor trust measures The transferor trust measures deal with the accruals taxation of Australian residents who have directly or indirectly transferred value to a non-resident trust. Broadly, the rules operate to accruals tax the undistributed income of the trust.

Underlying tax

Underlying tax refers to the tax paid on the taxable profits of a company.

Unlisted country

An unlisted country means a foreign country which is not a listed country.

Appendix 3 - Accruals taxation on the change of residence of a CFC from an unlisted country to a listed country or to Australia

The Australian controllers of a CFC are normally taxed under section 457 on the CFC's accumulated profits if the CFC changes residence from an unlisted to a listed country or to Australia. The profits are taxed at the residence change time because they are likely to be low taxed and can be distributed as exempt dividends after the CFC becomes a resident of a listed country.

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 distributable profits of the CFC. However, the amount of the distributable profits that is taxable to a resident taxpayer does not include:

• amounts that represent income which has been previously attributed or
• if the resident taxpayer is a company with a non-portfolio interest in the CFC, the exempting profits of the CFC.

Example 1

Attribution percentage

• Ausco owns 75 per cent of a CFC that is a resident of an unlisted country. The CFC became a resident of Australia on 1 July 1997. Its distributable profits at that time were $20,000.

  The amount included in the assessable income of Ausco for 1997-98 was 75 per cent of $20 000 - that is, $15,000.

Example 2

Exempting profits

• Ausco owns 75 per cent of a CFC that is a resident of an unlisted country. The CFC became a resident of Australia on 1 October 1997. Ausco's 1997-98 income year commenced on 1 October 1997, as did the statutory accounting period of the CFC. The accounting period of the CFC is accepted as its income year.

  The distributable profits of the CFC at the time of change of residence were as follows:

	$
Exempting profits	10 000
Other profits	20 000

• On 1 October 1997, Ausco had an attribution surplus of $10,000 in its attribution account for the CFC.

  The amount to be included in the assessable income of Ausco for 1997-98 was worked out as follows:

	$
Distributable profits on 1 October 1997	30 000
Take away exempting profits	10 000
	20 000
Ausco's share (75% of 20 000)	15 000
Take away attribution surplus	10 000
Amount to be included in Ausco's income for 1997-98	5 000

Tax consequences of a 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 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 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 3

Distributable profits

• Ausco owns 75 per cent of a CFC that is a resident of an unlisted country. The CFC became a resident of a listed country on 1 July 1997. Its distributable profits at the time of change of residence were $30,000. This includes an amount of $10,000 that would arise if all the assets of the CFC were disposed of at the time of the change of residence.

  Ausco's assessable income will include the following amounts:

	$
Distributable profits on 1 July 1997	30 000
Take away exempting profits	10 000
	20 000
Ausco's share (75% of 20 000)	15 000
Take away distribution surplus	10 000
Amount to be included in Ausco's income for 1997-98	5 000

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

The operation of section 457 is modified where an unlisted country CFC is treated as having changed residence to a listed country as a result of the unlisted country becoming listed. In this case, section 457 will not apply to tax the retained profits of a CFC if the CFC was a resident of the newly listed country for 3 or more years before the country became listed.

Where a CFC has been a resident of a newly listed country for less than 3 years, section 457 does apply but only to the realised profits of the CFC. Gains on the disposal of assets held at the residence change time are included in the attributable income of the CFC when they are realised. These gains are included in attributable income even though the CFC may satisfy the active income test in the period when the gains are realised.

Appendix 4 - 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
• - working out the tainted income ratio for a CFC
• - working out amounts from partnerships to be included in the tainted income ratio
• - working out the tainted income ratio for listed country CFCs for statutory accounting periods commencing before 1 July 1997
• - working out amounts from partnerships to include in the tainted income ratio for listed country CFCs for statutory accounting periods commencing before 1 July 1997
• - 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 Updated: 01 Jul 2003

ATO references:
NO NAT 1840