Foreign investment funds guide

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Chapter 2: Key concepts of the FIF measures

What is a foreign investment fund (FIF)?

A FIF is any foreign company or foreign trust . [subsection 481(1)]

A foreign company is a company that is not resident in Australia, according to the definition of a 'resident of Australia' in subsection 6(1) of the ITAA 1936 and the residency provisions of any relevant double taxation agreement. [subsection 481(2)]

A trust estate is a foreign trust if it:

• is not an Australian trust, an Australian superannuation fund, a complying approved deposit fund or a pooled superannuation trust, and
• did not result from
  • a will, a codicil or a court order that varied or modified a will or a codicil, or
  • intestacy or a court order that varied or modified the application of the law relating to the distribution of the estates of persons who die without leaving a will. [subsection 481(3)]

What is a foreign life assurance policy (FLP)?

A FLP is a life assurance policy issued by an entity that was not a resident of Australia at any time in the income year.

The FIF measures apply only to certain life policies, and do not include:

• a policy issued in Australia, provided that the entity that issued the policy was authorised under the Life Insurance Act 1995 to carry on life insurance business in Australia when it issued the policy
  
   
• policies that provide for payment of benefits only on death, or on death or permanent disability, and for which the premiums or premium instalments are calculated solely by reference to the period for which the life concerned is expected to continue, or within which the life concerned is expected to terminate
  
   
• policies issued before 1   July 1992 that cannot, after that date, be cancelled, surrendered or redeemed, and for which the terms have not been materially altered
  
   
• a contract of reinsurance of pure life cover between a resident insurer and a non-resident reinsurer. [section 482]

What is an interest in a FIF?

Foreign companies

An interest in a foreign company that is a FIF includes:

• a share other than an eligible finance share in the company
  
   
  
  A share includes any interest in the capital of the company in the nature of a share or stock. Examples include ordinary, preference, bonus and redeemable preference shares, as well as shares with deferred rights.
  
   
• a legal document that confers an entitlement to acquire such a share including an entitlement arising from an option or convertible note. [subsection 483(1)]

Even if your name does not appear on a share certificate or share register of the foreign company as the legal owner of those shares, you are still held to have an interest in the FIF if you have a beneficial interest in that FIF (without the legal title to it). [section 488]

Eligible finance share

A share in a company is an eligible finance share if:

• the shareholder is an Australian financial institution (AFI) or AFI subsidiary
• the share was issued to the shareholder by the company in the ordinary course of business carried on by the shareholder
• the shareholder is not an associate of the company, and
• payments of dividends on the share may reasonably be regarded as equivalent to the payment of interest on a loan. [section 327]

Foreign trusts

An interest in a FIF that is a foreign trust is:

• an interest in the capital or income of the trust - including a unit in a unit trust, or
• a legal document that confers an entitlement to acquire such an interest including an entitlement arising from an option or convertible note. [subsection 483(2)]

What is an interest in a FLP?

You have an interest in a FLP if you have the legal title to the FLP. [subsection 483(3)]

Interests in a FIF or a FLP subject to the FIF measures

The FIF measures apply to your interest in a FIF for the FIF's notional accounting period that ended in your income year if:

• you had an interest in a FIF at the end of the income year, and
• you were a resident of Australia at any time in that income year. [subsection 485(3)]

The measures do not apply to an interest in a FIF that you dispose of on or before 30   June of that income year. However, you may be subject to other Australian tax on the interest in the FIF - for example, capital gains tax.

The FIF measures apply to your interest in a FLP for the FLP's notional accounting period that ended in your income year if you:

• had an interest in a FLP at any time during that year, and
• you were a resident of Australia at any time in that year. [subsection 485(4)]

The FIF measures will not apply to a dual resident of Australia and another country where Australia has agreed, in a tax treaty, to treat that resident solely as a resident of the other country.

Election to exclude an interest in a foreign hybrid from the FIF measures

If at the end of an income year you have an interest in a FIF that is a corporate limited partnership for the purposes of Division 5A of Part III of the ITAA 1936, you may elect to exclude the FIF measures from applying to that interest. [ subsection 485AA(1) ].

In order to make the election, the limited partnership must satisfy the requirements contained in paragraphs 830-10(1)(a) to (d) of the Income Tax Assessment Act 1997 (ITAA 1997) . These conditions include:

• the entity must not be an Australian resident
• it must be treated as a partnership under the tax laws of its country of formation, and
• must not be treated as a resident entity by any foreign country. [subsections 485AA(1) and (2)]

If at the end of an income year you have an interest in a FIF that is a foreign hybrid company under the provisions of section 830-15 of the ITAA 1997, you may elect to exclude the FIF measures from applying to that interest. [ subsection 485AA(2) ]

If you choose to make an election under subsection 485AA(1) or (2) you must do so on or before lodgment of the tax return for the income year (subject to any deferrals allowed by the Commissioner) so that no income is attributed from the FIF under Part XI of the ITAA 1936. The election is irrevocable and applies to that income year and all future income years during which you have the FIF interest.

The effect of the election is not to attribute any income from your interest in the FIF to you for that and future income years. [ subsection 485AA(5) ] Because of this election, the interest in the limited partnership or company becomes an interest in a foreign hybrid. [subsections 830-10(2) and 830-15(5) of the ITAA 1997] However, the election in relation to a particular interest by a taxpayer does not have any effect, including for the purposes of Part XI of the ITAA 1936, in relation to any other interest of the taxpayer or any other taxpayer in a FIF. [ subsection 485AA(6) ]

For more information on how the foreign hybrid rules affect your interest in a FIF see the publication Foreign hybrids - information guide (NAT 11619) available on our website

Notional accounting period of a FIF

The FIF measures apply to a FIF's notional accounting period - this generally coincides with your income year.

The notional accounting period provides a measurement point for the application of the FIF provisions and is referred to for a variety of purposes including the application of the various methods of determining FIF income and for some of the exemptions.

Important: You must return attributable income from the FIF for the notional accounting period which ends in your income year.

If the period for which a FIF prepares its accounts is different from your income year, and this period is not more than 12   months, you may elect for the notional accounting period of the FIF to coincide with the period for which the accounts of the FIF are prepared. This election cannot be revoked for as long as you have the FIF interest. [subsections 486(3) and (4)]

Example: Election to align notional accounting period

Gary acquires an interest in a FIF on 1   March 2003. The FIF prepares its annual accounts for the accounting period 1   April to 31   March and Gary elects to align the notional accounting period with the accounting period of the FIF.

He needs to include attributable income from the FIF for the period 1   March 2003 (the date of acquisition) to 31   March 2003 (the end of the elected notional period) in his tax return for the income year ended 30   June 2003. This is because the notional accounting period of the FIF ended during the income year for which Gary is lodging his tax return.

If the FIF prepared its annual accounts for the accounting period 1   January to 31   December each year and Gary elected to align the notional accounting period with the accounting period of the FIF, he would have to include attributable income from the FIF for the period 1   March 2003 (the date of acquisition) to 31   December 2003 (the end of the elected notional accounting period) in his return for the income year ended 30   June 2004 as that is the income year in which the notional accounting period ended.

Notional accounting period of a FLP

The notional accounting period of a FLP is generally each period of 12   months ending on 30   June. [subsection 487(2)]

If the cash surrender values of your interest in a FLP are available on a day during the same month in each calendar year ('the relevant day'), you can elect that the notional accounting period of the FLP be determined under subsection 487(5). For example, if the relevant day is in February, you may elect that the accounting period begins in March (the month after the first relevant day) and ends at the end of February in the following year (in which the next relevant day occurs).

This election cannot be revoked for as long as you have an interest in the FLP. [subsection 487(4)]

Direct investments

The FIF legislation refers to an interest that is generally:

• a share in a foreign company
• an interest in the capital or income of a foreign trust, or
• the holding of the legal title of a foreign life assurance policy.

If you, as an Australian resident, personally and directly own foreign investments (not through a company or a trust), the FIF legislation does not apply as it does not cover direct interests in physical assets such as land, livestock, plant and debt instruments. Other provisions of the income tax law apply to such investments.

Bare trustee or nominee arrangements

Where a trustee holds an interest in a FIF or FLP on behalf of a beneficiary who is absolutely entitled to the interest in the FIF or FLP, the beneficiary will be taken to hold the interest under the FIF measures. [subsection 484(1)]

Deceased estates

Foreign trusts that are deceased estates are excluded from the FIF measures. For more information, see What is a foreign investment fund (FIF)? in this chapter.

Note: Other trust provisions of the ITAA 1936 may apply to deceased estates.

ATO references:
NO NAT 2130