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. Refer to section   470 for the meaning of 'Part   XI Australian resident'.

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 money 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
• an option, convertible note or other instrument that confers an entitlement to acquire such a share. [subsection 483(1)]

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.

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
• an option, convertible note or other instrument that confers an entitlement to acquire such an interest. [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)]

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 2010. 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 2010 (the date of acquisition) to 31   March 2010 (the end of the elected notional period) in his tax return for the income year ended 30   June 2010. 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 2010 (the date of acquisition) to 31   December 2010 (the end of the elected notional accounting period) in his return for the income year ended 30   June 2011 as that is the income year in which the notional accounting period ended.

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 commencing 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