Taxation Determination

TD 92/109

Income tax: foreign income: does a controlled foreign company (CFC) which conducts its business on a cyclical basis satisfy the active income test?

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FOI status:

may be releasedFOI number: I 1212767

1. Section 432 of the Income Tax Assessment Act 1936 provides an active income test to determine whether the income of a CFC will be exempt from attribution to resident shareholders. Under paragraph 432(1)(e), the active income test is only passed by a CFC which 'at all times during the statutory accounting period when the company was in existence and was a resident of a particular listed country, or of a particular unlisted country ... carried on business in that country at or through a permanent establishment of the company in that country;'.

2. We accept that a CFC can still pass the requirement in paragraph 432(1)(e) that at all times during the statutory accounting period it carried on business, even though it closes down operations for part of the statutory accounting period, if the CFC's business is a cyclical one and it is normal for a business of the type carried on by the CFC to be conducted on a cyclical basis.

Example:

Downhill Pty Ltd carries on business as a ski resort and closes down operations for 6 months of the year after the skiing season is over. It is normal for this type of business to be conducted on a cyclical basis. In this case, the company satisfies the requirement in paragraph 432(1)(e) that, at all times during the statutory accounting period, it carried on business as a ski resort.

Commissioner of Taxation
01/07/92

References

ATO references:
NO 92/3745-3

Subject References:
active income test;
CFCs;
cyclical business

Legislative References:
ITAA 432