1990 THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA HOUSE OF REPRESENTATIVES TAXATION LAWS AMENDMENT (FOREIGN INCOME) BILL 1990 TAXATION (INTEREST ON NON-RESIDENT TRUST DISTRIBUTIONS) BILL 1990 EXPLANATORY MEMORANDUM (Circulated by authority of the Treasurer, the Hon. P. J. Keatirig, M.P.)
1990 THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA HOUSE OF REPRESENTATIVES TAXATION LAWS AMENDMENT (FOREIGN INCOME) BILL 1990 TAXATION (INTEREST ON NON-RESIDENT TRUST DISTRIBUTIONS) BILL 1990 EXPLAiNATORY MEMORANDUM (Circulated by authority of the Treasurer, the Hon. P. J. Keating, M.P.)
Pñnted by Authority by th~commoowg.ilh (3ovurnment Printer
I TABLE OF CONTENTS General Outline 1 Main Features 3 Notes on Clauses 24 INDEX OF SPECIFIC MEASURES Measure Main Notes on Features Clauses* Page Page CONTROLLED FOREIGN COMPANIES The control rule Direct control interest in a company 4 4 225 240 Tracing rules 4 243 Jurisdictional coverage 207 Active income exemption 6 336 Calculation of attributable income 6 274 Attribution of income to resident taxpayers 9 369 Assessability of certain amounts on a change of residence of a CFC 9 371 Assessability of certain dividends paid by a CFC 9 372 Assessability of certain trust distributions 10 407 Dividends paid out of previously attributed income 10 33 De minimis exemption 11 284 Keeping of records 11 387 FOREIGN TAX CREDIT SYSTEM Dividends received from foreign companies 11 35 Overseas branches of Australian resident companies 13 28 Overseas branches of Australian life assurance companies 13 118 Quarantining of foreign taxes 14 130 Carry forward of excess credits 14 149 Credit for foreign taxes paid in respect of attributed income 14 137 Losses 15 145
1.1. NON-RESIDENT TRUSTS The transferor tax measures 15 58 Attributable income of a non-resident trust estate 16 3.01 The country of residence of a trust estate 17 69 Attribution of trust income 17 108 Certain family arrangements 18 73 Public unit trusts 19 70 Deemed rate of return 19 110 Trust distributions out of attributed income 19 55 Additional tax on certain trust distributions 20 82 Winding up of existing trusts 21 91 De minimis test 21 113 Keeping of records 21 114 INFORMATION HELD OFFSHORE Offshore information notices 22 169 * Main notes on clauses commence on this page
GENERAL OUTLINE TAXAT1ON LAWS AMENDMENT (FOREIGN INCOME) BILL IS9fl This Bill contains provisions to amend the Income Tax Assessment Act 1936 to give effect to the proposal, announced in the Economic Statement of 12 April 1989 and modified in press statements of 17 December 1989, 3 June 1990 and 29 June 1990, to introduce, with effect from the beginning of the 1990-91 income year, an accruals system of taxing certain foreign source income and, in particular: to attribute to Australian residents certain income derived by a non-resident company that is controlled by Australian residents, unless the company is subject to a tax system comparable to Australia s or is predominantly engaged in active business; to exempt from tax dividends received by a resident company from a company that is a resident of a country with a tax system comparable to Australia s, where the resident company has a voting interest of at least 10 per cept in the non-resident company; to generally exempt from tax profits derived by a resident company from carrying on business at or through a permanent establishment in a country with a tax system comparable to Australia s; to exempt from tax profits of a foreign branch of a life assurance company that relate to the provision of life assurance for the benefit of unassociated non-resident policy holders; to substitute a passive class of income for the narrower t interest class of income that applies for the purposes of quarantining foreign tax credits; to allow excess foreign tax credits to be carried forward for up to five years; to replace the per country/class of income basis of quarantining foreign losses under the foreign tax credit System with a worldwide/class of income basis, and to add a new class of income (broadly, passive income other than interest) to the existing classes of income; to attribute income of a non-resident trust to an Australian resident who has transferred value to the trust where, in broad terms, the trust is
2. resident in a low-tax country, or has derived certain concessionally taxed income, and the transfer was made: in the case of a discretionary trust, at any time; or in the case of a non-discretionary trust, after 12 April 1989; to generally exempt from tax distributions made by non-resident trusts out of income that has previously been so attributed; to provide for the attributable income of a non-resident trust to be calculated by applying a deemed rate of return to the market value of property transferred or services provided to the trust in circumstances where the transferor is unable to calculate the net income of the trust; to give an incentive - in the form of a 10 per cent final tax liability on the taxable amount of a trust distribution - to wind up non-resident discretionary trusts that were in existence on 12 April 1989; to provide for additional tax, in the nature of an interest charge, to be imposed on trust distributions that are included in the assessable income of a resident beneficiary where the trust income had neither been subject to tax on a current basis in a listed country, nor on an attribution basis under the transferor measures; to impose an evidentiary sanction in respect of foreign documents or information that are not provided pursuant to a request by the Commissioner of Taxation; and to impose specific record keeping requirements on a person who is an attributable taxpayer in relation to a controlled foreign company or a foreign trust. The draft Dill also contains provisions to amend: the Income Tax (International Agreements) Act l95~1 as a consequence of the changes to the classes of income that are to apply for the purposes of the foreign tax credit system; and the Taxation Administration Act 1953 to ensure that a person cannot be prosecuted in respect of a statement made in a document produced to the Commissioner in response to an offshore
3. information notice or under the active income test substantiation provisions TAXATION (INTEREST ON NON-RESIDENT TRUST DISTRIBUTIONS) BILL 1990 This Bill will formally impose the interest charge calculated in accordance with section 1O2AAM of the Income Tax Assessment Act 1936, proposed to be inserted by the Taxation Laws Amendment (Foreign Income) Bill 1990. TAXATION LAWS AMENDMENT (FOREIGN INCOME) BILL 1990 TAXATION (INTEREST ON NON-RESIDENT TRUST DISTRIBUTIONS) BILL 1990 FINANCIAL IMPACT The likely direct revenue gain resulting from the introduction of the accruals system of taxing foreign source income is difficult to determine. This is particularly so in the initial years because: of the variation in CPCs accounting periods and taxpayers years of income; I it is not known to what extent non-resident discretionary trusts will take advantage of the 10 per cent final tax liability by winding up before 30 June 1991; of the tax exemption for non-portfolio dividends received by resident companies from a company that is a resident of a country with a tax system comparable to Australia s; and it is not known to what extent the domestic tax base will increase as a result of these measures While the revenue gains in 1990-91 are not expected to be significant, it is anticipated that the revenue will increase to within the range of $60 million to $70 million in 1993-94 after the full impact of these measures takes effect. MAIN FEATURES The main features of the Bills are as follows. TAXATION LAWS AMENDMENT (FOREIGN INCOME) BILL 1990 CONTROLLED FOREIGN COMPANIES The broad aim of the proposals in relation to companies is to attribute to Australian residents income, other than active business income, derived by foreign companies that are controlled by Australian residents other
4 than in the case of a company that is subject to a tax system comparable to Australia s or is predominantly engaged in active business The control rule (Clause 49 : section 340) A foreign company will be a controlled foreign company (CFC) at a particular time if, at that time, five or fewer Australian residents own or are entitled to acquire (for example, by holding options), 50 per cent or more of the interests in the foreign company The interests of a resident in a foreign company for this purpose will include both direct and indirect interests of the resident and the resident s associates. A non-resident company will also be a CFC at a particular time if, at that time, five or fewer residents control the company although having less than 50 per cent of the interests in the company. There is a rebuttable presumption that a single resident is able to control a company if the resident, alone or together with associates, directly or indirectly holds an interest of 40 per cent or more in the company. Direct control interest in a comoanv (Clause 49 : section 350) An entity s direct control interest in a foreign company will be measured as the greatest of that entity s interest in: the issued capital of the company (measured in terms of the paid up value, not taking into account share premiums); the rights to vote or participate in any decision-making concerning distributions, the constitution of the company or variations in the company s capital; and the entitlement to distributions of capital or profits (including distributions on winding up). Shares issued to a financial intermediary under certain share financing arrangements may be disregarded for the purpose of measuring control interests. Tracing rules (Clause 49 : sections 352 to 355 and 357 to 360) In order to determine whether a foreign company is a CFC, the indirect interests in the company of a resident (an Australian entity ), and the direct and indirect interests in the company of associates of the resident are to be taken into account in addition to the direct interests of the resident. Indirect interests are also taken into account for the purposes of determining whether
5. a resident is an attributable taxpayer in relation to a CFC and, if so, the percentage of the CFC s income that is to be attributed to the resident. To determine the indirect interests held by a resident it may be necessary to trace through foreign companies, trusts and partnerships. An entity will only be traced through if it is a controlled foreign entity (CFE - that is, a CFC, a controlled foreign partnership (CFP) or a controlled foreign trust (CFT). Indirect interests will be determined by simple multiplication of the interests - including deemed interests of each entity in a chain. For the purpose of determining indirect control interests, but not for the purpose of calculating the amount of income to be attributed, a resident or an interposed CFE will be treated as owning 100 per cent of the interests in: a company, where the resident or CFE has interests of at least 50 per cent in the company; a company, where the resident or CFE otherwise controls, or by the rules described is taken to control, the company; a CFP, where a CFE is a partner in the CFP; a CFT, where the resident or CFE is an eligible transferor in relation to the CFT; and a CFT, where the resident or CFE has interests of at least 50 per cent in the CFT. Jurisdictional coverage (Clause 49 sections 311, 320, 321 and 324) The accruals measures are to apply in relation to a CFC that is not a resident of a country with a tax system comparable to Australia s. The measures will also apply in relation to a company that is a resident of a comparable tax country where, broadly, the company derives: income that benefits from a tax concession of a kind that is to be prescribed by the Income Tax R~gjulations; income sourced outside the country of residence that is not taxed by any comparable tax country; or certain categories of trust income. The countries that are to be treated as comparable tax countries for the purposes of the accruals measures, and the concessions that are to be treated as designated tax concessions, will be listed in the regulations.
6. Active income exemption (Clause 49 sections 317, 326 and 432 to 455) If a CFC passes an active income test, some or all of its income or gains will not be attributed to Australian resident shareholders. There are three main requirements for passing the active income test: the CFC must have a permanent establishment in its country of residence; the CFC must have kept accounts, and complied with substantiation requirements in respect of those accounts, prepared in accordance with commercially accepted accounting principles; and the CFC s tainted income must be less than 5 per cent of its total income. This last requirement is to be determined using gross revenue amounts recorded in the company s accounts for all categories of income other than capital gains, foreign exchange gains and gains from trading in commodity contracts, which are to be taken into account on the basis of net gains. Tainted income includes the types of income that are readily susceptible to being shifted to foreign tax jurisdictions. In very broad terms, tainted income will consist of passive income (for example, dividends, interest, royalties and most kinds of gains on the disposal of assets) and business income from transactions with related parties and Australian residents. Special rules will apply in relation to financial intermediaries and insurance companies Calculation of attributable inrome (Clause ~ : sections 381 to 431) Where a foreign company is a CFC at the end of its statutory accounting period, the attributable income of the CFC will be calculated separately for each attributable taxpayer. The attributable income of a CFC is to be calculated on the basis of the rules that apply under the Income Tax Assessment Act i9~c (the Assessment Act ) for the calculation of the taxable income of a resident company. In order to achieve this, certain basic assumptions are to be made. For a CFC that is a resident of either a listed country or an unlisted country, it is to be assumed that the company was a taxpayer that was a resident of Australia for the whole of its statutory accounting period, and that the statutory accounting period of the CFC was a year of income. These assumptions will enable a notional calculation of the taxable income of the CFC.
7. The income to be taken into account in the calculation of the attributable income will be different for a CFC resident in a listed country from that of a CFC resident in an unlisted country. It will also be dependent on whether or not the CFC passes the active income test. In either case, the income may be subject to further specific exclusions from attributable income. Where a CFC that is a resident of an unlisted country does not pass the active income test, the attributable income is the amount that would have been the taxable income if the CFC was a resident of Australia and its tainted income and trust income were its only income. Where the CFC passes the active income test, the attributable income is the amount that would have been the taxable income if the CFC was a resident of Australia and the only amounts included in assessable income were: amounts assessable under Division 6 of Part III of the Assessment Act (income derived as a beneficiary of a trust estate); and income attributed to a taxpayer as a transferor to a non-resident trust estate under the new measures for the taxation of non-resident trusts. Where a CFC that is a resident of a listed country does not pass the active income test, the attributable income is calculated as if the income of the CFC consisted only of: tainted income in respect of certain designated concession income; income derived from sources outside the listed country of residence that is not taxed in that listed country or in another listed country; amounts assessable under Division 6 of Part III of the Assessment Act that are not taxed in the listed country or in another listed country; and income attributed to a taxpayer as transferor to a non-resident trust under the new measures for the taxation of non-resident trusts. In relation to a CFC that is a resident of a listed country, the active income exemption is only available in respect of the CFC s designated concession income. This has the effect that the attributable income of a CFC that passes the active income test will include only the latter three categories of income listed in the preceding paragraph. The attributable income of a CFC that is a resident of an unlisted country will not include certain
9. amounts - broadly, amounts that have already been taxed in Australia or at a comparable rate. More specifically, the following amounts will not be included: amounts derived by the company in carrying on business through a permanent establishment in a listed country, provided the income is subject to tax and is not designated concession income; amounts included in the actual assessable income of the conpany - generally, branch income derived in Australia; franked dividends received by the Australian companies; company from any of the above categories of income derived by a company through a partnership or trust; non-portfolio dividends (that is, dividends paid to the company in respect of a substantial shareholding) that the company receives from any company resident in a listed country; dividends paid out of attributed income; non-portfolio dividends paid to the company by a CFC resident in an unlisted country; and non-portfolio dividends paid to the company by a company (other than a CFC) resident in an unlisted country out of exempting receipts of the company. A similar exclusion will apply for in a listed country. CFCs resident A number of modifications are to be made to the normal rules for the calculation of the taxable income of a resident company. Some of these are of a purely technical nature.?.mong the more important of the modifications are measures that relate to the calculation of capital gains and capital losses on disposals of assets (other than taxable Australian assets) by a CFC, including measures to prevent the application of the capital gains and capital losses provisions to gains or losses on such assets that accrued up to 30 June 1990; the treatment of depreciation and trading stock; the translation of amounts denominated in a foreign currency; the treatment of dividends paid under certain financing arrangements; and the deductibility of taxes paid. In calculating the attributable income of a CFC, its income is to be reduced by previous years losses. The reduction will be calculated in accordance with rules similar to those that apply for resident taxpayers under the Assessment Act for previous years losses in respect of foreign income. Additionally, a loss of a previous year
9 may only be taken into account if the CFC was a CFC in the year in which the loss was incurred and in each intervening year. Attribution of income to resident taxpayers (Clause 49 : section 456) With effect from the beginning of the 1990-91 income year, the assessable income of a taxpayer who is an attributable taxpayer in relation to a CFC will include the taxpayer s share of the attributable income of the CFC in respect of an accounting year of the CFC that commenced on or after 1 July 1990 and ended during the taxpayer s year of income. An attributable taxpayer is, broadly, an Australian resident who, alone or with associates, directly or indirectly holds an interest of 10 per cent or more in the CFC as at the end of the CFC s accounting year. An attributable taxpayer s share of the attributable income of a CFC is the attribution percentage (the sum of the taxpayer s direct and indirect percentage interests in the CFC) multiplied by the attributable income of the CFC. The direct and indirect interests of associates are not to be taken into account in computing the attribution percentage in this calculation. Assessabilitv of certain amounts on a change of of a CEC (Clause 49 : section 457) residence Where a CFC changes its residence from an unlisted country to a listed country, certain accumulated profits and deemed profits of the CFC will be included in the assessable income of a taxpayer who is an attributable taxpayer in relation to the CFC. The deemed profits arise from the CFC being treated as though it had disposed of all of its assets for a consideration equal to their market value at the residence-change time. Where the change of residence is from an unlisted country to Australia, only certain accumulated profits will be so included in assessable income. The accumulated profits of the CFC that are to be included in the assessable income of a taxpayer on a change of residence of the CFC will not include, in broad terms, the comparably taxed income of the CFC in relation to the taxpayer or income of the CFC that has previously been attributed to the taxpayer. Assessability of certain dividends paid by a CFC (Clause 49 sections 458 and 459) Non-portfolio dividends paid by a CFC that is a resident of an unlisted country to a CFC that is a resident of a listed country will be included in the assessable
10. income of a taxpayer if the taxpayer is an attributable taxpayer in respect of both the CFC paying the dividend and the CFC to which the dividend is paid. However, this will not apply where the dividend is subject to tax in a listed country at a comparable rate of tax. The share of the dividend to be included will be calculated by multiplying the taxpayer s attribution percentage in the CEC receiving the dividend by the amount of the dividend paid. The amount of the dividend paid is to be reduced to the extent that it is paid out of profits that have previously been attributed to the taxpayer or is paid out of exempting profits - that is, the profits of a CFC that are applicable to exempting receipts (broadly, amounts already taxed in Australia or at a comparable rate). A similar rule applies in relation to dividends paid by a CFC to certain controlled foreign partnerships, controlled foreign trusts or Australian trusts. Dividends paid by a CFC will include certain payments made by the CFC that are deemed to be dividends (see notes on clause 9). Section 458 will apply to upstream dividends and deemed dividends, while section 459 will apply to other deemed dividends (for example, downstream payments). Similar measures will apply to dividends and deemed dividends paid between 1 July 1989 and the commencement of these measures (see notes on clauses 52, 55 and 56). Assessability of certain trust distributions to a listed country CFC (Clause 57) As a transitional measure, certain trust distributions made by a OFT, directly or through interposed entities, to a CFC that is a resident of a listed country will be included in the assessable income of a taxpayer if the taxpayer is an attributable taxpayer in relation to the CFC and the CFT at the time the distribution was made. However, this will not apply where the distribution is subject to tax in a listed country at a comparable rate of tax, or where the distribution is made out of comparably taxed income of the trust. Dividends paid out of previously attributed income (Clause 8 section 23A1) where a taxpayer receives a dividend that is paid out of income that has previously been attributed to the taxpayer, the dividend will be exempt up to the amount that was previously included in assessable income. In order to determine whether the dividend was paid out of income that has been attributed to the taxpayer, accounts (called attribution accounts ) will need to be maintained. These accounts will facilitate the tracing of
11. a dividend as necessary through interposed companies, partnerships and trusts to determine whether, and to what extent, a distribution made by a foreign company to a resident taxpayer is out of income that had previously been attributed to the taxpayer. De minimis exemption (Clause 49 : subsection 365(4)) A de minimis exemption will apply where the attributable income of a CFC that is a resident of a listed country comprises income that is subject to a designated concession. The exemption will apply only in relation to a year of income where: for a CFC with a gross turnover of less than Si million - the sum of the designated concession income and income derived from sources outside the listed country that is neither subject to tax in a listed country nor in Australia does not exceed 5 per cent of the gross turnover of the CFC; or for a CEC with a gross turnover of more than $1 million - the sum of the designated concession income and income derived from sources outside the listed country that is neither subject to tax in a listed country nor in Australia is $50,000 or less. Where the exemption applies, the designated concession income will be excluded from the attributable income of the CFC. The exemption will not apply in relation to income derived through partnerships or trusts. seeping of records (Clause 49 : section 462 A person who is an attributable taxpayer in relation to a CFC will be required to keep certain records. These include documents relevant to the calculation of the taxpayer s attributable interest and attribution percentage and the calculation of the amount included in assessable income. Generally, the records must be kept for five years. A taxpayer who breaches the requirements is liable on conviction to a fine not exceeding $3000. FOREIGN TAX CREDIT SYSTEM Dividends received from foreign companies (Clause 8 : section 23AJ) Under the existing foreign tax credit system (FTCS), dividends paid by foreign companies to resident taxpayers are included in the assessable income of the resident. Foreign tax paid on the dividend is allowed as a
12. credit against (but limited to the amount of) the Australian tax payable by the recipient of the dividend. where the recipient of the dividend is an Australian company with a voting interest of at least 10 per cent in the foreign company paying the dividend, the amount of foreign tax for which the Australian company is allowed a credit also includes the underlying tax - that is, the foreign tax paid by the foreign company on the profits out of which the dividend was paid. Where the rate of tax imposed on the profits from which the dividend was paid is comparable to, or higher than, the rate of tax imposed in Australia, the foreign tax credit allowed will, in general, eliminate the Australian tax payable by the resident taxpayer in respect of that dividend. In this regard, the effect of the FTCS for companies entitled to credit for underlying tax is, in most cases, broadly equivalent to providing an exemption for the dividends, but it imposes greater compliance costs than would an exemption. Accordingly, with effect from the commencement of the 1990-91 income year, an exemption is to be provided for dividends received by resident companies from companies resident in a country which is included on the statutory list of comparable tax countries. The exemption will only apply where the recipient of the dividend is an Australian company which has a voting interest of at least 10 per cent in the foreign company. It will not be necessary that the foreign company be a CEC. These dividends will be exempt from tax either as dividends paid out of previously attributed income or as dividends paid out of comparably taxed income. Further, the Bill provides that a non-portfolio dividend received by a resident company from a company resident in an unlisted country will be exempt where the dividend is paid out of exempting profits - that is, profits arising from exempting receipts. Where the dividend is paid out of profits of a foreign company (whether a resident of a listed or an unlisted country) that relate to: comparably taxed income derived through a permanent establishment in a listed country; or income that has already been taxed by assessment at the full corporate rate in Australia, the exemption will also be available where the income was derived by the foreign company through a partnership or trust. Other dividends are to continue to be assessable and subject to relief measures along the lines of the existing FTCS, except in the case of a dividend paid to a taxpayer from the income of a CFC that has been attributed to the taxpayer under the accruals tax measures.
13. Overseas branches of Australian resident companies (Clause 8 section 23A11) The FTCS will be modified to exempt from income tax, with effect also from the commencement of the 1990-91 income year, the income or profits of a resident company derived in carrying on a business at or through a permanent establishment located in a listed country, except to the extent that the income or profits: benefited from a designated concession and was not taxed by another listed country; or did not benefit from a designated concession but was not taxed by any listed country. The measures in the Bill will allow the exemption for branch profits to flow through a partnership or trust where the amount is included in the net income of a partnership or in the net income of a trust estate and a resident company includes all or part of the net income in its assessable income, In these circumstances, the corporate partner or corporate beneficiary, as the case may be, will be entitled to an exemption for that part of the company s share of the net income that is attributable to the branch profits. Income of a resident company derived at or through a permanent establishment that is not located in a listed country is to continue to be subject to income tax, as is any branch income derived by a non-corporate taxpayer. Where foreign tax has been paid on branch income which is still assessable, a credit will continue to be allowed. Overseas branches of Australian life assurance companies (Clauses 20 to 26) As a general rule the FTCS, as amended by this Bill, will apply to the taxation of overseas branches of Australian resident companies. Where foreign operations are carried on by means of branches in listed countries, profits of a branch will generally be exempt from Australian tax. Amendments proposed by the Bill will repeal existing section 1125 of the Assessment Act, which excludes from the assessabi~ income of a life assurance company so much of its foreign income as is not remitted to Australia, and will specifically exempt from tax the profits of a foreign branch of a life assurance company which relate to the provision of life assurance for the benefit of unassociated non resident policy holders.
14. Quarantining of foreign taxes (Clause 30) Under the existing FTCS, credit to be allowed is calculated separately for each specified class of foreign income. The classes of income are interest income, income from offshore banking and other income. Certain dividends paid out of interest income derived by a foreign company are deemed to be interest income. The Bill will amend the classes of income so that, for the 1990-91 and subsequent income years, the existing interest class of income is replaced by a class that is referred to as passive income. That is, the classes of income will be passive income, offshore banking income and other income. The passive income class will generally comprise dividends, interest, annuities, rents, royalties, capital gains, commodity gains and attributed income. Carry forward of excess credits (Clause 35) Under the existing FTCS, any amount by which foreign tax paid on foreign source income exceeds the Australian tax payable on that income cannot be carried forward so as to reduce the Australian tax payable in another income year. However, the excess foreign tax credits arising in a year of income may be transferred within a wholly owned company group for offset against the Australian tax payable on foreign income of the same class, derived in the same year of income, by another company in that group. The Bill will allow excess foreign tax credits in respect of the 1990-91 and subsequent income years to be carried forward and applied against tax payable on any foreign income of the same class that is derived in the subsequent five years of income. Modified rules will apply to the transfer of credits within a wholly owned company group. Credit for foreiqn taxes paid in respect of attrihnt-erl income (Clause 33 : sections 1GOAFCA, 1GOAFCB, 16OAFCC and I6OAFCD) The existing FTCS allows a credit for taxes paid on foreign income or capital gains that are included in assessable income. The Bill provides for relief in respect of both foreign and Australian taxes paid on the attributable income of a CFC. That relief will be on a basis consistent with the availability of a credit under the existing FTCS for foreign taxes paid on profits out of which a dividend is paid. That is, credit for underlying taxes (foreign and Australian) will be available only to Australian companies that are related to the CFC. Other taxpayers obtain relief from double taxation by deduction
15. of those underlying taxes in ascertaining the attributable income. Credit against Australian tax on foreign source income is to be available to an Australian resident for foreign withholding taxes paid on dividends that are exempt by virtue of having been paid out of income that had previously been attributed to the resident, Losses (Clause 34) Another feature of the FTCS is that a foreign loss incurred by a taxpayer in relation to the derivation of a class of income can be offset only against foreign income of the same class. Under the existing law the classes of income are interest income, income from offshore banking and other income. A further restriction on the offset of losses is that the foreign income must be from the same foreign source as the loss - generally referred to as per country quarantining. Amendments proposed by this Bill will remove the restriction that the foreign income be from the same foreign source - that is, per country quarantining will be eliminated. This will apply to deductions for losses claimed in the 1990-91 income year and subsequent years. The Bill will also amend the definition of the classes of income. For the 1990-9 1 income year and all subsequent years the classes of income will be interest income, passive income other than interest income (generally, dividends, annuities, rents, royalties, commodity gains and attributed income), offshore banking income and other income. NON-RESIDENT TRUSTS The transferor tax measures (Clauses 16, 17, 18) This Bill provides for the attributable income of a non-resident trust estate to be included in the assessable income of a resident transferor with effect from and including the transferor s 1990-9 1 income year. An entity (which includes an individual) will be a transferor for the purposes of these measures if the entity; at any time transfers, or has transferred, value to a non-resident discretionary trust; or after 7.30 pm on 12 April 1989 (the IF time ) transfers, or has transferred, value for inadequate or no consideration to a non-resident non-discretionary trust. The measures will apply to both direct and indirect transfers to non-resident trusts.
16. In the case of a discretionary trust that was in existence on 12 April 1989, an exemption from these measures will be available to a transferor if neither the transferor nor an associate of the transferor was able to control the trust on or after 12 April 1989. The term control is defined in wide terms in relation to a trust, In the case of a natural person who first becomes a resident of Australia after 12 April 1989, an exemption from these measures will be available if the transfer of property or services was made before the change of residence and neither the transferor nor an associate of the transferor was able to control the trust after the end of the year of income in which that person became a resident. A trust that is, at all times, a non-resident family trust would also be excluded from these measures. A discretionary trust is defined as a trust estate in relation to which any person has a power or discretion to determine the persons who could benefit under that trust, or how the beneficiaries are to benefit as between themselves under the trust. A trust estate would also be a discretionary trust where one or more of the beneficiaries under the trust has a contingent or defeasible interest in some or all of the corpus or income of the trust estate or where any of the beneficiaries of the trust estate is itself a discretionary trust. Attributable income of a non-resident trust (Clause 18 section IO2AMJ) estate The attributable income of a non-resident trust estate will be computed for each income year of the transferor with effect from and including the 1990-91 income year. The attributable income of a non-resident trust is to be: reduced by: in the case of a trust that is not a resident of a listed country - the whole of the net income of the trust; and in the case of a trust that is a resident of a listed country - so much of the net income of the trust that benefits from a designated tax concession, any amount of the net income to which a resident beneficiary is presently entitled; any amount of the net income that is subject to tax in Australia by assessment on the trustee; any amount of the net income that is subject to tax in a listed country on a current basis;
17. any amount of the net income that is actually paid in that year of income or within one month of the end of that year of income to a beneficiary resident in a listed country and subject to tax in a listed country; the amount of any franked dividend derived by the trust from a company that is a resident of Australia; distributions received by the trust out of the income of another non-resident trust that has been attributed to a resident transferor; dividends received from a CFC to the extent that they were paid out of the income of the CFC that has been attributed to resident taxpayers; dividends received from a CFC to the extent that they were attributed to resident taxpayers; and foreign or Australian income tax paid by the trustee or a beneficiary in respect of the attributable income. The net income of the trust, including any net capital gains, is to be computed as if it were a resident trust. The cou 1 htry of residence of a trust estate (Clause 18 : section 102A1~E) A trust estate that is not a resident trust estate is to be treated as a resident of a listed country if all of the income of the trust (other than designated concession income) is taxed by assessment on the trustee or on the beneficiaries in one or more listed countries or in Australia in the year of income in which that income is derived by the trust or before the end of the next succeeding year of income. A trust that is neither a resident trust estate nor a resident of a listed country will be treated as a resident of an unlisted country. Attribution of trust income (Clause 18 : section 1O2AAZD) The whole of the attributable income of a non-resident trust will be included in the assessable income of each Australian resident (or in the attributable income of a CFC) who transfers, or had transferred, property or services to the trust in circumstances that attract the transferor tax measures (outlined earlier). The Commissioner of Taxation will be authorised to grant appropriate relief in cases where there are two or more transferors of property to the same trust estate.
18. Relief is to be conditional on a transferor providing sufficient information to enable the allocation of the attributable income of the trust to the transferors on the basis of the income attributable to the property transferred by each transferor. Certain family arrangements (Clause 18 : section IO2AA}fl The transferor tax measures will not apply in relation to a trust that is a non-resident family trust. A non-resident trust is to be treated as a non-resident family trust where the trust is a post marital trust or a family relief trust and was constituted by a deed of trust or other instrument or an order or declaration of a court. A post-marital family trust is, in broad terms, a trust created pursuant to a decree or order of dissolution or annulment of marriage or a decree or order of judicial separation or a similar instrument. A trust that was created in consequence of the breakdown of a de facto marriage will also qualify as a post-marital trust. In either case, the primary beneficiaries of the trust should be natural persons who are non-resident and who are covered by any of the following categories: the spouse or former spouse of the natural person; a child of the natural person or of the spouse of the natural person; a person who was a child of the former spouse of the natural person at a time when the marriage subsisted. A family relief trust in relation to a natural person is one that was established and is operated for the relief of persons who are in necessitous circumstances. The only persons who benefit or are capable of benefiting under the trust must be natural persons who are: identified by name in the trust deed or instrument or in the court order or declaration creating the trust; non-residents; and within specified categories of relatives of that person. To qualify as a family relief trust, one of the following conditions should also be satisfied: the assets of the trust must not be excessive having regard to the requirements or likely requirements of the primary beneficiaries;
19. no transfers of property or services should have been made to the trust after the IF time; or immediately after each transfer of property or services to the trust after the I? time, the assets of the trust should not have been excessive having regard to the requirements or likely requirements of the primary beneficiaries. The trust will not fail to qualify as a non-resident family trust if, on the death of a primary beneficiary, the children of that beneficiary could benefit from the trust or where, on there being no surviving beneficiary or issue of a beneficiary, a fund, authority or institution referred to in paragraph 78(l)(a) of the Assessment Act (the gifts provision) could benefit from the trust. Public unit trusts (Clause 18 : sections 1O2AAF and 1O2AAT) A resident taxpayer will not be an attributable taxpayer in relation to a non-resident trust estate for a year of defined income if that trust was a public unit trust (as in section 1O2AAF) at all times during that year of income. Deemed rate of return (Clause 18 : section IO2AAZD) Special rules will apply where the Commissioner is satisfied that the transferor is unable to obtain the information necessary to compute a trust s income according to Australian tax law. The amount of income to be included in the transferor s assessable income is to be calculated by applying a deemed rate of return to the market value - adjusted to reflect deemed returns for previous periods - of the property transferred or services provided to the trust. The deemed rate of return for a particular period is to be 5 percentage points above the rate of interest applicable for that period for the purposes of section 10 of the Taxation (Interest on Overpavments) Act 1983 - currently 14.026 per cent per annum. Trust distributions out of attributed income (Clause 16 : section 992) Section 998 of the Assessment Act includes in the assessable income of a resident beneficiary of a trust estate amounts that are paid to the beneficiary or applied for the benefit of the beneficiary where the amounts represent trust income that had accumulated without being subject to tax in Australia in the hands of either the trustee or the beneficiary. Attributable income of a trust estate that has been included in the assessable income of a transferor
20. (other than a company) will be exempt from tax in the hands of a beneficiary to whom that income is subsequently distributed. Where the attributable income of a trust estate was included in the assessable income of a company as transferor, subsequent distributions of that income to that company will be exempt from company tax. Additional tax on certain trust distributions (Clause 18 : section 1O2AAM) To the extent that a resident beneficiary s assessable income for the 1990-91 or a subsequent income year includes a distribution by a non-resident trust estate of income of previous years that has neither been attributed to a transferor nor taxed on a current basis to the trustee or a beneficiary, the beneficiary is to be liable, in certain circumstances, to pay an additional tax in the nature of an interest charge in respect of that amount. This charge is to be formally imposed by a separate Act (see the Taxation (Interest on Non-resident Trust Distributions) Bill 1990). The interest charge is not to apply if the amount included in the assessable income of the beneficiary is trust income that has previously been subject to tax on a current basis in a listed country (other than designated concession income). Interest will commence to accrue from the start of the beneficiary s first income year that follows the income year of the trust in respect of which the income would have bean included in the assessable income of the trust if the trust was a resident trust estate. The accrual period will terminate on the last day of the year of income in which the amount is included in the income of the resident beneficiary. Additional tax in respect of income that accumulated in a non-resident trust prior to the beginning of the 1990-91 income year of the trust will accrue only from 1 July 1990. Where a natural person who is a beneficiary of a non-resident trust estate becomes a resident, the income accumulated by the trust up to the date on which the beneficiary became a resident will be deemed, for the purpose of calculating any additional tax, to have been derived by the trust on the day on which the beneficiary became a resident. This rule is to apply only in relation to the first occasion on which a beneficiary becomes a resident of Australia. The interest rate that is to apply in any specified period will be the same as the rate that applies for the purposes of the Taxation (Interest on Overpayments) Act 1983 - currently 14.026 per cent per annum.
21. The sum of the income tax applicable to income distributed to a beneficiary and the additional tax is not to exceed the amount of the distributed income. Winding up of existing trusts (Clause 18 s section 1O2AA}fl As mentioned earlier, the transferor tax measures will apply in relation to non-resident discretionary trusts that were in existence on 12 April 1989 and to which a resident had transferred property or services prior to that date. As an incentive to wind up such a trust, a rebate of tax will be available so that the rate of Australian tax on trust distributions made after 12 April 1989 and before 30 June 1991 does not exceed 10 per cent. The rebate will apply only if all of the trust s accumulated income and corpus are distributed, and the trust is wound up before 30 June 1991. The limited rate of 10 per cent will apply only in relation to trust distributions that are included (or deemed to be included) in a beneficiary s assessable income by virtue of section 998 of the Assessment Act. No credit is to be allowed for any foreign tax paid in respect of the income from which the distribution is made. This concessional treatment will not apply to any income derived by the trust to the extent that the income relates to property transferred to the trust after 12 April 1989. The concessional treatment will not apply at all if the resident transferor or an associate of the transferor transfers value to the trust after that date. De minimis test (Clause 18 : section 1O2AAZE) The attributable income of a trust that is a resident of a listed country is not to be included in the assessable income of a transferor if the aggregate attributable income derived by non-resident trusts (including trusts in unlisted countries) to which the transferor has transferred value does not exceed the lesser of: Keeping of 10 per cent of the aggregate of the net incomes of the trusts; or $20,000. records (Clause 18 : section XO2AAZG) An attributable taxpayer in relation to a non-resident trust will be required to keep records that show how the transferor tax measures apply to the taxpayer. Generally, the records must be maintained for
22. five years. A taxpayer who breaches this requirement is liable on conviction to a fine not exceeding $3000. INFORMATION HELD OFFSHORE Offshore information notice (Clause 48 : section 264A) The Bill will authorise the Commissioner of Taxation to issue an offshore information notice in respect of information or documents held offshore. Where that notice is not complied with, the information or documents may not be used by the taxpayer as evidence to dispute an assessment. INCOME TAX (INTERNATIONAL AGREEMENTS) ACT 1953 (Clauses 62 to 64) The Bill will amend the Income Tax (International Agreements) Act 1953 as a consequence of the changes to the classes of income that are to apply for the purposes of the foreign tax credit system. TAXATION ADMINISTRATION ACT 1953 (Clauses 65 and 66) The Bill will amend the Taxation Administration Act 1953 to ensure that a person cannot be prosecuted in respect of a statement made in a document produced to the Commissioner in response to an offshore information notice or under the active income test substantiation provisions. TAXATION (INTEREST ON NON-RESIDENT TRUST DISTRIBUTIONS) BILL 1990 By this Bill, an interest charge will be payable on certain distributions from certain trust estates. The interest is to be calculated under section 1O2AAM of the Income Tax Assessment Act 1936, proposed to be inserted by the accompanying Taxation Laws Amendment (Foreign Income) Bill 1990. Broadly, the interest charge will be imposed on a resident taxpayer who receives a distribution from a trust estate where the distribution is included in assessable income and relates to both: a year of income of the trust estate for which it was not a resident of Australia; and income or profits which have accumulated in the trust estate and have not been taxed at a comparable rate in a foreign country which has a comparable tax system to Australia s.