Ap_att01

Attributed Foreign Income - What is it - and why are you asked about it?

What is accrued income and what is ATTRIBUTED FOREIGN INCOME?

The solution: attributable taxpayers, controlled foreign companies/trusts and foreign investment funds

What is accrued income and what is ATTRIBUTED FOREIGN INCOME?

If you are a salary & wage earner, your income is derived when your employer gives it to you, and not before.

If you conduct a business, then your income is derived as and when the business recognises the revenue it has earned, by sending out accounts to it's clients. It does not matter whether the client has paid the account

The income is said to be ACCRUED as and when the accounts are sent out.

What about dividends from a company or distributions from trusts?

When are they derived?

Whenever the directors of the company declare a dividend out of profits,

or the trustees distribute the net income of the trust to it's beneficiaries.

Until that happens, the shareholders of the company, or the beneficiaries of the trust have not derived the income.

The Income Tax Assessment Act contains penalty provisions to ensure that the directors declare dividends and trustees distribute trust income on a regular basis or face the maximum tax rate on undistributed income.

This ensures that people do not 'park' the income on which they would otherwise pay tax in 'shelters'.

However, it all becomes a lot more difficult to enforce if the company or trust is not a resident of Australia. In such a case, a few good lawyers could arrange it so that such income was shuffled around between foreign entities for as long as the shareholder or beneficiary wanted to defer (or avoid) paying Australian income tax on it.

The solution: attributable taxpayers, controlled foreign companies/trusts and foreign investment funds

To overcome this problem, the Government introduced the Accruals Taxation System of the Act, and gave us the questions dealing with...

attributable taxpayers, and ....

controlled foreign companies and foreign trusts

foreign investment funds and life assurance policies

The general aim of this legislation is to treat the income of such trusts and companies in much the same way as the income of a sole proprietor of a business is treated - so that it is deemed to be derived as it accrues.

Putting it very crudely indeed, an ATTRIBUTABLE TAXPAYER will have the income of a FOREIGN CONTROLLED COMPANY in his assessable income, as and when the company derives that income, or the income is accrued, rather than when the dividend is declared.

Credits for foreign income tax

There was another reason for the introduction of the accruals tax system.

It is outlined in the Foreign Income Return Form Guide , published in 1991 by the Australian Government Publishing Service for the Commissioner of Taxation, and available from the Tax Office on request, or from the AGPS.

You will know that the Foreign Tax Credit System was introduced in the year ended 30/6/88 allowing a credit for foreign tax paid by the taxpayer.

This 'credits system' replaced an 'exemption system', which worked on the basis that if any foreign income was taxed by any other country, it was exempt from any Australian tax. You can see why tax havens (countries with very low tax rates) were so popular. If you could get a tax haven to tax your income at a low rate, you would avoid the Australian tax.

The credits system sought to remedy this situation by imposing Australian tax on all income of a resident, but allowing a credit for tax paid to another country.

For taxpayers engaged in genuine foreign business activity, it would not be uncommon for the tax paid on the income to foreign governments to be equal to, or even greater than, the tax payable in Australia.

In other words, you would go to the trouble and expense of working out the income and tax payable to the Australian Tax Commissioner,

then discover that the credit for the tax already paid to foreign countries in which the income was derived meant that no Australian tax was payable anyway.

Income excluded from attribution

To reduce compliance costs in cases, in which the credit for the tax payable to the foreign country in which the income is derived would outweigh the Australian tax liability, two broad categories of income are EXCLUDED FROM ATTRIBUTION. They are .....

Income taxed in a foreign country in a comparable way to which similar income is taxed in Australia, and...

Income derived from the ACTIVE CONDUCT of a trade or business.

How do you know if a country taxes income in a comparable way to Australia?

These countries are listed in the Regulations, so you can look them up.

There is also an exemption for resident companies, which receive NON PORTFOLIO DIVIDENDS from companies which are resident in LISTED COUNTRIES as well as COMPARABLY TAXED PROFITS derived by resident companies from branches in listed countries.