Ap_att05

Relaxing the attribution test for companies in listed countries

Why we are not so concerned about income from a listed country

TAINTED INCOME TEST for the resident of a listed country

TAINTED INCOME TEST: what is ELIGIBLE DESIGNATED CONCESSION INCOME?

TAINTED INCOME TEST: What is TAINTED ELIGIBLE DESIGNATED CONCESSION INCOME?

PASSING the ACTIVE INCOME TEST in LISTED COUNTRY=NO attribution concessions

By now you should know if you are an ATTRIBUTED TAXPAYER- if you don't go back and look at the topic which explained this

You should also know whether the company which provides you with income is a CONTROLLED FOREIGN COMPANY - if not look at that topic.

But so what?

If you are an attributable taxpayer of a controlled foreign company, then the income you derive may be taxed as it accrues, rather than when it is remitted to you in Australia.

Remember, this legislation is aimed at income, which may be the result of tax avoidance, rather than income arising from genuine business activity.

So if the controlled foreign company is mainly engaged in active business, it will not be affected by the accruals tax system.

How do you work out whether a company is mainly engaged in active business?

The ACTIVE INCOME TEST - that's how!

What is the ACTIVE INCOME TEST?

If a company derives most of it's income from the sorts of receipts that could be said to be prone to tax minimisation, that might indicate that it is engaged in tax minimisation rather than genuine business.

Such receipts are referred to as TAINTED INCOME and if they represent more than 5% of the overall level of low taxed income they will trigger the application of the accruals legislation - that's the ACTIVE INCOME TEST.

How does a company satisfy the ACTIVE INCOME TEST?

There are 5 tests. We have looked at them in the previous topic on the ACTIVE INCOME TEST for UNLISTED COUNTRIES. If you want to refresh your memory on the first 4 of these you can look at that topic again.

We will look at the fifth one, which is the TAINTED INCOME RATIO now, but before we do that, just pause to consider the aim of the legislation.

The legislation aims to ATTRIBUTE income derived by CONTROLLED FOREIGN COMPANIES to the Australian residents which control them, AS THE INCOME ACCRUES, rather than when it is remitted to Australia.

Remember, a listed country is one with a tax system comparable to that in Australia.

So if the controlled foreign company is a resident of a listed country, it is likely that the tax paid by the foreign company to it's country of residence will be about the same as that which would be payable to the Australian Commissioner of Taxation. So the credit for the foreign tax paid will cancel out its Australian tax liability.

Because of this, the TAINTED INCOME TEST for LISTED COUNTRIES is easier to

satisfy than the TAINTED INCOME TEST for UNLISTED COUNTRIES.

It would probably be a good idea to work out exactly what a LISTED COUNTRY is before we go too much further...

What is a listed country?

A LISTED COUNTRY is one with a comparable tax system to that in Australia.

A list of such countries is found in regulation 152J, schedule 10, which is reproduced at para 21-130 CCH Master Tax Guide.

The way the income of the controlled foreign company is treated will depend on whether the company is resident in a LISTED or UNLISTED country.

Sec 332 defines a company as a resident of a listed country if....

the company is NOT a Part X Australian resident

and the company is treated as a resident of the listed country for purposes of the tax law of the listed country.

Let's break that definition up into it's 2 parts.

First part = the company is NOT a Part X Australian resident. In other words, the company does not come within the definition of resident, the main definitions section of the Income Tax Assessment Act.

If you are wondering what a company has to do to conform to this definition, it must be incorporated in Australia,

or if not, carry on business in Australia and have either

its central management and control in Australia or

its voting power controlled by shareholder who are residents of Australia.

If you refer to the definition of Part X Australian resident, or paragraph 21-160 CCH Master Tax Guide, you will notice that the definition is a little more complicated than this. Where the company could be said to have a dual resident status (resident in more than one country) and a double tax agreement provides rules for specifying a sole country of residence, but we won't stop to examine that now - look it up if you are interested.

So the resident of a listed country can not be a resident of Australia.

Now we know what a LISTED COUNTRY is but what is the TAINTED INCOME TEST for the resident of a listed country?

What is the TAINTED INCOME TEST for the resident of a listed country?

TAINTED INCOME RATIO must be less than 5%

And what is the TAINTED INCOME RATION

	TAINTED ELIGIBLE DESIGNATED CONCESSION INCOME
TAINTED INCOME RATIO =	---------------------------------------------
	ELIGIBLE DESIGNATED CONCESSION INCOME

So what is ELIGIBLE DESIGNATED CONCESSION INCOME?

Remember, we are trying to work out if the credit for the tax paid by the foreign controlled company will cancel out any Australian tax payable.

This is the most likely case for listed countries, which have a comparable tax system to that in Australia.

The only income that might not generate enough tax credits to cancel the Australian tax liability will be that which is taxed at concessional rates by the foreign country in which it is resident ... in other words ... ELIGIBLE DESIGNATED CONCESSION INCOME

To be a bit more rigorous, we can say ELIGIBLE DESIGNATED CONCESSION INCOME is THAT PART OF GROSS TURNOVER that

is designated as a concession by the Income Tax Regulations

is not taxed in the listed country, OTHER THAN as a designated concession.

Do you remember what GROSS TURNOVER is?

(You can look at the last topic if the following does not make much sense)

GROSS TURNOVER is

the sum of the low taxed net gains from certain transactions

and other low taxed gross revenue.

Calculating the Gross Turnover in 5 steps...

1. Get total gross revenue

2. Deduct those amounts that have been taxed in Australia/listed countries

3 & 4 Add net capital gains by deducting gross proceeds of sales of assets included in total revenue, then adding back the net gain

5. Add the share of gross turnover of each partnership in which the company is a partner.

So…

ELIGIBLE DESIGNATED CONCESSION INCOME is the part of GROSS TURNOVER that is taxed at concessional rates by the country of residence.

So, before you can apply the TAINTED INCOME TEST to a company resident in LISTED COUNTRY - you have to be able to work out GROSS TURNOVER. If you want to think a bit more about how this is done, you can go back to the last topic...

If you are confident you can visualise the steps required to get GROSS TURNOVER, you are ready to contemplate the wonders of ELIGIBLE DESIGNATED CONCESSION INCOME.

All you have to do is identify the part of the gross revenue

less amounts taxed in Australia or other LISTED COUNTRIES

less the gross proceeds of capital transactions

(Remember we want net capital gains - not gross proceeds of sales of assets)

Concessionally taxed revenue

Revenue taxed in Australia or listed countries

Gross Proceeds Disposals

NEXT,

NET CAPITAL GAINS THAT HAVE BEEN TREATED AS CONCESSION INCOME

Work out the part of the NET gain from the disposal of

assets (other than trading stock or commodities)

commodity investments

currency exchange rate fluctuations

THAT HAVE NOT BEEN TAXED in any listed country OTHER THAN AS A CONCESSION or are designated as a concession by the Income Tax Regulations

Concessionally taxed revenue

Revenue taxed in Australia or listed countries

Gross Proceeds Disposals

Net Proceeds Disposals treated as Concessions

Last of all, identify the share of the controlled company of the ELIGIBLE DESIGNATED CONCESSION INCOME of any partnerships of which it is a partner, and add those amounts to the total.

Concessionally taxed revenue

Revenue taxed in Australia or listed countries

Gross Proceeds Disposals

Net Proceeds Disposals treated as Concessions

ELIGIBLE DESIGNATED CONCESSION INCOME of any partnerships

What is TAINTED ELIGIBLE DESIGNATED CONCESSION INCOME?

PASSIVE INCOME

TAINTED SALES

TAINTED SERVICES INCOME

Let's start with PASSIVE INCOME. It includes

dividends

tainted interest income

annuity income

tainted rental income

amounts derived as consideration for the assignment... of copyright, patent, design, trade mark or other like property or right

net gains on disposal of tainted assets

income derived from carrying on a business of trading in tainted assets

net tainted commodity gains

net tainted currency exchange gains

So now we know what PASSIVE INCOME is - but what is tainted sales and tainted services income?

The short answer is that tainted sales and tainted services income is income from certain transactions

with,

or originating from,

associates or Australian residents.

So now we can go through the calculation of ELIGIBLE DESIGNATED CONCESSION

INCOME looking for TAINTED INCOME

PASSIVE INCOME

TAINTED SERVICES INCOME

TAINTED SALES INCOME

Having done this, we deduct...

amounts taxed in Australia or other LISTED COUNTRIES

the gross proceeds of capital transactions

(remember we want net capital gains - not gross proceeds of sales of assets)

NOW, identify that part of the NET GAINS, which are NET TAINTED GAINS

These are sum of the parts of the NET GAINS from

disposal of tainted commodity investments

tainted currency exchange rate fluctuations

disposal of tainted assets

Now add the company's share of GROSS TAINTED TURNOVER of each partnership in which it is a partner.

ELIGIBLE DESIGNATED CONCESSION INCOME is income which has NOT been taxed

The only income which has not been taxed is the ROYALTY income which is also TAINTED - see the definitions of tainted income.

tainted income ratio is 4,000,000 / 4,000,000 = 100% which is less than 5%