Tax & Superannuation: International - Guides
International
4. Accrual Taxation
Firm / Chambers:
Last updated: 31 Jul 2015
- The rules of accrual taxation are designed to tax residents on their share of income derived by certain foreign entities in which they have interest. This means that even if you had not received any direct income from abroad you may still be deemed to have received income for tax purposes. This income will be taxed in Australia as attributed income from the foreign company.
- The most significant rules of accrual taxation relate to controlled foreign companies (CFCs). These rules are aimed at taxing tainted income of certain related foreign companies. This tainted income is generally:
- interest;
- dividends;
- royalties; and
- gains from transactions between related parties.
- Taxation of such income depends on the country in which the foreign company is resident. For this purpose countries are divided into ‘listed’ and ‘unlisted’ countries.
- Under the CFC rules no income will be attributed to a resident if more than 95% of that income is derived by the foreign company from genuine business activities. This is referred to as active income.
- A foreign company will be taken to be a CFC if it satisfies any one of the following control tests:
- five or fewer Australian residents have or are entitled to acquire at least a 50% associate inclusive control interest in the foreign company; or
- a single Australian resident has at least 40% control interest in the foreign company and no others have greater control of the foreign company; or
- irrespective of whether there is a group of Australian residents who have the requisite control interest in the foreign company it will be considered a CFC if it is under actual control by a group of five or fewer Australian residents.
- Associate inclusive control interest is the aggregate of the direct and indirect control interest held by the taxpayer and the taxpayer’s associates.
- Only attributable taxpayers will have the income of a CFC attributed to them to be taxed in Australia. Unless you have a minimum of 10% associate inclusive controlling interest you will not have the income of a CFC (attributable income) attributed to you.
- If you are one of the five in the group referred to above then you can avoid attribution only if you have less than 1% associate inclusive controlling interest in the CFC. As such although you may be one in the group that is considered to have actual control of the CFC you may be able to avoid being an attributable taxpayer in respect of that CFC.
- Attribution of income will be based on the ‘attribution percentage’ of the resident taxpayer. This depends on the total of your direct and indirect control interest in the CFC.
- If you are an attributable taxpayer you are required to maintain records for five years showing the basis on which the attributable income was calculated.
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