ATO ID 2003/289: Foreign Investment Funds - Reduction of disposal consideration where amounts were previously attributed
Date of decision: 27 November 2002
Year of income: Year ended 30 June 2002
Business line: Public Groups and International

Issue
Does section 613 of the Income Tax Assessment Act 1936 (ITAA 1936) operate to reduce amounts that would otherwise be included in the assessable income of the taxpayer in respect of its share of the realised profits derived by unit trusts from the sale or redemption of the investments in non-exempt Foreign Investment Funds (FIFs) by amounts previously attributed from those FIFs, which have not been distributed.

Decision
Yes. Section 613 of the ITAA 1936 will operate to reduce those amounts.

Facts
The taxpayer is a company incorporated in Australia and is a unit holder in Australian resident fixed unit trusts. These unit trusts are not: The unit trusts invest in international property trusts and property stocks listed on foreign stock exchanges and in private equity real estate funds, which in turn invest in a diversified portfolio of real estate assets and real estate operating companies. A number of the investments held by the unit trusts are non-exempt FIF interests for the purposes of Part XI of the ITAA 1936. The unit trusts will sell or redeem their investments in the non-exempt FIFs either as a result of turning over their investment portfolio or as a result of the ultimate winding up of the unit trusts. The unit trusts will realise profits when they sell or redeem their investments in the non-exempt FIFs. The FIF income from these investments is calculated using the market value method or the deemed rate of return method. The taxpayer is assessable on its share of the net income of the unit trusts under section 97 of the ITAA 1936 (including its share of gains realised from the sale or redemption of investments in FIFs by the unit trusts). Furthermore, the taxpayer will be required to maintain FIF attribution accounts which will be credited when attribution from the respective FIF occurs (subsection 605(1) of the ITAA 1936). The taxpayer has a surplus in the FIF attribution account maintained by it in respect of the FIF investments which have been sold or redeemed by the unit trusts. The surplus reflects the fact that the taxpayer has previously been assessed on its share of the income of the unit trusts, which includes amounts assessed under the FIF provisions on undistributed FIF income in respect of those FIF investments.

Reasons for decision
Summary: When an interest in a FIF entity is disposed of for a profit or gain, that profit or gain will normally be taken into account in the calculation of the taxpayer's assessable income. To avoid double taxation, section 613 of the ITAA 1936 operates to deem the consideration received or the capital proceeds on the disposal of an interest in a FIF entity, to be reduced by any amount previously attributed to a taxpayer that has not been distributed to the taxpayer. This amount cannot exceed the consideration or capital proceeds. When the unit trusts sell or redeem their interests in the non-exempt FIFs for a profit or gain section 613 of the ITAA 1936 will operate to reduce the sale or redemption proceeds. The taxpayer's share of the profit or gain realised from the sale or redemption of investments in non-exempt FIFs by the unit trusts will be reduced under section 613 of the ITAA 1936. Note: The FIF attribution account balance will be reduced by the amount of the FIF attribution surplus that was taken into account in reducing the consideration or capital proceeds (subsection 605(8) of the ITAA 1936).

Legislative references: Income Tax Assessment Act 1936 subsection 96A(4) section 97 subsection 605(1) subsection 605(8) section 613 Division 6B Division 6C Part IX Part XI
Subject references: Foreign investment funds Disposal of interest in a FIF