ATO ID 2006/180: Controlled Foreign Companies: cost base of assets owned by the CFC when it first becomes an eligible CFC
Date of decision: 20 July 2006
Year of income: Year ended 30 June 2004
Business line: Public Groups and International

Issue
Will a controlled foreign companies (CFC's) commencing day under section 406 of the Income Tax Assessment Act 1936 (ITAA 1936) in relation to an attributable taxpayer be the first day that the attributable taxpayer acquires a controlling interest in a CFC that was already an eligible CFC?

Decision
No. The CFC's commencing day under section 406 of the ITAA 1936 is the first day the CFC became an eligible CFC or 30 June 1990 whichever is the later.

Facts
A foreign company is a CFC and an Australian resident company (A Co) is an attributable taxpayer in relation to that CFC. Subsequently, another Australian resident company (B Co) acquires a controlling interest in the CFC and becomes an attributable taxpayer in relation to that CFC.

Reasons for decision
Summary: Section 406 of the ITAA 1936 sets out what day the 'commencing day' is for a CFC. This is relevant to calculating the cost base of the CFC's assets when applying the capital gains tax rules to calculate the CFC's attributable income. Section 406 of the ITAA 1936 provides, as relevant, that 'in calculating the attributable income of the eligible CFC, the eligible CFC's commencing day is' either 30 June 1990 or 'the first day after 30 June 1990 at the end of which the eligible CFC was a CFC' whichever is the later. At issue is whether, when calculating the attributable income in relation to an attributable taxpayer, a CFC's commencing day is the first day on which the foreign company becomes an eligible CFC or whether it is the first day on which the attributable taxpayer becomes an attributable taxpayer in relation to the CFC. Section 381 of the ITAA 1936 provides that, where at the end of a statutory accounting period of a company, the company is a CFC and there are one or more attributable taxpayers in relation to the company, the attributable income of the company is calculated separately for each attributable taxpayer. The company is called the 'eligible CFC'. So, to be an 'eligible CFC', the company must be a CFC and there must be one or more attributable taxpayers (within the meaning of section 361 of the ITAA 1936) in relation to it. Section 406 of the ITAA 1936 provides that the commencing day is the first day on which the CFC becomes an eligible CFC or 30 June 1990, whichever is the later. To be an eligible CFC, section 381 of the ITAA 1936 states that there must be one or more attributable taxpayers in relation to the CFC at the end of a statutory accounting period. The CFC is then an eligible CFC. Under the terms of section 381, once there are one or more attributable taxpayers in relation to a CFC, the CFC is then an eligible CFC. Once the CFC is an eligible CFC for the purposes of section 381, the commencing day under section 406 is the first day on which the CFC becomes an eligible CFC or 30 June 1990, whichever is the later. Therefore, the commencing day under section 406 of the ITAA 1936 is the first day the foreign company becomes a CFC and there is an attributable taxpayer in relation to that CFC, even though B Co was not an attributable taxpayer is the in relation to the CFC at that time. The cost base of the assets owned by the CFC at the end of that day is, under section 412 of the ITAA 1936, the greater of the market value at the end of that day or the cost base on that day.

Legislative references: Income Tax Assessment Act 1936 section 406 section 412 section 361 section 381
Subject references: Controlled foreign companies International tax