Private ruling: Conduit foreign income
Published: February 2015
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q2: Can Trust declare and pay a distribution of an unfranked distribution comprising non-assessable OBU income derived in the 2006-2014 income tax years received from Company as conduit foreign income to Individual, a non-resident beneficiary, free of Australian tax pursuant to section 802-17 of the Income Tax Assessment Act 1997 ?

Relevant facts and circumstances: 1. Company operates a business of which the principal activity is commodity trading advice. There has been no significant change in the nature of these activities in the period 1 July 2005 to now. 2. At all relevant times, Company's business has maintained an office in Australia where it employs staff to conduct the commodity trading advisory business. As at 1 July 2005, at all relevant times, Company's management with general authority to negotiate and conclude contracts on behalf of KG were situated in Australia. 3. In 2005, the Company was notified that it had been declared an offshore banking unit (OBU) for the purposes of Division 11 of Part III of the Income Tax Assessment Act 1936. 4. All of the OBU income has been derived from services provided to offshore clients under which any money payable is not Australian currency. 5. Company paid income tax in each year in respect of one third of its OBU income. 6. At all times, 100% of the shares in Company have been owned by a Trust. All dividends declared and paid during the period 1 July 2006 to now were to the Trust. 7. The trustee of the Trust has a broad discretionary power to distribute income to any one or more of the discretionary beneficiaries of the trust. The trustee of the Trust is a company in which are 100% owned by an Individual. 8. For all income years up to and including 2012, Individual was a resident of Australia for tax purposes. 9. In 2013, Individual ceased to be a resident of Australia for income tax purposes and established a principal place of residence in the X. 10. It is proposed that a distribution will be declared and paid on or before 30 June 2015.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 98 | Income Tax Assessment Act 1936 section 99 | Income Tax Assessment Act 1936 section 99A | Income Tax Assessment Act 1936 paragraph 128B(3)(gaa) | Income Tax Assessment Act 1936 subsection 121EA(b) | Income Tax Assessment Act 1936 section 121EG | Income Tax Assessment Act 1936 subdivision B of Division 11A | Income Tax Assessment Act 1997 section 802-10 | Income Tax Assessment Act 1997 section 802-15 | Income Tax Assessment Act 1997 section 802-17 | Income Tax Assessment Act 1997 section 802-30 | Income Tax Assessment Act 1997 section 802-35 | Income Tax Assessment Act 1997 section 802-50 | Income Tax Assessment Act 1997 Section 802-55 | Income Tax Assessment Act 1997 subsection 830-10(1) | Tax Laws Amendment (Loss Recoupment Rules and Other Measures) Act 2005

Reasons for decision: Summary: 1. Division 802 was inserted in the Income Tax Assessment Act 1997 (ITAA 1997) by the Tax Laws Amendment (Loss Recoupment Rules and Other Measures) Act 2005. 2. The 'conduit foreign income' (CFI) rules in Division 802 of the ITAA 1997 replaced a more limited withholding tax exemption in paragraph 128B(3)(gaa) of the Income Tax Assessment Act 1936 (ITAA 1936) which applied in relation to certain foreign dividend accounts (former subdivision B of Division 11A of the ITAA 1936). 3. According to section 802-10 of the ITAA 1997, the objects of the CFI rules are to encourage the establishment in Australia of regional holding companies for foreign groups and to improve Australia's attractiveness as a continuing base for its multinational companies. This is achieved by providing tax relief on certain distributions to foreign residents by Australian companies if those distributions relate to 'CFI' (in broad terms foreign income received by a foreign resident through an Australian corporate tax entity). Generally, the measure only applies to foreign income that is sheltered from Australian tax when it is received by the Australian corporate tax entity. 4. In 2007, the CFI rules were amended by inserting section 802-17 of the ITAA 1997 which applies in certain cases where CFI is paid to a trust with foreign resident beneficiaries who are presently entitled to that income. 5. Where it is declared to be CFI, an unfranked dividend paid by an Australian company to a foreign resident is non-assessable non-exempt income and isn't subject to section 128B of the ITAA 1936 by virtue of section 802-15 of the ITAA 1997. 6. Subsection 802-17(1) of the ITAA 1997 provides: So much of a share of the net income of a trust as is reasonably attributable to the whole or a part of the *unfranked part of a *frankable distribution made by an *Australian corporate tax entity that the entity declares, in its *distribution statement, to be *conduit foreign income: (a) is not assessable income and is not *exempt income of a beneficiary of the trust who: (i) is a foreign resident; and (ii) is presently entitled to the share of the income of the trust; and (b) is an amount to which section 128B (Liability to withholding tax) of the Income Tax Assessment Act 1936 does not apply. | Detailed Reasoning - Payment of CFI via a trust under section 802-17 of the ITAA 1997: 7. Company is owned by Trust which is an Australian resident trust and it is proposed that the distribution of CFI would be passed on in full to Individual who is not an Australian resident for taxation purposes and is presently entitled to the share of income of the trust. 8. CFI distributed to Individual via Trust qualifies for the CFI exemption from Australian tax to the extent that it is its share. As Trust is a discretionary trust and it is within the powers of the trustee to distribute the dividends received to Individual, Division 802 of the ITAA 1997 allows for: (a) the trust to receive, as the total or a proportion of its net income, an unfranked distribution from Company that has been declared as CFI; (b) Company to make the CFI declaration on or before the day that the distribution is made; and (c) after receiving the CFI distribution, the trust to distribute income to Individual who will be a presently entitled, non-resident beneficiary. 9. The proposed distribution by Company will form part of the net income of Trust and will be reasonably attributable to the unfranked (but frankable) dividend paid by Company. 10. Furthermore the trustee will not be assessed under sections 98, 99 or 99A of the ITAA 1936 in accordance with subsection 802-17(3) of the ITAA 1997. 11. Whether the income received by Trust as a distribution from Company is CFI is determined by applying sections 802-30 to 802-55 of the ITAA 1997. 12. It is assumed for the purposes of this private ruling that none of the requirements in sections 802-35 to 802-55 of the ITAA 1997 reduce Company's CFI amount. | Detailed Reasoning - Conduit foreign income: Amount of ordinary income or statutory income derived by Company that has been, is or will be included in an income statement or similar statement of Company - subsection 802-30(1)of the ITAA 1997 13. This requirement is satisfied as the income from Company's overseas business unit (OBU) activity is ordinary income and is disclosed in its annual financial statements. Amount would not be included in Company's assessable income if it were a foreign resident at the relevant time - paragraph 802-30(1)(a)of the ITAA 1997 14. The relevant OBU income would not have been included in Company's assessable income if were a foreign resident. Although it would have been derived from an Australian source (actually or deemed by virtue of section 121EJ of the ITAA 1936), it was derived from eligible OBU activity such that it would have been excluded from Company's assessable income under section 121EG of the ITAA 1936. 15. Given the required assumption under subsection 830-10(1) of the ITAA 1997 that Company was a foreign resident at the relevant time, Company's trading would have had to be done in Australia at or through a permanent establishment in order for the relevant OBU income to be excluded from its assessable income (see subsection 121EA(b) of the ITAA 1936). 16. Accordingly, this requirement is satisfied as the income was derived from OBU activity done in carrying on business in Australia. Reduce by amounts included in Company's assessable income - section 802-30(2) of the ITAA 1997 17. Amounts included in Company's assessable income (i.e. one third of its OBU income) has already been distributed and do not form part of the retained earnings available for the proposed distribution. | Detailed Reasoning - Conclusion - foreign source income: 18. As sections 802-30 to 802-55 of the ITAA 1997 are satisfied, Company may declare the proposed distribution be CFI (on or before the day it actually makes the proposed distribution). 19. In addition, as the distribution is considered CFI, section 128B of the ITAA 1936 will not apply as specified in paragraph 802-17(1)(b) of the ITAA 1997. | Detailed Reasoning - Conclusion - section 807-17 of the ITAA 1997: 20. Company, an Australian corporate tax entity, can declare and pay an unfranked distribution, being conduit foreign income and comprising OBU income, to Trust. 21. Trust can declare and pay this amount to Individual, a foreign resident and presently entitled to the share of the income of Trust. The amount received by Individual will be not assessable and not exempt income and therefore free of Australian tax.

Question 1: Can Company declare and pay an unfranked distribution comprising non-assessable OBU income derived in the 2006-2014 income tax years as conduit foreign income to the Trust for the benefit of Individual pursuant to section 802-17 of the Income Tax Assessment Act 1997 ?