Private ruling: Controlled Foreign Company
Published: November 2012
Ruling period: Year ended 30 June 2009 | Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012 | Year ending 30 June 2013
Date scheme commenced: On or after 1 January 2008

Ruling: Question and Answer | Is the attributable income of a foreign company, attributable under section 456 of the Income Tax Assessment Act 1936 (ITAA 1936) to you, an Australian resident holding 100% equity interest in the foreign company? | Yes.

Relevant facts and circumstances: You are an Australian resident for tax purposes. You have a 100% equity interest in a company incorporated in a unlisted country The company has been dormant since its incorporation. It intends to commence its business in the unlisted country. The principal activities of the company are to be provision of wealth management and advisory services. The company is going to rent an office in the unlisted country through which its main business will be carried on. The company will hire a local employee in the unlisted country who is going to be stationed in the unlisted country and will be attending to marketing and administrative duties at the start-up stage. Further staff will be hired to provide the services as the business develops. The company will not be providing any services to a Part X of the Income Tax Assessment Act 1936 Australian resident or a non-resident, in connection with a business carried on by the non-resident at or through a permanent establishment in Australia, either directly or indirectly. The company will not have any subsidiaries, associates or branches in the unlisted country or elsewhere. The company will not be providing services via any form of associated entities. There will be no ownership transition during the business commencement. The company will continue to be owned by you. Other incomes that will be generated by the company are bank interest income and currency exchange gains/losses. The interest income will be from pure bank deposits in the unlisted country or elsewhere other than in Australia. The currency exchange gains/losses will be generated from receipts/payments from/to clients/suppliers through the currency used that is different to the company's functional currency. The currency exchange gains/losses will be generated from the company's genuine active business activities. The company is not expecting to derive any other kind of significant income, being tainted or non-tainted, such as tainted rental income, tainted royalty income, net gains on disposal of tainted assets, dividends and tainted sales income. The company has no intention to conduct a business to obtain such income. The company is not expecting to derive any of the following income: · FIF income derived directly or indirectly as a partner in a partnership · Trust amounts arising to the company directly · Trust amounts arising to the company indirectly because the company is a partner in a partnership · Transferor trust amounts arising to the company directly or indirectly as a partner in a partnership. Any tainted generated by the company will be less than 5% of the gross turnover of a given statutory period. The company's statutory accounting period ends on 30 June. The company will keep accounts in accordance with commercially accepted accounting principles and produce accounts which give a true and fair view of its financial position of a statutory accounting period. The company will comply with all relevant rules that are necessary to comply with to pass the active income test under section 432 of the ITAA 1936: · be in existence at the end of its statutory accounting period and be a resident of a listed or unlisted country at all times during the accounting period when the company was in existence · have at all times carried on business through a permanent establishment in its country of residence · maintain accounts which are prepared in accordance with accounting standards and give a true and fair view of the financial position of the company · have less than 5% of its gross turnover as stated in its recognised accounts in the form of tainted income.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 384 | Section 456 | Section 432

Reasons for decision: Detailed Reasoning - Background explanation of the CFC regime: Section 456 of the ITAA 1936 attributes certain income of a CFC on an accruals basis to an Australian resident taxpayer that has at least a 10% associate-inclusive interest in the CFC. To have an amount included in a taxpayer's assessable income under section 456 there must be a CFC which has attributable income for a statutory accounting period in respect of an attributable taxpayer. Therefore to determine whether section 456 applies, we need to consider: · Whether there is a CFC · Whether there is an attributable taxpayer · What is the attributable taxpayer's attribution percentage? · What is the attributable income for the CFC? There is a CFC and you are an attributable taxpayer with a direct control interest and direct attribution interest of 100% being sole ownership of the COMPANY. Accordingly you will be assessable on all the attributable income of THE COMPANY in terms of section 456 of the ITAA 1936 unless the company passes the active income test. Where a CFC which is a resident of an unlisted country does not pass the active income test under section 432 of the ITAA 1936, it is required under section 384 to include any adjusted tainted income (i.e. passive income, tainted sales and tainted services income) in its notional assessable income for attribution purposes. The active income test (section 432) requires a CFC to satisfy each of the following basic conditions: · be in existence at the end of its statutory accounting period and be a resident of a listed or unlisted country at all times during the accounting period when the company was in existence · have at all times carried on business through a permanent establishment in its country of residence · maintain accounts which are prepared in accordance with accounting standards and give a true and fair view of the financial position of the company · have less than 5% of its gross turnover as stated in its recognised accounts in the form of tainted income. You confirm the company will comply with all of the above conditions. As the company passes the active income test, it does not need to include any adjusted tainted income. Accordingly as you are an attributable taxpayer will need to include in your assessable income all of the company's attributable income.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.