Private ruling: Controlled Foreign Company - tainted assets - trading stock
Date of advice: 11 March 2026
Published: 28 April 2026
Ruling period: Year ended 30 June 2024
Date scheme commenced: 1 July 2023

Ruling: Q1: Were you a Controlled Foreign Company (CFC) under Part X of the Income Tax Assessment Act 1936 (ITAA 1936) until you became an Australian resident on DDMMYYYY? | A1: Yes. | Q2: Are the digital tokens you held at the time you became an Australian resident tainted assets as defined in section 317 of the ITAA 1936? | A2: No. | Q3: Does section 70-30 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to deem a sale and purchase of any digital tokens held by you as trading stock when you became an Australian resident? | A3: No.

Relevant facts and circumstances: You were incorporated an unlisted country. Your equal shareholders are: • Individual 1, and • Individual 2 as trustee for the Individual 2 Trust. When you were incorporated: • Individual 1 was a foreign resident and an employee pf Company A, and • Both Individual 2 and the Individual 2 Trust were (and are) residents of Australia for tax purposes. From incorporation until DDMMYYYY your sole director was a corporate entity based in the unlisted country. The corporate entity held all its board meetings in the unlisted country. You were created to participate in the launch of the Z Network. The Z network is a blockchain. Z Network has a native digital token. On DDMMYYYY, the Z Network launched. A large number of native digital tokens were issued to various parties upon launch. Upon the launch you received an airdrop of native digital tokens on the Z Network. The native digital tokens are known as 'utility tokens' (as compared to 'security tokens') and do not represent ownership in a company or share in profits. The native digital tokens have none of the features of a traditional security, in particular: • they were not offered for consideration • there was no pooling of funds • they bear no right to income distributions from the issuer or to principal repayments, and • they bear no priority or otherwise favourable rights in future token issuances. You are are one of the entities responsible for running a reliable, enterprise-grade validator (server) necessary to launch the network and ensure its integrity. You have a Token Disposal policy. Individual 1 is appointed to be your agent for various purposes including to 'use the Company's private keys to sign Z Network transactions contemplated by the Token Disposal Policy.' An r-address was created by Individual 1, and they hold the private keys to sign any transactions from this address. You recorded the native digital tokens at zero cost as at the time of the airdrop there was no market for native digital token and neither the token nor the coin had ever traded. With the benefit of their prior experience Individual 1 has been the principal architect and author of the Z Network. Only Individual 1 can physically perform any transactions on the Z Network from that address. In contrast, Individual 2's involvement in the project can be described as passive. You have disposed of a considerable number of the native digital tokens you received when the Z Network was launched. On DDMMYYY, Individual 1 relocated his family from the foreign country to Australia. On that day, you still held a significant number of native digital tokens On DDMMYYYY, your shareholders resolved to retire the corporate director in the unlisted country and appoint Individual 1 and Individual 2 as directors.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 6(1) | Income Tax Assessment Act 1936 Part X | Income Tax Assessment Act 1936 section 317 | Income Tax Assessment Act 1936 subsection 317(1) | Income Tax Assessment Act 1936 subsection 320(1) | Income Tax Assessment Act 1936 subsection 333(1) | Income Tax Assessment Act 1936 subsection 333(2) | Income Tax Assessment Act 1936 section 340 | Income Tax Assessment Act 1936 section 446 | Income Tax Assessment Act 1936 section 447 | Income Tax Assessment Act 1936 section 448 | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 70-10 | Income Tax Assessment Act 1997 section 70-30 | Income Tax Assessment (1936 Act) Regulation 2015 section 19

Reasons for decision: Summary: You are a company and were a resident of an unlisted country. In addition, the Individual 2 Trust, an Australian resident trust, has held 50% of the shares in you since incorporation. As such, you were a CFC until you became an Australian resident on DDMMYYYY. | Detailed Reasoning - Detailed reasoning: A company is a CFC at a particular time if, at that time, the company is a resident of a listed country or of an unlisted country and any of the following paragraphs applies: (a) at that time, there is a group of 5 or fewer Australian 1% entities the aggregate of whose associate-inclusive control interests in the company is not less than 50% (b) both of the following subparagraphs apply: (i) at that time, there is a single Australian entity (in this paragraph called the assumed controller ) whose associate-inclusive control interest in the company is not less than 40% (ii) at that time, the company is not controlled by a group of entities not being or including the assumed controller or any of its associates (c) at that time, the company is controlled by a group of 5 or fewer Australian entities, either alone or together with associates (whether or not any associate is also an Australian entity) (section 340 of the ITAA 1936). A listed country means a foreign country, or a part of a foreign country, that is declared by the regulations to be a listed country for the purposes of this Part [Part X of the ITAA 1936] (subsection 320(1) of the ITAA 1936). For the definition of listed country in subsection 320(1) of the ITAA 1936, each of the following is declared to be a listed country for the purposes of Part X of the ITAA 1936: (a) Canada (b) France (c) Germany (d) Japan (e) New Zealand (f) United Kingdom, and (g) United States of America (section 19 of the Income Tax Assessment (1936 Act) Regulation 2015 ). An unlisted country means: (a) a foreign country that does not (either in whole or in part) consist of a listed country or listed countries, or (b) if one or more parts of a foreign country are listed countries - the remainder of that foreign country (subsection 320(1) of the ITAA 1936). For the purposes of Part X of the ITAA 1936, a company is a resident of an unlisted country at a particular time if, and only if: (a) the company is, in accordance with subsection (2), a resident of a particular unlisted country at that time, or (b) paragraph (a) does not apply and the company is at that time neither: (i) a Part X Australian resident, nor (ii) a resident of a particular listed country (subsection 333(1) of the ITAA 1936. For the purposes of Part X of the ITAA 1936, a company is a resident of a particular unlisted country (in this section called the unlisted country of residence) at a particular time if, and only if: (a) the company is not a Part X Australian resident at that time, and (b) the company is not treated as a resident of a listed country at that time for the purposes of the tax law of the listed country, and (c) any of the following subparagraphs applies: (i) both of the following conditions are satisfied at that time: (A) the company is treated as a resident of the unlisted country of residence for the purposes of the tax law of the unlisted country of residence, (B) the company is not treated as a resident of any other unlisted country for the purposes of the tax law of the unlisted country, (ii) both of the following conditions are satisfied at that time: (A) the company is treated as a resident of the unlisted country of residence and at least one other unlisted country for the purposes of the tax laws of each of those unlisted countries, (B) the company is incorporated in the unlisted country of residence (iii) both of the following conditions are satisfied at that time: (A) the company is not treated as a resident of any unlisted country for the purposes of the tax law of the unlisted country, (B) the company's management and control is solely or principally located in the unlisted country of residence, (iv) all of the following conditions are satisfied at that time: (A) the company is not treated as a resident of any unlisted country for the purposes of the tax law of the unlisted country, (B) the company's management and control is not solely or principally located in the unlisted country of residence (C) the company is incorporated in the unlisted country of residence (subsection 333(2) of the ITAA 1936). A Part X Australian resident means a resident within the meaning of section 6 (of the ITAA 1936?), but does not include an entity where: (a) there is a double tax agreement in force in respect of a foreign country, and (b) that agreement contains a provision that is expressed to apply where, apart from the provision, the entity would, for the purposes of the agreement, be both a resident of Australia and a resident of the foreign country, and (c) that provision has the effect that the entity is, for the purposes of the agreement, a resident solely of the foreign country (subsection 317(1) of the ITAA 1936). In the ITAA 1936, unless the contrary intention appears, resident or resident of Australia means (in the context of a company), a company which is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia (subsection 6(1) of the ITAA 1936). | Detailed Reasoning - Application to your circumstances: The following factors need to be established in order for a company to be a CFC: (i) is the entity a company? (ii) is the company a resident of either a listed country or an unlisted country? (iii) is there a group of five or fewer Australian 1% entities, the aggregate of whose associate inclusive control interests in the company, is not less than 50%? (strict control test) In regard to the above (i) you are a company incorporated in the unlisted country (ii) you were a resident of an unlisted country until you became an Australian resident, and (iii) the Individual 2 Trust, an Australian resident trust, has held exactly 50% of the shares in you since incorporation. As such, you were a CFC until you became an Australian resident on DDMMYYYY. | Summary: The native tokens do not appear to have the characteristics or features of a security, or any of the other asset types listed in the definition of tainted assets. The tokens also do not appear to constitute a financial instrument that is similar to those listed in that definition. As such, the native digital tokens are not tainted assets. | Detailed Reasoning - Detailed reasoning: Tainted asset, in relation to a company, means: (a) any of the following: (i) loans (including deposits with a bank or other financial institution) (ii) debenture stock, bonds, debentures, certificates of entitlement, bills of exchange, promissory notes or other securities (iii) shares in a company (iv) an interest in a trust or partnership (v) futures contracts (vi) forward contracts (vii) interest rate swap contracts (viii) currency swap contracts (ix) forward exchange rate contracts (x) forward interest rate contracts (xi) life assurance policies (xii) a right or option in respect of such a loan, security, share, interest, contract or policy (xiii) any similar financial instrument; or (b) an asset that was held by the company solely or principally for the purpose of deriving tainted rental income, or (c) an asset other than: (i) trading stock, or (ii) any other asset used solely in carrying on a business but does not include a commodity investment (subsection 317(1) of the ITAA 1936). Taxation Determination TD 93/168 Income tax: foreign income - can 'trading stock' and 'other assets used solely in carrying on a business' come within the definition of 'tainted asset' in section 317? (TD 93/168) provides that assets which fall within paragraph (a) or (b) of the definition of 'tainted asset' are tainted whether or not they are trading stock or otherwise used solely in carrying on a business. | Detailed Reasoning - Application to your circumstances: Digital assets such as cryptocurrency, security tokens and utility tokens are not specifically listed as 'tainted assets' in subsection 317(1) of the ITAA 1936. However, consideration needs to be given as to whether the native digital tokens are other securities (subparagraph 317(1)(a)(ii) of the ITAA 1936) or similar financial instruments (subparagraph 317(1)(a)(xiii) of the ITAA 1936). The terms 'other securities' and 'financial instruments' are not defined in the ITAA 1936 or ITAA 1997.. | Detailed Reasoning - Is the native digital token a security?: The term 'other securities' is not a defined term in Part X of the ITAA 1936, and accordingly, the question of whether the native digital tokens are properly characterised as falling within 'other securities' will need to be determined by reference to its ordinary meaning. The precise wording of subparagraph 317(1)(a)(ii) of the ITAA 1936 is: (ii) debenture stock, bonds, debentures, certificates of entitlement, bills of exchange, promissory notes or other securities The Commissioner's view of the ordinary meaning of 'security' is found in the interpretation of the statutory definition of 'security' in subsection 159GP(1) of the ITAA 1936 which provides: " security " means: (a) stock, a bond, debenture, certificate of entitlement, bill of exchange, promissory note or other security, (b) a deposit with a bank or other financial institution, (c) a secured or unsecured loan, or (d) any other contract, whether or not in writing, under which a person is liable to pay an amount or amounts, whether or not the liability is secured. Although the wording of subparagraph 317(a)(ii) of the ITAA 1936 is not exactly the same as that used in paragraph 159GP(1)(a) of the ITAA 1936, the securities mentioned in each of the provisions are essentially the same. The Commissioner's views in this regard are set out in Taxation Ruling TR 96/14 Income Tax: Traditional Securities (TR 96/14). Specifically, the following interpretation is provided there: • paragraph (a) of the definition of 'security' in subsection 159GP(1) of the Act includes securities which are generally regarded as debt instruments. Having regard to paragraphs (a), (b) and (c) of the definition, only those contracts that have debt like obligations will usually fall under paragraph (d) of the definition (paragraph 4(i) of TR 96/14) • paragraph (a) of the definition refers to items which are usually taken to be a security, with the normal meaning of security being to denote a debt or claim the payment of which is in some way secured; or written undertakings securing repayment of money (paragraphs 24-26 of TR 96/14), and • whilst appreciating the difficulty of finding one genus in paragraph (a), the view is taken that the term 'or other security' in the context it is used encompasses instruments that evidence or secure an obligation on the part of the issuer or drawer to pay an amount to the holder or acceptor, whether during the term of the instrument or at its maturity. This is on the basis that the listed items in paragraph (a) evidence such an obligation. These types of securities will generally be recognised as debt instruments (paragraph 29 of TR 96/14). Having regard to the above, the native digital tokens do not appear to have the characteristics or features of a security, or any of the other asset types listed in the definition of tainted assets in paragraphs (i) to (xii) in subsection 317(1) of the ITAA 1936. The tokens also do not appear to constitute a financial instrument that is similar to those listed in that definition. As such, the native digital tokens are not tainted assets. This is because the native digital tokens: | Summary: In order for section 70-30 of the ITAA 1997 to apply you must start holding as trading stock an item you already own but do not hold as trading stock. The native digital tokens you held when you became an Australian resident were acquired and held for the purpose of sale in the ordinary course of your business. As such, section 70-30 of the ITAA 1997 has no application to your circumstances. | Detailed Reasoning - Detailed reasoning: Trading stock includes: (a) anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business, and (b) live stock (subsection 70-10(1) of the ITAA 1997). Section 70-30 of the ITAA 1997 provides: If you start holding as trading stock an item you already own, but do not hold as trading stock, you are treated as if: (a) just before it became trading stock, you had sold the item to someone else (at arm's length) for whichever of these amounts you elect: • its cost (as worked out under subsection (3) or (4)), • its market value just before it became trading stock, and (b) you had immediately bought it back for the same amount. | Detailed Reasoning - Application to your circumstances: In order for section 70-30 of the ITAA 1997 to apply you must start holding as trading stock an item you already own but do not hold as trading stock. You acknowledge that on a literal interpretation of the provision you fail to satisfy this requirement because the native digital tokens were already your trading stock prior to you becoming a permanent resident of Australia. Therefore, section 70-30 will not apply to deem a sale and purchase of the native digital tokens you held as trading stock when you became an Australian resident. As a result, no cost is allocated to the native digital tokens, and you will not be entitled to a deduction under section 8-1 of the ITAA 1997.

were not offered for consideration and there was no pooling of funds | bear no right to income distributions from the issuer or to principal repayments (that is, no debt like obligations), and