Private ruling: Assessability of foreign income
Published: February 2014
Ruling period: Year ended 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2012

Ruling: Question and answer | Are you assessable on the net rental income of a limited liability company established in Country X in Australia? | No.

Relevant facts and circumstances: You are an Australian resident for tax purposes. You have established a limited liability company (the LLC) in Country X for the purpose of acquiring rental properties. You are the sole shareholder in the LLC and you fulfil all roles, including director and secretary. Under Country X income tax law, the LLC is a disregarded entity. You are therefore required to include the rental income and expenses incurred by the LLC in your own individual US tax return.

Relevant legislative provisions: Income Tax Assessment Act 1936 Part X. | Income Tax Assessment Act 1936 Section 320. | Income Tax Assessment Act 1936 Section 317. | Income Tax Assessment Act 1997 Subsection 6-5(2).

Reasons for decision: Detailed Reasoning - Assessability of foreign income generally: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) states that if you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year. In your case, you are the director of the LLC. The income that the LLC derives is not assessable to you under subsection 6-5(2) of the ITAA 1997 as the LLC is a separate legal entity and therefore the income is not derived by you. However, in some circumstances, income that is not assessable under subsection 6-5(2) of the ITAA 1997 may be assessable where the controlled foreign company (CFC) rules apply. | Detailed Reasoning - Controlled foreign company (CFC) rules: The CFC rules are set out in Part X of the Income Tax Assessment Act 1936 (ITAA 1936). The broad purpose of the CFC rules is to tax Australian shareholders on their share of a CFC's "tainted income" as it is earned, unless that income is comparably taxed offshore or the CFC derives its income almost exclusively from active business activities. This result is achieved by "attributing" tainted income to the Australian resident controllers of the CFC. The CFC rules generally apply accruals taxation to: (i) tainted income derived by CFCs resident in "unlisted" countries; and (ii) "eligible designated concession income" derived by CFCs resident in one of seven "listed" countries. Section 320 of the ITAA 1936 sets out seven "listed countries" for the purpose of the CFC rules. Country X is included as a listed country. "Eligible designated concession income" is defined in section 317 of the ITAA 1936. In general, it is designated concession income is income or profits that is either not taxed at all (e.g. capital gains), or is taxed at reduced rates to attract particular forms of business or financial activity. In your case, the LLC derives income from Country X, a listed country, however, the rental income itself does not meet the definition of eligible designated concession income. Therefore, the CFC rules do not apply to your situation and the income from the LLC is not part of your assessable income in Australia.