The Government recently released Exposure draft legislation to introduce new CFC provisions, which should simplify calculations with respect to ownership of CFCs and significantly reduce the compliance burden of affected taxpayers.
Who is affected?
The current CFC provisions generally affect Australian taxpayers (together with associates) who directly or indirectly control a foreign company (the "CFC"). The CFC rules has the effect of including certain income (the "attributable income") of a CFC in the assessable income of the taxpayer i.e. the income of the taxpayer is attributed to the taxpayer. The new rules will be of interest to, inter-alia, multinational enterprises with holding companies in Australia and to investment funds that hold foreign properties or assets via foreign companies.
The rules surrounding when a taxpayer is taken to control a CFC will be changed. The proposed rules will align the tax law to the concept of control under the Accounting standards. Practically speaking, MNE groups will in most cases wholly-own their foreign subsidiaries and in such cases there will be no practical impact. However, it should not be assumed that the rules have no application because a taxpayer has a non-controlling interest in a CFC. The taxpayer could still be an "attributable taxpayer" if it is an associate of another taxpayer that controls the CFC.
Further, the new CFC rules will mean that the operative provisions will not apply to complying superannuation funds.
When do the new rules apply?
The Exposure Draft legislation will be subject to public consultation and there is no determinative start date for the new proposed measures. Further, the final legislation will contain more detail than is currently contained in the exposure draft legislation.
Income subject to attribution
The type of income that is subject to attribution has been significantly narrowed. The table overleaf provides a comparison with the current CFC rules.
| Type of Income | Attributable? | |
| Current rules | Proposed rules | |
| Tainted sales income – generally sale transactions which involve an Australian taxpayer or permanent establishment | Yes* | No |
| Income from services provided to Australian residents or permanent establishments (ie. tainted services income) | Yes* | No |
| Income from services provided to non-residents | Yes* | No |
| Rental Income from real property | Yes* | No |
| Other rental income – e.g. from charter of ships or containers | Yes* | Yes*# |
| Interest income | Yes* | Yes*# |
| Portfolio dividends (i.e. from shareholding < 10% | Yes* | Yes*# |
| Non-portfolio dividends | No | No |
| Capital gains | Generally Yes | Generally Yes |
| Royalty income | Generally Yes | Generally Yes |
| Gains or losses from financial instruments | Generally Yes | Generally Yes |
Other
The rules are silent on the treatment of accumulated CFC losses. Under the current rules, losses of a CFC are not attributed but can generally be carried forward. It appears that when the new rules commence, any CFC losses being carried forward may be forfeited/lost.
Further, under the current rules, when calculating the capital gain derived by a CFC, the relevant CGT asset is broadly taken to be acquired on the end of the year when the foreign company first became a CFC. It is assumed that the final legislation will have similar provisions.
The Government also released exposure draft legislation introducing new Foreign Accumulation Fund (FAF) rules which would apply to foreign companies (which are not CFCs) and trusts. The new rules are designed to target entities investing in predominantly debt instruments and do not distribute at least 80% of their realised profits or gains.
If you have any queries in relation to this article or the CFC provisions, please contact Daren Yeoh on 8635 1800 or your Moore Stephens Relationship Partner.
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