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
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
Tainted sales income – generally sale transactions
which involve an Australian taxpayer or permanent
Income from services provided to Australian residents or
permanent establishments (ie. tainted services income)
Income from services provided to non-residents
Rental Income from real property
Other rental income – e.g. from charter of ships or
Portfolio dividends (i.e. from shareholding < 10%
Gains or losses from financial instruments
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
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
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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