Australia: What will the new foreign source attribution rules mean for Australian businesses?

Last Updated: 3 August 2011

For anyone that has had to plough through the complex provisions in Part X of the Income Tax Assessment Act 1936, the reform of the Controlled Foreign Companies ("CFC") rules is likely to be good news. The new Foreign Accumulation Fund ("FAF") rule seeks to address only the most abusive cases of deferral that are not caught by the CFC measures following the repeal of the foreign investment fund regime. However, there are a few concerns over certain aspects of the new rules.


A threshold issue for any CFC regime is the meaning of control of a foreign entity. Under the existing rules, there are three control tests. Satisfaction of any of the three will potentially result in passive income derived by the controlled entity being subject to attribution. The three control tests are:

1. Strict Control Test

If five or fewer Australian entities have an associate-inclusive control interest of 50% or more, then that entity is a CFC.

2. Objective De Facto Control Test

Where a single Australian entity has an associate-inclusive control interest of not less than 40% and no other group of entities control the foreign entity, then that entity is a CFC.

3. Subjective De Facto Control Test

Five or fewer Australian entities together with associates control the foreign entity.

The new legislation moves away from a quantitative control interest test towards a qualitative control test as it generally relies on accounting standards. This is a positive development for reporting entities because they already use these concepts in their financial accounts. As a result, it should lead to potential compliance cost savings.

The main argument against adopting these proposals is that the relevant accounting standards (AASB 127 and AASB 131) can require a degree of discretion in determining whether an Australian entity or group of Australian entities control a foreign entity. This may lead to uncertainty in some circumstances. Under a quantitative control test there is a greater level of certainty in determining whether an entity is controlled by another because it is often merely a case of determining the amount of equity the Australian entity has in the overseas entity.

The final issue is that because the accounting standards are determined by the US based IFRS board, it is unlikely to consider the Australian tax implications of changes it makes to the definition of control. This raises issues in relation to Australian territorial sovereignty and the claimed revenue neutrality of the proposed reforms.

Passive Income – New Active Income Carve Out

Under the new rules, income of an active character is not included in an entity's passive income if:

  • the income is attributable to a permanent establishment of the entity
  • it arises from the entity competing in a market
  • it arises substantively from the ongoing use of labour by the entity.

At this point in time, there is no guidance on what "competing in a market" and "substantially from the ongoing use of labour" mean, so it is difficult to advise with any certainty until final legislation is released.

One of the major changes provided for in the new rules is the removal of tainted sales income and tainted services income, which previously went into the tainted turnover ratio. Under the current rules, where the tainted income ratio exceeded 5% (ie, gross "tainted turnover" is greater than 5% of gross turnover) then income is generally subject to attribution.

The new rules are still based on a 5% passive/active mix – providing an early exit out of the CFC rules if less than 5% of a CFC's income, as determined by reference to its financial accounts, has a passive character. "Prima facie passive income" includes dividends, rent, royalties and so on, which are all similar to the old rules. The main difference is that they are determined by reference to the financial accounts.

What's Next?

The Government claims there will be no leakage as a result of these changes. However, given that such threshold issues as the definition of control and passive income will be determined by reference to accounting rather than tax concepts and by a foreign board, the possibility of leakage is not remote. Consequently, it is likely there will be further changes once this legislation finally comes into effect.

For further information generally please contact your local Crowe Horwath Head of Tax advisor: Sydney - Steve DiLeo +612 9619 1637; Melbourne – Norman Elliott +613 9258 6866; Perth - Peter Fallon +618 9488 1102; Brisbane – Tony Marks +617 3233 3593

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.