Draft FAF Legislation for Publication

Draft FAF Legislation for Publication

Inserts for

Tax Laws Amendment (Foreign Source Income Deferral) Bill 2011: Foreign accumulation funds

Schedule FAF—Foreign accumulation funds

Part 1—Amendments

Income Tax Assessment Act 1997

Division 806—Foreign accumulation funds

Table of Subdivisions

806‑A   FAFs: Liability rule

806‑B    FAFs: FAF attributable income

806‑C    FAFs: Limitations on liability

@806‑1  What this Division is about

[To be completed at a later time.]

Subdivision 806‑A—FAFs: Liability rule

Table of sections

@806‑5     Attribution rule for FAFs

@806‑10   Meaning of foreign accumulation fund

@806‑15   Meaning of FAF statutory accounting period

@806‑5  Attribution rule for FAFs

             (1)  Include in your assessable income for an income year the amount mentioned in subsection (2) if:

                     (a)  you have an *equity interest in another entity at the end of the other entity’s *FAF statutory accounting period; and

                     (b)  the other entity is a *foreign accumulation fund for the FAF statutory accounting period; and

                      (c)  the FAF statutory accounting period ends in that income year; and

                   (d)  you are an Australian resident, *Australian trust, or *Australian partnership at the end of the FAF statutory accounting period; and

                     (e)  the entity is not a *CFC for which you are an *attributable taxpayer at the end of the FAF statutory accounting period. 

             (2)  The amount is your *FAF attributable income (see Subdivision 806‑B) for the *foreign accumulation fund for the *FAF statutory accounting period that ends in the income year.

@806‑10  Meaning of foreign accumulation fund 

             (1)  An entity is a foreign accumulation fund (or FAF) for a *FAF statutory accounting period if:

                     (a)  the entity is:

                              (i)  a company; or

                             (ii)  a *fixed trust; and

                     (b)  at the end of the period the entity:

                              (i)  for a company—is a foreign resident; or

                             (ii)  for a trust—is not a resident trust estate for the purposes of Division 6 of Part III of the Income Tax Assessment Act 1936; and

                     (c)  the requirement in subsection (2) is met at the end of the period; and

                     (d)  the requirement in subsection (3) is met for the period.

A provision similar to section @803‑205 will be included to cover the situation where an entity changes residence during the period.

Investments requirement

             (2)  This requirement is met if the *market value of all *debt interests held by the entity comprises 80% or more of the market value of all assets held by the entity.

Accumulation requirement

             (3)  This requirement is met if the amount that:

                     (a)  for a *corporate tax entity—is *distributed within the period (the distribution period) beginning at the start of the entity’s *FAF statutory accounting period and ending 3 months after the end of that period; or

                     (b)  for a trust other than a corporate tax entity:

                              (i)  is distributed within the distribution period; or

                             (ii)  constitutes *net income of the trust that is included in the assessable income of 1 or more beneficiaries of the trust;

is no more than 80% of the amount of the profits and gains of the entity mentioned in subsection (4).

Realised and controlled profits and gains

             (4)  The amount of the profits and gains of an entity (the first entity) for a *FAF statutory accounting period is the sum of:

                     (a)  the realised profits and gains of the first entity for the period; and

                     (b)  if the first entity controls another entity at the end of the period—so much of the realised profits and gains of the other entity as:

                              (i)  are for the FAF statutory accounting period of the other entity that ends in the FAF statutory accounting period of the first entity; and

                             (ii)  are reflected in the first entity’s unrealised profits and gains for the period.

             (5)  For the purposes of paragraph (4)(b), determine whether an entity controls another entity in accordance with paragraphs @801‑30(1)(a), (b) and (c).

Regulations may prescribe other types of entity

             (6)  An entity is also a foreign accumulation fund (or FAF) for a *FAF statutory accounting period if:

                     (a)  the entity is of a kind prescribed by the regulations; and

                     (b)  the entity meets the investments requirement in subsection (2) at the end of the period; and

                     (c)  the entity meets the requirements (if any) prescribed by the regulations for the purposes of this paragraph.

Classes of interest

             (7)  If there are 2 or more classes of interest in the entity, this section operates separately in relation to each class as if the interests in that class were all the interests in that entity.

@806‑15  Meaning of FAF statutory accounting period 

             (1)  The FAF statutory accounting period of an entity is the 12 month period for which accounts are prepared in relation to the entity for the purposes of complying with the tax laws of any country.

             (2)  However, if:

                     (a)  there is no period to which subsection (1) applies; or

                     (b)  there is more than one period to which subsection (1) applies;

the FAF statutory accounting period of an entity is the 12 month period for which accounts are prepared for the purposes of reporting to the entity’s *members.

             (3)  If there is no 12 month period to which subsection (1) or (2) applies, the FAF statutory accounting period of an entity is each period of 12 months finishing at the end of 30 June.

Subdivision 806‑B—FAFs: FAF attributable income

This Subdivision will include a calculation method to work out the FAF attributable income.

The calculation will be based on the change in the market value of an interest in the FAF over the FAF statutory accounting period, plus distributions from the FAF.

Subdivision 806‑C—FAFs: Limitations on liability

Table of sections

@806‑40   Lightly taxed entities exception—complying superannuation entity

@806‑45   Lightly taxed entities exception—life insurance company

@806‑50   Lightly taxed entities exception—interposed trust or partnership with lightly taxed entity as sole member

@806‑55   Lightly taxed entities exception—interposed trust or partnership with lightly taxed entity as a member

@806‑40  Lightly taxed entities exception—complying superannuation entity

This provision will be based on section @804‑205.

@806‑45  Lightly taxed entities exception—life insurance company

This provision will be based on section @804‑210.

@806‑50  Lightly taxed entities exception—interposed trust or partnership with lightly taxed entity as sole member

This provision will be based on section @804‑215.

@806‑55  Lightly taxed entities exception—interposed trust or partnership with lightly taxed entity as a member

This provision will be based on section @804‑220.

Double tax relief 

Division 805 will be adapted to also deal with attribution credits from FAFs.

Attribution credits from FAFs will be interchangeable with attribution credits from CFCs (ie. there is one class of credit).

Attribution credits will be able to be used to convert a distribution into non‑assessable non‑exempt income, or to reduce capital proceeds, if:

              (a)     the distribution is paid on an interest in an entity, or the CGT event happens in relation to a CGT asset that is an equity interest in an entity; and

              (b)     the taxpayer has had an amount of income included under section @806‑5 for the entity for an income year; and

               (c)     the taxpayer has held at least one interest in the entity continuously since that year.

Distributions received through trusts and partnerships will be covered in the same way as they are in section @805‑15 for CFCs.

Subsection @805‑15(4) will be adapted to deal with the situation where a CFC disposes of an equity interest in a FAF.