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

EXPOSURE DRAFT

If you have any comments on this exposure draft they should be sent before 18 March 2011 to: [email protected]
Or
The Manager
International Tax Projects Unit
The Treasury
Langton Crescent Parkes
ACT 2600
 

Schedule 1—Main provisions

Income Tax Assessment Act 1997

1  After Part 4‑5

Insert:

Part 4‑10—Attribution of foreign income

Division 800—Guide to Part 4‑10

Table of sections

Division 801—CFCs: key liability rule for attributable income

Table of Subdivisions

@801‑1  What this Division is about

[To be completed at a later time.]

Table of sections

@801‑5  Attribution of CFC’s attributable income to attributable taxpayer

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

(a)  you are an *attributable taxpayer for a *CFC at the end of a *statutory accounting period; and

(b)  the period ends in that year; and

(c)  the CFC has *attributable income for that period.

(2)  The amount is that *attributable income multiplied by your *total participation interest (see Subdivision 960‑GP) in the *CFC at the end of that *statutory accounting period.

(3)  However, in working out your *total participation interest for the purposes of subsection (2), disregard the total participation interest of any other entity if that other entity is an *attributable taxpayer for the *CFC at the end of the *statutory accounting period.

(4)  The following provisions provide for situations where subsection (1) does not apply:

(a)  Subdivision 804‑A (the active CFC test);

(b)  Subdivision 804‑B (lightly taxed entities).

@801‑20  Attributable taxpayer

(1)  An entity (the first entity) is an attributable taxpayer for another entity (the second entity) at a time if, at that time:

(a)  the first entity is an *Australian entity; and

(b)  the first entity:

(i)  controls the second entity; or

(ii)  is an *associate of another entity that controls the second entity; and

(c)  the first entity holds:

(i)  a *direct participation interest in the second entity of greater than zero; or

(ii)  a *total participation interest in the second entity of greater than zero.

(2)  However, in working out the first entity’s *total participation interest for the purposes of subsection (1), disregard the total participation interest of any other entity in the second entity if that other entity is an *attributable taxpayer for the second entity (under a previous operation of this section) at the end of the *statutory accounting period.

@801‑30  Control and joint control

(1)  For the purposes of subsection @801‑20(1):

(a)  determine whether an entity controls another entity in accordance with *accounting standard AASB 127 (or another accounting standard specified by the regulations for the purposes of this paragraph); and

(b)  if 2 or more entities jointly control another entity, treat each of them as controlling the other entity; and

(c)  determine whether 2 or more entities jointly control another entity in accordance with accounting standard AASB 131 (or another accounting standard specified by the regulations for the purposes of this paragraph).

(2)  If 2 entities each hold 50% of the *equity interests in another entity, treat them for the purposes of paragraph (1)(b) as jointly controlling the other entity.

@801‑40  Controlled foreign company (CFC)

A company is a controlled foreign company (or CFC) at a time if:

(a)  the company is not an Australian resident at that time; and

(b)  there is at least one *attributable taxpayer for the company at that time.

Division 802—CFCs: key income concepts

Table of Subdivisions

@802‑1  Guide to this Division

[To be completed at a later time.]

Subdivision 802‑A—Attributable income

Table of sections

@802‑10  Attributable income

The attributable income of a *CFC for a *statutory accounting period is the amount of its *CFC taxable income (see section @802‑105) for the period.

Subdivision 802‑B—CFC taxable income

Guide to Subdivision 802‑B

@802‑100  What this Subdivision is about

[To be completed at a later time.]

Table of sections

Principles

@802‑105  CFC taxable income

The CFC taxable income of a *CFC for a *statutory accounting period is the amount that would be its taxable income for the period if the principles in section @802‑110 were observed in working out that taxable income.

@802‑110  Principles in working out CFC taxable income

Residence assumption

(1)  Assume that the *CFC is an Australian resident company for the entire period.

Income year assumption

(2)  Assume that period is an income year (the CFC income year), and that the CFC income year is the *financial year in which the period ends.

Actual assessable income and deductions

(3)  Treat an amount as not assessable income and not *exempt income of the *CFC if it is included in the actual assessable income of the CFC for any income year.

(4)  Treat an amount as not being a deduction of the *CFC if it is an actual deduction of the CFC for any income year.

Modifications of tax law

(5)  Take account of the modifications set out in the following sections of this Subdivision.

Transforming adjusted passive income to assessable income and deductions

(6)  Treat an amount as being included in the ordinary income or statutory income of the *CFC for the CFC income year only to the extent that it is referable to its *adjusted passive income (see Subdivision 802‑C).

(7)  Treat an amount as being a general deduction or specific deduction of the *CFC for the CFC income year only to the extent that it is referable to its *adjusted passive income.

Trust and partnerships

(8)  Work out the *net income of a partnership or trust by making the assumptions and observing the principles in the preceding subsections of this section. However, in doing so, apply these rules:

(a)  treat the references in those subsections (and provisions that have effect in relation to those subsections) to the *CFC as being instead references to the partnership or trust;

(b)  treat the partnership or trust as being a resident of the same country as the CFC (despite subsection (1));

(c)  in the case of a trust—for the purposes of Parts 3‑1 and 3‑3, treat the trust as being a *resident trust for CGT purposes.

General modifications

@802‑115  Elections to be made by CFC controller

[see section 390

(1)  This section applies if, apart from this section, the *CFC would be able to do any of these things in relation to the CFC income year:

(a)  make a declaration, election, choice or selection under this Act;

(b)  give a notice under this Act;

(c)  exercise an option under this Act.

(2)  Subject to subsection (3), treat an entity that controls the *CFC at the end of the CFC income year as being able to do the thing (instead of the CFC being able to do the thing).

(3)  The entity may do the thing:

(a)  by the day it lodges its *income tax return for the income year in which CFC income year ends; or

(b)  within a further time allowed by the Commissioner.

(4)  If more than one entity controls the *CFC at the end of the CFC income year, the thing can be done only by all of those entities (the joint entities) acting jointly.

(5)  The joint entities may do the thing:

(a)  either:

(i)  if the joint entities’ *income tax returns for the income year in which CFC income year ends are lodged on different days—on or before the earliest of those days; or

(ii)  if the joint entities’ income tax returns for the income year in which CFC income year ends are lodged on the same day—on or before that day; or

(b)  within a further time allowed by the Commissioner.

@802‑120  Double tax agreements to be disregarded

[see section 388

Disregard the International Tax Agreements Act 1953, except for the purpose of references in this Act to that Act.

@802‑125  Certain provisions to be disregarded in calculating attributable income

[see section 389

Disregard these provisions:

(a)  [except for the purposes of a reference in any other provision of this Division—]subsection 136AF(1A) of the Income Tax Assessment Act 1936;

(b)  section 25‑90 of this Act (Deduction relating to foreign non‑assessable non‑exempt income);

(c)  [except for the purposes of a reference in a provision of Division 801 or this Division—]Part 3‑6 (Imputation);

(d)  Part 3‑30 (Superannuation);

(e)  Part 3‑90 (Consolidation);

(f)  section @801‑5 (Attribution of CFC attributable income);

(g)  [the provision attributing income from FAFs];

(h)  Division 820 (Thin capitalisation).

Specific modifications

@802‑130  Deduction for taxes paid

[see section 393

Treat the following as a deduction for the *CFC for the CFC income year:

(a)  *foreign income tax or *withholding tax paid by or for the CFC in respect of amounts included in its *CFC assessable income for the CFC income year [, whether paid before, during or after that income year];

(b)  if a person pays an amount of tax that the person is liable to pay under subsection 148(3) of the Income Tax Assessment Act 1936 in respect of premiums paid or credited to the CFC—that amount, to the extent that those premiums are included in the CFC’s CFC assessable income for the CFC income year.

Subdivision 802‑C—Adjusted passive income

Table of sections

@802‑200  Adjusted passive income

A *CFC’s adjusted passive income is its *passive income (see section @960‑300) as adjusted in accordance with this Subdivision and Subdivision 802‑D.

@802‑205  Comparably taxed CFC income

(1)  If the *CFC is a resident of a *listed country at the end of the *statutory accounting period mentioned in subsection @801‑5(1), its *adjusted passive income does not include its *comparably taxed CFC income (despite any other provision in this Subdivision).

(2)  Comparably taxed CFC income means income or profits of a kind specified in the regulations made for the purposes of this section, if:

(a)  the income or profits is subject to *foreign income tax imposed by a tax law of a listed country (other than foreign income tax in the nature of a withholding tax); and

(b)  there is no qualification to the imposition of that foreign income tax in respect of the income or profits because of a feature in relation to that tax; and

(c)  the feature is of a kind specified in the regulations made for the purposes of this section.

(3)  Subsection (1) does not apply to an amount of *comparably taxed CFC income if:

(a)  the amount of comparably taxed CFC income is referrable to a *CGT event that happens in relation to an asset; and

(b)  before becoming a resident of the *listed country, the *CFC was a resident of an *unlisted country; and

(c)  the CFC held the asset when it was a resident of the unlisted country.

@802‑210  Rent from real property

A *CFC’s *adjusted passive income does not include rent from real property (including a lease of land) (despite any other provision in this Subdivision).

@802‑215  Integrity rule in working out adjusted passive income

(1)  Subsection (2) applies if:

(a)  a *CFC has an amount of *prima facie passive income; and

(b)  any of the following entities is entitled to a tax benefit covered under subsection (3) for an income year (regardless whether the amount of prima facie passive income arises before, during or after that income year):

(i)  an *attributable taxpayer for the CFC;

(ii)  an *associate of an attributable taxpayer for the CFC;

(c)  the tax benefit is referrable to the CFC having the amount of prima facie passive income; and

(d)  disregarding subsection (2), the amount of prima facie passive income is not included in the *adjusted passive income of the CFC; and

(e)  if the CFC is a resident of a *listed country [throughout the income year]—the amount is not *comparably taxed CFC income [for the income year].

(2)  The *CFC’s *adjusted passive income includes the amount of *prima facie passive income.

(3)  The tax benefits covered by this subsection are as follows:

(a)  a deduction;

(b)  an increase in the *cost base or *reduced cost base of a *CGT asset;

(c)  a *tax offset.

@802‑220  Royalty income connected with Australia

(1)  A *CFC’s *adjusted passive income includes *royalty income connected with Australia.

(2)  Royalty income connected with Australia means an amount received by an entity as or by way of royalty, if:

(a)  the matter or thing in respect of which the royalty is consideration was *acquired at a time (directly or indirectly) by the entity from another entity that was at that time an Australian resident and an *associate of the entity; and

(b)  the entity has not substantially developed, altered or improved that matter or thing with the result of substantially enhancing the market value of the matter or thing.

@802‑225  CFC group income

(1)  This section applies if a *CFC is a *member of a *CFC group throughout a *statutory accounting period.

(2)  The *CFC’s *adjusted passive income for the period does not include an amount of *prima facie passive income if:

(a)  the prima facie passive income is referable to a financial benefit provided to the CFC by another CFC that is also a *member of the group throughout the period; and

(b)  for the purposes of determining the *CFC taxable income of the other CFC for the period, the financial benefit does not give rise to a deduction for the other CFC.

(3)  This section applies despite section @802‑235 (Disconnected income).

@802‑230  CFC group

(1)  A CFC group consists at a time of all entities that, at that time:

(a)  are *CFCs of a single *attributable taxpayer; and

(b)  are controlled by that attributable taxpayer; and

(c)  are not controlled by any other attributable taxpayer.

(2)  Each *CFC of which a *CFC group consists at a time is a member of the group at that time.

(3)  To avoid doubt, a *CFC cannot be a member of more than one *CFC group at a time.

@802‑235  Disconnected income

(1)  A *CFC’s *adjusted passive income includes so much of the CFC’s *prima facie passive income as would be its *passive income if the assumption in subsection (2) were made.

(2)  Assume that paragraph @960‑300(a) included an additional requirement that all of the following have a substantial connection with the country in which the *permanent establishment mentioned in subparagraph @960‑300(a)(i) is located:

(a)  the source of the prima facie passive income;

(b)  the market mentioned in subparagraph @960‑300(a)(ii);

(c)  the labour mentioned in subparagraph @960‑300(a)(iii).

Subdivision 802‑D—Adjusted passive income: AFI subsidiaries

Table of sections

@802‑240  Object

The object of this Subdivision is to reduce compliance costs by recognising the active character of certain income generated by banking business and like business.

@802‑245  Exception for AFI subsidiary

The *adjusted passive income of a *CFC does not include its *excluded AFI income (see section @802‑260) if:

(a)  the CFC is an *AFI subsidiary (see section @802‑250) at the time the excluded AFI income was [gained]; and

(b)  the CFC’s sole or principal *business is *financial intermediary business (see section @802‑255) at that time.

@802‑250  AFI subsidiary

(1)  A *CFC is an AFI subsidiary at a time when it is controlled by a company that is an *AFI.

(2)  However, a *CFC is not an AFI subsidiary at a time if:

(a)  two or more companies jointly control the CFC; and

(b)  any of those companies are not *AFIs.

(3)  For the purposes of subsections (1) and (2):

(a)  determine whether an entity controls a *CFC in accordance with *accounting standard AASB 127 (or another accounting standard prescribed by the regulations for the purposes of this section); and

(b)  determine whether 2 or more entities jointly control a CFC in accordance with accounting standard AASB 131 (or another accounting standard prescribed by the regulations for the purposes of this section).

(4)  An AFI or Australian financial institution means any of the following Australian entities:

(a)  an *ADI;

(b)  a person who carries on State banking within the meaning of paragraph 51(xiii) of the Constitution;

(c)  a registered entity under the Financial Sector (Collection of Data) Act 2001;

(d)  a *life insurance company.

@802‑255  Financial intermediary business

Financial intermediary business means:

(a)  banking business; or

(b)  a *business whose income is principally derived from the lending of money.

@802‑260  Excluded AFI income

Division 803—Controlled foreign companies: other liability provisions

Table of Subdivisions

@803‑1  Guide to this Division

[To be completed at a later time.]

Subdivision 803‑A—Becoming or ceasing to be a CFC

Table of sections

Subdivision 803‑B—CFC changing residence status: general rules

Table of sections

@803‑205  Change of residence: statutory accounting periods

(1)  This section applies if at a time (the residence change time) in a *statutory accounting period (the original statutory accounting period) of a *CFC:

(a)  the CFC stops being a resident of one country and becomes a resident of another country; and

(b)  at least one of the countries is not an *unlisted country.

(2)  Treat the original statutory accounting period as being instead 2 *statutory accounting periods of the *CFC, as follows:

(a)  the first statutory accounting period starts when the original statutory accounting period starts, and ends just before the residence change time;

(b)  the second statutory accounting period starts at the residence change time and ends at the time the original statutory accounting period ends.

(3)  To avoid doubt, the original statutory accounting period may be a statutory accounting period that exists because of a previous operation of this section.

Subdivision 803‑C—CFC changing residence status: CGT rules

Table of sections

@803‑305  CFC changing residence status: CGT rules

(1)  If an entity stops being an Australian resident and becomes a *CFC at a time (the residence change time), this section sets out rules relevant to each *CGT asset that it owned just before that time, except an asset that is *taxable Australian property.

Note 1:       In this situation the rules in Subdivision 104‑I (CGT event I1) will also apply. That CGT event:

(a)    applies for the purposes of determining the assessable income of the entity; but

(b)    does not apply for the purposes of determining the CFC taxable income of the entity.

Note 2:       If at a residence change time an entity stops being a CFC and becomes an Australian resident, apply the rules in Subdivision 855‑B (cost base resetting for the purposes of assessable income). That Subdivision:

(a)    applies for the purposes of determining the assessable income of the entity after the residence change time; but

(b)    does not apply for the purposes of determining the CFC taxable income of the entity in relation to its previous status as a CFC.

Note 3:       If at a residence change time an entity stops being a resident of a foreign country and becomes a resident of another foreign country, apply the rules in section @802‑130 (deduction for taxes paid) for any foreign tax payable in the first foreign country because of the change of residence.

(2)  Subsections (3) and (4) apply for the purposes of determining the *CFC taxable income of the CFC for a *statutory accounting period that ends after the residence change time.

(3)  The first element of the *cost base and *reduced cost base of the asset (at the residence change time) is its *market value at that time.

(4)  Also, Parts 3‑1 and 3‑3 apply to the asset as if the *CFC had *acquired it at the residence change time.

Division 804—Controlled foreign companies: limitations on liability

Table of Subdivisions

@804‑1  Guide to this Division

This Division reduces compliance costs for taxpayers by providing an exception from attribution if less than 5% of the income (determined by reference to financial accounts) of the relevant CFC has a passive character.

Subdivision 804‑A—The active CFC test

Table of sections

@804‑10  The active CFC test

Subsection @801‑5(1) does not apply in relation to a *CFC in respect of a *statutory accounting period if:

(a)  the CFC has kept accounts for the statutory accounting period that:

(i)  are prepared in accordance with commercially accepted accounting principles; and

(ii)  give a true and fair view of the financial position of the company; and

(b)  the CFC’s *passive financial account income for that period is less than 5% of its *financial account income for that period.

@804‑15  Financial account income

The financial account income of an entity for a period is its [gross] income or revenue for the period, as recognised in its accounts for the period.

@804‑20  Passive financial account income

The passive financial account income of an entity for a period is its *financial account income for the period to the extent that it is referable to *prima facie passive income.

Subdivision 804‑B—Lightly taxed entities exceptions

Table of sections

@804‑205  Lightly taxed entities exception—complying superannuation entity

Subsection @801‑5(1) does not apply if the *attributable taxpayer is a *complying superannuation entity for the income year in which the *statutory accounting period  mentioned in that subsection ends.

@804‑210  Lightly taxed entities exception—life insurance company

Subsection @801‑5(1) does not apply if:

(a)  the *attributable taxpayer is a *life insurance company when the *statutory accounting period mentioned in that subsection ends; and

(b)  all of the attributable taxpayer’s interest in the *CFC is a *complying superannuation/FHSA asset or a *segregated exempt asset of the attributable taxpayer.

@804‑215  Lightly taxed entities exception—interposed trust or partnership with only lightly taxed entities as members

Subsection @801‑5(1) does not apply for the purposes of determining the *net income for an income year of a trust or partnership if:

(a)  all *members of the trust or partnership at the end of the *statutory accounting period mentioned in that subsection are entities mentioned in section @804‑205 or @804‑210; and

(b)  disregarding this section, all of the *net income of the trust or partnership for the income year would be included in the assessable income of its members for the income year.

@804‑220  Lightly taxed entities exception—interposed trust or partnership with lightly taxed entity as a member

(1)  This section applies if, apart from this section, an amount would be included in the assessable income [for an income year] of an entity mentioned in section @804‑205 or @804‑210 under Division 5 or 6 of Part III of the Income Tax Assessment Act 1936 (because the entity is a *member of a trust or partnership).

(2)  The amount is not assessable income, and is not *exempt income, of the entity to the extent that the amount is referable to another amount that is included in the *net income of the trust or partnership [for the income year] because of subsection @801‑5(1) (CFC attribution).

Division 805—Controlled foreign companies: double tax relief

Table of Subdivisions

@805‑1  Guide to this Division

[To be completed at a later time.]

Table of sections

@805‑5  Generation of credits for attributed income

(1)  An entity is entitled to an attribution credit at the start of an income year if:

(a)  the entity is not a partnership or trust; and

(b)  an amount is included in its assessable income for the income year:

(i)  under section @801‑5 (Attribution of CFC attributable income); or

(ii)  as a result of the operation of Division 5 or 6 of Part III of the Income Tax Assessment Act 1936 in relation to a partnership or trust, if the amount is to any extent referable to an amount that is included in the *net income of a partnership or a trust under section @801‑5.

(2)  The amount of the *attribution credit is equal to:

(a)  if subparagraph (1)(b)(i) applies—the amount included in the entity’s assessable income for the income year under section @801‑5; or

(b)  if subparagraph (1)(b)(ii) applies—the amount included in the entity’s assessable income for the income year, to the extent that it is referable to the amount included in the *net income mentioned in that subparagraph.

@805‑10  Available attribution credits

An entity’s available attribution credits at a time are the *attribution credits to which the entity is entitled under section @805‑5 at that time, to the extent that they have not already been used under section @805‑15.

@805‑15  Use of available attribution credits to convert assessable income to NANE income etc.

(1)  Use an entity’s *available attribution credits at a time to convert an amount that:

(a)  is included in the entity’s assessable income at that time (disregarding this subsection and subsections @768‑55(1) and (3)); and

(b)  is covered by subsection (2) of this subsection;

into an amount that is not assessable income, and is not *exempt income of the entity.

(2)  This section covers an amount of assessable income of an entity to the extent that it arises:

(a)  because of a *distribution in respect of an *equity interest made at a time to the entity from a *CFC for which the entity is an *attributable taxpayer [at that time]; or

(b)  as a result of the operation of Division 5 of Part III of the Income Tax Assessment Act 1936 in relation to a partnership, to the extent that the amount is referable to an amount included in the *net income of the partnership [for the income year] because of a distribution in respect of an equity interest made to a partnership or trust from a CFC for which the partnership was an attributable taxpayer; or

(c)  as a result of the operation of Division 6 of Part III of the Income Tax Assessment Act 1936 in relation to a trust, to the extent that the amount is referable to an amount included in the net income of the trust [for the income year] because of a distribution in respect of an equity interest made to a partnership or trust from a CFC for which the trust was an attributable taxpayer.

(3)  Use an entity’s *available attribution credits at a time to reduce the *capital proceeds from a *CGT event, if at that time:

(a)  the CGT event happens in relation to a *CGT asset that the entity holds; and

(b)  the asset is an *equity interest in a *CFC for which the entity is an *attributable taxpayer.

However, do not use those available attribution credits to the extent that this would result in a *capital loss from the CGT event.

(4)  Use an entity’s *available attribution credits at a time to reduce an amount included in the entity’s assessable income for an income year under section @801‑5 (Attribution of CFC attributable income) in relation to a *CFC if:

(a)  at a time in the CFC’s *statutory accounting period ending in that income year, a *CGT event happened in relation to a *CGT asset that the CFC held; and

.                    (b)  for the purposes of determining the *CFC taxable income of the CFC for a *statutory accounting period, the CFC made a *capital gain from the CGT event; and

(c)  the asset was an *equity interest in another CFC for which the entity was an *attributable taxpayer [at the end of that statutory accounting period].

Reduce the amount to the extent that it is referable to the capital gain.

Schedule 2—Passive income

Income Tax Assessment Act 1997

1  After Subdivision 960‑M

Insert:

Subdivision 960‑P—Passive income

Table of sections

@960‑300  Passive income

(1)  An entity’s passive income is its *prima facie passive income, except to the extent that the prima facie passive income is covered by subsection (2) or (3).

Income of an active character

(2)  The *prima facie passive income is covered by this subsection to the extent that it meets all of these requirements:

(a)  it is attributable to a *permanent establishment of the entity (whether in Australia or in another country); and

(b)  it arises from the entity competing in a market; and

(c)  it arises substantially from the ongoing use of labour by the entity.

Profits from assets or arrangements producing income of an active character

(3)  The *prima facie passive income is covered by this subsection to the extent that it meets all of these requirements:

(a)  it is a profit mentioned in paragraph @960‑305(f) or (g); and

(b)  it is not covered by subsection (2); and

(c)  the asset or *financial arrangement mentioned in paragraph @960‑305(f) or (g) was held for the predominant purpose of producing:

(i)  prima facie passive income covered by subsection (2) of this section; or

(ii)  amounts that were not prima facie passive income.

@960‑305  Prima facie passive income

Prima facie passive income is any of the following:

(a)  a *return on an *equity interest;

(b)  a return on a *debt interest;

(c)  a payment of rent;

(d)  a payment of an *annuity;

(e)  a payment as or by way of royalty;

(f)  a profit from a *financial arrangement (other than an amount mentioned in any of the previous paragraphs);

(g)  a profit from a *CGT event that happens in relation to an asset, if the asset gave rise, or could have given rise, to an amount mentioned in any of the preceding paragraphs.

Schedule 3—Ordinary membership interests and participation interests

Income Tax Assessment Act 1997

00  At the end of section 960‑140

Add:

(2)  For the purposes of sections @960‑145 to @960‑165, treat a *membership interest in an entity other than a *corporate tax entity as an ordinary membership interest if:

(a)  in the case of a membership interest in a partnership—it is an interest in the income of the partnership; and

(b)  in the case of a membership interest in a unit trust—it is a unit in the trust; and

(c)  in the case of a membership interest in a fixed trust—it is a *fixed entitlement to some or all of the income [or capital] of the trust.

00  At the end of Subdivision 960‑G

Add:

@960‑145  Total ordinary membership interest

An entity’s total ordinary membership interest at a particular time in another entity is the sum of:

(a)  the entity’s *direct ordinary membership interest in the other entity at that time; and

(b)  the entity’s *indirect ordinary membership interest in the other entity at that time.

@960‑150  Indirect ordinary membership interest

(1)  Work out the indirect ordinary membership interest that an entity (the holding entity) holds at a particular time in another entity (the test entity) by multiplying:

(a)  the holding entity’s *direct ordinary membership interest (if any) in another entity (the intermediate entity) at that time;

by:

(b)  the sum of:

(i)  the intermediate entity’s direct ordinary membership interest (if any) in the test entity at that time; and

(ii)  the intermediate entity’s indirect ordinary membership interest (if any) in the test entity at that time (as worked out under one or more other applications of this section).

(2)  If there is more than one intermediate entity to which paragraph (1)(a) applies at that time, the holding entity’s indirect ordinary membership interest is the sum of the percentages worked out under subsection (1) in relation to each of those intermediate entities.

@960‑155  Direct ordinary membership interest

An entity holds a direct ordinary membership interest at a particular time in another entity equal to the percentage that the entity holds at that time of the total number of *ordinary membership interests in the other entity.

@960‑160  Enhanced direct ordinary membership interest

(1)  Subject to subsection (2), an entity’s enhanced direct ordinary membership interestat a particular time in another entity is the entity’s *direct ordinary membership interest in the other entity at that time.

(2)  For the purposes of this section, if a trust or partnership is interposed directly between one entity and another entity, then increase the first entity’s *direct ordinary membership interest in the other entity (if any) by the amount worked out by multiplying:

(a)  the first entity’s direct ordinary membership interest (if any) in the trust or partnership at that time;

by:

(b)  the trust or partnership’s enhanced direct ordinary membership interest (if any) in the other entity at that time  (as worked out under one or more other applications of this section).

@960‑165  Non‑portfolio interest test

A *membership interest held by an entity (the holding entity) in another entity (the test entity) passes the non‑portfolio interest test at a time if the sum of the *enhanced direct ordinary membership interests held by the holding entity and its *associates in the test entity at that time is 10% or more.

00  Section 960‑190

Repeal the section, substitute:

@960‑190  Direct participation interest

An entity holds a direct participation interest at a particular time in another entity equal to the percentage that the entity holds at that time of the total rights of *members of the other entity to returns on *equity interests in the other entity (otherwise than on winding‑up) that are distributions of profits.

00  Section 960‑195

Repeal the section.

Schedule 4—Returns on foreign investment

Income Tax Assessment Act 1936

00  Section 23AH

Repeal the section.

00  Section 23AJ

Repeal the section.

Income Tax Assessment Act 1997

00  Before Subdivision 768‑B

Insert:

Subdivision 768‑A—Returns on foreign investment

Table of sections

@768‑55  Distributions to Australian resident company on equity interests in foreign resident company

(1)  A *distribution made by a company (the distributing company) that is a foreign resident to another company (the receiving company) that is an Australian resident in respect of an *equity interest [in the distributing company] is not assessable income, and is not *exempt income, of the receiving company if, at the time the distribution is made:

(a)  the receiving company does not receive the distribution in the capacity of a trustee; and

(b)  any of the following requirements are satisfied:

(i)  the receiving company holds an *enhanced direct ordinary membership interest in the distributing company of at least 10%;

(ii)  the receiving company is an *attributable taxpayer for the distributing company.

(2)  Subsection (3) applies if:

(a)  disregarding that subsection, an amount is included in the assessable income of a company (the receiving company) that is an Australian resident under Division 5 or 6 of Part III of the Income Tax Assessment Act 1936 for an income year because the receiving company is a partner in a partnership or a beneficiary of a trust; and

(b)  another company (the distributing company) that is a foreign resident made a distribution [(whether in that income year or in an earlier income year)] in respect of an *equity interest [in the distributing company] to:

(i)  the partnership or trust; or

(ii)  if there are entities interposed between the partnership or trust and the distributing company, and all of the interposed entities are partnerships or trusts—one of the interposed entities; and

(c)  the amount mentioned in paragraph (a) is referable to the amount of the distribution; and

(d)  any of the following requirements are satisfied:

(i)  the receiving company holds an *enhanced direct ordinary membership interest in the distributing company of at least 10%;

(ii)  the partnership or trust mentioned in paragraph (a) is an *attributable taxpayer for the distributing company;

                          [(iii)  if there are entities interposed between the partnership or trust and the distributing company—any of the interposed entities is an *attributable taxpayer for the distributing company.]

(3)  The amount mentioned in paragraph (2)(a) is not assessable income, and is not *exempt income, of the receiving company.

(4)  Subsections (1) and (3) do not apply in relation to an amount to the extent that the amount is not assessable income, and is not *exempt income, because of the operation of section @805‑15 (Use of available attribution credits).

@768‑70  Branch profits from foreign permanent establishment

(1)  Subsection (2) applies to an amount that would, apart from this section, be included in the assessable income for an income year of a company that is an Australian resident from carrying on a *business, at or through a *permanent establishment of the company in a foreign country.

(2)  Subject to subsection (3), the amount is not assessable income, and is not *exempt income, of the company.

(3)  The company’s assessable income for the income year includes the amount (if any) that would be included in the company’s assessable income for the income year under subsection @801‑5(1) (Attribution of CFC attributable income) if these assumptions were made for the income year:

(a)  assume that the *permanent establishment was a separate entity from the company;

(b)  assume that the separate entity was a resident of the foreign country;

(c)  assume that the separate entity was a *CFC;

(d)  assume that income year was the CFC’s *statutory accounting period;

(e)  assume that the company was an *attributable taxpayer for the CFC at the end of the statutory accounting period;

(f)  assume that the company had a *total participation interest in the CFC of 100% at the end of the statutory accounting period.