Income Tax Assessment Act 1997

No. 38, 1997

Compilation No. 174

Compilation date:   12 October 2017

Includes amendments up to: Act No. 108, 2017

Registered:    12 October 2017

This compilation is in 11 volumes

Volume 1: sections 11 to 3655

Volume 2: sections 401 to 5510

Volume 3: sections 581 to 122205

Volume 4: sections 1241 to 152430

Volume 5: sections 1641 to 220800

Volume 6: sections 2301 to 31215

Volume 7: sections 3151 to 42070

Volume 8: sections 6151 to 727910

Volume 9: sections 7681 to 9951

Volume 10: Endnotes 1 to 3

Volume 11: Endnote 4

Each volume has its own contents

 

About this compilation

This compilation

This is a compilation of the Income Tax Assessment Act 1997 that shows the text of the law as amended and in force on 12 October 2017 (the compilation date).

The notes at the end of this compilation (the endnotes) include information about amending laws and the amendment history of provisions of the compiled law.

Uncommenced amendments

The effect of uncommenced amendments is not shown in the text of the compiled law. Any uncommenced amendments affecting the law are accessible on the Legislation Register (www.legislation.gov.au). The details of amendments made up to, but not commenced at, the compilation date are underlined in the endnotes. For more information on any uncommenced amendments, see the series page on the Legislation Register for the compiled law.

Application, saving and transitional provisions for provisions and amendments

If the operation of a provision or amendment of the compiled law is affected by an application, saving or transitional provision that is not included in this compilation, details are included in the endnotes.

Editorial changes

For more information about any editorial changes made in this compilation, see the endnotes.

Modifications

If the compiled law is modified by another law, the compiled law operates as modified but the modification does not amend the text of the law. Accordingly, this compilation does not show the text of the compiled law as modified. For more information on any modifications, see the series page on the Legislation Register for the compiled law.

Selfrepealing provisions

If a provision of the compiled law has been repealed in accordance with a provision of the law, details are included in the endnotes.

 

 

 

Contents

Chapter 4—International aspects of income tax

Part 45—General

Division 768—Foreign nonassessable income and gains

Subdivision 768A—Returns on foreign investment

Guide to Subdivision 768A

7681 What this Subdivision is about

Foreign equity distributions on participation interests

7685 Foreign equity distributions on participation interests

76810 Meaning of foreign equity distribution

76815 Participation test—minimum 10% participation

Subdivision 768B—Some items of income that are exempt from income tax

768100 Foreign government officials in Australia

768105 Compensation arising out of Second World War

768110 Foreign residents deriving income from certain activities in Australia’s exclusive economic zone or on or above Australia’s continental shelf

Subdivision 768G—Reduction in capital gains and losses arising from CGT events in relation to certain voting interests in active foreign companies

Guide to Subdivision 768G

768500 What this Subdivision is about

Operative provisions

768505 Reducing a capital gain or loss from certain CGT events in relation to certain voting interests

Active foreign business asset percentage

768510 Active foreign business asset percentage

768515 Choices to apply market value method or book value method

768520 Market value method—choice made under subsection 768515(1)

768525 Book value method—choice made under subsection 768515(2)

768530 Active foreign business asset percentage—modifications for foreign life insurance companies and foreign general insurance companies

768533 Foreign company that is a FIF using CFC calculation method—treatment as AFI subsidiary under this Subdivision

768535 Modified rules for foreign whollyowned groups

Types of assets of a foreign company

768540 Active foreign business assets of a foreign company

768545 Assets included in the total assets of a foreign company

Voting percentages in a company

768550 Direct voting percentage in a company

768555 Indirect voting percentage in a company

768560 Total voting percentage in a company

Subdivision 768R—Temporary residents

Guide to Subdivision 768R

768900 What this Subdivision is about

Operative provisions

768905 Objects

768910 Income derived by temporary resident

768915 Certain capital gains and capital losses of temporary resident to be disregarded

768950 Individual becoming an Australian resident

768955 Temporary resident who ceases to be temporary resident but remains an Australian resident

768960 Temporary resident not attributable taxpayer for purposes of controlled foreign companies rules

768970 Modification of rules for accruals system of taxation of certain nonresident trust estates

768980 Interest paid by temporary resident

Division 770—Foreign income tax offsets

Guide to Division 770 34

7701 What this Division is about

7705 Object

Subdivision 770A—Entitlement rules for foreign income tax offsets

Basic entitlement rule for foreign income tax offset

77010 Entitlement to foreign income tax offset

77015 Meaning of foreign income tax, credit absorption tax and unitary tax

Subdivision 770B—Amount of foreign income tax offset

Guide to Subdivision 770B

77065 What this Subdivision is about

Operative provisions

77070 Amount of foreign income tax offset

77075 Foreign income tax offset limit

77080 Increase in offset limit for tax paid on amounts to which section 23AI or 23AK of the Income Tax Assessment Act 1936 apply

Subdivision 770C—Rules about payment of foreign income tax

Rules about when foreign tax is paid

770130 When foreign income tax is considered paid—taxes paid by someone else

770135 Foreign income tax paid by CFCs on attributed amounts

Rules about when foreign tax is considered not paid

770140 When foreign income tax is considered not paid—antiavoidance rule

Subdivision 770D—Administration

770190 Amendment of assessments

Division 775—Foreign currency gains and losses

Guide to Division 775 46

7755 What this Division is about

Subdivision 775A—Objects of this Division

77510 Objects of this Division

Subdivision 775B—Realisation of forex gains or losses

77515 Forex realisation gains are assessable

77520 Certain forex realisation gains are exempt income

77525 Certain forex realisation gains are nonassessable nonexempt income

77527 Certain forex realisation gains are nonassessable nonexempt income

77530 Forex realisation losses are deductible

77535 Certain forex realisation losses are disregarded

77540 Disposal of foreign currency or right to receive foreign currency—forex realisation event 1

77545 Ceasing to have a right to receive foreign currency—forex realisation event 2

77550 Ceasing to have an obligation to receive foreign currency—forex realisation event 3

77555 Ceasing to have an obligation to pay foreign currency—forex realisation event 4

77560 Ceasing to have a right to pay foreign currency—forex realisation event 5

77565 Only one forex realisation event to be counted

77570 Tax consequences of certain shortterm forex realisation gains

77575 Tax consequences of certain shortterm forex realisation losses

77580 You may choose not to have sections 77570 and 77575 apply to you

77585 Forex cost base of a right to receive foreign currency

77590 Forex entitlement base of a right to pay foreign currency

77595 Proceeds of assuming an obligation to pay foreign currency

775100 Net costs of assuming an obligation to receive foreign currency

775105 Currency exchange rate effect

775110 Constructive receipts and payments

775115 Economic setoff to be treated as legal setoff

775120 Nonarm’s length transactions

775125 CGT consequences of the acquisition of foreign currency as a result of forex realisation event 2 or 3

775130 Certain deductions not allowable

775135 Right to receive or pay foreign currency

775140 Obligation to pay or receive foreign currency

775145 Application of forex realisation events to currency and fungible rights and obligations

775150 Transitional election

775155 Applicable commencement date

775160 Exception—event happens before the applicable commencement date

775165 Exception—currency or right acquired, or obligation incurred, before the applicable commencement date

775168 Exception—disposal or redemption of traditional securities

775175 Application to things happening before commencement

Subdivision 775C—Rollover relief for facility agreements

Guide to Subdivision 775C

775180 What this Subdivision is about

Operative provisions

775185 What is a facility agreement?

775190 What is an eligible security?

775195 You may choose rollover relief for a facility agreement

775200 Forex realisation event 4 does not apply

775205 What is a rollover?

775210 Notional loan

775215 Discharge of obligation to pay the principal amount of a notional loan under a facility agreement—forex realisation event 6

775220 Material variation of a facility agreement—forex realisation event 7

Subdivision 775D—Qualifying forex accounts that pass the limited balance test

Guide to Subdivision 775D

775225 What this Subdivision is about

Operative provisions

775230 Election to have this Subdivision apply to one or more qualifying forex accounts

775235 Variation of election

775240 Withdrawal of election

775245 When does a qualifying forex account pass the limited balance test?

775250 Tax consequences of passing the limited balance test

775255 Notional realisation when qualifying forex account starts to pass the limited balance test

775260 Modification of tax recognition time

Subdivision 775E—Retranslation for qualifying forex accounts

Guide to Subdivision 775E

775265 What this Subdivision is about

Operative provisions

775270 You may choose retranslation for a qualifying forex account

775275 Withdrawal of choice

775280 Tax consequences of choosing retranslation for an account

775285 Retranslation of gains and losses relating to a qualifying forex account—forex realisation event 8

Subdivision 775F—Retranslation under foreign exchange retranslation election under Subdivision 230D

Guide to Subdivision 775F

775290 What this Subdivision is about

775295 When this Subdivision applies

775300 Tax consequences of choosing retranslation for arrangement

775305 Retranslation of gains and losses relating to arrangement to which foreign exchange retranslation election applies—forex realisation event 9

775310 When election ceases to apply to arrangement

775315 Balancing adjustment when election ceases to apply to arrangement

Division 802—Foreign residents’ income with an underlying foreign source

Subdivision 802A—Conduit foreign income

Guide to Subdivision 802A

8025 What this Subdivision is about

Operative provisions

80210 Objects

80215 Foreign residents—exempting CFI from Australian tax

80217 Trust estates and foreign resident beneficiaries—exempting CFI from Australian tax

80220 Distributions between Australian corporate tax entities—nonassessable nonexempt income

80225 Conduit foreign income of an Australian corporate tax entity

80230 Foreign source income amounts

80235 Capital gains and losses

80240 Effect of foreign income tax offset on conduit foreign income

80245 Previous declarations of conduit foreign income

80250 Receipt of an unfranked distribution from another Australian corporate tax entity

80255 No double benefits

80260 No streaming of distributions

Division 815—Crossborder transfer pricing

Subdivision 815A—Treatyequivalent crossborder transfer pricing rules

Guide to Subdivision 815A

8151 What this Subdivision is about

Operative provisions

8155 Object

81510 Transfer pricing benefit may be negated

81515 When an entity gets a transfer pricing benefit

81520 Crossborder transfer pricing guidance

81525 Modified transfer pricing benefit for thin capitalisation

81530 Determinations negating transfer pricing benefit

81535 Consequential adjustments

81540 No double taxation

Subdivision 815B—Arm’s length principle for crossborder conditions between entities

Guide to Subdivision 815B

815101 What this Subdivision is about

Operative provisions

815105 Object

815110 Operation of Subdivision

815115 Substitution of arm’s length conditions

815120 When an entity gets a transfer pricing benefit

815125 Meaning of arm’s length conditions

815130 Relevance of actual commercial or financial relations

815135 Guidance

815140 Modification for thin capitalisation

815145 Consequential adjustments

815150 Amendment of assessments

Subdivision 815C—Arm’s length principle for permanent establishments

Guide to Subdivision 815C

815201 What this Subdivision is about

Operative provisions

815205 Object

815210 Operation of Subdivision

815215 Substitution of arm’s length profits

815220 When an entity gets a transfer pricing benefit

815225 Meaning of arm’s length profits

815230 Source rules for certain arm’s length profits

815235 Guidance

815240 Amendment of assessments

Subdivision 815D—Special rules for trusts and partnerships

Guide to Subdivision 815D

815301 What this Subdivision is about

Operative provisions

815305 Special rule for trusts

815310 Special rules for partnerships

Subdivision 815E—Reporting obligations for significant global entities

Guide to Subdivision 815E

815350 What this Subdivision is about

Operative provisions

815355 Requirement to give statements

815360 Replacement reporting periods

815365 Exemptions

Division 820—Thin capitalisation rules

Guide to Division 820 166

8201 What this Division is about

8205 Does this Division apply to an entity?

82010 Map of Division

Subdivision 820A—Preliminary

82030 Object of Division

82032 Exemption for private or domestic assets and nondebt liabilities

82035 Application—$2 million threshold

82037 Application—assets threshold

82039 Exemption of certain special purpose entities

82040 Meaning of debt deduction

Subdivision 820B—Thin capitalisation rules for outward investing entities (nonADI)

Guide to Subdivision 820B

82065 What this Subdivision is about

Operative provisions

82085 Thin capitalisation rule for outward investing entities (nonADI)

82090 Maximum allowable debt

82095 Safe harbour debt amount—outward investor (general)

820100 Safe harbour debt amount—outward investor (financial)

820105 Arm’s length debt amount

820110 Worldwide gearing debt amount—outward investor that is not also an inward investment vehicle

820111 Worldwide gearing debt amount—outward investor that is also an inward investment vehicle

820115 Amount of debt deduction disallowed

820120 Application to part year periods

Subdivision 820C—Thin capitalisation rules for inward investing entities (nonADI)

Guide to Subdivision 820C

820180 What this Subdivision is about

Operative provisions

820185 Thin capitalisation rule for inward investing entities (nonADI)

820190 Maximum allowable debt

820195 Safe harbour debt amount—inward investment vehicle (general)

820200 Safe harbour debt amount—inward investment vehicle (financial)

820205 Safe harbour debt amount—inward investor (general)

820210 Safe harbour debt amount—inward investor (financial)

820215 Arm’s length debt amount

820216 Worldwide gearing debt amount—inward investment vehicle (general)

820217 Worldwide gearing debt amount—inward investment vehicle (financial)

820218 Worldwide gearing debt amount—inward investor (general)

820219 Worldwide gearing debt amount—inward investor (financial)

820220 Amount of debt deduction disallowed

820225 Application to part year periods

Subdivision 820D—Thin capitalisation rules for outward investing entities (ADI)

Guide to Subdivision 820D

820295 What this Subdivision is about

Operative provisions

820300 Thin capitalisation rule for outward investing entities (ADI)

820305 Minimum capital amount

820310 Safe harbour capital amount

820315 Arm’s length capital amount

820320 Worldwide capital amount

820325 Amount of debt deduction disallowed

820330 Application to part year periods

Subdivision 820E—Thin capitalisation rules for inward investing entities (ADI)

Guide to Subdivision 820E

820390 What this Subdivision is about

Operative provisions

820395 Thin capitalisation rule for inward investing entities (ADI)

820400 Minimum capital amount

820405 Safe harbour capital amount

820410 Arm’s length capital amount

820415 Amount of debt deduction disallowed

820420 Application to part year periods

Subdivision 820EA—Some financial entities may choose to be treated as ADIs

820430 When choice can be made, and what effect it has

820435 Conditions

820440 Revocation of choice

820445 How this Subdivision interacts with Subdivision 820FA

Subdivision 820FA—How the thin capitalisation rules apply to consolidated groups and MEC groups

Guide to Subdivision 820FA

820579 What this Subdivision is about

Operative provisions

820581 How this Division applies to head company for income year in which group comes into existence or ceases to exist

820583 Classification of head company

820584 Exempt special purpose entities treated as not being member of group

820585 Exemption for consolidated group headed by foreigncontrolled Australian ADI or its holding company

820587 Additional application of Subdivision 820D to MEC group that includes foreigncontrolled Australian ADI

820588 Choice to treat specialist credit card institutions as being financial entities and not ADIs

820589 How Subdivision 820D applies to a MEC group

Subdivision 820FB—Grouping branches of foreign banks and foreign financial entities with a consolidated group, MEC group or single Australian resident company

Guide to Subdivision 820FB

820595 What this Subdivision is about

Choice to group with branches of foreign banks and foreign financial entities

820597 Choice by head company of consolidated group or MEC group

820599 Choice by Australian resident company outside consolidatable group and MEC group

Effect of choice

820601 Application

820603 General

820605 Effect on establishment entity if certain debt deductions disallowed

820607 Effect on test periods under this Division

820609 Effect on classification of head company or single company

820610 Choice not to be outward investing entity (ADI) or inward investing entity (ADI)

820611 Values to be based on what would be in consolidated accounts for group

820613 How Subdivision 820D applies

820615 How Subdivision 820E applies

Subdivision 820G—Calculating the average values

Guide to Subdivision 820G

820625 What this Subdivision is about

How to calculate the average values

820630 Methods of calculating average values

820635 The opening and closing balances method

820640 The 3 measurement days method

820645 The frequent measurement method

Special rules about values and valuation

820675 Amount to be expressed in Australian currency

820680 Valuation of assets, liabilities and equity capital

820682 Recognition of assets and liabilities—modifying application of accounting standards

820683 Recognition of internally generated intangible items—modifying application of accounting standards

820684 Valuation of intangible assets if no active market—modifying application of accounting standards

820685 Valuation of debt capital

820690 Commissioner’s power

Subdivision 820H—Control of entities

Guide to Subdivision 820H

820740 What this Subdivision is about

Australian controller of a foreign entity

820745 What is an Australian controlled foreign entity?

820750 What is an Australian controller of a controlled foreign company?

820755 What is an Australian controller of a controlled foreign trust?

820760 What is an Australian controller of a controlled foreign corporate limited partnership?

Foreign controlled Australian entity

820780 What is a foreign controlled Australian entity?

820785 What is a foreign controlled Australian company?

820790 What is a foreign controlled Australian trust?

820795 What is a foreign controlled Australian partnership?

Thin capitalisation control interest

820815 General rule about thin capitalisation control interest in a company, trust or partnership

820820 Special rules about calculating TC control interest held by an entity

820825 Special rules about calculating TC control interests held by a group of entities

820830 Special rules about determining percentage of TC control interest

820835 Commissioner’s power

TC direct control interest, TC indirect control interest and TC control tracing interest

820855 TC direct control interest in a company

820860 TC direct control interest in a trust

820865 TC direct control interest in a partnership

820870 TC indirect control interest in a company, trust or partnership

820875 TC control tracing interest in a company, trust or partnership

Subdivision 820HA—Controlled foreign entity debt and controlled foreign entity equity

Guide to Subdivision 820HA

820880 What this Subdivision is about

820881 Application

820885 What is controlled foreign entity debt?

820890 What is controlled foreign entity equity?

Subdivision 820I—Associate entities

Guide to Subdivision 820I

820900 What this Subdivision is about

820905 Associate entity

820910 Associate entity debt

820915 Associate entity equity

820920 Associate entity excess amount

Subdivision 820J—Equity interest in a trust or partnership

Guide to Subdivision 820J

820925 What this Subdivision is about

820930 Equity interest in a trust or partnership

Subdivision 820JA—Worldwide debt and equity concepts

Guide to Subdivision 820JA

820931 What this Subdivision is about

Operative provisions

820932 Worldwide debt and worldwide equity

820933 Statement worldwide debt, statement worldwide equity and statement worldwide assets

820935 Meaning of audited consolidated financial statements

Subdivision 820K—Zerocapital amount

Guide to Subdivision 820K

820940 What this Subdivision is about

820942 How to work out the zerocapital amount

Subdivision 820KA—Costfree debt capital and excluded equity interests

Guide to Subdivision 820KA

820945 What this Subdivision is about

820946 Costfree debt capital and excluded equity interest

Subdivision 820L—Record keeping requirements

Guide to Subdivision 820L

820950 What this Subdivision is about

Records about Australian permanent establishments

820960 Records about Australian permanent establishments

820965 Review of Commissioner’s decision

Records about arm’s length amounts

820980 Records about arm’s length debt amount and arm’s length capital amount

Records about asset revaluations

820985 Methodology of revaluation and independence of valuer

Offences committed by certain entities

820990 Offences—treatment of partnerships

820995 Offences—treatment of unincorporated companies

Division 830—Foreign hybrids

Guide to Division 830 342

8301 What this Division is about

Subdivision 830A—Meaning of “foreign hybrid”

8305 Foreign hybrid

83010 Foreign hybrid limited partnership

83015 Foreign hybrid company

Subdivision 830B—Extension of normal partnership provisions to foreign hybrid companies

83020 Treatment of company as a partnership

83025 Partners are the shareholders in the company

83030 Individual interest of a partner in net income etc. equals percentage of notional distribution of company’s profits

83035 Partner’s interest in assets

83040 Control and disposal of share in partnership income

Subdivision 830C—Special rules applicable while an entity is a foreign hybrid

83045 Partner’s revenue and net capital losses from foreign hybrid not to exceed partner’s loss exposure amount

83050 Deduction etc. where partner’s foreign hybrid revenue loss amount and foreign hybrid net capital loss amount are less than partner’s loss exposure amount

83055 Meaning of foreign hybrid net capital loss amount

83060 Meaning of loss exposure amount

83065 Meaning of outstanding foreign hybrid revenue loss amount

83070 Meaning of outstanding foreign hybrid net capital loss amount

83075 Extended meaning of subject to foreign tax

Subdivision 830D—Special rules applicable when an entity becomes or ceases to be a foreign hybrid

83080 Setting the tax cost of partners’ interests in the assets of an entity that becomes a foreign hybrid

83085 Setting the tax cost of assets of an entity when it ceases to be a foreign hybrid

83090 What the expression tax cost is set means

83095 What the expression tax cost setting amount means

830100 What the expression tax cost means

830105 What the expression assetbased income tax regime means

830110 No disposal of assets etc. on entity becoming or ceasing to be a foreign hybrid

830115 Tax losses cannot be transferred to a foreign hybrid

830120 End of CFC’s last statutory accounting period

830125 How long interest in asset, or asset, held

Division 840—Withholding taxes

Guide to Division 840 368

8401 What this Division is about

Subdivision 840M—Managed investment trust withholding tax

Guide to Subdivision 840M

840800 What this Subdivision is about

Operative provisions

840805 Liability for managed investment trust withholding tax

840810 When managed investment trust withholding tax is payable

840815 Certain income is nonassessable nonexempt income

840820 Agency rules

Subdivision 840S—Seasonal Labour Mobility Program withholding tax

Guide to Subdivision 840S

840900 What this Subdivision is about

Operative provisions

840905 Liability for Seasonal Labour Mobility Program withholding tax

840910 When Seasonal Labour Mobility Program withholding tax is payable

840915 Certain income is nonassessable nonexempt income

840920 Overpayment of Seasonal Labour Mobility Program withholding tax

Division 842—Exempt Australian source income and gains of foreign residents

Subdivision 842B—Some items of Australian source income of foreign residents that are exempt from income tax

Guide to Subdivision 842B

842100 What this Subdivision is about

842105 Amounts of Australian source ordinary income and statutory income that are exempt

Subdivision 842I—Investment manager regime

Guide to Subdivision 842I

842200 What this Subdivision is about

Object of this Subdivision

842205 Object of this Subdivision

IMR concessions

842210 IMR concessions apply only to foreign residents etc.

842215 IMR concessions

842220 Meaning of IMR entity

842225 Meaning of IMR financial arrangement

IMR widely held entities

842230 Meaning of IMR widely held entity

842235 Rules for determining total participation interests for the purposes of the widely held test

842240 Extended meaning of IMR widely held entity—temporary circumstances outside entity’s control

Independent Australian fund managers

842245 Meaning of independent Australian fund manager

842250 Reductions in IMR concessions if independent Australian fund manager entitled to substantial share of IMR entity’s income

Division 855—Capital gains and foreign residents

Guide to Division 855 397

8551 What this Division is about

Subdivision 855A—Disregarding a capital gain or loss by foreign residents

8555 Objects of this Subdivision

85510 Disregarding a capital gain or loss from CGT events

85515 When an asset is taxable Australian property

85516 Meaning of permanent establishment article

85520 Taxable Australian real property

85525 Indirect Australian real property interests

85530 Principal asset test

85532 Disregard market value of duplicated nonTARP assets

85535 Reducing a capital gain or loss from a business asset—Australian permanent establishments

85540 Capital gains and losses of foreign residents through fixed trusts

Subdivision 855B—Becoming an Australian resident

85545 Individual or company becomes an Australian resident

85550 Trust becomes a resident trust

85555 CFC becomes an Australian resident

Chapter 5—Administration

Part 530—Recordkeeping and other obligations

Division 900—Substantiation rules

Guide to Division 900 410

9001 What this Division is about

Subdivision 900A—Application of Division

9005 Application of the requirements of Division 900

90010 Substantiation requirement

90012 Application to recipients and payers of certain withholding payments

Subdivision 900B—Substantiating work expenses

90015 Getting written evidence

90020 Keeping travel records

90025 Retaining the written evidence and travel records

90030 Meaning of work expense

90035 Exception for small total of expenses

90040 Exception for laundry expenses below a certain limit

90045 Exception for work expense related to award transport payment

90050 Exception for domestic travel allowance expenses

90055 Exception for overseas travel allowance expenses

90060 Exception for reasonable overtime meal allowance

90065 Crew members on international flights need not keep travel records

Subdivision 900C—Substantiating car expenses

90070 Getting written evidence

90075 Retaining the written evidence and odometer records

Subdivision 900D—Substantiating business travel expenses

90080 Getting written evidence

90085 Keeping travel records

90090 Retaining the written evidence and travel records

90095 Meaning of business travel expense

Subdivision 900E—Written evidence

Guide to Subdivision 900E

900100 What this Subdivision is about

Operative provisions

900105 Ways of getting written evidence

900110 Time limits

900115 Written evidence from supplier

900120 Written evidence of depreciating asset expense

900125 Evidence of small expenses

900130 Evidence of expenses considered otherwise too hard to substantiate

900135 Evidence on a payment summary

Subdivision 900F—Travel records

Guide to Subdivision 900F

900140 What this Subdivision is about

900145 Purpose of a travel record

Operative provisions

900150 Recording activities in travel records

900155 Showing which of your activities were incomeproducing activities

Subdivision 900G—Retaining and producing records

Guide to Subdivision 900G

900160 What this Subdivision is about

900165 The retention period

Operative provisions

900170 Extending the retention period if an expense is disputed

900175 Commissioner may tell you to produce your records

900180 How to comply with a notice

900185 What happens if you don’t comply

Subdivision 900H—Relief from effects of failing to substantiate

900195 Commissioner’s discretion to review failure to substantiate

900200 Reasonable expectation that substantiation would not be required

900205 What if your documents are lost or destroyed?

Subdivision 900I—Award transport payments

Guide to Subdivision 900I

900210 What this Subdivision is about

Operative provisions

900215 Deducting an expense related to an award transport payment

900220 Definition of award transport payment

900225 Substituted industrial instruments

900230 Changes to industrial instruments applied for before 29 October 1986

900235 Changes to industrial instruments solely referable to matters in the instrument

900240 Deducting in anticipation of receiving award transport payment

900245 Effect of exception in this Subdivision on exception for small total of expenses

900250 Effect of exception in this Subdivision on methods of calculating car expense deductions

Part 535—Miscellaneous

Division 905—Offences

9055 Application of the Criminal Code

Division 909—Regulations

9091 Regulations

Chapter 6—The Dictionary

Part 61—Concepts and topics

Division 950—Rules for interpreting this Act

950100 What forms part of this Act

950105 What does not form part of this Act

950150 Guides, and their role in interpreting this Act

Division 960—General

Subdivision 960B—Utilisation of tax attributes

96020 Utilisation

Subdivision 960C—Foreign currency

96049 Objects of this Subdivision

96050 Translation of amounts into Australian currency

96055 Application of translation rules

Subdivision 960D—Functional currency

Guide to Subdivision 960D

96056 What this Subdivision is about

Operative provisions

96059 Object of this Subdivision

96060 You may choose a functional currency

96061 Functional currency for calculating capital gains and losses on indirect Australian real property interests

96065 Backdated startup choice

96070 What is the applicable functional currency?

96075 What is a transferor trust?

96080 Translation rules

96085 Special rule about translation—events that happened before the current choice took effect

96090 Withdrawal of choice

Subdivision 960E—Entities

960100 Entities

960105 Certain entities treated as agents

Subdivision 960F—Distribution by corporate tax entities

960115 Meaning of corporate tax entity

960120 Meaning of distribution

Subdivision 960G—Membership of entities

960130 Members of entities

960135 Membership interest in an entity

960140 Ordinary membership interest

Subdivision 960GP—Participation interests in entities

960180 Total participation interest

960185 Indirect participation interest

960190 Direct participation interest

960195 Nonportfolio interest test

Subdivision 960H—Abnormal trading in shares or units

960220 Meaning of trading

960225 Abnormal trading

960230 Abnormal trading—5% of shares or units in one transaction

960235 Abnormal trading—suspected 5% of shares or units in a series of transactions

960240 Abnormal trading—suspected acquisition or merger

960245 Abnormal trading—20% of shares or units traded over 60 day period

Subdivision 960J—Family relationships

Guide to Subdivision 960J

960250 What this Subdivision is about

Operative provisions

960252 Object of this Subdivision

960255 Family relationships

Subdivision 960M—Indexation

Guide to Subdivision 960M

960260 What this Subdivision is about

960265 The provisions for which indexation is relevant

Operative provisions

960270 Indexing amounts

960275 Indexation factor

960280 Index number

960285 Indexation—superannuation and employment termination

960290 Indexation—levy threshold for the major bank levy

Subdivision 960S—Market value

Guide to Subdivision 960S

960400 What this Subdivision is about

Operative provisions

960405 Effect of GST on market value of an asset

960410 Market value of noncash benefits

960412 Working out market value using an approved method

960415 Amounts that depend on market value

Subdivision 960T—Meaning of Australia

Guide to Subdivision 960T

960500 What this Subdivision is about

Operative provisions

960505 Meaning of Australia

Subdivision 960U—Significant global entities

Guide to Subdivision 960U

960550 What this Subdivision is about

Operative provisions

960555 Meaning of significant global entity

960560 Meaning of global parent entity

960565 Meaning of annual global income

960570 Meaning of global financial statements

Division 961—Notional tax offsets

Subdivision 961A—Dependant (nonstudent child under 21 or student) notional tax offset

Guide to Subdivision 961A

9611 What this Subdivision is about

Entitlement to the notional tax offset

9615 Who is entitled to the notional tax offset

Amount of the notional tax offset

96110 Amount of the dependant (nonstudent child under 21 or student) notional tax offset

96115 Reduced amounts of the dependant (nonstudent child under 21 or student) notional tax offset

96120 Reductions to take account of the dependant’s income

Subdivision 961B—Dependant (sole parent of a nonstudent child under 21 or student) notional tax offset

Guide to Subdivision 961B

96150 What this Subdivision is about

Operative provisions

96155 Who is entitled to the notional tax offset

96160 Amount of the dependant (sole parent of a nonstudent child under 21 or student) notional tax offset

96165 Reductions to take account of change in circumstances

Division 974—Debt and equity interests

Subdivision 974A—General

Guide to Division 974 510

9741 What this Division is about

9745 Overview of Division

Operative provisions

97410 Object

Subdivision 974B—Debt interests

97415 Meaning of debt interest

97420 The test for a debt interest

97425 Exceptions to the debt test

97430 Providing a financial benefit

97435 Valuation of financial benefits—general rules

97440 Valuation of financial benefits—rights and options to terminate early

97445 Valuation of financial benefits—convertible interests

97450 Valuation of financial benefits—value in present value terms

97455 The debt interest and its issue

97460 Debt interest arising out of obligations owed by a number of entities

97465 Commissioner’s power

Subdivision 974C—Equity interests in companies

97470 Meaning of equity interest in a company

97475 The test for an equity interest

97480 Equity interest arising from arrangement funding return through connected entities

97485 Right or return contingent on aspects of economic performance

97490 Right or return at discretion of company or connected entity

97495 The equity interest

Subdivision 974D—Common provisions

974100 Treatment of convertible and converting interests

974105 Effect of action taken in relation to interest arising from related schemes

974110 Effect of material change

974112 Determinations by Commissioner

Subdivision 974E—Nonshare distributions by a company

974115 Meaning of nonshare distribution

974120 Meaning of nonshare dividend

974125 Meaning of nonshare capital return

Subdivision 974F—Related concepts

974130 Financing arrangement

974135 Effectively noncontingent obligation

974140 Ordinary debt interest

974145 Benchmark rate of return

974150 Schemes

974155 Related schemes

974160 Financial benefit

974165 Convertible and converting interests

Division 975—Concepts about companies

Subdivision 975A—General

975150 Position to affect rights in relation to a company

975155 When is an entity a controller (for CGT purposes) of a company?

975160 When an entity has an associateinclusive control interest

Subdivision 975G—What is a company’s share capital account?

975300 Meaning of share capital account

Subdivision 975W—Whollyowned groups of companies

975500 Whollyowned groups

975505 What is a 100% subsidiary?

Division 976—Imputation

9761 Franked part of a distribution

9765 Unfranked part of a distribution

97610 The part of a distribution that is franked with an exempting credit

97615 The part of a distribution that is franked with a venture capital credit

Division 977—Realisation events, and the gains and losses they realise for income tax purposes

CGT assets 

9775 Realisation event

97710 Loss realised for income tax purposes

97715 Gain realised for income tax purposes

Trading stock 

97720 Realisation event

97725 Disposal of trading stock: loss realised for income tax purposes

97730 Ending of an income year: loss realised for income tax purposes

97735 Disposal of trading stock: gain realised for income tax purposes

97740 Ending of an income year: gain realised for income tax purposes

Revenue assets 

97750 Meaning of revenue asset

97755 Loss or gain realised for income tax purposes

Part 65—Dictionary definitions

Division 995—Definitions

9951 Definitions

Chapter 4International aspects of income tax

Part 45General

Division 768Foreign nonassessable income and gains

 

Table of Subdivisions

768A Returns on foreign investment

768B Some items of income that are exempt from income tax

768G Reduction in capital gains and losses arising from CGT events in relation to certain voting interests in active foreign companies

768R Temporary residents

Subdivision 768AReturns on foreign investment

Guide to Subdivision 768A

7681  What this Subdivision is about

If:

 (a) an Australian corporate tax entity receives a foreign equity distribution from a foreign company, either directly or indirectly through one or more interposed trusts or partnerships; and

 (b) the Australian corporate tax entity holds a participation interest of at least 10% in the foreign company;

the distribution is nonassessable nonexempt income for the Australian corporate tax entity.

Table of sections

Foreign equity distributions on participation interests

7685 Foreign equity distributions on participation interests

76810 Meaning of foreign equity distribution

76815 Participation test—minimum 10% participation

Foreign equity distributions on participation interests

7685  Foreign equity distributions on participation interests

Foreign equity distributions received directly

 (1) A *foreign equity distribution is not assessable income, and is not *exempt income, of the entity to which it is made if:

 (a) the entity is an Australian resident and a *corporate tax entity; and

 (b) at the time the distribution is made, the entity satisfies the participation test in section 76815 in relation to the company that made the distribution; and

 (c) the entity:

 (i) does not receive the distribution in the capacity of a trustee; or

 (ii) receives the distribution in the capacity of a trustee of a *public trading trust.

Foreign equity distributions received through interposed trusts and partnerships

 (2) An amount is not assessable income, and is not *exempt income, of an entity if:

 (a) the entity is a beneficiary of a trust or a partner in a partnership, an Australian resident and a *corporate tax entity; and

 (b) the amount is all or part of the *net income of the trust or partnership that would, apart from this subsection, be included in the entity’s assessable income because of:

 (i) Division 276; or

 (ii) Division 5 or 6 of Part III of the Income Tax Assessment Act 1936; and

 (c) the amount can be attributed (either directly or indirectly through one or more interposed trusts or partnerships that are not *corporate tax entities) to a *foreign equity distribution; and

 (d) at the time the distribution is made, the entity satisfies the participation test in section 76815 in relation to the company that made the distribution; and

 (e) the entity:

 (i) does not receive the distribution in the capacity of a trustee; or

 (ii) receives the distribution in the capacity of a trustee of a *public trading trust.

 (3) An amount that is *nonassessable nonexempt income under subsection (2) is taken, for the purpose of section 2590 (about deductions relating to foreign nonassessable nonexempt income) to be derived from the same source as the *foreign equity distribution.

76810  Meaning of foreign equity distribution

  A foreign equity distribution is a *distribution or *nonshare dividend made by a company that is a foreign resident in respect of an *equity interest in the company.

76815  Participation test—minimum 10% participation

  An entity satisfies the participation test in this section in relation to another entity at a time if, at that time, the sum of the following is at least 10%:

 (a) the *direct participation interest the entity would have in the other entity if rights on windingup were disregarded;

 (b) the *indirect participation interest the entity would have in the other entity if:

 (i) rights on windingup were disregarded; and

 (ii) section 960185 only applied to intermediate entities that are not *corporate tax entities.

Subdivision 768BSome items of income that are exempt from income tax

Table of sections

768100 Foreign government officials in Australia

768105 Compensation arising out of Second World War

768110  Foreign residents deriving income from certain activities in Australia’s exclusive economic zone or on or above Australia’s continental shelf

768100  Foreign government officials in Australia

 (1) The amounts of *ordinary income and *statutory income covered by the table are exempt from income tax. In some cases, the exemption is subject to exceptions or special conditions, or both.

Note 1: Ordinary and statutory income that is exempt from income tax is called exempt income: see section 620. The note to subsection 615(2) describes some of the other consequences of it being exempt income.

Note 2: Even if an exempt payment is made to you, the Commissioner can still require you to lodge an income tax return or information under section 161 of the Income Tax Assessment Act 1936.

 

Exempt amounts

Item

If you are:

the following amounts are exempt from income tax:

subject to these exceptions and special conditions:

1

(a) a representative in Australia of the government of a foreign country; or

(b) a member of the official staff of such a representative;

and you are neither an Australian citizen nor ordinarily resident in Australia

(a) your official salary; and

(b) your *ordinary income, and your *statutory income, from a source outside Australia

(a) no Convention listed in subsection (2) applies to the representative; and

(b) the country concerned grants in relation to Australia exemptions from taxes on income that correspond with the exemption in this item

2

(a) an officer of the government of a *Commonwealth of Nations country; and

(b) temporarily in Australia to render service on behalf of that country, or an *Australian government agency, in accordance with an *arrangement between the governments of that country and of the Commonwealth or of a State or Territory

(a) your official salary; and

(b) your *ordinary income, and your *statutory income, from a source outside Australia

that country exempts from income tax the salaries of officers of the government of the Commonwealth temporarily in that country for similar purposes in accordance with a similar arrangement

 (2) The Conventions are:

 (a) the Vienna Convention on Diplomatic Relations, as having the force of law because of the Diplomatic Privileges and Immunities Act 1967;

 (b) the Vienna Convention on Consular Relations, as having the force of law because of the Consular Privileges and Immunities Act 1972.

Note: Those Conventions have the force of law in Australia because of those Acts and achieve substantially the same effect as item 1 of the table: see Article 34 of the Vienna Convention on Diplomatic Relations and Article 49 of the Vienna Convention on Consular Relations.

768105  Compensation arising out of Second World War

 (1) A payment to you is exempt from income tax if:

 (a) you are an Australian resident at the time when it would otherwise be included in your assessable income; and

 (b) the payment is from a source in a foreign country; and

 (c) the payment is in connection with:

 (i) any wrong or injury; or

 (ii) any loss of, or damage to, property; or

 (iii) any other detriment;

  suffered by you or another individual as a result of:

 (iv) persecution by the National Socialist regime of Germany during the National Socialist period; or

 (v) persecution during the Second World War by any other enemy of the Commonwealth or by a regime covered by subsection (3); or

 (vi) flight from persecution mentioned in subparagraph (iv) or (v); or

 (vii) participation in a resistance movement during the Second World War against forces of the National Socialist regime of Germany or against forces of any other enemy of the Commonwealth; and

 (d) the payment is not directly or indirectly from any of your *associates.

Note: An example of a detriment covered by subparagraph (c)(iii) is if you lost the opportunity to qualify for a pension because your period of contribution was cut short because you had to flee persecution by the National Socialist regime.

Duration of Second World War

 (2) Subsection (1) applies to:

 (a) the period immediately before the Second World War; and

 (b) the period immediately after the Second World War;

in the same way as it applies to the period of the Second World War.

Regimes associated with an enemy of the Commonwealth

 (3) This subsection covers a regime that was:

 (a) in alliance with; or

 (b) occupied by; or

 (c) effectively controlled by; or

 (d) under duress from; or

 (e) surrounded by;

either or both of the following:

 (f) the National Socialist regime of Germany;

 (g) any other enemy of the Commonwealth.

Legal personal representative

 (4) Subsection (1) applies to a payment to:

 (a) your *legal personal representative; or

 (b) a trust established by your will;

in a corresponding way to the way in which it would have applied if:

 (c) the payment had been to you; and

 (d) if the payment is made after your death—you were still alive.

768110  Foreign residents deriving income from certain activities in Australia’s exclusive economic zone or on or above Australia’s continental shelf

 (1) The object of this section is to ensure Australia’s compliance with certain provisions of the *United Nations Convention on the Law of the Sea.

Note: The text of the United Nations Convention on the Law of the Sea is in Australian Treaty Series 1994 No. 31 ([1994] ATS 31) and could in 2014 be viewed in the Australian Treaties Library on the AustLII website (http://www.austlii.edu.au).

 (2) If you are a foreign resident, your *ordinary income and *statutory income is neither assessable income, nor *exempt income, to the extent that:

 (a) the income is from an activity carried on in an area that is:

 (i) part of Australia’s exclusive economic zone; or

 (ii) part of, or above, Australia’s continental shelf; and

 (b) the activity is specified by regulation to be a prescribed activity for the purpose of this section.

Subdivision 768GReduction in capital gains and losses arising from CGT events in relation to certain voting interests in active foreign companies

Guide to Subdivision 768G

768500  What this Subdivision is about

If:

 (a) a company has a capital gain or capital loss arising from a CGT event that happens in relation to a share in a foreign company; and

 (b) the company holds a direct voting percentage of 10% or more in the foreign company for a certain period before the CGT event happens;

the gain or loss is reduced by a percentage that reflects the degree to which the assets of the foreign company are used in an active business.

Table of sections

Operative provisions

768505 Reducing a capital gain or loss from certain CGT events in relation to certain voting interests

Active foreign business asset percentage

768510 Active foreign business asset percentage

768515 Choices to apply market value method or book value method

768520 Market value method—choice made under subsection 768515(1)

768525 Book value method—choice made under subsection 768515(2)

768530 Active foreign business asset percentage—modifications for foreign life insurance companies and foreign general insurance companies

768533 Foreign company that is a FIF using CFC calculation method—treatment as AFI subsidiary under this Subdivision

768535 Modified rules for foreign whollyowned groups

Types of assets of a foreign company

768540 Active foreign business assets of a foreign company

768545 Assets included in the total assets of a foreign company

Voting percentages in a company

768550 Direct voting percentage in a company

768555 Indirect voting percentage in a company

768560 Total voting percentage in a company

Operative provisions

768505  Reducing a capital gain or loss from certain CGT events in relation to certain voting interests

 (1) The *capital gain or *capital loss a company (the holding company) that is an Australian resident makes from a *CGT event that happened at a particular time (the time of the CGT event) to a *share in a company (the foreign disposal company) that is a foreign resident is reduced if:

 (a) the holding company held a *direct voting percentage of 10% or more in the foreign disposal company throughout a 12 month period that:

 (i) began no earlier than 24 months before the time of the CGT event; and

 (ii) ended no later than that time; and

 (b) the share is not:

 (i) an eligible finance share (within the meaning of Part X of the Income Tax Assessment Act 1936); or

 (ii) a widely distributed finance share (within the meaning of that Part); and

 (c) the CGT event is CGT event A1, B1, C2, E1, E2, G3, J1, K4, K6, K10 or K11.

 (2) The gain or loss is reduced by the *active foreign business asset percentage (see sections 768510, 768530 and 768535) of the foreign disposal company in relation to the holding company at the time of the CGT event.

Active foreign business asset percentage

768510  Active foreign business asset percentage

 (1) The active foreign business asset percentage of a company (the foreign company) that is a foreign resident, in relation to the holding company mentioned in section 768505, at the time of the CGT event mentioned in that section, is worked out in accordance with this section.

Market value method

 (2) Work out that percentage under section 768520 if:

 (a) the holding company has made a choice under subsection 768515(1) in relation to the foreign company for that time; and

 (b) there is sufficient evidence of the *market value at that time of:

 (i) all *assets included in the total assets of the foreign company at that time; and

 (ii) all *active foreign business assets of the foreign company at that time.

Book value method

 (3) Work out that percentage under section 768525 if:

 (a) the holding company has made a choice under subsection 768515(2) in relation to the foreign company for that time; and

 (b) there are *recognised company accounts of the foreign company for a period that ends no later than that time, but no more than 12 months before that time; and

 (c) if the foreign company was in existence before the start of the period mentioned in paragraph (b)—there are recognised company accounts of the foreign company for a period that ends at least 6 months, but no more than 18 months, before the end of the period mentioned in paragraph (b).

Default method

 (4) Otherwise, that percentage is:

 (a) 100% (if this section is being applied for the purposes of section 768505 to reduce a *capital loss of the holding company); or

 (b) zero (in any other case).

768515  Choices to apply market value method or book value method

Choice for market value method

 (1) The holding company may choose to work out the *active foreign business asset percentage of the foreign company for the time of the CGT event under section 768520.

Choice for book value method

 (2) The holding company may choose to work out the *active foreign business asset percentage of the foreign company for the time of the CGT event under section 768525.

Method of making choice

 (3) The way an entity making a choice under subsection (1) or (2) prepares its *income tax return is sufficient evidence of the making of the choice.

Note: If an entity does not make a choice under subsection (1) or (2), it will work out the active foreign business asset percentage of the foreign company in accordance with the default method in subsection 768510(4).

768520  Market value method—choice made under subsection 768515(1)

 (1) The active foreign business asset percentage of the foreign company in relation to the holding company, at the time of the CGT event, is worked out under this section in this way.

Method statement

Step 1. Work out the *market value at that time of all *assets included in the total assets of the foreign company at that time.

Step 2. Work out the *market value (see subsection (2)) at that time of all *active foreign business assets of the foreign company at that time.

Step 3. Divide the result of step 2 by the result of step 1.

Step 4. Express the result of step 3 as a percentage, and round that percentage to the nearest whole percentage point (rounding a number ending in .5 upwards).

Step 5. The active foreign business asset percentage is:

 (a) if the result of step 4 is less than 10%—zero; or

 (b) if the result of step 4 is 10% or more, but less than 90%—that result; or

 (c) if the result of step 4 is 90% or more—100%.

Note 1: If the foreign company is a foreign life insurance company or a foreign general insurance company, the result of step 2 is modified under section 768530.

Note 2: If the foreign company is a member of a whollyowned group, section 768535 may modify the way in which this section operates.

 (2) If, at the time of the CGT event:

 (a) an *active foreign business asset of the foreign company is a *share in another company (the subsidiary company); and

 (b) the subsidiary company is a foreign resident;

then, in working out the *market value of all *active foreign business assets of the foreign company at that time for the purposes of step 2 of the method statement in subsection (1), treat the *market value of the share at that time according to the following table.

 

Market value of a share in subsidiary company

Item

If:

treat the market value of the share as:

1

(a) the foreign company has a *direct voting percentage of 10% or more in the subsidiary company at that time; and

(b) the holding company has a *total voting percentage of 10% or more in the subsidiary company at that time

the *share’s *market value at that time, multiplied by the *active foreign business asset percentage of the subsidiary company in relation to the holding company at that time

2

item 1 does not apply

zero

Note: For the purposes of item 1 of the table, it is necessary to work out the active foreign business asset percentage of the subsidiary company before working out the active foreign business asset percentage of the foreign company.

768525  Book value method—choice made under subsection 768515(2)

 (1) The active foreign business asset percentage of the foreign company in relation to the holding company, at the time of the CGT event, is worked out under this section in this way.

Method statement

Step 1. Work out the foreign company’s average value of total assets at that time under subsection (2).

Step 2. Work out the foreign company’s average value of active foreign business assets at that time under subsection (3).

Step 3. Divide the result of step 2 by the result of step 1.

Step 4. Express the result of step 3 as a percentage, and round that percentage to the nearest whole percentage point (rounding a number ending in .5 upwards).

Step 5. The active foreign business asset percentage is:

 (a) if the result of step 4 is less than 10%—zero; or

 (b) if the result of step 4 is 10% or more, but less than 90%—that result; or

 (c) if the result of step 4 is 90% or more—100%.

Note: If the foreign company is a member of a whollyowned group, section 768535 may modify the way in which this section operates.

 (2) The foreign company’s average value of total assets at the time of the CGT event is worked out in this way.

Method statement

Step 1. Work out the sum of the values (see subsection (5)) of every *asset included in the total assets of the foreign company at the end of the most recent period:

 (a) that ends no later than that time, but no more than 12 months before that time; and

 (b) for which the foreign company has *recognised company accounts.

Step 2. Work out the sum of the values (see subsection (5)) of every *asset included in the total assets of the foreign company at the end of the most recent period:

 (a) that ends at least 6 months, but no more than 18 months, before the end of the period mentioned in step 1; and

 (b) for which the foreign company has *recognised company accounts.

 Note: See subsection (6) if the foreign company does not have recognised company accounts for a period mentioned in this step.

Step 3. Work out the sum of the results of steps 1 and 2, and divide that sum by 2.

 (3) The foreign company’s average value of active foreign business assets at that time is worked out in this way.

Method statement

Step 1. Work out the sum of the values (see subsections (4) and (5)) of every *active foreign business asset of the foreign company at the end of the most recent period:

 (a) that ends no later than that time, but no more than 12 months before that time; and

 (b) for which the foreign company has *recognised company accounts.

Step 2. Work out the sum of the values (see subsections (4) and (5)) of every *active foreign business asset of the foreign company at the end of the most recent period:

 (a) that ends at least 6 months, but no more than 18 months, before the end of the period mentioned in step 1; and

 (b) for which the foreign company has *recognised company accounts.

 Note: See subsection (6) if the foreign company does not have recognised company accounts for a period mentioned in this step.

Step 3. Work out the sum of the results of steps 1 and 2, and divide that sum by 2.

Note: If the foreign company is a foreign life insurance company or a foreign general insurance company, the results of steps 1 and 2 are modified under section 768530.

 (4) If an *active foreign business asset of the foreign company is a *share in another company (the subsidiary company) that is a foreign resident, then, for the purposes of steps 1 and 2 of the method statement in subsection (3), treat the value of the share at a particular time according to the following table.

 

Value of a share in subsidiary company

Item

If:

treat the value of the share as:

1

(a) the foreign company has a *direct voting percentage of 10% or more in the subsidiary company at that time; and

(b) the holding company has a *total voting percentage of 10% or more in the subsidiary company at that time

the *share’s value (see subsection (5)) at that time, multiplied by the *active foreign business asset percentage of the subsidiary company in relation to the holding company at that time

2

item 1 does not apply

zero

Note: For the purposes of item 1 of the table, it is necessary to work out the active foreign business asset percentage of the subsidiary company before working out the active foreign business asset percentage of the foreign company.

 (5) For the purposes of this section, the value of an asset of a foreign company at the end of a period is taken to be:

 (a) the value of the asset as shown in the *recognised company accounts of the foreign company for that period; or

 (b) if the value of the asset is not shown in the recognised company accounts of the foreign company for that period—zero.

 (6) The result of:

 (a) step 2 of the method statement in subsection (2); and

 (b) step 2 of the method statement in subsection (3);

is taken to be zero if the foreign company does not have *recognised company accounts for a period mentioned in those steps.

Note: This will only be the case if the foreign company was not in existence before the start of the period mentioned in step 1 of those method statements (see paragraph 768510(3)(c)).

768530  Active foreign business asset percentage—modifications for foreign life insurance companies and foreign general insurance companies

 (1) If the foreign company is a *foreign life insurance company or a *foreign general insurance company, work out its *active foreign business asset percentage according to section 768510, but with the modifications set out in subsections (2) and (3).

 (2) Treat a reference in the following provisions to a period as a reference to a *statutory accounting period of the foreign company:

 (a) paragraphs 768510(3)(b) and (c);

 (b) section 768525.

 (3) Apply the modifications set out in the following table.

 

Modifications for foreign life insurance companies and foreign general insurance companies

Item

The result of this step:

is increased by the amount applicable under subsection (4) for this statutory accounting period:

1

step 2 of the method statement in subsection 768520(1)

the most recent *statutory accounting period of the foreign company ending at or before the time mentioned in that step

2

step 1 of the method statement in subsection 768525(3)

the *statutory accounting period mentioned in that step (as modified by subsection (2) of this section)

3

step 2 of the method statement in subsection 768525(3)

the *statutory accounting period mentioned in that step (as modified by subsection (2) of this section)

 (4) The amount applicable under this subsection for a *statutory accounting period of the foreign company is worked out using the following formula:

where:

active insurance amount means:

 (a) if the foreign company is a *foreign life insurance company—the untainted policy liabilities (within the meaning of subsection 446(2) of the Income Tax Assessment Act 1936) of the foreign company for the statutory accounting period; or

 (b) if the foreign company is a *foreign general insurance company—the active general insurance amount worked out under subsection (5) for the statutory accounting period.

total insurance assets means:

 (a) if the foreign company is a *foreign life insurance company—the total assets (within the meaning of subsection 446(2) of the Income Tax Assessment Act 1936) of the foreign company for the statutory accounting period; or

 (b) if the foreign company is a *foreign general insurance company—the total assets (within the meaning of subsection 446(4) of that Act) of the foreign company for the statutory accounting period.

value of nonactive foreign business assets means:

 (a) for the purposes of item 1 of the table in subsection (3)—the difference between:

 (i) the result of step 1 of the method statement in subsection 768520(1); and

 (ii) the result of step 2 of that method statement (apart from this section); or

 (b) for the purposes of item 2 of the table in subsection (3)—the difference between:

 (i) the result of step 1 of the method statement in subsection 768525(2); and

 (ii) the result of step 1 of the method statement in subsection 768525(3) (apart from this section); or

 (c) for the purposes of item 3 of the table in subsection (3)—the difference between:

 (i) the result of step 2 of the method statement in subsection 768525(2); and

 (ii) the result of step 2 of the method statement in subsection 768525(3) (apart from this section).

Active insurance amount for foreign general insurance company

 (5) The active general insurance amount under this subsection for a *statutory accounting period of the foreign company is worked out using the following formula:

where:

net assets means the net assets (within the meaning of subsection 446(4) of the Income Tax Assessment Act 1936) of the foreign company for the statutory accounting period.

solvency amount means the solvency amount (within the meaning of subsection 446(4) of the Income Tax Assessment Act 1936) of the foreign company for the statutory accounting period.

tainted outstanding claims means the tainted outstanding claims (within the meaning of subsection 446(4) of the Income Tax Assessment Act 1936) of the foreign company for the statutory accounting period.

total general insurance assets means the total assets (within the meaning of subsection 446(4) of the Income Tax Assessment Act 1936) of the foreign company for the statutory accounting period.

768533  Foreign company that is a FIF using CFC calculation method—treatment as AFI subsidiary under this Subdivision

 (1) This section applies if:

 (a) the foreign company is a FIF (within the meaning of former section 481 of the Income Tax Assessment Act 1936); and

 (b) the holding company has made a choice under former subsection 559A(1) of the Income Tax Assessment Act 1936 in relation to the foreign company in respect of a notional accounting period (within the meaning of former section 486 of that Act) of the foreign company that ends in the 200910 income year; and

 (c) because of the choice, the foreign company has been treated under former paragraph 559A(3)(c) of that Act as an AFI subsidiary (within the meaning of that Act) in relation to that holding company; and

 (d) the holding company makes a choice under subsection (1A) in relation to the foreign company; and

 (e) the holding company has not failed to make a choice under that subsection for the 201011 income year or any later income year.

 (1A) A holding company may make a choice under this subsection in relation to a foreign company if the holding company could have made a choice in relation to the foreign company under former section 559A of the Income Tax Assessment Act 1936 if it had not been repealed by item 37 of Schedule 1 to the Tax Laws Amendment (Foreign Source Income Deferral) Act (No. 1) 2010.

 (2) For the purposes of this Subdivision, treat the foreign company as an AFI subsidiary in relation to that holding company at that time.

768535  Modified rules for foreign whollyowned groups

 (1) This section applies if:

 (a) for the purposes of section 768505, it is necessary to work out the *active foreign business asset percentage of a company (the top foreign company) in relation to the holding company mentioned in that section, at the time of the CGT event mentioned in that section; and

 (b) the top foreign company is not:

 (i) an AFI subsidiary (within the meaning of Part X of the Income Tax Assessment Act 1936); or

 (ii) a *foreign life insurance company; or

 (iii) a *foreign general insurance company; and

 (c) for the purposes of section 768505, it is also necessary (apart from this section) to work out the active foreign business asset percentage at that time of 1 or more other companies in relation to the holding company, at that time, where:

 (i) the top foreign company and 1 or more of those other companies (the subsidiary foreign companies) are members of a *whollyowned group; and

 (ii) each of the subsidiary foreign companies is a *100% subsidiary of the top foreign company.

 (2) The holding company may choose to work out the *active foreign business asset percentage of the top foreign company in accordance with subsections (4) and (6).

 (3) The way an entity making a choice under subsection (2) prepares its *income tax return is sufficient evidence of the making of the choice.

 (4) If the holding company has made a choice under subsection (2), the provisions mentioned in subsection (5) operate, for the purposes of section 768505, as if each subsidiary foreign company were a part of the top foreign company, rather than a separate entity.

Note 1: This subsection means that certain assets are not treated as active foreign business assets, or as assets included in the total assets, of any of the subsidiary foreign companies or of the top foreign company. For example:

(a) a share owned by one of those companies in another of those companies; and

(b) a debt owed by one of those companies to another of those companies.

Note 2: If an asset (other than an asset mentioned in Note 1) is actually an active foreign business asset, or an asset included in the total assets, of a subsidiary foreign company, it is treated under this subsection as an active foreign business asset, or as an asset included in the total assets, of the top foreign company.

 (5) For the purposes of subsection (4), the provisions are:

 (a) section 768540 (active foreign business assets of a foreign company); and

 (b) section 768545 (assets included in the total assets of a foreign company).

 (6) If the holding company has made a choice under subsection (2), then for the purposes of sections 768510 and 768525, treat the *recognised consolidated accounts of the top foreign company and all of the subsidiary foreign companies as the *recognised company accounts of the top foreign company.

Types of assets of a foreign company

768540  Active foreign business assets of a foreign company

 (1) An asset is, at a particular time, an active foreign business asset of a company (the foreign company) that is a foreign resident if, at that time:

 (a) the asset is an *asset included in the total assets of the company; and

 (b) the asset satisfies any of these conditions:

 (i) the asset is used, or held ready for use, by the company in the course of carrying on a *business;

 (ii) the asset is goodwill;

 (iii) the asset is a *share; and

 (c) the asset is not any of the following:

 (i) *taxable Australian property;

 (ii) a *membership interest in a company that is an Australian resident;

 (iii) a membership interest in a *resident trust for CGT purposes;

 (iv) an option or right to acquire a membership interest mentioned in subparagraph (ii) or (iii); and

 (d) the asset is not covered by subsection (2); and

 (e) if the foreign company is an AFI subsidiary (within the meaning of Part X of the Income Tax Assessment Act 1936) whose sole or principal business is financial intermediary business—the asset is not covered under subsection (4).

 (2) An asset is covered by this subsection if it is:

 (a) a financial instrument (other than a *share or a trade debt); or

 (b) either:

 (i) an eligible finance share (within the meaning of Part X of the Income Tax Assessment Act 1936); or

 (ii) a widely distributed finance share (within the meaning of that Part); or

 (c) an interest in a trust or *partnership; or

 (d) a *life insurance policy; or

 (e) a right or option in respect of:

 (i) a financial instrument; or

 (ii) an interest in a company, trust or partnership; or

 (iii) a life insurance policy; or

 (f) cash or cash equivalent; or

 (g) an asset whose main use in the course of carrying on the *business mentioned in subparagraph (1)(b)(i) is to *derive interest, an *annuity, rent, *royalties or foreign exchange gains unless:

 (i) the asset is an intangible asset and has been substantially developed, altered or improved by the foreign company so that its *market value has been substantially enhanced; or

 (ii) its main use for deriving rent was only temporary.

 (3) If, at the time mentioned in subsection (1), the foreign company is an AFI subsidiary (within the meaning of Part X of the Income Tax Assessment Act 1936) whose sole or principal business is financial intermediary business (within the meaning of that Part), subsection (2) operates as if:

 (a) paragraphs (2)(a) and (f) were omitted; and

 (b) paragraph (2)(g) did not contain a reference to interest, an *annuity or foreign exchange gains; and

 (c) subparagraph (2)(e)(i) were omitted and the following subparagraph were substituted:

 (i) a financial instrument, other than an asset mentioned in paragraph 450(1)(b) of the Income Tax Assessment Act 1936; or

 (4) The asset is covered under this subsection if:

 (a) all of these conditions are satisfied:

 (i) the asset is an asset mentioned in subparagraph 450(4)(b)(i) or (ii) of the Income Tax Assessment Act 1936;

 (ii) the asset was acquired from another entity;

 (iii) either of the conditions mentioned in subparagraph 450(6)(c)(i) and (ii) of the Income Tax Assessment Act 1936 were satisfied in relation to the other entity at the time of the acquisition; or

 (b) both of these conditions are satisfied:

 (i) the asset relates to a debt to which factoring income (within the meaning of Part X of the Income Tax Assessment Act 1936) of the foreign company relates;

 (ii) the condition in paragraph 450(8)(b) of the Income Tax Assessment Act 1936 is satisfied in relation to the debt.

768545  Assets included in the total assets of a foreign company

 (1) At a particular time, an asset is an asset included in the total assets of a company (the foreign company) that is a foreign resident if:

 (a) the asset is a *CGT asset at that time; and

 (b) the foreign company owns the asset at that time; and

 (c) if at that time the foreign company is not an AFI subsidiary (within the meaning of Part X of the Income Tax Assessment Act 1936) whose sole or principal business is financial intermediary business (within the meaning of that Part)—the asset is not a foreign company derivative asset covered by subsection (2).

 (2) An asset is a foreign company derivative asset covered by this subsection if:

 (a) the asset is an *arrangement covered by subsection (3), unless the regulations declare the asset not to be a foreign company derivative asset covered by this subsection; or

 (b) the regulations declare the asset to be a foreign company derivative asset covered by this subsection.

 (3) An *arrangement is covered by this subsection if:

 (a) under the arrangement, a party to the arrangement must, or may be required to, provide at some future time consideration of a particular kind or kinds to someone; and

 (b) that future time is not less than the number of days, prescribed by regulations made for the purposes of paragraph 761D(1)(b) of the Corporations Act 2001, after the day on which the arrangement is entered into; and

 (c) the amount of the consideration, or the value of the arrangement, is ultimately determined, *derived from or varies by reference to (wholly or in part) the value or amount of something else (of any nature whatsoever and whether or not deliverable), including, for example, one or more of the following:

 (i) an asset;

 (ii) a rate (including an interest rate or exchange rate);

 (iii) an index;

 (iv) a commodity; and

 (d) subsection (4) does not apply in relation to the arrangement.

 (4) An *arrangement under which one person has an obligation to buy, and another person has an obligation to sell, property is not an arrangement covered by subsection (3) merely because the arrangement provides for the consideration to be varied by reference to a general inflation index such as the Consumer Price Index.

Voting percentages in a company

768550  Direct voting percentage in a company

 (1) An entity’s direct voting percentage at a particular time in a company is:

 (a) if the entity has a voting interest (within the meaning of section 334A of the Income Tax Assessment Act 1936) in the foreign company at that time amounting to a percentage of the voting power of the company—that percentage; or

 (b) otherwise—zero.

 (2) In applying section 334A of the Income Tax Assessment Act 1936 for the purposes of subsection (1) of this section, assume that:

 (a) the entity is a company; and

 (b) the entity is not the beneficial owner of a *share in the company if a trust or partnership is interposed between the entity and the company.

768555  Indirect voting percentage in a company

 (1) An entity’s indirect voting percentage at a particular time in a company (the subsidiary company) is worked out by multiplying:

 (a) the entity’s *direct voting percentage (if any) in another company (the intermediate company) at that time;

by:

 (b) the sum of:

 (i) the intermediate company’s direct voting percentage (if any) in the subsidiary company at that time; and

 (ii) the intermediate company’s indirect voting percentage (if any) in the subsidiary company at that time (as worked out under one or more other applications of this section).

 (2) If there is more than one intermediate company to which subsection (1) applies at that time, the entity’s indirect voting percentage is the sum of the percentages worked out under subsection (1) in relation to each of those intermediate companies.

768560  Total voting percentage in a company

  An entity’s total voting percentage at a particular time in a company is the sum of:

 (a) the entity’s *direct voting percentage in the company at that time; and

 (b) the entity’s *indirect voting percentage in the company at that time.

Subdivision 768RTemporary residents

Guide to Subdivision 768R

768900  What this Subdivision is about

This Subdivision modifies the general tax rules for people in Australia who are temporary residents, whether Australian residents or foreign residents.

Generally foreign income derived by temporary residents is nonassessable nonexempt income and capital gains and losses they make are also disregarded for CGT purposes. There are some exceptions for employmentrelated income and capital gains on shares and rights acquired under employee share schemes.

Temporary residents are also partly relieved of recordkeeping obligations in relation to the controlled foreign company rules.

Interest paid by temporary residents is not subject to withholding tax and may be nonassessable nonexempt income for a foreign resident.

Table of sections

Operative provisions

768905 Objects

768910 Income derived by temporary resident

768915 Certain capital gains and capital losses of temporary resident to be disregarded

768950 Individual becoming an Australian resident

768955 Temporary resident who ceases to be temporary resident but remains an Australian resident

768960 Temporary resident not attributable taxpayer for purposes of controlled foreign companies rules

768970 Modification of rules for accruals system of taxation of certain nonresident trust estates

768980 Interest paid by temporary resident

Operative provisions

768905  Objects

  The objects of this Subdivision are to:

 (a) provide *temporary residents with tax relief on most foreign source income and capital gains; and

 (b) relieve the burdens associated with complying with certain recordkeeping obligations and interest withholding tax obligations.

768910  Income derived by temporary resident

 (1) The following are *nonassessable nonexempt income:

 (a) the *ordinary income you *derive directly or indirectly from a source other than an *Australian source if you are a *temporary resident when you derive it;

 (b) your *statutory income (other than a *net capital gain) from a source other than an Australian source if you are a temporary resident when you derive it.

This subsection has effect subject to subsections (3) and (5).

Note: A capital gain or loss you make may be disregarded under section 768915.

 (2) For the purposes of paragraph (1)(b):

 (a) if you have statutory income because a particular circumstance occurs, you derive the statutory income at the time when the circumstance occurs; and

 (b) if you have statutory income because a number of circumstances occur, you derive the statutory income at the time when the last of those circumstances occurs.

Exception to subsection (1)

 (3) However, the following are not *nonassessable nonexempt income under subsection (1):

 (a) the *ordinary income you *derive directly or indirectly from a source other than an *Australian source to the extent that it is remuneration, for employment undertaken, or services provided, while you are a *temporary resident;

 (b) your *statutory income (other than a *net capital gain) from a source other than an Australian source to the extent that it relates to employment undertaken, or services provided, while you are a temporary resident;

 (c) an amount included in your assessable income under Division 86.

Note: This subsection only makes an amount not nonassessable nonexempt income under subsection (1). It does not prevent that amount from being nonassessable nonexempt income under some other provision of this Act or the Income Tax Assessment Act 1936.

768915  Certain capital gains and capital losses of temporary resident to be disregarded

 (1) A *capital gain or *capital loss you make from a *CGT event is disregarded if:

 (a) you are a *temporary resident when, or immediately before, the CGT event happens; and

 (b) you would not make a capital gain or loss from the CGT event, or the capital gain or loss from the CGT event would have been disregarded under Division 855, if you were a foreign resident when, or immediately before, the CGT event happens.

 (2) Subsection (1) does not apply in relation to *CGT event I1 if:

 (a) the CGT event happens in relation to an *ESS interest that is a beneficial interest in a right (or to a *share acquired by exercising such a right); and

 (b) the provisions referred to in paragraphs 83A33(1)(a) to (c) (about start ups) apply to the ESS interest.

768950  Individual becoming an Australian resident

  Section 85545 does not apply to your becoming an Australian resident if you are a *temporary resident immediately after you become an Australian resident.

768955  Temporary resident who ceases to be temporary resident but remains an Australian resident

 (1) If you are a *temporary resident and you then cease to be a temporary resident (but remain, at that time, an Australian resident), there are rules relevant to each *CGT asset that:

 (a) you owned just before you ceased to be a temporary resident; and

 (b) is not *taxable Australian property; and

 (c) you *acquired on or after 20 September 1985.

 (2) The first element of the *cost base and *reduced cost base of the asset (at the time you cease to be a *temporary resident) is its *market value at that time.

 (3) Also, Parts 31 and 33 apply to the asset as if you had *acquired it at the time you ceased to be a *temporary resident.

 (4) This section does not apply to an *ESS interest if:

 (a) Subdivision 83AC (about employee share schemes) applies to the interest, and the *ESS deferred taxing point for the interest has not yet occurred; or

 (b) the provisions referred to in paragraphs 83A33(1)(a) to (c) (about start ups) apply to the ESS interest.

768960  Temporary resident not attributable taxpayer for purposes of controlled foreign companies rules

  For the purposes of Part X of the Income Tax Assessment Act 1936 (which deals with the attribution of income in respect of controlled foreign companies), you are taken not to be an *attributable taxpayer in relation to a *CFC or *CFT at any time you are a *temporary resident.

768970  Modification of rules for accruals system of taxation of certain nonresident trust estates

  At any time when you are a *temporary resident, you are taken not to be a resident for the purposes of section 102AAZD of the Income Tax Assessment Act 1936.

768980  Interest paid by temporary resident

  Interest that is paid by a *temporary resident:

 (a) is an amount to which section 128B (liability to withholding tax) of the Income Tax Assessment Act 1936 does not apply; and

 (b) is *nonassessable nonexempt income if the interest is:

 (i) *derived by a foreign resident; and

 (ii) is not derived from carrying on *business in Australia at or through a *permanent establishment in Australia.

Division 770Foreign income tax offsets

Table of Subdivisions

 Guide to Division 770

770A Entitlement rules for foreign income tax offsets

770B Amount of foreign income tax offset

770C Rules about payment of foreign income tax

770D Administration

Guide to Division 770

7701  What this Division is about

You may get a nonrefundable tax offset for foreign income tax paid on your assessable income.

There is a limit on the amount of the tax offset.

A resident of a foreign country does not get the offset for some foreign income taxes.

You may also get the offset for foreign income tax paid on some amounts that are not taxed in Australia.

7705  Object

 (1) The object of this Division is to relieve double taxation where:

 (a) you have paid foreign income tax on amounts included in your assessable income; and

 (b) you would, apart from this Division, pay Australian income tax on the same amounts.

 (2) To achieve this object, this Division gives you a tax offset to reduce or eliminate Australian income tax otherwise payable on those amounts.

Note 1: This Division applies in relation to Medicare levy and Medicare levy (fringe benefits) surcharge in the same way as it applies to Australian income tax. See section 901 in Schedule 1 to the Taxation Administration Act 1953.

Note 2: The tax offset under this Division can be applied against your Medicare levy and Medicare levy (fringe benefits) surcharge liability for the year, if an amount of it remains after you apply it against your basic income tax liability. See item 22 of the table in subsection 6310(1).

Subdivision 770AEntitlement rules for foreign income tax offsets

Table of sections

Basic entitlement rule for foreign income tax offset

77010 Entitlement to foreign income tax offset

77015 Meaning of foreign income tax, credit absorption tax and unitary tax

Basic entitlement rule for foreign income tax offset

77010  Entitlement to foreign income tax offset

 (1) You are entitled to a *tax offset for an income year for *foreign income tax. An amount of foreign income tax counts towards the tax offset for the year if you paid it in respect of an amount that is all or part of an amount included in your assessable income for the year.

Note 1: The offset is for the income year in which your assessable income included an amount in respect of which you paid foreign income tax—even if you paid the foreign income tax in another income year.

Note 2: If the foreign income tax has been paid on an amount that is part nonassessable nonexempt income and part assessable income for you for the income year, only a proportionate share of the foreign income tax (the share that corresponds to the part that is assessable income) will count towards the tax offset (excluding the operation of subsection (2)).

Note 3: For offshore banking units, the amount of foreign income tax paid in respect of offshore banking income is reduced: see subsection 121EG(3A) of the Income Tax Assessment Act 1936.

Taxes paid on section 23AI or 23AK amounts

 (2) An amount of *foreign income tax counts towards the *tax offset for you for the year if you paid it in respect of an amount that is your *nonassessable nonexempt income under either section 23AI or 23AK of the Income Tax Assessment Act 1936 for the year.

Note 1: Sections 23AI and 23AK of the Income Tax Assessment Act 1936 provide that amounts paid out of income previously attributed from a controlled foreign company or a foreign investment fund are nonassessable nonexempt income.

Note 2: Foreign income taxes covered by this subsection are direct taxes (for example, a withholding tax on a dividend payment) and not underlying taxes, only some of which are covered by section 770135.

Exception for certain residencebased foreign income taxes

 (3) An amount of *foreign income tax you paid does not count towards the *tax offset for the year if you paid it:

 (a) to a foreign country because you are a resident of that country for the purposes of a law relating to the foreign income tax; and

 (b) in respect of an amount derived from a source outside that country.

Exception for previously complying funds and previously foreign funds

 (4) An amount of *foreign income tax paid by a *superannuation provider in relation to a *superannuation fund does not count towards the *tax offset for the year if:

 (a) the tax was paid in respect of an amount included in the fund’s assessable income under table item 2 or 3 in section 295320; and

 (b) the provider paid the tax before the start of the income year.

Note: Table items 2 and 3 in section 295320 include additional amounts in the assessable income of superannuation funds that change their status from complying to noncomplying or from foreign to Australian.

Exception for credit absorption tax and unitary tax

 (5) An amount of *credit absorption tax or *unitary tax you paid does not count towards the *tax offset for the year.

77015  Meaning of foreign income tax, credit absorption tax and unitary tax

 (1) Foreign income tax means tax that:

 (a) is imposed by a law other than an *Australian law; and

 (b) is:

 (i) tax on income; or

 (ii) tax on profits or gains, whether of an income or capital nature; or

 (iii) any other tax, being a tax that is subject to an agreement having the force of law under the International Tax Agreements Act 1953.

Note: Foreign income tax includes only that which has been correctly imposed in accordance with the relevant foreign law or, where the foreign jurisdiction has a tax treaty with Australia (having the force of law under the International Tax Agreements Act 1953), has been correctly imposed in accordance with that tax treaty.

 (2) Credit absorption tax means a tax imposed by a law of a foreign country, or of any part of, or place in, a foreign country to the extent that the tax would not have been payable if the entity concerned or another entity had not been entitled to an offset in respect of the tax under this Division.

 (3) Unitary tax means a tax imposed by a law of a foreign country, or of any part of, or place in, a foreign country, being a law which, for the purposes of taxing income, profits or gains of a company derived from sources within that country, takes into account, or is entitled to take into account, income, losses, outgoings or assets of the company (or of a company that for the purposes of that law is treated as being associated with the company) derived, incurred or situated outside that country, but does not include tax imposed by that law if that law only takes those matters into account:

 (a) if such an associated company is a resident of the foreign country for the purposes of the law of the foreign country; or

 (b) for the purposes of granting any form of relief in relation to tax imposed on dividends received by one company from another company.

Subdivision 770BAmount of foreign income tax offset

Guide to Subdivision 770B

77065  What this Subdivision is about

The amount of your tax offset is based on the amount of foreign income tax you have paid.

However, there is a limit on the maximum amount of your offset. The limit is the greater of $1,000 and an amount worked out under this Subdivision. This amount is based on a comparison between your tax liability and the tax liability you would have if certain foreigntaxed and foreignsourced income and related deductions were disregarded.

You may choose to use the limit of $1,000 and not work out this amount.

There is an increase in the limit to ensure foreign income tax paid on some amounts that are not taxed always forms part of the offset.

Table of sections

Operative provisions

77070 Amount of foreign income tax offset

77075 Foreign income tax offset limit

77080 Increase in offset limit for tax paid on amounts to which section 23AI or 23AK of the Income Tax Assessment Act 1936 apply

Operative provisions

77070  Amount of foreign income tax offset

  The amount of your *tax offset for the year is the sum of the *foreign income tax you paid that counts towards the offset for the year.

Note 1: The amount of foreign income tax you paid may be affected by Subdivision 770C.

Note 2: The amount of the offset might be increased under section 770230 of the Income Tax (Transitional Provisions) Act 1997, if you have precommencement excess foreign income tax.

77075  Foreign income tax offset limit

 (1) There is a limit (the offset limit) on the amount of your *tax offset for a year. If your tax offset exceeds the offset limit, reduce the offset by the amount of the excess.

 (2) Your offset limit is the greater of:

 (a) $1,000; and

 (b) this amount:

 (i) the amount of income tax payable by you for the income year; less

 (ii) the amount of income tax that would be payable by you for the income year if the assumptions in subsection (4) were made.

Note 1: If you do not intend to claim a foreign income tax offset of more than $1,000 for the year, you do not need to work out the amount under paragraph (b).

Note 2: The amount of the offset limit might be increased under section 77080.

 (3) For the purposes of paragraph (2)(b), work out the amount of income tax payable by you, or that would be payable by you, disregarding any *tax offsets.

 (4) Assume that:

 (a) your assessable income did not include:

 (i) so much of any amount included in your assessable income as represents an amount in respect of which you paid *foreign income tax that counts towards the *tax offset for the year; and

 (ii) any other amounts of *ordinary income or *statutory income from a source other than an *Australian source; and

 (b) you were not entitled to any deductions that:

 (i) are *debt deductions that are attributable to an *overseas permanent establishment of yours; or

 (ii) are deductions (other than debt deductions) that are reasonably related to amounts covered by paragraph (a) for that year.

Note: You must also assume you were not entitled to any deductions for certain converted foreign losses: see section 77035 of the Income Tax (Transitional Provisions) Act 1997.

Example: If an entity has paid foreign income tax on a capital gain that comprises part of its net capital gain, only that capital gain on which foreign income tax has been paid is disregarded.

77080  Increase in offset limit for tax paid on amounts to which section 23AI or 23AK of the Income Tax Assessment Act 1936 apply

  Your offset limit under subsection 77075(2) is increased by any amounts of *foreign income tax that count towards the *tax offset for you for the year because of subsection 77010(2).

Subdivision 770CRules about payment of foreign income tax

Table of sections

Rules about when foreign tax is paid

770130 When foreign income tax is considered paid—taxes paid by someone else

770135 Foreign income tax paid by CFCs on attributed amounts

Rules about when foreign tax is considered not paid

770140 When foreign income tax is considered not paid—antiavoidance rule

Rules about when foreign tax is paid

770130  When foreign income tax is considered paid—taxes paid by someone else

 (1) This Act applies to you as if you had paid an amount of *foreign income tax in respect of an amount (a taxed amount) that is all or part of an amount included in your *ordinary income or *statutory income if you are covered by subsection (2) or (3) for an amount of foreign income tax paid in respect of the taxed amount.

 (2) You are covered by this subsection for an amount of *foreign income tax paid in respect of a taxed amount if that foreign income tax has been paid in respect of the taxed amount by another entity under an *arrangement with you or under the law relating to the foreign income tax.

Example: You are a partner in a partnership and the partnership pays foreign income tax on the partnership income.

 (3) You are covered by this subsection for an amount of *foreign income tax paid in respect of the taxed amount to the extent that:

 (a) the taxed amount is taken, because of section 6B of the Income Tax Assessment Act 1936 (the 1936 Act), to be attributable to another amount of income of a particular kind or source; and

 (b) foreign income tax has been paid in respect of the other amount of income; and

 (c) the taxed amount is less than it would have been if that tax had not been paid.

Example: Aust Co (an Australian resident) is the sole beneficiary of an Australian resident trust H and is presently entitled to all the income of trust H. Trust H owns shares in For Co (a foreign company). For Co pays a dividend to trust H and the dividend is subject to withholding tax in For Co’s country of residence.

 Trust H allocates to Aust Co, the dividend, as well as other Australian source income trust H earned in the year (none of which was subject to foreign income tax). Aust Co is treated as having paid the foreign income tax paid by For Co under subsection 770130(3). The foreign income tax is treated as paid in respect of the amount included in Aust Co’s assessable income that is attributable to the dividend.

770135  Foreign income tax paid by CFCs on attributed amounts

 (1) This Division applies to an entity (other than a *CFC) as if it had paid an amount of *foreign income tax worked out under subsection (7) in respect of an amount included in its assessable income if:

 (a) the amount is included in its assessable income as described in subsection (2); and

 (b) the conditions in subsections (3) and (5) are satisfied.

 (2) An amount is included in an entity’s assessable income as described in this subsection if the entity is a company and the amount is included under:

 (a) section 456 (a section 456 case) of the 1936 Act in relation to a *CFC and a statutory accounting period; or

 (b) section 457 (a section 457 case) of that Act in relation to a CFC.

Note: Section 456 of the 1936 Act includes, in the assessable income of certain Australian shareholders, amounts that are attributable to the profits of an Australiancontrolled foreign company.

 Section 457 does likewise when a controlled foreign company changes residence from an unlisted to a listed country or to Australia.

Tax paid condition

 (3) An amount of *foreign income tax, income tax or *withholding tax (the tax amount) must have been paid:

 (a) for a section 456 case—by the *CFC in respect of an amount included in the notional assessable income of the CFC for the statutory accounting period; or

 (b) for a section 457 case—by the CFC.

Note: Section 770130 deems foreign income tax to have been paid in certain circumstances.

 (4) For the purposes of paragraphs (3)(a) and (b), the tax amount includes an amount that is taken to have been paid by the *CFC under subsection 393(4) of the 1936 Act (about tax paid on reinsurance premiums).

Association condition

 (5) If the entity is a company, it must have an *attribution percentage of 10% or more:

 (a) for a section 456 case—in relation to the *CFC at the end of the statutory accounting period; or

 (b) for a section 457 case—in relation to the CFC at the residencechange time (within the meaning of section 457 of the 1936 Act).

Amount of foreign income tax

 (7) The amount worked out under this subsection is:

 (a) for a section 456 case—the sum of all the tax amounts for the statutory accounting period multiplied by the company’s *attribution percentage in relation to the *CFC at the time mentioned in paragraph (5)(a); or

 (b) for a section 457 case—the sum of all the tax amounts to the extent they are attributable to the amount included in the company’s assessable income under section 457 of the 1936 Act.

Grossingup of attributed amount

 (8) For the purposes of this Act except this section and section 371 of the 1936 Act (for a section 456 case or a section 457 case), the amount included in the entity’s assessable income as described in subsection (2) is taken to be increased by the amount of tax worked out under subsection (7).

Note: Section 371 of the 1936 Act records an amount in an attribution account when the amount is included in the assessable income of an attributable taxpayer in relation to a CFC.

Rules about when foreign tax is considered not paid

770140  When foreign income tax is considered not paid—antiavoidance rule

  Despite anything else in this Division, this Act applies to you as if you had not paid an amount of *foreign income tax to the extent that you or any other entity become entitled to:

 (a) a refund of the foreign income tax; or

 (b) any other benefit worked out by reference to the amount of the foreign income tax (other than a reduction in the amount of the foreign income tax).

Subdivision 770DAdministration

Table of sections

770190 Amendment of assessments

770190  Amendment of assessments

 (1) Section 170 of the Income Tax Assessment Act 1936 does not prevent the amendment of an assessment for the purpose of giving effect to this Division for an income year if:

 (a) an event described in subsection (2) (an amendment event) happens after the time you lodged your *income tax return for that year; and

 (b) the amendment is made at any time during the period of 4 years starting immediately after the amendment event.

Note: Section 170 of that Act specifies the periods within which assessments may be amended.

 (2) The following are amendment events:

 (a) you pay an amount of *foreign income tax that counts towards your *tax offset for the year;

 (b) there is an increase in an amount of foreign income tax you paid that counts towards your offset for the year;

 (c) there is a reduction in an amount of foreign income tax you paid that counts towards your offset for the year.

Division 775Foreign currency gains and losses

 

Table of Subdivisions

 Guide to Division 775

775A Objects of this Division

775B Realisation of forex gains or losses

775C Rollover relief for facility agreements

775D Qualifying forex accounts that pass the limited balance test

775E Retranslation for qualifying forex accounts

775F Retranslation under foreign exchange retranslation election under Subdivision 230D

Guide to Division 775

7755  What this Division is about

Your assessable income includes a forex realisation gain you make as a result of a forex realisation event.

You can deduct a forex realisation loss that you make as a result of a forex realisation event.

There are 5 main types of forex realisation events:

 (a) forex realisation event 1 happens if you dispose of foreign currency, or a right to receive foreign currency, to another entity;

 (b) forex realisation event 2 happens if you cease to have a right to receive foreign currency (otherwise than because you disposed of the right to another entity);

 (c) forex realisation event 3 happens if you cease to have an obligation to receive foreign currency;

 (d) forex realisation event 4 happens if you cease to have an obligation to pay foreign currency;

 (e) forex realisation event 5 happens if you cease to have a right to pay foreign currency.

There are special rules for certain shortterm forex realisation gains and losses.

You may choose rollover relief for certain facility agreements.

You may elect to receive concessional tax treatment for a qualifying forex account that passes the limited balance test.

You may choose retranslation for a qualifying forex account.

Subdivision 775AObjects of this Division

Table of sections

77510 Objects of this Division

77510  Objects of this Division

  The objects of this Division are as follows:

 (a) to recognise *foreign currency gains and losses for income tax purposes;

 (b) to quantify those gains and losses by reference to the change in the Australian dollar value of rights and obligations;

 (c) to treat certain foreign currency denominated financing facilities that are the economic equivalent of a loan as if the relevant facility were a loan;

 (d) to reduce compliance costs by not requiring the recognition of certain lowvalue foreign currency gains and losses that involve substantial calculations.

Subdivision 775BRealisation of forex gains or losses

Table of sections

77515 Forex realisation gains are assessable

77520 Certain forex realisation gains are exempt income

77525 Certain forex realisation gains are nonassessable nonexempt income

77527 Certain forex realisation gains are nonassessable nonexempt income

77530 Forex realisation losses are deductible

77535 Certain forex realisation losses are disregarded

77540 Disposal of foreign currency or right to receive foreign currency—forex realisation event 1

77545 Ceasing to have a right to receive foreign currency—forex realisation event 2

77550 Ceasing to have an obligation to receive foreign currency—forex realisation event 3

77555 Ceasing to have an obligation to pay foreign currency—forex realisation event 4

77560 Ceasing to have a right to pay foreign currency—forex realisation event 5

77565 Only one forex realisation event to be counted

77570 Tax consequences of certain shortterm forex realisation gains

77575 Tax consequences of certain shortterm forex realisation losses

77580 You may choose not to have sections 77570 and 77575 apply to you

77585 Forex cost base of a right to receive foreign currency

77590 Forex entitlement base of a right to pay foreign currency

77595 Proceeds of assuming an obligation to pay foreign currency

775100 Net costs of assuming an obligation to receive foreign currency

775105 Currency exchange rate effect

775110 Constructive receipts and payments

775115 Economic setoff to be treated as legal setoff

775120 Nonarm’s length transactions

775125 CGT consequences of the acquisition of foreign currency as a result of forex realisation event 2 or 3

775130 Certain deductions not allowable

775135 Right to receive or pay foreign currency

775140 Obligation to pay or receive foreign currency

775145 Application of forex realisation events to currency and fungible rights and obligations

775150 Transitional election

775155 Applicable commencement date

775160 Exception—event happens before the applicable commencement date

775165 Exception—currency or right acquired, or obligation incurred, before the applicable commencement date

775168 Exception—disposal or redemption of traditional securities

775175 Application to things happening before commencement

77515  Forex realisation gains are assessable

Basic rule

 (1) Your assessable income for an income year includes a *forex realisation gain you make as a result of a *forex realisation event that happens during that year.

Exceptions

 (2) However, your assessable income does not include a *forex realisation gain to the extent that it:

 (a) is a gain of a private or domestic nature; and

 (b) is not covered by an item of the table:

 

Forex realisation gains to which this subsection does not apply

Item

You make the forex realisation gain as a result of this event...

happening to...

and the following condition is satisfied...

1

forex realisation event 1 or 2

*foreign currency or a right, or a part of a right, to receive foreign currency

a gain that would result from the occurrence of a *realisation event in relation to the foreign currency, or to the right, or the part of the right, would, apart from this Division, be taken into account under Part 31 or 33

2

forex realisation event 2

a right, or a part of a right, created or acquired in return for the occurrence of a *realisation event in relation to a *CGT asset you own, where subparagraph 77545(1)(b)(iv) applies

a gain or loss that would result from the occurrence of the realisation event in relation to the CGT asset would be taken into account for the purposes of Part 31 or 33

3

forex realisation event 4

an obligation, or a part of an obligation, you incurred in return for the acquisition of a *CGT asset

a gain or loss that would result from the occurrence of a *realisation event in relation to the CGT asset would be taken into account for the purposes of Part 31 or 33

Note: Parts 31 and 33 deal with capital gains and losses.

 (3) Section 77570 provides for additional exceptions.

Note: Section 77570 is about the tax consequences of certain shortterm forex realisation gains.

No double taxation

 (4) To the extent that a *forex realisation gain would be included in your assessable income under this section and another provision of this Act, the gain is only included in your assessable income under this section.

Note: Under section 23020, foreign exchange gains from a Division 230 financial arrangement are dealt with under Division 230 and not under this Division.

77520  Certain forex realisation gains are exempt income

  A *forex realisation gain you make is *exempt income to the extent that, if it had been a *forex realisation loss, it would have been made in gaining or producing exempt income.

77525  Certain forex realisation gains are nonassessable nonexempt income

  A *forex realisation gain you make is *nonassessable nonexempt income to the extent that, if it had been a *forex realisation loss, it would have been made in gaining or producing nonassessable nonexempt income.

77527  Certain forex realisation gains are nonassessable nonexempt income

  Sections 77520 and 77525 apply to a *forex realisation gain only if, had it been a *forex realisation loss, it would have been disregarded under section 77535.

77530  Forex realisation losses are deductible

Basic rule

 (1) You can deduct from your assessable income for an income year a *forex realisation loss that you make as a result of a *forex realisation event that happens during that year.

Exceptions

 (2) However, you cannot deduct a *forex realisation loss under this section to the extent that it:

 (a) is a loss of a private or domestic nature; and

 (b) is not covered by an item of the table:

 

Forex realisation losses to which this subsection does not apply

Item

You make the forex realisation loss as a result of this event...

happening to...

and the following condition is satisfied...

1

forex realisation event 2

a right, or a part of a right, created or acquired in return for the occurrence of a *realisation event in relation to a *CGT asset you own, where subparagraph 77545(1)(b)(iv) applies

a gain or loss that would result from the occurrence of the realisation event in relation to the CGT asset would be taken into account for the purposes of Part 31 or 33

2

forex realisation event 4

an obligation, or a part of an obligation, you incurred in return for the acquisition of a *CGT asset

a gain or loss that would result from the occurrence of a *realisation event in relation to the CGT asset would be taken into account for the purposes of Part 31 or 33

Note: Parts 31 and 33 deal with capital gains and losses.

 (3) Section 77575 provides for additional exceptions.

Note: Section 77575 is about the tax consequences of certain shortterm forex realisation losses.

No double deductions

 (4) To the extent that this section and another provision of this Act would allow you a deduction for a *forex realisation loss, you can only deduct the loss under this section.

Note: Under section 23020, foreign exchange losses from a Division 230 financial arrangement are dealt with under Division 230 and not under this Division.

77535  Certain forex realisation losses are disregarded

 (1) A *forex realisation loss you make as a result of forex realisation event 1, 2 or 5 is disregarded to the extent that it is made in gaining or producing *exempt income or *nonassessable nonexempt income.

 (2) A *forex realisation loss you make as a result of forex realisation event 3, 4 or 6 is disregarded to the extent that:

 (a) it is made in gaining or producing *exempt income or *nonassessable nonexempt income; and

 (b) the obligation, or the part of the obligation, does not give rise to a deduction.

77540  Disposal of foreign currency or right to receive foreign currency—forex realisation event 1

Forex realisation event 1

 (1) Forex realisation event 1 is *CGT event A1 that happens if you dispose of:

 (a) *foreign currency; or

 (b) a right, or a part of a right, to receive foreign currency.

Note: For extended meaning of right to receive foreign currency, see section 775135.

Disposal

 (2) For the purposes of this section, use subsection 10410(2) to work out whether you have disposed of:

 (a) *foreign currency; or

 (b) a right, or a part of a right, to receive foreign currency.

Note: Under subsection 10410(2), a disposal requires a change of ownership.

Time of event

 (3) For the purposes of this section, subsection 10410(3) is modified so that the time of the event is when:

 (a) the *foreign currency is disposed of; or

 (b) the right, or the part of the right, is disposed of.

Forex realisation gain

 (4) You make a forex realisation gain if:

 (a) you make a *capital gain from the event; and

 (b) some or all of the capital gain is attributable to a *currency exchange rate effect.

The amount of the forex realisation gain is so much of the capital gain as is attributable to a currency exchange rate effect.

Note: For currency exchange rate effect, see section 775105.

 (5) For the purposes of paragraph (4)(a), Part 31 is modified so that section 11820 is disregarded in working out the *capital gain.

Note: Section 11820 deals with reducing capital gains if an amount is otherwise assessable.

Forex realisation loss

 (6) You make a forex realisation loss if:

 (a) you make a *capital loss from the event; and

 (b) some or all of the capital loss is attributable to a *currency exchange rate effect.

The amount of the forex realisation loss is so much of the capital loss as is attributable to a currency exchange rate effect.

Note: For currency exchange rate effect, see section 775105.

No indexation of cost base

 (7) For the purposes of this section, disregard Division 114.

Note: Division 114 deals with indexation of the cost base.

Foreign currency hedging gains and losses

 (8) For the purposes of this section, disregard section 11855.

Note: Section 11855 deals with foreign currency hedging gains and losses.

Capital proceeds

 (9) For the purposes of this section, if the *capital proceeds from the event are more or less than the *market value of:

 (a) the *foreign currency; or

 (b) the right, or the part of the right;

the capital proceeds from the event are taken to be the market value. (The market value is worked out as at the time of the event.)

77545  Ceasing to have a right to receive foreign currency—forex realisation event 2

Forex realisation event 2

 (1) Forex realisation event 2 happens if:

 (a) you cease to have a right, or a part of a right, to receive *foreign currency; and

 (b) the right, or the part of the right, is one of the following:

 (i) a right, or a part of a right, to receive, or that represents, *ordinary income or *statutory income (other than statutory income that is assessable under this Division or Division 102);

 (ii) a right, or a part of a right, created or acquired in return for your ceasing to *hold a *depreciating asset;

 (iii) a right, or a part of a right, created or acquired in return for your paying, or agreeing to pay, an amount of Australian currency or foreign currency;

 (iv) a right, or a part of a right, created or acquired in return for the occurrence of a *realisation event in relation to a *CGT asset you own, and none of subparagraphs (i), (ii) and (iii) applies; and

 (c) you did not cease to have the right, or the part of the right, because you disposed of the right or the part of the right (within the meaning of section 77540).

Note 1: Disposals are dealt with by section 77540 (forex realisation event 1).

Note 2: For extended meaning of right to receive foreign currency, see section 775135.

Time of event

 (2) The time of the event is when you cease to have the right or the part of the right.

Forex realisation gain

 (3) You make a forex realisation gain if:

 (a) the amount you receive in respect of the event happening exceeds the *forex cost base of the right or the part of the right (the forex cost base is worked out as at the tax recognition time); and

 (b) some or all of the excess is attributable to a *currency exchange rate effect.

The amount of the forex realisation gain is so much of the excess as is attributable to a currency exchange rate effect.

Note 1: For forex cost base, see section 77585.

Note 2: For tax recognition time, see subsection (7).

Note 3: For currency exchange rate effect, see section 775105.

Forex realisation loss

 (4) You make a forex realisation loss if:

 (a) the amount you receive in respect of the event happening falls short of the *forex cost base of the right or the part of the right (the forex cost base is worked out as at the tax recognition time); and

 (b) some or all of the shortfall is attributable to a *currency exchange rate effect.

The amount of the forex realisation loss is so much of the shortfall as is attributable to a currency exchange rate effect.

Note 1: For forex cost base, see section 77585.

Note 2: For tax recognition time, see subsection (7).

Note 3: For currency exchange rate effect, see section 775105.

 (5) You make a forex realisation loss if:

 (a) the event happens because an option to buy *foreign currency expires without having been exercised, or is cancelled, released or abandoned; and

 (b) you were capable of exercising the option immediately before the event happened.

The amount of the forex realisation loss is the amount you paid in return for the grant or acquisition of the option.

Noncash benefit

 (6) The amount you receive in respect of the event happening can include a *noncash benefit. Use the *market value of the benefit to work out the amount you receive.

Tax recognition time

 (7) For the purposes of this section, the tax recognition time is worked out using the table:

 

Tax recognition time

Item

If the right, or part of the right, is...

the tax recognition time is...

1

a right, or a part of a right, to receive, or that represents, *ordinary income or *statutory income (other than statutory income that is assessable under this Division or Division 102)

(a) in the case of ordinary income—when the ordinary income is *derived; or

(b) in the case of statutory income—when the requirement first arose to include the statutory income in your assessable income.

2

a right, or a part of a right, created or acquired in return for your ceasing to *hold a *depreciating asset

when you stop holding the asset.

3

a right, or a part of a right, referred to in subsection 775165(3) (which deals with extensions of loans)

the extension time referred to in that subsection.

4

a right, or a part of a right, created or acquired in return for your paying, or agreeing to pay, an amount of Australian currency, where item 3 does not apply

when the amount is paid.

5

a right, or a part of a right, created or acquired in return for your paying, or agreeing to pay, an amount of *foreign currency, where item 3 does not apply

when the amount is paid.

6

a right, or a part of a right, created in return for the occurrence of a *realisation event in relation to a *CGT asset you own, and none of the above items apply

when the realisation event occurs.

Note: Subsection 775260(1) modifies the tax recognition time if forex realisation event 2 happens in relation to a qualifying forex account that has ceased to pass the limited balance test.

77550  Ceasing to have an obligation to receive foreign currency—forex realisation event 3

Forex realisation event 3

 (1) Forex realisation event 3 happens if:

 (a) you cease to have an obligation, or a part of an obligation, to receive *foreign currency; and

 (b) the obligation, or the part of the obligation, is one of the following:

 (i) an obligation, or a part of the obligation, incurred in return for the creation or acquisition of a right to pay foreign currency;

 (ii) an obligation, or a part of the obligation, incurred in return for the creation or acquisition of a right to pay Australian currency;

 (iii) an obligation, or a part of an obligation, under an option to sell foreign currency.

Note 1: For extended meaning of obligation to receive foreign currency, see section 775140.

Note 2: For extended meaning of right to pay foreign currency, see section 775135.

Time of event

 (2) The time of the event is when you cease to have the obligation or the part of the obligation.

Forex realisation gain

 (3) You make a forex realisation gain if:

 (a) the amount you receive in respect of the event happening exceeds the net costs of assuming the obligation or the part of the obligation (the net costs are worked out as at the tax recognition time); and

 (b) some or all of the excess is attributable to a *currency exchange rate effect.

The amount of the forex realisation gain is so much of the excess as is attributable to a currency exchange rate effect.

Note 1: For net costs of assuming the obligation, see section 775100.

Note 2: For tax recognition time, see subsection (7).

Note 3: For currency exchange rate effect, see section 775105.

 (4) You make a forex realisation gain if:

 (a) the event happens because an option to sell *foreign currency expires without having been exercised, or is cancelled, released or abandoned; and

 (b) if the option had been exercised immediately before the event, you would have been obliged to buy the foreign currency.

The amount of the forex realisation gain is the amount you received in return for granting or assuming obligations under the option.

Forex realisation loss

 (5) You make a forex realisation loss if:

 (a) the amount you receive in respect of the event happening falls short of the net costs of assuming the obligation or the part of the obligation (the net costs are worked out as at the tax recognition time); and

 (b) some or all of the shortfall is attributable to a *currency exchange rate effect.

The amount of the forex realisation loss is so much of the shortfall as is attributable to a currency exchange rate effect.

Note 1: For net costs of assuming the obligation, see section 775100.

Note 2: For tax recognition time, see subsection (7).

Note 3: For currency exchange rate effect, see section 775105.

Noncash benefit

 (6) The amount you receive in respect of the event happening can include a *noncash benefit. Use the *market value of the benefit to work out the amount you receive.

Tax recognition time

 (7) For the purposes of this section, the tax recognition time is the time when you received an amount in respect of the event happening.

Right to pay Australian currency

 (8) To avoid doubt, for the purposes of this section, a right to pay Australian currency includes a right to pay Australian currency, where the right is subject to a contingency.

77555  Ceasing to have an obligation to pay foreign currency—forex realisation event 4

Forex realisation event 4

 (1) Forex realisation event 4 happens if:

 (a) you cease to have an obligation, or a part of an obligation, to pay *foreign currency; and

 (b) any of the following applies:

 (i) the obligation, or the part of the obligation, is an expense or outgoing that you deduct;

 (ii) the obligation, or the part of the obligation, is an element in the calculation of a net amount included in your assessable income (other than under this Division or Division 102 of this Act or Division 5 or 6 of Part III of the Income Tax Assessment Act 1936);

 (iii) the obligation, or the part of the obligation, is an element in the calculation of a net amount that is deductible (other than under Division 5 of Part III of the Income Tax Assessment Act 1936);

 (iv) you incurred the obligation, or the part of the obligation, in return for the acquisition of a *CGT asset;

 (v) you incurred the obligation, or the part of the obligation, as the second, third, fourth or fifth element of the *cost base of a CGT asset;

 (vi) you incurred the obligation, or the part of the obligation, in return for your starting to hold a *depreciating asset, and you deduct an amount under Division 40 or 328 for the depreciating asset;

 (vii) you incurred the obligation, or the part of the obligation, as the second element of the *cost of a depreciating asset, and you deduct an amount under Division 40 or 328 for the depreciating asset;

 (viii) you incurred the obligation, or the part of the obligation, as a *project amount;

 (ix) you incurred the obligation, or the part of the obligation, in return for receiving an amount of Australian currency or foreign currency;

 (x) you incurred the obligation, or the part of the obligation, in return for the creation or acquisition of a right to receive an amount of Australian currency or foreign currency;

 (xi) the obligation, or the part of the obligation, is under an option to buy foreign currency.

Note: For extended meaning of obligation to pay foreign currency, see section 775140.

Time of event

 (2) The time of the event is when you cease to have the obligation or the part of the obligation.

Forex realisation gain

 (3) You make a forex realisation gain if:

 (a) the amount you paid in respect of the event happening falls short of the proceeds of assuming the obligation or the part of the obligation (the proceeds are worked out as at the tax recognition time); and

 (b) some or all of the shortfall is attributable to a *currency exchange rate effect.

The amount of the forex realisation gain is so much of the shortfall as is attributable to a currency exchange rate effect.

Note 1: For proceeds of assuming the obligation, see section 77595.

Note 2: For tax recognition time, see subsection (7).

Note 3: For currency exchange rate effect, see section 775105.

 (4) You make a forex realisation gain if:

 (a) the event happens because an option to buy *foreign currency expires without having been exercised, or is cancelled, released or abandoned; and

 (b) if the option had been exercised immediately before the event, you would have been obliged to sell the foreign currency.

The amount of the forex realisation gain is the amount you received in return for granting or assuming obligations under the option.

Forex realisation loss

 (5) You make a forex realisation loss if:

 (a) the amount you paid in respect of the event happening exceeds the proceeds of assuming the obligation or the part of the obligation (the proceeds are worked out as at the tax recognition time); and

 (b) some or all of the excess is attributable to a *currency exchange rate effect.

The amount of the forex realisation loss is so much of the excess as is attributable to a currency exchange rate effect.

Note 1: For proceeds of assuming the obligation, see section 77595.

Note 2: For tax recognition time, see subsection (7).

Note 3: For currency exchange rate effect, see section 775105.

Noncash benefit

 (6) The amount you paid in respect of the event happening can include a *noncash benefit. Use the *market value of the benefit to work out the amount you paid.

Tax recognition time

 (7) For the purposes of this section, the tax recognition time is worked out using the table:

 

Tax recognition time

Item

In this case...

the tax recognition time is...

1

(a) the obligation, or the part of the obligation, is an expense or outgoing that you deduct; and

(b) the obligation, or the part of the obligation, was not incurred:

(i) in return for the acquisition of an item of *trading stock; or

(ii) in return for your starting to hold a *depreciating asset; and

(c) the obligation, or the part of the obligation, was not incurred as the second element of the cost of a depreciating asset

the time when the expense or outgoing became deductible.

2

(a) the obligation, or the part of the obligation, is an expense or outgoing that you deduct; and

(b) the obligation, or the part of the obligation, was incurred in return for the acquisition of an item of *trading stock

the time when the item becomes part of your trading stock on hand.

3

the obligation, or the part of the obligation, is an element in the calculation of a net amount included in your assessable income (other than under this Division or Division 102 of this Act or Division 5 or 6 of Part III of the Income Tax Assessment Act 1936)

the time of the determination of the exchange rate used to translate the element for the purpose of calculating the net amount.

4

the obligation, or the part of the obligation, is an element in the calculation of a net amount that is deductible (other than under Division 5 of Part III of the Income Tax Assessment Act 1936)

the time of the determination of the exchange rate used to translate the element for the purpose of calculating the net amount.

5

(a) you incurred the obligation, or the part of the obligation:

(i) in return for your starting to hold a *depreciating asset; or

(ii) as the second element of the cost of a depreciating asset; and

(b) you deduct an amount under Division 40 or 328 for the depreciating asset

(a) in the case of the acquisition of a depreciating asset—when you began to hold the depreciating asset (worked out under Division 40); or

(b) in the case of the second element of the cost of a depreciating asset—when you incurred the relevant expenditure.

6

you incurred the obligation, or the part of the obligation, as a *project amount

the first time when any part of the amount became deductible.

7

the obligation, or the part of the obligation, is referred to in subsection 775165(5) (which deals with extension of loans)

the extension time referred to in that subsection.

8

you incurred the obligation, or the part of the obligation, in return for:

(a) receiving Australian currency or *foreign currency; or

(b) the creation or acquisition of a right to receive an amount of Australian currency or foreign currency;

where item 7 does not apply

the time when you received the currency.

9

(a) you incurred the obligation, or the part of the obligation, in return for the acquisition of a *CGT asset; and

(b) none of the above items apply

the time when you acquired the CGT asset (worked out under Division 109).

10

(a) you incurred the obligation, or the part of the obligation, as the second, third, fourth or fifth element of the *cost base of a CGT asset; and

(b) none of the above items apply

the time of the transaction under which you incurred the obligation.

Note 1: Foreign currency is a CGT asset. If you acquire foreign currency as the borrower under a loan, item 8 will apply to your obligation to repay the foreign currency borrowed under the loan.

Note 2: If you have made a choice for rollover relief for a facility agreement, and forex realisation event 7 (material variation of a facility agreement) happens, subsection 775220(6) modifies the tax recognition time for an obligation under a security that was in existence under the agreement at the time of that event.

Note 3: Subsection 775260(2) modifies the tax recognition time if forex realisation event 4 happens in relation to a qualifying forex account that has ceased to pass the limited balance test.

Note 4: If you have made a choice for rollover relief for a facility agreement, a forex realisation gain or forex realisation loss you make under the agreement as a result of forex realisation event 4 is disregarded—see section 775200.

77560  Ceasing to have a right to pay foreign currency—forex realisation event 5

Forex realisation event 5

 (1) Forex realisation event 5 happens if:

 (a) you cease to have a right, or a part of a right, to pay *foreign currency; and

 (b) the right, or the part of the right, is one of the following:

 (i) a right, or a part of a right, created or acquired in return for the assumption of an obligation to pay foreign currency;

 (ii) a right, or a part of a right, created or acquired in return for the assumption of an obligation to pay Australian currency;

 (iii) a right, or a part of a right, under an option to sell foreign currency.

Note 1: For extended meaning of right to pay foreign currency, see section 775135.

Note 2: For extended meaning of obligation to pay foreign currency, see section 775140.

Time of event

 (2) The time of the event is when you cease to have the right or the part of the right.

Forex realisation gain

 (3) You make a forex realisation gain if:

 (a) the amount you pay in respect of the event happening falls short of the *forex entitlement base of the right or the part of the right (the forex entitlement base is worked out as at the tax recognition time); and

 (b) some or all of the shortfall is attributable to a *currency exchange rate effect.

The amount of the forex realisation gain is so much of the shortfall as is attributable to a currency exchange rate effect.

Note 1: For forex entitlement base, see section 77590.

Note 2: For tax recognition time, see subsection (7).

Note 3: For currency exchange rate effect, see section 775105.

Forex realisation loss

 (4) You make a forex realisation loss if:

 (a) the amount you pay in respect of the event happening exceeds the *forex entitlement base of the right or the part of the right (the forex entitlement base is worked out as at the tax recognition time); and

 (b) some or all of the excess is attributable to a *currency exchange rate effect.

The amount of the forex realisation loss is so much of the excess as is attributable to a currency exchange rate effect.

Note 1: For forex entitlement base, see section 77590.

Note 2: For tax recognition time, see subsection (7).

Note 3: For currency exchange rate effect, see section 775105.

 (5) You make a forex realisation loss if:

 (a) the event happens because an option to sell *foreign currency expires without having been exercised, or is cancelled, released or abandoned; and

 (b) you were capable of exercising the option immediately before the event happened.

The amount of the forex realisation loss is the amount you paid in return for the grant or acquisition of the option.

Noncash benefit

 (6) The amount you pay in respect of the event happening can include a *noncash benefit. Use the *market value of the benefit to work out the amount you pay.

Tax recognition time

 (7) For the purposes of this section, the tax recognition time is the time when you pay an amount in respect of the event happening.

Obligation to pay Australian currency

 (8) To avoid doubt, for the purposes of this section, an obligation to pay Australian currency includes an obligation to pay Australian currency, where the obligation is subject to a contingency.

77565  Only one forex realisation event to be counted

Option to buy foreign currency

 (1) The following table applies to an option to buy a particular *foreign currency if the exercise price is payable in another foreign currency:

 

Option to buy foreign currency

Item

If you are...

and both of these events happen when the option is exercised...

this is the result...

1

the entity who is capable of exercising the option

(a) forex realisation event 1;

(b) forex realisation event 4

ignore forex realisation event 4.

2

the entity who is capable of exercising the option

(a) forex realisation event 2;

(b) forex realisation event 4

ignore forex realisation event 4.

3

the entity who granted the option

(a) forex realisation event 3;

(b) forex realisation event 4

ignore forex realisation event 3.

Option to sell foreign currency

 (2) The following table applies to an option to sell a particular *foreign currency if the exercise price is payable in another foreign currency:

 

Option to sell foreign currency

Item

If you are...

and both of these events happen when the option is exercised...

this is the result...

1

the entity who is capable of exercising the option

(a) forex realisation event 3;

(b) forex realisation event 5

ignore forex realisation event 3.

2

the entity who granted the option

(a) forex realisation event 3;

(b) forex realisation event 4

ignore forex realisation event 3.

Forward contracts

 (3) The following table applies to a contract to buy a particular *foreign currency in return for another foreign currency:

 

Forward contracts

Item

If both of these events happen when the contract is carried out...

this is the result...

1

(a) forex realisation event 1;

(b) forex realisation event 4

ignore forex realisation event 4.

2

(a) forex realisation event 2;

(b) forex realisation event 4

ignore forex realisation event 4.

Residual rule

 (4) If:

 (a) 2 or more of forex realisation events 1, 2, 3, 4 and 5 happen to you at the same time in relation to the same rights and/or obligations; and

 (b) none of the above subsections applies;

apply the forex realisation event that is most appropriate, and ignore the remaining event or events.

77570  Tax consequences of certain shortterm forex realisation gains

 (1) The following table has effect unless you have made a choice under section 77580:

 

Tax consequences of certain shortterm forex realisation gains

Item

In this case...

this is the result...

1

you make a *forex realisation gain as a result of forex realisation event 2, and:

(a) the right to receive *foreign currency was created in return for the occurrence of a *realisation event in relation to a *CGT asset you own; and

(b) item 6 of the table in subsection 77545(7) applies; and

(c) the foreign currency became due for payment within 12 months after the occurrence of the realisation event

(a) the forex realisation gain is not included in your assessable income under section 77515; and

(b) CGT event K10 happens.

2

you make a *forex realisation gain as a result of forex realisation event 4, and:

(a) the obligation to pay *foreign currency was incurred:

(i) in return for the acquisition of a *CGT asset; or

(ii) as the second, third, fourth or fifth element of the *cost base of a CGT asset; and

(b) item 9 of the table in subsection 77555(7) applies; and

(c) the foreign currency became due for payment within 12 months after the time when:

(i) if subparagraph (a)(i) applies—you acquired the CGT asset (worked out under Division 109); or

(ii) if subparagraph (a)(ii) applies—you incurred the relevant expenditure

(a) the forex realisation gain is not included in your assessable income under section 77515; and

(b) both the *cost base and the *reduced cost base of the CGT asset are reduced by an amount equal to the forex realisation gain.

3

you make a *forex realisation gain as a result of forex realisation event 4, and:

(a) the obligation to pay *foreign currency was incurred:

(i) in return for your starting to hold a *depreciating asset; or

(ii) as the second element of the cost of a depreciating asset; and

(b) if subparagraph (a)(i) applies—the foreign currency became due for payment within the 24month period that began 12 months before the time when you began to hold the depreciating asset (worked out under Division 40); and

(c) if subparagraph (a)(ii) applies—the foreign currency became due for payment within 12 months after the time when you incurred the relevant expenditure

(a) the forex realisation gain is not included in your assessable income under section 77515; and

(b) if:

(i) the forex realisation event happens in the income year in which the asset’s *start time occurs; and

(ii) the asset is not allocated to a pool under Subdivision 40E or 328D;

 the asset’s *cost is reduced (but not below zero) by an amount equal to the forex realisation gain; and

(c) if:

(i) the forex realisation event happens in an income year that is later than the one in which the asset’s *start time occurs; and

(ii) the asset is not allocated to a pool under Subdivision 40E or 328D;

 the depreciating asset’s *opening adjustable value for the income year in which the forex realisation event happens is reduced (but not below zero) by an amount equal to the forex realisation gain; and

(d) if the asset is allocated to a pool under Subdivision 40E or 328D—the opening pool balance of the pool for the income year in which the forex realisation event happens is reduced (but not below zero) by an amount equal to the forex realisation gain.

4

you make a *forex realisation gain as a result of forex realisation event 4, and:

(a) the obligation to pay *foreign currency was incurred as a project amount; and

(b) the foreign currency became due for payment within 12 months after the time when you incurred the project amount; and

(c) the project amount is allocated to a project pool

(a) the forex realisation gain is not included in your assessable income under section 77515; and

(b) the pool value of the project pool for the income year in which you incurred the project amount is reduced (but not below zero) by an amount equal to the forex realisation gain.

Additional result where forex realisation gain exceeds cost etc.

 (2) The following table has effect:

 

Additional result where forex realisation gain exceeds cost etc.

Item

If...

and the following conditions are satisfied...

this is the result...

1

item 3 of the table in subsection (1) applies in relation to a *depreciating asset

(a) the forex realisation event happens in the income year in which the asset’s *start time occurs; and

(b) the asset is not allocated to a pool under Subdivision 40E or 328D; and

(c) the forex realisation gain exceeds the asset’s *cost

the excess is included in your assessable income.

2

item 3 of the table in subsection (1) applies in relation to a *depreciating asset

(a) the forex realisation event happens in an income year that is later than the one in which the asset’s *start time occurs; and

(b) the asset is not allocated to a pool under Subdivision 40E or 328D; and

(c) the forex realisation gain exceeds the asset’s *opening adjustable value for the income year in which the forex realisation event happens

the excess is included in your assessable income.

3

item 3 of the table in subsection (1) applies in relation to a *depreciating asset

(a) the asset is allocated to a pool under Subdivision 40E or 328D; and

(b) the forex realisation gain exceeds the opening pool balance of the pool for the income year in which the forex realisation event happens

the excess is included in your assessable income.

4

item 4 of the table in subsection (1) applies in relation to a project amount

the forex realisation gain exceeds the pool value of the project pool for the income year in which you incurred the project amount

the excess is included in your assessable income.

 (3) To the extent that a *forex realisation gain:

 (a) would have been included in your assessable income under section 77515 if this section had not been enacted; and

 (b) would, apart from this subsection, be included in your assessable income under another provision of this Act;

the gain is not included in your assessable income under that other provision.

77575  Tax consequences of certain shortterm forex realisation losses

 (1) The following table has effect unless you have made a choice under section 77580:

 

Tax consequences of certain shortterm forex realisation losses

Item

In this case...

this is the result...

1

you make a *forex realisation loss as a result of forex realisation event 2, and:

(a) the right to receive *foreign currency was created in return for the occurrence of a *realisation event in relation to a *CGT asset you own; and

(b) item 6 of the table in subsection 77545(7) applies; and

(c) the foreign currency became due for payment within 12 months after the occurrence of the realisation event

(a) the forex realisation loss is not deductible under section 77530; and

(b) CGT event K11 happens.

2

you make a *forex realisation loss as a result of forex realisation event 4, and:

(a) the obligation to pay *foreign currency was incurred:

(i) in return for the acquisition of a *CGT asset; or

(ii) as the second, third, fourth or fifth element of the *cost base of a CGT asset; and

(b) item 9 of the table in subsection 77555(7) applies; and

(c) the foreign currency became due for payment within 12 months after the time when:

(i) if subparagraph (a)(i) applies—you acquired the CGT asset (worked out under Division 109); or

(ii) if subparagraph (a)(ii) applies—you incurred the relevant expenditure

(a) the forex realisation loss is not deductible under section 77530; and

(b) both the *cost base and the *reduced cost base of the CGT asset are increased by an amount equal to the *forex realisation loss.

3

you make a *forex realisation loss as a result of forex realisation event 4, and:

(a) the obligation to pay *foreign currency was incurred:

(i) in return for your starting to hold a *depreciating asset; or

(ii) as the second element of the cost of a depreciating asset; and

(b) if subparagraph (a)(i) applies—the foreign currency became due for payment within the 24month period that began 12 months before the time when you began to hold the depreciating asset (worked out under Division 40); and

(c) if subparagraph (a)(ii) applies—the foreign currency became due for payment within 12 months after the time when you incurred the relevant expenditure

(a) the forex realisation loss is not deductible under section 77530; and

(b) if:

(i) the forex realisation event happens in the income year in which the asset’s *start time occurs; and

(ii) the asset is not allocated to a pool under Subdivision 40E or 328D;

 the asset’s *cost is increased by an amount equal to the forex realisation loss; and

(c) if:

(i) the forex realisation event happens in an income year that is later than the one in which the asset’s *start time occurs; and

(ii) the asset is not allocated to a pool under Subdivision 40E or 328D;

 the depreciating asset’s *opening adjustable value for the income year in which the forex realisation event happens is increased by an amount equal to the forex realisation loss; and

(d) if the asset is allocated to a pool under Subdivision 40E or 328D—the opening pool balance of the pool for the income year in which the forex realisation event happens is increased by an amount equal to the forex realisation loss.

4

you make a *forex realisation loss as a result of forex realisation event 4, and:

(a) the obligation to pay *foreign currency was incurred as a project amount; and

(b) the foreign currency became due for payment within 12 months after the time when you incurred the project amount

(a) the forex realisation loss is not deductible under section 77530; and

(b) the pool value of the project pool for the income year in which you incurred the project amount is increased by an amount equal to the forex realisation loss.

 (2) To the extent that:

 (a) section 77530 would have allowed you a deduction for a *forex realisation loss if this section had not been enacted; and

 (b) apart from this subsection, another provision of this Act would allow you a deduction for the loss;

you cannot deduct the loss under that other provision.

77580  You may choose not to have sections 77570 and 77575 apply to you

 (1) You may choose not to have sections 77570 and 77575 apply to you.

 (2) A choice must be in writing.

 (3) A choice must be made:

 (a) if you were in existence at the start of the applicable commencement date:

 (i) within 90 days after the applicable commencement date; or

 (ii) within 30 days after the commencement of this subsection; or

 (b) if you came into existence within 90 days after the start of the applicable commencement date:

 (i) within 90 days after you came into existence; or

 (ii) within 30 days after the commencement of this subsection; or

 (c) if the Commissioner allows a longer period—within that longer period.

Note: For applicable commencement date, see section 775155.

 (4) A choice has effect from the start of the applicable commencement date.

 (5) A choice may not be revoked.

77585  Forex cost base of a right to receive foreign currency

  The forex cost base of a right, or a part of a right, to receive *foreign currency is the total of:

 (a) the money you:

 (i) paid; or

 (ii) are required to pay; or

 (iii) would be required to pay in the event of the exercise of an option;

  in respect of acquiring the right or part of the right; and

 (b) the *market value of any *noncash benefit you:

 (i) provided; or

 (ii) are required to provide; or

 (iii) would be required to provide in the event of the exercise of an option;

  in respect of acquiring the right or part of the right;

reduced by any amounts that are deductible under a provision of this Act other than this Division.

77590  Forex entitlement base of a right to pay foreign currency

  The forex entitlement base of a right, or a part of a right, to pay *foreign currency is the total of:

 (a) the money you:

 (i) are entitled to receive; or

 (ii) would be entitled to receive in the event of the exercise of an option;

  in respect of the discharge or satisfaction of the right or the part of the right; and

 (b) the *market value of any *noncash benefit you:

 (i) are entitled to acquire or obtain; or

 (ii) would be entitled to acquire or obtain in the event of the exercise of an option;

  in respect of the discharge or satisfaction of the right or the part of the right;

reduced by:

 (c) any amounts that you paid to acquire the right or the part of the right, where the amounts are not deductible under a provision of this Act other than this Division; and

 (d) the market value of any noncash benefit that you provided to acquire the right or the part of the right, where the market value is not deductible under a provision of this Act other than this Division.

77595  Proceeds of assuming an obligation to pay foreign currency

  For the purposes of this Division, the proceeds of assuming an obligation, or a part of an obligation, to pay *foreign currency are the total of:

 (a) the money you:

 (i) received; or

 (ii) are entitled to receive; or

 (iii) would be entitled to receive in the event of the exercise of an option;

  in return for incurring the obligation or the part of the obligation; and

 (b) the *market value of any *noncash benefit you:

 (i) acquired or obtained; or

 (ii) are entitled to acquire or obtain; or

 (iii) would be entitled to acquire or obtain in the event of the exercise of an option;

  in return for incurring the obligation or the part of the obligation;

reduced by any amounts that are included in assessable income under a provision of this Act other than this Division.

775100  Net costs of assuming an obligation to receive foreign currency

 (1) For the purposes of this Division, the net costs of assuming an obligation, or a part of an obligation, to receive *foreign currency are the total of:

 (a) the money you:

 (i) are required to pay; or

 (ii) would be required to pay in the event of the exercise of an option;

  in respect of the fulfilment of the obligation or the part of the obligation; and

 (b) the *market value of any *noncash benefit you:

 (i) are required to provide; or

 (ii) would be required to provide in the event of the exercise of an option;

  in respect of the fulfilment of the obligation or the part of the obligation;

reduced by the amount worked out under subsection (2).

 (2) The amount worked out under this subsection is the total of:

 (a) the money you:

 (i) received; or

 (ii) are entitled to receive;

  because you incurred the obligation or the part of the obligation; and

 (b) the *market value of any *noncash benefit you:

 (i) received or obtained; or

 (ii) are entitled to receive or obtain;

  because you incurred the obligation or the part of the obligation;

reduced by any amounts that are included in assessable income under a provision of this Act other than this Division.

 (3) To avoid doubt, paragraphs (2)(a) and (b) do not apply to money or a *noncash benefit that you:

 (a) received or obtained; or

 (b) are entitled to receive or obtain;

because of the fulfilment of the obligation or the part of the obligation.

775105  Currency exchange rate effect

 (1) A currency exchange rate effect is:

 (a) any currency exchange rate fluctuations; or

 (b) a difference between:

 (i) an expressly or implicitly agreed currency exchange rate for a future date or time; and

 (ii) the applicable currency exchange rate at that date or time.

 (2) To work out whether there is a currency exchange rate effect and (if so), the extent of that effect, use whichever of the following translation rules is applicable to you:

 (a) the translation rules in section 96050 (the standard rules);

 (b) the translation rules in section 96080 (the functional currency rules).

775110  Constructive receipts and payments

  For the purposes of this Subdivision, if an entity (the payer) did not actually pay an amount to another entity (the recipient), but the amount was applied or dealt with in any way on the recipient’s behalf or as the recipient directs (including by discharging all or a part of an obligation owed by the recipient), then:

 (a) the payer is taken to have paid the amount as soon as it is applied or dealt with; and

 (b) the recipient is taken to have received the amount as soon as it is applied or dealt with.

Note: The setoff of an obligation to pay an amount against a right to receive an amount is an example of how this section would operate.

775115  Economic setoff to be treated as legal setoff

  If the economic effect of an *arrangement is to provide for the setoff, in whole or in part, of one or more amounts against one or more other amounts, this Subdivision applies as if:

 (a) the parties to the arrangement had the respective rights and obligations that they would have had if the provision for economic setoff were structured as a provision for legal setoff of rights and obligations; and

 (b) if the economic setoff happens—the parties were taken, under section 775110, to have paid and received the respective amounts that they would have paid and received if the economic setoff were structured as a legal setoff of rights and obligations.

775120  Nonarm’s length transactions

  If:

 (a) you and another entity did not deal with each other at *arm’s length in connection with a transaction that is relevant to working out:

 (i) whether you make a *forex realisation gain or a *forex realisation loss; or

 (ii) the amount of any *forex realisation gain or a *forex realisation loss made by you; and

 (b) apart from this section, a particular amount is more or less than it would have been if you and the other entity had been dealing with each other at arm’s length;

this Subdivision applies to you as if that amount were the amount it would have been if you and the other entity had been dealing with each other at arm’s length.

775125  CGT consequences of the acquisition of foreign currency as a result of forex realisation event 2 or 3

  If you acquire *foreign currency as a result of forex realisation event 2 or 3:

 (a) the first element of the foreign currency’s *cost base is replaced by the foreign currency’s *market value at the time you received the foreign currency; and

 (b) the first element of the foreign currency’s *reduced cost base is replaced by the foreign currency’s market value at the time you received the foreign currency.

775130  Certain deductions not allowable

  If:

 (a) an amount is included in your assessable income under this Division; and

 (b) if this Division had not been enacted, the amount would not have been included in your assessable income under any other provision of this Act (other than Division 102); and

 (c) if this section had not been enacted, a deduction would be allowable to you under a provision listed in the table in subsection 51AAA(2) of the Income Tax Assessment Act 1936; and

 (d) if the amount had not been included in your assessable income under this Division, the deduction would not be allowable;

the deduction is not allowable.

775135  Right to receive or pay foreign currency

Extended meaning of right to receive foreign currency

 (1) For the purposes of this Division, a right to receive foreign currency includes a right to receive an amount calculated by reference to a currency exchange rate effect, even if that amount is not an amount of *foreign currency.

 (2) To avoid doubt, for the purposes of this Division, a right to receive foreign currency includes a right to receive *foreign currency, where the right is subject to a contingency.

Extended meaning of right to pay foreign currency

 (3) For the purposes of this Division, a right to pay foreign currency includes a right to pay an amount calculated by reference to a currency exchange rate effect, even if that amount is not an amount of *foreign currency.

 (4) To avoid doubt, for the purposes of this Division, a right to pay foreign currency includes a right to pay *foreign currency, where the right is subject to a contingency.

775140  Obligation to pay or receive foreign currency

Extended meaning of obligation to pay foreign currency

 (1) For the purposes of this Division, an obligation to pay foreign currency includes an obligation to pay an amount calculated by reference to a currency exchange rate effect, even if that amount is not an amount of *foreign currency.

 (2) To avoid doubt, for the purposes of this Division, an obligation to pay foreign currency includes an obligation to pay *foreign currency, where the obligation is subject to a contingency.

Extended meaning of obligation to receive foreign currency

 (3) For the purposes of this Division, an obligation to receive foreign currency includes an obligation to receive an amount calculated by reference to a currency exchange rate effect, even if that amount is not an amount of *foreign currency.

 (4) To avoid doubt, for the purposes of this Division, an obligation to receive foreign currency includes an obligation to receive *foreign currency, where the obligation is subject to a contingency.

775145  Application of forex realisation events to currency and fungible rights and obligations

 (1) Forex realisation event 1, 2 or 4 applies in relation to:

 (a) *foreign currency; or

 (b) a fungible right, or a part of a fungible right, to receive foreign currency; or

 (c) a fungible obligation, or a part of a fungible obligation, to pay foreign currency;

on a firstin firstout basis.

 (2) The regulations may provide that any or all of forex realisation events 1, 2 and 4 apply, or apply in specified circumstances, to:

 (a) *foreign currency; or

 (b) a fungible right, or a part of a fungible right, to receive foreign currency; or

 (c) a fungible obligation, or a part of a fungible obligation, to pay foreign currency;

on a weighted average basis (despite subsection (1)).

 (3) The circumstances that may be specified for the purposes of subsection (2) include the circumstance that you have made an election to use a weighted average basis.

 (4) Subsection (3) does not limit subsection (2).

775150  Transitional election

 (1) You may elect to have this section apply to you.

Note: For the consequences of an election, see sections 775160 and 775165.

 (2) An election must be in writing.

 (3) An election must be made:

 (a) within 60 days after the applicable commencement date; or

 (b) within 30 days after the commencement of this subsection.

Note: For applicable commencement date, see section 775155.

 (4) An election may not be revoked.

775155  Applicable commencement date

  For the purposes of this Division, your applicable commencement date is:

 (a) the first day of the 200304 income year; or

 (b) if that day is earlier than 1 July 2003—the first day of the 200405 income year.

775160  Exception—event happens before the applicable commencement date

 (1) A *forex realisation gain or *forex realisation loss you make as a result of forex realisation event 1, 2, 3, 4 or 5 is disregarded if the event happened before the applicable commencement date.

Note: For applicable commencement date, see section 775155.

 (2) Subsection (1) does not apply if:

 (a) you have made an election under section 775150; and

 (b) the Commissioner is satisfied that the event happened under, or as a result of, an *arrangement that was entered into or carried out for the purpose, or for purposes that included the purpose, of obtaining the benefit of the operation of subsection (1).

775165  Exception—currency or right acquired, or obligation incurred, before the applicable commencement date

Exception—foreign currency acquired before the applicable commencement date

 (1) A *forex realisation gain or *forex realisation loss you make on the disposal of *foreign currency as a result of forex realisation event 1 is disregarded if:

 (a) the foreign currency was acquired before the applicable commencement date; and

 (b) you have not made an election under section 775150.

For the purposes of paragraph (a), the time of acquisition is worked out under Division 109.

Note: For applicable commencement date, see section 775155.

Exception—right acquired before the applicable commencement date

 (2) A *forex realisation gain or *forex realisation loss you make as a result of forex realisation event 1, 2 or 5 happening to a right or a part of a right is disregarded if:

 (a) the right, or the part of the right;

 (i) was acquired before the applicable commencement date; or

 (ii) arose under an eligible contract (within the meaning of the former Division 3B of Part III of the Income Tax Assessment Act 1936) that was entered into before the applicable commencement date; and

 (b) you have not made an election under section 775150.

For the purposes of subparagraph (a)(i), the time of acquisition is worked out under Division 109.

Note: For applicable commencement date, see section 775155.

 (3) If:

 (a) at a particular time (the extension time) on or after the applicable commencement date and under a contract that was entered into before the applicable commencement date, the period for which money has been lent is extended; and

 (b) either:

 (i) the contract is separate from the original loan contract; or

 (ii) the extension amounts to a variation of the original loan contract;

subparagraph (2)(a)(ii) does not apply to a right, or a part of a right, that arises after the extension time and relates to the loan.

Note: For applicable commencement date, see section 775155.

Exception—obligation incurred before the applicable commencement date

 (4) A *forex realisation gain or *forex realisation loss you make as a result of forex realisation event 3 or 4 happening to an obligation or a part of an obligation is disregarded if:

 (a) either:

 (i) you incurred the obligation, or the part of the obligation, before the applicable commencement date; or

 (ii) the obligation, or the part of the obligation, arose under an eligible contract (within the meaning of the former Division 3B of Part III of the Income Tax Assessment Act 1936) that was entered into before the applicable commencement date; and

 (b) you have not made an election under section 775150.

Note: For applicable commencement date, see section 775155.

 (5) If:

 (a) at a particular time (the extension time) on or after the applicable commencement date and under a contract that was entered into before the applicable commencement date, the period for which money has been lent is extended; and

 (b) either:

 (i) the contract is separate from the original loan contract; or

 (ii) the extension amounts to a variation of the original loan contract;

subparagraph (4)(a)(ii) does not apply to an obligation, or a part of an obligation, that arises after the extension time and relates to the loan.

Note: For applicable commencement date, see section 775155.

775168  Exception—disposal or redemption of traditional securities

  A *forex realisation gain or *forex realisation loss you make as a result of forex realisation event 2 is disregarded if the event happened because of a disposal or redemption covered by:

 (a) subsection 26BB(4) or (5) of the Income Tax Assessment Act 1936; or

 (b) subsection 70B(2B) or (2C) of that Act.

775175  Application to things happening before commencement

  The use of the present tense in a provision of this Division does not imply that the provision does not apply to things happening before the commencement of this Division.

Subdivision 775CRollover relief for facility agreements

Guide to Subdivision 775C

775180  What this Subdivision is about

A facility agreement is an agreement where:

 (a) you have a right to issue eligible securities and another entity or entities must acquire the securities; and

 (b) the economic effect of the agreement is to enable you to obtain finance in a particular foreign currency.

If you choose rollover relief for a facility agreement:

 (a) a forex realisation gain or a forex realisation loss you make as a result of forex realisation event 4 is disregarded if the event happens because you discharge your obligation under an eligible security issued by you under the agreement; and

 (b) if you issue an eligible security under the agreement otherwise than as a result of a rollover—you are taken to have been given a loan (the notional loan); and

 (c) if an eligible security is rolledover under the agreement—the period of the notional loan is extended by the term of the new security; and

 (d) forex realisation event 6 happens if you discharge your obligation under the notional loan; and

 (e) forex realisation event 7 happens if a material variation is made to the agreement.

Table of sections

Operative provisions

775185 What is a facility agreement?

775190 What is an eligible security?

775195 You may choose rollover relief for a facility agreement

775200 Forex realisation event 4 does not apply

775205 What is a rollover?

775210 Notional loan

775215 Discharge of obligation to pay the principal amount of a notional loan under a facility agreement—forex realisation event 6

775220 Material variation of a facility agreement—forex realisation event 7

Operative provisions

775185  What is a facility agreement?

  A facility agreement is an agreement between an entity (the first entity) and another entity or entities under which:

 (a) the first entity has a right to issue *eligible securities; and

 (b) an entity or entities must acquire the securities;

where the economic effect of the agreement is to enable the first entity to obtain finance in a particular *foreign currency:

 (c) up to the foreign currency amount specified in the agreement; and

 (d) during the term of the agreement.

775190  What is an eligible security?

  An eligible security is:

 (a) a bill of exchange, or a promissory note, that is:

 (i) noninterest bearing; and

 (ii) issued at a discount to face value; and

 (iii) denominated in a particular *foreign currency; and

 (iv) for a fixed term; or

 (b) a security that is:

 (i) specified in the regulations; and

 (ii) denominated in a foreign currency; and

 (iii) for a fixed term.

775195  You may choose rollover relief for a facility agreement

 (1) You may choose rollover relief for a *facility agreement if:

 (a) you have entered into the agreement; and

 (b) you have a right to issue *eligible securities under the agreement; and

 (c) the economic effect of the agreement is to enable you to obtain finance in a particular *foreign currency:

 (i) up to the foreign currency amount specified in the agreement; and

 (ii) during the term of the agreement.

 (2) A choice must be made:

 (a) within 90 days after the first time you issue an *eligible security under the *facility agreement; or

 (b) within 90 days after the applicable commencement date; or

 (c) within 30 days after the commencement of this subsection.

Note: For applicable commencement date, see section 775155.

 (3) If you make a choice within 90 days after the first time you issue an *eligible security under the *facility agreement, the choice is taken to have been in effect throughout the period that began immediately before the first time you issued an eligible security under the facility agreement.

 (4) If:

 (a) you make a choice:

 (i) within 90 days after the applicable commencement date; or

 (ii) within 30 days after the commencement of this subsection; and

 (b) subsection (3) does not apply;

the choice is taken to have been in effect throughout the period that began at whichever is the later of the following times:

 (c) the start of the applicable commencement date;

 (d) the first time you issued an *eligible security under the *facility agreement.

Note: For applicable commencement date, see section 775155.

 (5) A choice must be in writing.

 (6) A choice continues to apply until the *facility agreement ends.

Note: If forex realisation event 7 happens (material variation of facility agreement), subsection 775220(5) terminates your choice.

 (7) A choice may not be revoked.

775200  Forex realisation event 4 does not apply

  A *forex realisation gain or a *forex realisation loss you make as a result of forex realisation event 4 or 9 is disregarded to the extent to which the event happens because:

 (a) you discharge your obligation under an *eligible security issued by you under a *facility agreement; and

 (b) you have made a choice for rollover relief for the facility agreement, and that choice is in effect.

775205  What is a rollover?

  A rollover happens under a *facility agreement if:

 (a) you discharge your obligation under an *eligible security issued by you under the agreement (the rolledover security); and

 (b) at the same time, you issue a new eligible security (the new security) under the agreement; and

 (c) the issue of the new security is related to the discharge of your obligation under the rolledover security in one of the following ways:

 (i) your obligation under the rolledover security is wholly or partly set off against your right to receive the *foreign currency issue price of the new security;

 (ii) your obligation under the rolledover security is wholly or partly satisfied by the issue of the new security; and

 (d) you have made a choice for rollover relief for the agreement, and that choice is in effect; and

 (e) the new security is issued on or after the applicable commencement date; and

 (f) if you have not made an election under section 775150—the rolledover security is issued on or after the applicable commencement date.

Note: For applicable commencement date, see section 775155.

775210  Notional loan

 (1) The rules in this section have effect only for the purposes of this Subdivision.

Notional loan

 (2) If you issue an *eligible security under a *facility agreement otherwise than as a result of a rollover, you are taken to have been given a loan (the notional loan):

 (a) of a *foreign currency principal amount equal to the foreign currency face value of the security; and

 (b) for a period equal to the term of the security; and

 (c) that is taken to be attached to the security; and

 (d) the start time of which is the time when you issued the security.

Note 1: The period of the notional loan may be extended as the result of a later rollover—see subsection (3).

Note 2: The notional loan may become attached to a later security as the result of a rollover—see subsection (3).

Note 3: The foreign currency principal amount of the notional loan may remain the same, or may fall (but not rise), as a result of a later rollover—see subsection (3).

Note 4: If, at a later time, the security is rolledover, and the foreign currency face value of the new security exceeds the foreign currency face value of the rolledover security, you are taken to have been given an additional notional loan of a foreign currency principal amount equal to the excess—see subsection (3).

Effect of rollover

 (3) The table has effect if an *eligible security is rolledover under a *facility agreement:

 

Rollover of eligible security

Item

If the foreign currency face value of the new security...

this is the result...

1

equals the *foreign currency face value of the rolledover security

(a) the period of each notional loan attached to the rolledover security is extended by the term of the new security; and

(b) each notional loan attached to the rolledover security is taken to be attached to the new security.

2

exceeds the *foreign currency face value of the rolledover security

(a) you are taken to have been given an additional notional loan:

(i) of a foreign currency principal amount equal to the excess; and

(ii) for a period equal to the term of the new security; and

(iii) that is taken to be attached to the new security; and

(iv) the start time of which is the time when you issued the new security; and

(b) the period of each notional loan attached to the rolledover security is extended by the term of the new security; and

(c) each notional loan attached to the rolledover security is taken to be attached to the new security.

3

falls short of the *foreign currency face value of the rolledover security, and there is only one notional loan attached to the rolledover security

(a) you are taken to have paid a foreign currency amount equal to the shortfall in order to discharge so much of your obligation to pay the foreign currency principal amount of the notional loan as equals the shortfall; and

(b) the period of the notional loan is extended by the term of the new security; and

(c) the notional loan is taken to be attached to the new security.

4

falls short of the *foreign currency face value of the rolledover security, and there are 2 or more notional loans attached to the rolledover security

(a) you are taken to have paid a foreign currency amount equal to the shortfall in order to discharge your obligation to pay so much of the total foreign currency principal amounts of the notional loans as equals the shortfall, and to have done so on a firstin firstout basis, that is to say:

(i) first, by fully or partly discharging (as the case requires) your obligation to pay the foreign currency principal amount of the notional loan with the earliest start date; and

(ii) second, if your obligation to pay the foreign currency principal amount of the notional loan with the earliest start date is fully discharged—by fully or partly discharging (as the case requires) your obligation to pay the foreign currency principal amount of the notional loan with the next start date, and so on; and

(b) the period of each notional loan attached to the rolledover security that is not fully discharged is extended by the term of the new security; and

(c) each notional loan attached to the rolledover security that is not fully discharged is taken to be attached to the new security.

Consequences if security is not rolledover

 (4) If:

 (a) you discharge your obligation under an *eligible security issued under a *facility agreement; and

 (b) the security is not rolledover at the time of discharge; and

 (c) you have made a choice for rollover relief for the facility agreement, and that choice is in effect;

then, for each notional loan attached to the security, you are taken to have paid a *foreign currency amount equal to the foreign currency principal amount of the notional loan in order to discharge your obligation to pay the foreign currency principal amount of the notional loan.

Foreign currency

 (5) For the purposes of the application of this section to a particular *facility agreement that provides for the issue of *eligible securities, foreign currency is the *foreign currency in which the securities are denominated.

Note: Section 96050 (Australian currency translation rule) does not affect the operation of this section—see subsection 96050(10). You translate to Australian currency when you apply section 775215 (forex realisation event 6).

775215  Discharge of obligation to pay the principal amount of a notional loan under a facility agreement—forex realisation event 6

Forex realisation event 6

 (1) Forex realisation event 6 happens if:

 (a) you discharge an obligation, or a part of an obligation, to pay the *foreign currency principal amount of a notional loan attached to an *eligible security issued by you under a *facility agreement; and

 (b) you have made a choice for rollover relief for the agreement, and that choice is in effect.

Time of event

 (2) The time of the event is when you discharge the obligation or the part of the obligation.

Forex realisation gain

 (3) You make a forex realisation gain if:

 (a) the amount of the obligation, or the part of the obligation, at the start time of the notional loan, exceeds the amount you paid in order to discharge the obligation or the part of the obligation; and

 (b) some or all of the excess is attributable to a *currency exchange rate effect.

The amount of the forex realisation gain is so much of the excess as is attributable to a currency exchange rate effect.

Note: For currency exchange rate effect, see section 775105.

Forex realisation loss

 (4) You make a forex realisation loss if:

 (a) the amount of the obligation, or the part of the obligation, at the start time of the notional loan, falls short of the amount you paid in order to discharge the obligation or the part of the obligation; and

 (b) some or all of the shortfall is attributable to a *currency exchange rate effect.

The amount of the forex realisation loss is so much of the shortfall as is attributable to a currency exchange rate effect.

Note: For currency exchange rate effect, see section 775105.

Exempt income etc.

 (5) For the purposes of the application of sections 77520, 77525 and 77535 to the event, assume that the notional loan had been an actual loan.

775220  Material variation of a facility agreement—forex realisation event 7

Forex realisation event 7

 (1) Forex realisation event 7 happens if:

 (a) a material variation is made to the terms or conditions of a *facility agreement; or

 (b) a material variation is made to the effect of a facility agreement; or

 (c) a material variation is made to the type or types of security that can be issued under a facility agreement;

so long as you have made a choice for rollover relief for the facility agreement, and that choice is in effect.

Note: See also subsections (7) and (8).

Time of the event

 (2) The time of the event is when the material variation happens.

Forex realisation gain

 (3) You make a forex realisation gain if:

 (a) the total of the forex realisation gains that you would have made as a result of forex realisation event 6 if you had, at the time of forex realisation event 7:

 (i) discharged your liabilities under each of the notional loans to which the agreement relates; and

 (ii) not rolledover any *eligible security;

exceeds:

 (b) the total of the forex realisation losses that you would have made as a result of forex realisation event 6 if you had, at the time of forex realisation event 7:

 (i) discharged your liabilities under each of the notional loans to which the agreement relates; and

 (ii) not rolledover any eligible security.

The amount of the forex realisation gain is the amount of the excess.

Note: See also subsection (9).

Forex realisation loss

 (4) You make a forex realisation loss if:

 (a) the total of the forex realisation losses that you would have made as a result of forex realisation event 6 if you had, at the time of forex realisation event 7:

 (i) discharged your liabilities under each of the notional loans to which the agreement relates; and

 (ii) not rolledover any *eligible security;

exceeds:

 (b) the total of the forex realisation gains that you would have made as a result of forex realisation event 6 if you had, at the time of forex realisation event 7:

 (i) discharged your liabilities under each of the notional loans to which the agreement relates; and

 (ii) not rolledover any eligible security.

The amount of the forex realisation loss is the amount of the excess.

Note: See also subsection (9).

Termination of choice

 (5) If forex realisation event 7 happens in relation to a *facility agreement:

 (a) your choice for rollover relief for the facility agreement ceases to have effect immediately after the event; and

 (b) you are not entitled to make a fresh choice for rollover relief for the facility agreement.

Modification of tax recognition time

 (6) If:

 (a) forex realisation event 7 happens in relation to a *facility agreement; and

 (b) an *eligible security issued by you under the facility agreement was in existence at the time of that event; and

 (c) at a later time, forex realisation event 4 happens because you cease to have an obligation, or a part of an obligation, to pay *foreign currency under the security;

section 77555 applies to you as if the tax recognition time for the obligation, or the part of the obligation, were the time of forex realisation event 7 (despite subsection 77555(7)).

Material variation

 (7) To avoid doubt, if a variation to:

 (a) the terms or conditions of a facility agreement; or

 (b) the effect of a facility agreement;

results in the agreement ceasing to be a facility agreement, the variation is taken to be a material variation for the purposes of subsection (1).

 (8) The regulations may provide that a specified kind of variation is taken to be a material variation for the purposes of subsection (1).

Total amount

 (9) To avoid doubt, the total amount referred to in paragraph (3)(b) or (4)(b) may be zero.

Subdivision 775DQualifying forex accounts that pass the limited balance test

Guide to Subdivision 775D

775225  What this Subdivision is about

You may elect to have this Subdivision apply to one or more qualifying forex accounts held by you.

If you elect to have this Subdivision apply to an account, a forex realisation gain or a forex realisation loss you make in relation to the account as a result of forex realisation event 2 or 4 is disregarded if the account passes the limited balance test.

For an account to pass the limited balance test, the combined balance of all the accounts covered by your election must not be more than the foreign currency equivalent of $250,000.

The limited balance test includes a buffer provision which allows the combined balance to be more than the foreign currency equivalent of $250,000, but not more than the foreign currency equivalent of $500,000, for not more than 2 15day periods in any income year.

Table of sections

Operative provisions

775230 Election to have this Subdivision apply to one or more qualifying forex accounts

775235 Variation of election

775240 Withdrawal of election

775245 When does a qualifying forex account pass the limited balance test?

775250 Tax consequences of passing the limited balance test

775255 Notional realisation when qualifying forex account starts to pass the limited balance test

775260 Modification of tax recognition time

Operative provisions

775230  Election to have this Subdivision apply to one or more qualifying forex accounts

 (1) You may elect to have this Subdivision apply to one or more *qualifying forex accounts held by you.

 (2) An election must be in writing.

 (2A) If:

 (a) you make an election within 30 days after the commencement of this subsection; and

 (b) the election is expressed to have come into effect on a specified day; and

 (c) the specified day is included in the period:

 (i) beginning on 1 July 2003; and

 (ii) ending on the day on which the election is made;

the election is taken to have come into effect on the specified day.

 (3) An election continues in effect, in relation to a particular account, until:

 (a) you cease to hold the account; or

 (b) the account ceases to be a *qualifying forex account; or

 (c) the election is varied by removing the account; or

 (d) a withdrawal of the election takes effect;

whichever happens first.

Note 1: For variation of election, see section 775235.

Note 2: For withdrawal of election, see section 775240.

 (4) If an election made by you under this section is in effect, you are not entitled to make another election under this section.

 (5) An *ADI or a *nonADI financial institution is not entitled to make an election under this section.

775235  Variation of election

 (1) If you have made an election under section 775230, you may vary your election by:

 (a) adding one or more *qualifying forex accounts; or

 (b) removing one or more qualifying forex accounts.

 (2) A variation must be in writing.

 (3) Removing an account does not prevent you from adding the account in a future variation.

775240  Withdrawal of election

 (1) If you have made an election under section 775230, you may withdraw your election.

 (2) A withdrawal must be in writing.

 (3) Withdrawing an election does not prevent you from making a fresh election under section 775230 in relation to any or all of the same accounts.

775245  When does a qualifying forex account pass the limited balance test?

Basic rule

 (1) For the purposes of this Subdivision, a *qualifying forex account that you hold passes the limited balance test at a particular time if, at that time:

 (a) an election made by you under section 775230 has effect in relation to:

 (i) the account; or

 (ii) the account and one or more other *qualifying forex accounts; and

 (b) the total of the credit balances of the account and each of those other accounts (if any) is not more than the *foreign currency equivalent of $250,000; and

 (c) the total of the debit balances of the account and each of those other accounts (if any) is not more than the foreign currency equivalent of $250,000.

Note: For buffering during an increased balance period, see subsections (2) and (3).

Buffering during first and second increased balance period

 (2) For the purposes of this section, an increased balance period is a continuous period consisting of:

 (a) an income year; or

 (b) a particular part of an income year;

where, at each time during the period, either or both of the following conditions is satisfied:

 (c) the total of the credit balances of the account or accounts covered by your section 775230 election is more than the *foreign currency equivalent of $250,000, but not more than the foreign currency equivalent of $500,000;

 (d) the total of the debit balances of the account or accounts covered by your section 775230 election is more than the foreign currency equivalent of $250,000, but not more than the foreign currency equivalent of $500,000.

 (3) The table has effect:

 

Increased balance period

Item

In this case...

this is the result...

1

(a) an increased balance period is the first or only increased balance period that occurs in a particular income year; and

(b) the duration of the period is 15 days or less; and

(c) it is not the case that:

(i) the period began at the start of the income year; and

(ii) another increased balance period ended at the end of the previous income year

paragraphs (1)(b) and (c) do not apply during the firstmentioned increased balance period.

2

(a) an increased balance period is the first or only increased balance period that occurs in a particular income year; and

(b) both:

(i) the period began at the start of the income year; and

(ii) another increased balance period ended at the end of the previous income year; and

(c) the total duration of those increased balance periods is 15 days or less

paragraphs (1)(b) and (c) do not apply during those increased balance periods.

3

(a) an increased balance period is the first or only increased balance period that occurs in a particular income year; and

(b) the duration of the period is more than 15 days; and

(c) it is not the case that:

(i) the period began at the start of the income year; and

(ii) another increased balance period ended at the end of the previous income year

paragraphs (1)(b) and (c) do not apply during the first 15 days of the firstmentioned increased balance period.

4

(a) an increased balance period is the first or only increased balance period that occurs in a particular income year; and

(b) both:

(i) the period began at the start of the income year; and

(ii) another increased balance period ended at the end of the previous income year; and

(c) the total duration of those increased balance periods is more than 15 days

paragraphs (1)(b) and (c) do not apply during the first 15 days of the period that consists of those increased balance periods.

5

(a) an increased balance period is the second increased balance period that occurs in a particular income year; and

(b) the duration of the period is 15 days or less; and

(c) item 1 or 2 applies to the first increased balance period that occurred in the income year

paragraphs (1)(b) and (c) do not apply during the firstmentioned increased balance period.

6

(a) an increased balance period is the second increased balance period that occurs in a particular income year; and

(b) the duration of the period is more than 15 days; and

(c) item 1 or 2 applies to the first increased balance period that occurred in the income year

paragraphs (1)(b) and (c) do not apply during the first 15 days of the firstmentioned increased balance period.

Translation of foreign currency

 (4) For the purposes of the application of section 96050 to this section, work out the *foreign currency equivalent of an amount of Australian currency as at a particular time in an income year by translating the foreign currency to Australian currency at the average exchange rate for the third month that preceded the income year.

Debit balances

 (5) For the purposes of this section, a debit balance is to be expressed as a positive amount.

Note: For example, if you owe $1,100 on a credit card account, the debit balance of that account is $1,100.

775250  Tax consequences of passing the limited balance test

 (1) A *forex realisation gain or a *forex realisation loss you make as a result of forex realisation event 2 or 4 is disregarded if the event happens in relation to a *qualifying forex account that:

 (a) you hold at the time of the event; and

 (b) passes the limited balance test at the time of the event.

 (2) If CGT event C1 or C2 happens in relation to a *qualifying forex account that:

 (a) you hold at the time of the event; and

 (b) passes the limited balance test at the time of the event;

disregard so much of any *capital gain or *capital loss you make as a result of the event as is attributable to a *currency exchange rate effect.

Note: For currency exchange rate effect, see section 775105.

775255  Notional realisation when qualifying forex account starts to pass the limited balance test

Credit balance

 (1) For the purposes of this Division, if:

 (a) you hold a *qualifying forex account; and

 (b) at a particular time:

 (i) the account starts to pass the limited balance test; and

 (ii) the account has a credit balance; and

 (iii) you have one or more rights to receive a total amount of *foreign currency represented by the credit balance of the account;

you are treated as:

 (c) having ceased to have those rights at that time; and

 (d) having reacquired those rights immediately after that time.

Note: This means that forex realisation event 2 will happen when the account starts to pass the limited balance test.

Debit balance

 (2) For the purposes of this Division, if:

 (a) you hold a *qualifying forex account; and

 (b) at a particular time:

 (i) the account starts to pass the limited balance test; and

 (ii) the account has a debit balance; and

 (iii) you have one or more obligations to pay a total amount of *foreign currency represented by the debit balance of the account;

you are treated as:

 (c) having ceased to have those obligations at that time; and

 (d) having started to again owe those obligations immediately after that time.

Note: This means that forex realisation event 4 will happen when the account starts to pass the limited balance test.

775260  Modification of tax recognition time

Forex realisation event 2

 (1) If:

 (a) forex realisation event 2 happens in relation to a *qualifying forex account that:

 (i) you hold at the time of the event; and

 (ii) does not pass the limited balance test at the time of the event; and

 (b) apart from this subsection, the tax recognition time, worked out using the table in subsection 77545(7), happened at a time when the account passed the limited balance test;

section 77545 applies to you as if the tax recognition time were the most recent time before the forex realisation event when the account ceased to pass the limited balance test (despite subsection 77545(7)).

Forex realisation event 4

 (2) If:

 (a) forex realisation event 4 happens in relation to a *qualifying forex account that:

 (i) you hold at the time of the event; and

 (ii) does not pass the limited balance test at the time of the event; and

 (b) apart from this subsection, the tax recognition time, worked out using the table in subsection 77555(7), happened at a time when the account passed the limited balance test;

section 77555 applies to you as if the tax recognition time were the most recent time before the forex realisation event when the account ceased to pass the limited balance test (despite subsection 77555(7)).

Subdivision 775ERetranslation for qualifying forex accounts

Guide to Subdivision 775E

775265  What this Subdivision is about

If you choose retranslation for a qualifying forex account:

 (a) a forex realisation gain or a forex realisation loss you make in relation to the account as a result of forex realisation event 2 or 4 is disregarded; and

 (b) forex realisation event 8 enables any gains or losses to be worked out on a retranslation basis.

Table of sections

Operative provisions

775270 You may choose retranslation for a qualifying forex account

775275 Withdrawal of choice

775280 Tax consequences of choosing retranslation for an account

775285 Retranslation of gains and losses relating to a qualifying forex account—forex realisation event 8

Operative provisions

775270  You may choose retranslation for a qualifying forex account

 (1) You may choose retranslation for a *qualifying forex account held by you.

 (1A) A choice under subsection (1) does not apply to a *qualifying forex account held by you if a *foreign exchange retranslation election by you is in effect in relation to the account under Subdivision 230D.

 (2) A choice must be in writing.

 (2A) If:

 (a) either:

 (i) you make a choice within 30 days after the commencement of the New Business Tax System (Taxation of Financial Arrangements) Act (No. 1) 2003; or

 (ii) you make a choice within 90 days after the commencement of Part 1 of Schedule 1 to the Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009; and

 (b) the choice is expressed to have come into effect on a specified day; and

 (c) the specified day is included in the period:

 (i) beginning on 1 July 2003; and

 (ii) ending on the day on which the choice is made;

the choice is taken to have come into effect on the specified day.

 (3) A choice continues in effect until:

 (a) you cease to hold the account; or

 (b) the account ceases to be a *qualifying forex account; or

 (c) a withdrawal of the choice takes effect;

whichever happens first.

Note: For withdrawal of choice, see section 775275.

775275  Withdrawal of choice

 (1) If you have made a choice for retranslation for a *qualifying forex account held by you, you may withdraw your choice.

 (2) A withdrawal must be in writing.

 (3) Withdrawing a choice does not prevent you from making a fresh choice under section 775270.

775280  Tax consequences of choosing retranslation for an account

 (1) A *forex realisation gain or *forex realisation loss you make as a result of forex realisation event 2 or 4 is disregarded if:

 (a) the event happens in relation to a *qualifying forex account that you hold; and

 (b) you have made a choice for retranslation for the account; and

 (c) the choice is in effect when the event happens.

 (2) If:

 (a) CGT event C1 or C2 happens in relation to a *qualifying forex account that you hold at the time of the event; and

 (b) you have made a choice for retranslation for the account; and

 (c) the choice is in effect when the event happens;

disregard so much of any *capital gain or *capital loss you make as a result of the event as is attributable to a *currency exchange rate effect.

Note: For currency exchange rate effect, see section 775105.

775285  Retranslation of gains and losses relating to a qualifying forex account—forex realisation event 8

Forex realisation event 8

 (1) Forex realisation event 8 happens if:

 (a) you have made a choice for retranslation for a *qualifying forex account held by you; and

 (b) that choice was in effect throughout a continuous period (the retranslation period) consisting of:

 (i) an income year; or

 (ii) a particular part of an income year; and

 (c) either:

 (i) there is a positive retranslation amount for the account for the retranslation period (worked out under subsection (2)); or

 (ii) there is a negative retranslation amount for the account for the retranslation period (worked out under subsection (3)).

Retranslation amount

 (2) If the amount worked out using the formula in subsection (4) is a positive amount, that amount is a positive retranslation amount for the account for the retranslation period.

 (3) If the amount worked out using the formula in subsection (4) is a negative amount, that amount is a negative retranslation amount for the account for the retranslation period.

 (4) Work out an amount for the account for the retranslation period using the formula:

 (5) For the purposes of subsection (4), a debit balance is to be expressed as a negative amount (for example, a debit balance of $50,000 is to be expressed as$50,000).

Forex realisation gain

 (6) You make a forex realisation gain if there is a positive retranslation amount for the account for the retranslation period. The amount of the forex realisation gain is the positive retranslation amount.

Forex realisation loss

 (7) You make a forex realisation loss if there is a negative retranslation amount for the account for the retranslation period. The amount of the forex realisation loss is the negative retranslation amount.

 (8) For the purposes of subsection (7), reverse a negative amount (for example, a negative retranslation amount of$50,000 will become a forex realisation loss of $50,000).

Translation of foreign currency

 (9) For the purposes of the application of section 96050 to this section:

 (a) if a retranslation period for an account did not begin immediately after the end of another retranslation period for the account—the opening balance of the account for the firstmentioned retranslation period is to be translated to Australian currency at the exchange rate applicable at the start of the firstmentioned retranslation period; and

 (b) if a retranslation period for an account began immediately after the end of another retranslation period for the account—the opening balance of the account for the firstmentioned retranslation period is to be translated to Australian currency at the exchange rate applicable at the end of the other retranslation period; and

 (c) the closing balance of an account for a retranslation period is to be translated to Australian currency at the exchange rate applicable at the end of the retranslation period; and

 (d) each deposit is to be translated to Australian currency at the exchange rate applicable at the time of the deposit; and

 (e) each withdrawal is to be translated to Australian currency at the exchange rate applicable at the time of the withdrawal.

Deposits

 (10) For the purposes of this section, a deposit includes any amount paid or transferred into the account.

Withdrawals

 (11) For the purposes of this section, a withdrawal includes any amount paid, advanced, drawn or transferred out of the account.

Subdivision 775FRetranslation under foreign exchange retranslation election under Subdivision 230D

Guide to Subdivision 775F

775290  What this Subdivision is about

If you have made a foreign exchange retranslation election under Subdivision 230D:

 (a) a forex realisation gain or a forex realisation loss you make in relation to an arrangement that is not a Division 230 financial arrangement as a result of forex realisation event 1 to 5 or 8 is disregarded; and

 (b) forex realisation event 9 enables any gains or losses to be worked out on a retranslation basis.

Table of sections

775295 When this Subdivision applies

775300 Tax consequences of choosing retranslation for arrangement

775305 Retranslation of gains and losses relating to arrangement to which foreign exchange retranslation election applies—forex realisation event 9

775310 When election ceases to apply to arrangement

775315 Balancing adjustment when election ceases to apply to arrangement

775295  When this Subdivision applies

 (1) A *foreign exchange retranslation election applies to an *arrangement for the purposes of this Subdivision if:

 (a) you start to have the arrangement after the start of the income year in which the election is made; and

 (b) the arrangement is recognised in financial reports of a kind referred to in paragraph 230255(2)(a) that are audited, or required to be audited, as referred to in paragraph 230255(2)(b); and

 (c) the arrangement is one in relation to which you are required by:

 (i) *accounting standard AASB 121 (or another accounting standard prescribed for the purposes of paragraph 230265(1)(c)); or

 (ii) if that standard does not apply to the preparation of the financial report—a comparable accounting standard that applies to the preparation of the financial report under a *foreign law;

  to recognise, in the financial reports referred to in paragraph 230255(2)(a), amounts in profit or loss (if any) that are attributable to changes in currency exchange rates.

 (2) The *foreign exchange retranslation election does not apply to an *arrangement for the purposes of this Subdivision if:

 (a) the election is made by the *head company of a *consolidated group or *MEC group; and

 (b) the election specifies that the election is not to apply to *financial arrangements in relation to *life insurance business carried on by a member of the consolidated group or MEC group; and

 (c) the arrangement is one that relates to the life insurance business carried on by a member of the consolidated group or MEC group.

 (3) The *foreign exchange retranslation election does not apply to an *arrangement for the purposes of this Subdivision if the arrangement is associated with a business of a kind specified in regulations made for the purposes of subsection 230270(4).

775300  Tax consequences of choosing retranslation for arrangement

 (1) A *forex realisation gain or *forex realisation loss you make as a result of forex realisation event 1, 2, 3, 4, 5 or 8 is disregarded if:

 (a) the event happens in relation to an *arrangement that you hold; and

 (b) you have made a *foreign exchange retranslation election that applies to the arrangement; and

 (c) the election is in effect when the event happens.

 (2) If:

 (a) CGT event C1 or C2 happens in relation to an *arrangement that you hold at the time of the event; and

 (b) you have made a *foreign exchange retranslation election that applies to the arrangement; and

 (c) the election is in effect when the event happens;

disregard so much of any *capital gain or *capital loss you make as a result of the event as is attributable to a *currency exchange rate effect.

Note: For currency exchange rate effect, see section 775105.

775305  Retranslation of gains and losses relating to arrangement to which foreign exchange retranslation election applies—forex realisation event 9

Forex realisation event 9

 (1) Forex realisation event 9 happens in relation to an *arrangement during an income year if:

 (a) you have made a *foreign exchange retranslation election that applies to the arrangement; and

 (b) you are required by:

 (i) *accounting standard AASB 121 (or another accounting standard prescribed for the purposes of paragraph 230265(1)(c)); or

 (ii) if that standard does not apply to the preparation of the financial report—a comparable accounting standard that applies to the preparation of the financial report under a *foreign law;

  to recognise, in the financial report referred to in paragraph 230255(2)(a) for that income year, amounts in profit or loss (if any) in relation to the arrangement that are attributable to changes in currency exchange rates.

The forex realisation event 9 is taken to have happened in the income year.

Forex realisation gain

 (2) You make a forex realisation gain if the standard referred to in paragraph (1)(b) requires you to recognise an amount of gain in profit or loss in relation to the *arrangement. That amount of the forex realisation gain is the amount the standard requires you to recognise.

Forex realisation loss

 (3) You make a forex realisation loss if the *accounting standard referred to in paragraph (1)(b) requires you to recognise an amount of loss in profit or loss in relation to the *arrangement. That amount of the forex realisation loss is the amount that the accounting standard requires you to recognise.

Section does not apply to amounts previously recognised in equity

 (4) Subsections (1), (2) and (3) do not apply to amounts that have previously been required by the standards referred to in paragraph 230255(2)(a) to be recognised in equity.

775310  When election ceases to apply to arrangement

 (1) For the purposes of this Division, a *foreign exchange retranslation election under subsection 230255(1) ceases to apply to an *arrangement from the start of an income year if the arrangement ceases to satisfy a requirement of paragraph 775295(1)(b) or (c) during that income year.

 (2) If the election ceases to apply to an *arrangement under subsection (1), the election cannot subsequently reapply to that arrangement (even if the requirements of paragraphs 775295(1)(b) and (c) are satisfied once more in relation to the arrangement).

775315  Balancing adjustment when election ceases to apply to arrangement

 (1) This section applies if:

 (a) you make a *foreign exchange retranslation election; and

 (b) the election ceases to have effect or ceases to apply to an *arrangement.

 (2) You are taken, for the purposes of this Division, to have:

 (a) disposed of the *arrangement for its fair value immediately before the election ceases to have effect or ceases to apply to the arrangement; and

 (b) reacquired the arrangement at its fair value immediately after the election ceases to have effect or ceases to apply to the arrangement.

Note: Paragraph (a) means that there would be a forex realisation event 9 in relation to the arrangement.

Division 802Foreign residents’ income with an underlying foreign source

Table of Subdivisions

802A Conduit foreign income

Subdivision 802AConduit foreign income

Guide to Subdivision 802A

8025  What this Subdivision is about

A distribution that an Australian corporate tax entity makes to a foreign resident is not subject to dividend withholding tax, and is not assessable income, to the extent that the entity declares it to be conduit foreign income.

An Australian corporate tax entity has an amount that is nonassessable nonexempt income if it receives a distribution including conduit foreign income from another such entity and it makes a distribution including conduit foreign income.

This Subdivision sets out the method of working out an entity’s conduit foreign income.

It also discourages streaming of distributions to entities that can take advantage of the receipt of conduit foreign income.

Table of sections

Operative provisions

80210 Objects

80215 Foreign residents—exempting CFI from Australian tax

80217 Trust estates and foreign resident beneficiaries—exempting CFI from Australian tax

80220 Distributions between Australian corporate tax entities—nonassessable nonexempt income

80225 Conduit foreign income of an Australian corporate tax entity

80230 Foreign source income amounts

80235 Capital gains and losses

80240 Effect of foreign income tax offset on conduit foreign income

80245 Previous declarations of conduit foreign income

80250 Receipt of an unfranked distribution from another Australian corporate tax entity

80255 No double benefits

80260 No streaming of distributions

Operative provisions

80210  Objects

  The objects of this Subdivision are:

 (a) to encourage the establishment in Australia of regional holding companies for foreign groups; and

 (b) to improve Australia’s attractiveness as a continuing base for its multinational companies;

by providing relief from tax on *distributions by *Australian corporate tax entities to *members who are foreign residents or other Australian corporate tax entities if those distributions relate to *conduit foreign income.

80215  Foreign residents—exempting CFI from Australian tax

 (1) So much of the *unfranked part of a *frankable distribution made by an *Australian corporate tax entity that the entity declares, in its *distribution statement, to be *conduit foreign income:

 (a) is not assessable income and is not *exempt income of a foreign resident; and

 (b) is an amount to which section 128B (Liability to withholding tax) of the Income Tax Assessment Act 1936 does not apply.

 (2) The declaration must be made on or before the day on which the *distribution is made.

Note: For a private company, this rule may bring forward the time at which the company is required to make its distribution statement: see section 20275.

80217  Trust estates and foreign resident beneficiaries—exempting CFI from Australian tax

Foreign resident beneficiaries

 (1) So much of a share of the net income of a trust as is reasonably attributable to the whole or a part of the *unfranked part of a *frankable distribution made by an *Australian corporate tax entity that the entity declares, in its *distribution statement, to be *conduit foreign income:

 (a) is not assessable income and is not *exempt income of a beneficiary of the trust who:

 (i) is a foreign resident; and

 (ii) is presently entitled to the share of the income of the trust; and

 (b) is an amount to which section 128B (Liability to withholding tax) of the Income Tax Assessment Act 1936 does not apply.

Note: A frankable distribution to which a part of the net income of a trust is reasonably attributable may be made by the Australian corporate tax entity to the trust directly, or to the trust indirectly through one or more interposed trusts.

 (2) The declaration must be made on or before the day on which the *distribution is made.

Note: For a private company, this rule may bring forward the time at which the company is required to make its distribution statement: see section 20275.

Trusts

 (3) The trustee of a trust is not to be assessed (and pay tax) under section 98, 99 or 99A of the Income Tax Assessment Act 1936 in respect of so much of the net income of the trust as is *nonassessable nonexempt income of a beneficiary of the trust under subsection (1).

80220  Distributions between Australian corporate tax entities—nonassessable nonexempt income

 (1) An *Australian corporate tax entity (the receiving entity) has an amount that is not assessable income and is not *exempt income for an income year if:

 (a) it receives from another Australian corporate tax entity a *frankable distribution that has an *unfranked part; and

 (b) the *distribution statement for the *distribution declares an amount (a received CFI amount) of the unfranked part to be *conduit foreign income; and

 (c) the receiving entity, after the start of the income year but before the due day for lodging its *income tax return for that income year:

 (i) makes a frankable distribution that has an unfranked part; and

 (ii) declares an amount (a declared CFI amount) of the unfranked part to be conduit foreign income.

 (2) The amount that is not assessable income and is not *exempt income is the lesser of:

 (a) the sum of the received CFI amounts that the receiving entity receives during the income year (the total received CFI amounts); and

 (b) the amount worked out using this formula:

where:

related expenses means the receiving entity’s expenses that are reasonably related to the total received CFI amounts.

total declared CFI amounts means the sum of the declared CFI amounts in distributions made by the receiving entity before the due day for lodging its *income tax return for the income year.

Example: AusCo 1 and AusCo 2 are both Australian corporate tax entities.

 AusCo 1 pays an unfranked dividend of $80 to AusCo 2. AusCo 1 declares all of the $80 to be its conduit foreign income (so the $80 is a received CFI amount).

 AusCo 2 has $5 of deductible expenses relating to the $80 dividend.

 AusCo 2 pays an unfranked dividend of $30. AusCo 2 declares $15 of the $30 to be conduit foreign income (so the $15 is a declared CFI amount).

 The amount that is not assessable income and is not exempt income for AusCo 2 (assuming there are no other received CFI amounts or declared CFI amounts) is:

 The remaining $64 is included in AusCo 2’s assessable income and it can deduct $4 (the part of the expenses related to the $64).

 (3) If the receiving entity’s expenses that are reasonably related to the total received CFI amounts equal or exceed the total received CFI amounts for an income year, the total received CFI amounts is not assessable income and is not *exempt income of the receiving entity for the income year.

 (4) If a declared CFI amount is taken into account in working out an amount of *nonassessable nonexempt income of an entity for an income year, that amount cannot be taken into account for the entity for a later income year.

 (5) Work out how much *conduit foreign income in a *frankable distribution flows through a trust or a partnership in the same way that you work out the *share of a *franking credit on a *franked distribution that flows through a trust or a partnership. That amount is treated as a received CFI amount under this section.

Note: See sections 20750, 20755 and 20757 for the share of a franking credit on a franked distribution that flows through a trust or a partnership.

80225  Conduit foreign income of an Australian corporate tax entity

  An *Australian corporate tax entity’s conduit foreign income at a particular time (the relevant time) is worked out by applying sections 80230 to 80255.

Note: Subdivision 715U modifies the single entity and the entry history rule for the purposes of working out conduit foreign income for consolidated groups and MEC groups.

80230  Foreign source income amounts

 (1) Work out the amount of the entity’s *ordinary income and *statutory income derived by the entity that has been, is or will be included in an income statement or similar statement of the entity or of another entity and that would not be included in the entity’s assessable income if the entity:

 (a) for a company or a *corporate limited partnership—were a foreign resident at the relevant time; or

 (b) for a *public trading trust—were not a *resident unit trust for the income year in which the relevant time occurs.

Note: Income statements are prepared under the Framework for the Preparation and Presentation of Financial Statements (which is referred to in the Australian Accounting Standards).

 (2) Reduce the subsection (1) amount by any part of that amount that is or will be included in the entity’s assessable income (apart from section 80220).

 (3) Add to the amount remaining after subsection (2) these amounts:

 (a) if the entity receives from another *Australian corporate tax entity a *frankable distribution that has an *unfranked part—any amount declared in the *distribution statement for that *distribution to be *conduit foreign income;

 (b) an amount that is treated as a received CFI amount for the purposes of section 80220 because of subsection 80220(5);

 (c) an amount that is *nonassessable nonexempt income under section 7685 and that would be not be included under subsection (1).

 (4) Reduce the amount remaining after subsection (3) by these amounts:

 (a) an amount that is *nonassessable nonexempt income under section 23AI or 23AK of the Income Tax Assessment Act 1936;

 (b) an amount that is not included in the entity’s assessable income because of the operation of paragraph 99B(2)(e) of that Act;

 (c) the amount worked out using the formula:

  where:

available franking credit means any part of the amount remaining after subsection (3) to the extent to which a *franking credit arises or will arise for the entity.

 (5) Reduce the amount remaining after subsection (4) by any of the entity’s expenses that are reasonably related to that amount, except expenses the entity has deducted or can deduct under this Act. In applying this subsection to an amount covered by paragraph (3)(a), assume that amount is *nonassessable nonexempt income.

 (6) The result is an amount included in the entity’s conduit foreign income.

 (7) This section applies to an entity as if it had derived an amount if the amount has been applied for its benefit (including by discharging all or part of a debt it owes) or as it directs.

80235  Capital gains and losses

Capital gains

 (1) The entity’s conduit foreign income includes these amounts:

 (a) the amount by which a *capital gain of the entity is reduced because of the operation of section 768505;

 (b) a capital gain that is disregarded because of the operation of subsection 23AH(3) of the Income Tax Assessment Act 1936;

 (c) the amount of a capital gain that is disregarded as a result of the operation of an *international tax sharing treaty.

Capital losses

 (2) The entity’s conduit foreign income is reduced by these amounts:

 (a) the amount by which a *capital loss of the entity is reduced because of the operation of section 768505;

 (b) a capital loss that is disregarded because of the operation of subsection 23AH(4) of the Income Tax Assessment Act 1936;

 (c) the amount of a capital loss that is disregarded as a result of the operation of an *international tax sharing treaty.

Timing rule

 (3) The adjustments are made under this section at the end of the income year in which the *CGT event occurred.

80240  Effect of foreign income tax offset on conduit foreign income

  The entity’s conduit foreign income includes an amount if a tax offset arose for the entity under Division 770 for the income year immediately before the one in which the relevant time occurs. The amount is worked out using the formula:

80245  Previous declarations of conduit foreign income

  The entity’s conduit foreign income is reduced if:

 (a) the entity makes a *frankable distribution that has an *unfranked part; and

 (b) the entity declares an amount of the unfranked part to be conduit foreign income.

The amount of the reduction is the amount so declared.

Note: If the amount declared is less than the amount available for declaration, the difference is available for a later declaration.

80250  Receipt of an unfranked distribution from another Australian corporate tax entity

 (1) The entity’s conduit foreign income is reduced if:

 (a) the entity (the receiving entity) receives from another *Australian corporate tax entity a *frankable distribution that has an *unfranked part; and

 (b) the *distribution statement for the *distribution declares an amount (the declared amount) of the unfranked part to be conduit foreign income; and

 (c) some or all of the declared amount is not *nonassessable nonexempt income under section 80220.

 (2) The amount of the reduction is the amount that is not *nonassessable nonexempt income under section 80220 less any expenses reasonably related to that amount.

80255  No double benefits

  An amount cannot be both:

 (a) an unfranked nonportfolio dividend credit for an entity under section 46FB of the Income Tax Assessment Act 1936; and

 (b) counted towards:

 (i) the entity’s *conduit foreign income; and

 (ii) the entity’s *nonassessable nonexempt income under section 80220.

80260  No streaming of distributions

 (1) Subsection (2) has effect if:

 (a) an *Australian corporate tax entity makes one or more *frankable distributions in a *franking period; and

 (b) at least one of the *distributions has an *unfranked part; and

 (c) the entity declares an amount of the unfranked part to be *conduit foreign income.

 (2) If the entity does not, for that *franking period, declare the same proportion of *conduit foreign income for all *membership interests and *nonshare equity interests then, instead of the amount that it declared to be conduit foreign income on those *distributions, it is taken to have declared under section 80245 the greater amount that it would have declared had it declared that same proportion on all those distributions.

Note: Breaching subsection (2) may make the entity subject to a penalty under section 28880 in Schedule 1 to the Taxation Administration Act 1953 (about over declaring conduit foreign income).

Example: There are 10,000 membership interests in AusCo Limited, 7,500 held by foreign residents and 2,500 held by Australian residents. It has $1,800 of conduit foreign income.

 AusCo makes an unfranked distribution of 50 cents per membership interest to all of its members. It declares $1,500 of the distribution to be conduit foreign income for its 7,500 foreign membership interests (20 cents per membership interest or 40% of each distribution) and none for its Australian membership interests.

 AusCo is taken to have declared the same proportion (40% of each distribution) of conduit foreign income for its Australian membership interests (which amounts to $500 of conduit foreign income). It is therefore taken to have declared $2,000 of conduit foreign income. This is an overdeclaration of $200 and a penalty under section 28880 in Schedule 1 to the Taxation Administration Act 1953 will apply.

 (3) For the purposes of subsection (2), ignore *membership interests and *nonshare equity interests that do not carry a right to receive *distributions (other than distributions on winding up).

 (4) Despite subsection (2), an entity that receives a *frankable distribution that has an *unfranked part is entitled to rely on the *distribution statement made by the entity that made the distribution.

Division 815Crossborder transfer pricing

Table of Subdivisions

815A Treatyequivalent crossborder transfer pricing rules

815B Arm’s length principle for crossborder conditions between entities

815C Arm’s length principle for permanent establishments

815D Special rules for trusts and partnerships

815E Reporting obligations for significant global entities

Subdivision 815ATreatyequivalent crossborder transfer pricing rules

Guide to Subdivision 815A

8151  What this Subdivision is about

The crossborder transfer pricing rules in this Subdivision are equivalent to, but independent of, the transfer pricing rules in Australia’s double tax agreements.

Table of sections

Operative provisions

8155 Object

81510 Transfer pricing benefit may be negated

81515 When an entity gets a transfer pricing benefit

81520 Crossborder transfer pricing guidance

81525 Modified transfer pricing benefit for thin capitalisation

81530 Determinations negating transfer pricing benefit

81535 Consequential adjustments

81540 No double taxation

Operative provisions

8155  Object

  The object of this Subdivision is to ensure the following amounts are appropriately brought to tax in Australia, consistent with the arm’s length principle:

 (a) profits which would have accrued to an Australian entity if it had been dealing at *arm’s length, but, by reason of nonarm’s length conditions operating between the entity and its foreign associated entities, have not so accrued;

 (b) profits which an Australian permanent establishment (within the meaning of the relevant *international tax agreement) of a foreign entity might have been expected to make if it were a distinct and separate entity engaged in the same or similar activities under the same or similar conditions, but dealing wholly independently.

81510  Transfer pricing benefit may be negated

 (1) The Commissioner may make a determination mentioned in subsection 81530(1), in writing, for the purpose of negating a *transfer pricing benefit an entity gets.

Treaty requirement

 (2) However, this section only applies to an entity if:

 (a) the entity gets the *transfer pricing benefit under subsection 81515(1) at a time when an *international tax agreement containing an *associated enterprises article applies to the entity; or

 (b) the entity gets the transfer pricing benefit under subsection 81515(2) at a time when an international tax agreement containing a *business profits article applies to the entity.

Note: This Subdivision does not apply to income years to which Subdivisions 815B and 815C apply: see section 8151 of the Income Tax (Transitional Provisions) Act 1997.

81515  When an entity gets a transfer pricing benefit

Transfer pricing benefit—associated enterprises

 (1) An entity gets a transfer pricing benefit if:

 (a) the entity is an Australian resident; and

 (b) the requirements in the *associated enterprises article for the application of that article to the entity are met; and

 (c) an amount of profits which, but for the conditions mentioned in the article, might have been expected to accrue to the entity, has, by reason of those conditions, not so accrued; and

 (d) had that amount of profits so accrued to the entity:

 (i) the amount of the taxable income of the entity for an income year would be greater than its actual amount; or

 (ii) the amount of a tax loss of the entity for an income year would be less than its actual amount; or

 (iii) the amount of a *net capital loss of the entity for an income year would be less than its actual amount.

The amount of the transfer pricing benefit is the difference between the amounts mentioned in subparagraph (d)(i), (ii) or (iii) (as the case requires).

Transfer pricing benefit—business profits

 (2) A foreign resident entity gets a transfer pricing benefit if:

 (a) the entity has a permanent establishment (within the meaning of the *international tax agreement) in Australia; and

 (b) the amount of profits attributed to the permanent establishment falls short of the amount of profits the permanent establishment might be expected to make if it were a distinct and separate entity engaged, and dealing, in the manner mentioned in the *business profits article; and

 (c) had the profits attributed to the permanent establishment included that shortfall:

 (i) the amount of the taxable income of the entity for an income year would be greater than its actual amount; or

 (ii) the amount of a tax loss of the entity for an income year would be less than its actual amount; or

 (iii) the amount of a *net capital loss of the entity for an income year would be less than its actual amount.

The amount of the transfer pricing benefit is the difference between the amounts mentioned in subparagraph (c)(i), (ii) or (iii) (as the case requires).

Nil amounts

 (3) For the purposes of working out whether an entity gets a *transfer pricing benefit, and of negating that benefit under subsection 81530(1):

 (a) treat an entity that has no taxable income for an income year as having a taxable income for the year of a nil amount; and

 (b) treat an entity that has no tax loss for an income year as having a tax loss for the year of a nil amount; and

 (c) treat an entity that has no *net capital loss for an income year as having a net capital loss for the year of a nil amount.

Multiple transfer pricing benefits

 (4) To avoid doubt, an entity may get 2 or more *transfer pricing benefits, in one or more income years, in relation to one amount of profits, or one shortfall of profits.

Meaning of associated enterprises article

 (5) An associated enterprises article is:

 (a) Article 9 of the United Kingdom convention (within the meaning of the International Tax Agreements Act 1953); or

 (b) a corresponding provision of another *international tax agreement.

Meaning of business profits article

 (6) A business profits article is:

 (a) Article 7 of the United Kingdom convention (within the meaning of the International Tax Agreements Act 1953); or

 (b) a corresponding provision of another *international tax agreement.

81520  Crossborder transfer pricing guidance

 (1) For the purpose of determining the effect this Subdivision has in relation to an entity:

 (a) work out whether an entity gets a *transfer pricing benefit consistently with the documents covered by this section, to the extent the documents are relevant; and

 (b) interpret a provision of an *international tax agreement consistently with those documents, to the extent they are relevant.

 (2) The documents covered by this section are as follows:

 (a) the Model Tax Convention on Income and on Capital, and its Commentaries, as adopted by the Council of the Organisation for Economic Cooperation and Development and last amended on 22 July 2010;

 (b) the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, as approved by that Council and last amended on 22 July 2010;

 (c) a document, or part of a document, prescribed by the regulations for the purposes of this paragraph.

 (3) However, a document, or a part of a document, mentioned in paragraph (2)(a) or (b) is not covered by this section if the regulations so prescribe.

 (4) Regulations made for the purposes of paragraph (2)(c) or subsection (3) may prescribe different documents or parts of documents for different circumstances.

81525  Modified transfer pricing benefit for thin capitalisation

 (1) This section modifies the *transfer pricing benefit an entity gets, or apart from this section would get, in an income year if:

 (a) Division 820 (about thin capitalisation) applies to the entity for the income year; and

 (b) the transfer pricing benefit relates to profits, or a shortfall of profits, referable to costs that are *debt deductions of the entity for the income year.

 (2) If working out what those costs might have been, or might be expected to be, involves applying a rate to a *debt interest:

 (a) work out the rate by applying section 81515, having regard to section 81520; but

 (b) apply the rate to the debt interest the entity actually issued.

Note: Division 820 may apply to further reduce debt deductions.

81530  Determinations negating transfer pricing benefit

 (1) The determinations the Commissioner may make are as follows:

 (a) a determination of an amount by which the taxable income of the entity for an income year is increased;

 (b) a determination of an amount by which the tax loss of the entity for an income year is decreased;

 (c) a determination of an amount by which the *net capital loss of the entity for an income year is decreased.

 (2) If the Commissioner makes a determination under subsection (1), the determination is taken to be attributable, to the relevant extent, to such of the following as the Commissioner may determine:

 (a) an increase of a particular amount in assessable income of the entity for an income year under a particular provision of this Act;

 (b) a decrease of a particular amount in particular deductions of the entity for an income year;

 (c) an increase of a particular amount in particular capital gains of the entity for an income year;

 (d) a decrease of a particular amount in particular capital losses of the entity for an income year.

 (3) If the Commissioner makes a determination under subsection (1), the Commissioner must make a determination under subsection (2), unless it is not possible or practicable for the Commissioner to do so.

Example: If section 81525 is relevant in working out the transfer pricing benefit an entity gets, this subsection requires the Commissioner to make a determination relating to the debt deductions of the entity.

 (4) Nothing done under subsection (2) affects the validity of a determination made under subsection (1).

 (5) The Commissioner may take such action as the Commissioner considers necessary to give effect to a determination under this section.

 (6) The Commissioner must give a copy of a determination under this section to the entity.

 (7) A failure to comply with subsection (6) does not affect the validity of the determination.

81535  Consequential adjustments

Consequential adjustment—associated enterprises

 (1) The Commissioner may make a determination under subsection (4) in relation to an entity (the disadvantaged entity) if:

 (a) the Commissioner makes a determination under subsection 81530(1) in relation to a *transfer pricing benefit an entity gets under subsection 81515(1); and

 (b) the Commissioner considers that, but for the conditions mentioned in the *associated enterprises article:

 (i) the amount of the taxable income of the disadvantaged entity for an income year might have been expected to be less than its actual amount; or

 (ii) the amount of a *tax loss of the disadvantaged entity for an income year might have been expected to be greater than its actual amount; or

 (iii) the amount of a *net capital loss of the disadvantaged entity for an income year might have been expected to be greater than its actual amount; or

 (iv) an amount of *withholding tax payable in respect of interest or royalties by the disadvantaged entity might have been expected to be less than its actual amount; and

 (c) the Commissioner considers that it is fair and reasonable that the actual amount mentioned in subparagraph (b)(i), (ii), (iii) or (iv) (as the case requires) be adjusted accordingly.

Consequential adjustment—business profits

 (2) The Commissioner may make a determination under subsection (4) in relation to an entity (the disadvantaged entity) if:

 (a) the Commissioner makes a determination under subsection 81530(1) in relation to a *transfer pricing benefit an entity gets under subsection 81515(2); and

 (b) the Commissioner considers that, if the permanent establishment were a distinct and separate entity engaged, and dealing, in the manner mentioned in the *business profits article:

 (i) the amount of the taxable income of the disadvantaged entity for an income year might have been expected to be less than its actual amount; or

 (ii) the amount of a *tax loss of the disadvantaged entity for an income year might have been expected to be greater than its actual amount; or

 (iii) the amount of a *net capital loss of the disadvantaged entity for an income year might have been expected to be greater than its actual amount; or

 (iv) an amount of *withholding tax payable in respect of interest or royalties by the disadvantaged entity might have been expected to be less than its actual amount; and

 (c) the Commissioner considers that it is fair and reasonable that the actual amount mentioned in subparagraph (b)(i), (ii), (iii) or (iv) (as the case requires) be adjusted accordingly.

Nil amounts

 (3) For the purposes of this section:

 (a) treat an entity that has no taxable income for an income year as having a taxable income for the year of a nil amount; and

 (b) treat an entity that has no tax loss for an income year as having a tax loss for the year of a nil amount; and

 (c) treat an entity that has no *net capital loss for an income year as having a net capital loss for the year of a nil amount.

Consequential adjustment—determinations

 (4) The Commissioner may make one or more of the following determinations, in writing, for the purpose of adjusting an amount as mentioned in paragraph (1)(c) or (2)(c):

 (a) a determination of an amount by which the taxable income of the disadvantaged entity for an income year is decreased;

 (b) a determination of an amount by which the tax loss of the disadvantaged entity for an income year is increased;

 (c) a determination of an amount by which the *net capital loss of the disadvantaged entity for an income year is increased;

 (d) a determination of an amount by which the *withholding tax payable by the disadvantaged entity in respect of interest or royalties is decreased.

 (5) The Commissioner may take such action as the Commissioner considers necessary to give effect to a determination under this section.

 (6) The Commissioner must give a copy of a determination under this section to the disadvantaged entity.

 (7) A failure to comply with subsection (6) does not affect the validity of the determination.

 (9) An entity may give the Commissioner a written request to make a determination under this section relating to the entity. The Commissioner must decide whether or not to grant the request, and give the entity notice of the Commissioner’s decision.

 (10) If the entity is dissatisfied with the Commissioner’s decision, the entity may object, in the manner set out in Part IVC of the Taxation Administration Act 1953, against that decision.

81540  No double taxation

 (1) The amount of a *transfer pricing benefit that is negated under this Subdivision for an entity is not to be taken into account again under another provision of this Act to increase the entity’s assessable income, reduce the entity’s deductions or reduce a *net capital loss of the entity.

 (2) Subsection (1) has effect despite former section 136AB of the Income Tax Assessment Act 1936.

 (3) Nothing in this Subdivision limits Division 820 (about thin capitalisation) in its application to further reduce *debt deductions of an entity.

Subdivision 815BArm’s length principle for crossborder conditions between entities

Guide to Subdivision 815B

815101  What this Subdivision is about

This Subdivision applies if an entity would otherwise get a tax advantage in Australia from crossborder conditions that are inconsistent with the internationally accepted arm’s length principle.

The entity is treated for income tax and withholding tax purposes as if arm’s length conditions had operated.

Table of sections

Operative provisions

815105 Object

815110 Operation of Subdivision

815115 Substitution of arm’s length conditions

815120 When an entity gets a transfer pricing benefit

815125 Meaning of arm’s length conditions

815130 Relevance of actual commercial or financial relations

815135 Guidance

815140 Modification for thin capitalisation

815145 Consequential adjustments

815150 Amendment of assessments

Operative provisions

815105  Object

 (1) The object of this Subdivision is to ensure that the amount brought to tax in Australia from crossborder conditions between entities is not less than it would be if those conditions reflected:

 (a) the arm’s length contribution made by Australian operations through functions performed, assets used and risks assumed; and

 (b) the conditions that might be expected to operate between entities dealing at *arm’s length.

 (2) The Subdivision does this by specifying that, where an entity would otherwise get a tax advantage from actual conditions that differ from *arm’s length conditions, the arm’s length conditions are taken to operate for income tax and withholding tax purposes.

815110  Operation of Subdivision

 (1) Nothing in the provisions of this Act other than this Subdivision limits the operation of this Subdivision.

 (2) Nothing in this Subdivision limits Division 820 (about thin capitalisation) in its application to reduce, or further reduce, *debt deductions of an entity.

815115  Substitution of arm’s length conditions

 (1) For the purposes covered by subsection (2), if an entity gets a *transfer pricing benefit from conditions that operate between the entity and another entity in connection with their commercial or financial relations:

 (a) those conditions are taken not to operate; and

 (b) instead, the *arm’s length conditions are taken to operate.

Note 1: The conditions that operate include, but are not limited to, such things as price, gross margin, net profit, and the division of profit between the entities.

Note 2: There are special rules about documentation that affect when an entity has a reasonably arguable position about the application (or nonapplication) of this Subdivision: see Subdivision 284E in Schedule 1 to the Taxation Administration Act 1953.

 (2) The purposes covered by this subsection are:

 (a) if the *transfer pricing benefit arises under subparagraph 815120(1)(c)(i)—working out the amount (if any) of the entity’s taxable income for the income year; and

 (b) if the transfer pricing benefit arises under subparagraph 815120(1)(c)(ii)—working out the amount (if any) of the entity’s loss of a particular *sort for the income year; and

 (c) if the transfer pricing benefit arises under subparagraph 815120(1)(c)(iii)—working out the amount (if any) of the entity’s *tax offsets for the income year; and

 (d) if the transfer pricing benefit arises under subparagraph 815120(1)(c)(iv)—working out the amount (if any) of *withholding tax payable by the entity in respect of interest or royalties.

815120  When an entity gets a transfer pricing benefit

 (1) An entity gets a transfer pricing benefit from conditions that operate between the entity and another entity in connection with their commercial or financial relations if:

 (a) those conditions (the actual conditions) differ from the *arm’s length conditions; and

 (b) the actual conditions satisfy the crossborder test in subsection (3) for the entity; and

 (c) had the arm’s length conditions operated, instead of the actual conditions, one or more of the following would, apart from this Subdivision, apply:

 (i) the amount of the entity’s taxable income for an income year would be greater;

 (ii) the amount of the entity’s loss of a particular *sort for an income year would be less;

 (iii) the amount of the entity’s *tax offsets for an income year would be less;

 (iv) an amount of *withholding tax payable in respect of interest or royalties by the entity would be greater.

Absence of condition

 (2) For the purposes of subsection (1), there is taken to be a difference between the actual conditions and the *arm’s length conditions if:

 (a) an actual condition exists that is not one of the arm’s length conditions; or

 (b) a condition does not exist in the actual conditions but is one of the arm’s length conditions.

Crossborder test

 (3) Conditions that operate between an entity and another entity in connection with their commercial or financial relations satisfy the crossborder test if:

 (a) the conditions meet the overseas requirement in the following table for either or both of the entities; or

 (b) the conditions operate in connection with a *business that the entity carries on in an *area covered by an international tax sharing treaty.

 

Overseas requirement

Item

Column 1

The conditions meet the overseas requirement for this type of entity:

Column 2

if:

1

any of the following:

(a) an Australian resident;

(b) a resident trust estate for the purposes of Division 6 of Part III of the Income Tax Assessment Act 1936;

(c) a partnership in which all of the partners are, directly or indirectly through one or more interposed partnerships, Australian residents or resident trust estates

the conditions operate at or through an *overseas permanent establishment of the entity.

2

an entity not covered by column 1 of item 1

the conditions do not operate solely at or through an *Australian permanent establishment of the entity.

 (4) For the purposes of the table in subsection (3), treat any entity that is an Australian resident as not being an Australian resident if:

 (a) the entity is also a resident in a country that has entered into an *international tax agreement with Australia containing a *residence article; and

 (b) under that residence article, the entity is taken, for the purposes of the agreement, to be a resident only of that other country.

Nil amounts

 (5) For the purposes of this section and section 815145:

 (a) treat an entity that has no taxable income for an income year as having a taxable income for the year of a nil amount; and

 (b) treat an entity that has no loss of a particular *sort for an income year as having a loss of that sort for the year of a nil amount; and

 (c) treat an entity that has no *tax offsets for an income year as having tax offsets for the year of a nil amount.

Meaning of residence article

 (6) A residence article is:

 (a) Article 4 of the United Kingdom convention (within the meaning of the International Tax Agreements Act 1953); or

 (b) a corresponding provision of another *international tax agreement.

815125  Meaning of arm’s length conditions

 (1) The arm’s length conditions, in relation to conditions that operate between an entity and another entity, are the conditions that might be expected to operate between independent entities dealing wholly independently with one another in comparable circumstances.

Most appropriate and reliable method to be used

 (2) In identifying the *arm’s length conditions, use the method, or the combination of methods, that is the most appropriate and reliable, having regard to all relevant factors, including the following:

 (a) the respective strengths and weaknesses of the possible methods in their application to the actual conditions;

 (b) the circumstances, including the functions performed, assets used and risks borne by the entities;

 (c) the availability of reliable information required to apply a particular method;

 (d) the degree of comparability between the actual circumstances and the comparable circumstances, including the reliability of any adjustments to eliminate the effect of material differences between those circumstances.

Note: The possible methods include the methods set out in the documents mentioned in section 815135 (about relevant guidance material).

Comparability of circumstances

 (3) In identifying comparable circumstances for the purpose of this section, regard must be had to all relevant factors, including the following:

 (a) the functions performed, assets used and risks borne by the entities;

 (b) the characteristics of any property or services transferred;

 (c) the terms of any relevant contracts between the entities;

 (d) the economic circumstances;

 (e) the business strategies of the entities.

 (4) For the purposes of this section, circumstances are comparable to actual circumstances if, to the extent (if any) that the circumstances differ from the actual circumstances:

 (a) the difference does not materially affect a condition that is relevant to the method; or

 (b) a reasonably accurate adjustment can be made to eliminate the effect of the difference on a condition that is relevant to the method.

815130  Relevance of actual commercial or financial relations

Basic rule

 (1) The identification of the *arm’s length conditions must:

 (a) be based on the commercial or financial relations in connection with which the actual conditions operate; and

 (b) have regard to both the form and substance of those relations.

Exceptions

 (2) Despite paragraph (1)(b), disregard the form of the actual commercial or financial relations to the extent (if any) that it is inconsistent with the substance of those relations.

 (3) Despite subsection (1), if:

 (a) independent entities dealing wholly independently with one another in comparable circumstances would not have entered into the actual commercial or financial relations; and

 (b) independent entities dealing wholly independently with one another in comparable circumstances would have entered into other commercial or financial relations; and

 (c) those other commercial or financial relations differ in substance from the actual commercial or financial relations;

the identification of the *arm’s length conditions must be based on those other commercial or financial relations.

 (4) Despite subsection (1), if independent entities dealing wholly independently with one another in comparable circumstances would not have entered into commercial or financial relations, the identification of the *arm’s length conditions is to be based on that absence of commercial or financial relations.

 (5) Subsections 815125(3) and (4) (about comparability of circumstances) apply for the purposes of this section.

815135  Guidance

 (1) For the purpose of determining the effect this Subdivision has in relation to an entity, identify *arm’s length conditions so as best to achieve consistency with the documents covered by this section.

 (2) The documents covered by this section are as follows:

 (a) subject to paragraph (aa), the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, as approved by the Council of the Organisation for Economic Cooperation and Development and last amended on 22 July 2010;

 (aa) the Aligning Transfer Pricing Outcomes with Value Creation, Actions 810 2015 Final Reports, of the Organisation for Economic Cooperation and Development, published on 5 October 2015;

 (b) a document, or part of a document, prescribed by the regulations for the purposes of this paragraph.

 (3) However, the document mentioned in paragraph (2)(a) or (aa) is not covered by this section if the regulations so prescribe.

 (4) Regulations made for the purposes of paragraph (2)(b) or subsection (3) may prescribe different documents or parts of documents for different circumstances.

815140  Modification for thin capitalisation

 (1) This section modifies the way an entity to which section 815115 applies works out its taxable income, or its loss of a particular *sort, for an income year, if:

 (a) Division 820 (about thin capitalisation) applies to the entity for the income year; and

 (b) the *arm’s length conditions affect costs that are *debt deductions of the entity for the income year.

 (2) If working out what those costs would be if the *arm’s length conditions had operated involves applying a rate to a *debt interest:

 (a) work out the rate as if the arm’s length conditions had operated; but

 (b) apply the rate to the debt interest the entity actually issued.

Note: Division 820 may apply to reduce or further reduce debt deductions.

815145  Consequential adjustments

 (1) The Commissioner may make a determination under subsection (2) in relation to an entity (the disadvantaged entity) if:

 (a) *arm’s length conditions are taken by section 815115 to operate; and

 (b) the Commissioner considers that, if the arm’s length conditions, instead of the actual conditions, had operated:

 (i) the amount of the disadvantaged entity’s taxable income for an income year might have been expected to be less than its actual amount; or

 (ii) the amount of the disadvantaged entity’s loss of a particular *sort for an income year might have been expected to be greater than its actual amount; or

 (iii) the amount of the disadvantaged entity’s *tax offsets for an income year might have been expected to be greater than their actual amount; or

 (iv) an amount of *withholding tax payable in respect of interest or royalties by the disadvantaged entity might have been expected to be less than its actual amount; and

 (c) the Commissioner considers that it is fair and reasonable that the actual amount mentioned in subparagraph (b)(i), (ii), (iii) or (iv) (as the case requires) be adjusted accordingly.

 (2) For the purpose of adjusting an amount as mentioned in paragraph (1)(c), the Commissioner may make a determination stating the amount that is (and has been at all times) the amount of the disadvantaged entity’s:

 (a) taxable income for the income year; or

 (b) loss of a particular *sort for the income year; or

 (c) *tax offsets, or tax offset of a particular kind, for the income year; or

 (d) *withholding tax payable in respect of interest or royalties.

 (3) The Commissioner may take such action as the Commissioner considers necessary to give effect to a determination under this section.

 (4) The Commissioner must give a copy of a determination under this section to the disadvantaged entity.

 (5) A failure to comply with subsection (4) does not affect the validity of the determination.

 (7) An entity may give the Commissioner a written request to make a determination under this section relating to the entity. The Commissioner must decide whether or not to grant the request, and give the entity notice of the Commissioner’s decision.

 (8) If the entity is dissatisfied with the Commissioner’s decision, the entity may object, in the manner set out in Part IVC of the Taxation Administration Act 1953, against that decision.

815150  Amendment of assessments

 (1) Section 170 of the Income Tax Assessment Act 1936 does not prevent the amendment of an assessment of an entity for an income year if:

 (a) the amendment is made within 7 years after the day on which the Commissioner gives notice of the assessment to the entity; and

 (b) the amendment is made for the purpose of giving effect to section 815115.

 (2) Section 170 of the Income Tax Assessment Act 1936 does not prevent the amendment of an assessment at any time for the purpose of giving effect to section 815145.

Subdivision 815CArm’s length principle for permanent establishments

Guide to Subdivision 815C

815201  What this Subdivision is about

This Subdivision applies the internationally accepted arm’s length principle in the context of permanent establishments (PEs).

Table of sections

Operative provisions

815205 Object

815210 Operation of Subdivision

815215 Substitution of arm’s length profits

815220 When an entity gets a transfer pricing benefit

815225 Meaning of arm’s length profits

815230 Source rules for certain arm’s length profits

815235 Guidance

815240 Amendment of assessments

Operative provisions

815205  Object

  The object of this Subdivision is to ensure that the amount brought to tax in Australia by entities operating *permanent establishments is not less than it would be if the permanent establishment were a distinct and separate entity engaged in the same or comparable activities under the same or comparable circumstances, but dealing wholly independently with the other part of the entity.

815210  Operation of Subdivision

 (1) Nothing in the provisions of this Act other than this Subdivision limits the operation of this Subdivision.

 (2) Nothing in this Subdivision limits Division 820 (about thin capitalisation) in its application to reduce, or further reduce, *debt deductions of an entity.

 (3) For the purposes of this Subdivision, a branch to which subsection 160ZZW(2) of the Income Tax Assessment Act 1936 (about certain Australian branches of foreign banks) applies is taken not to be, and not to have been at any time since its establishment, a *permanent establishment in Australia of the bank.

815215  Substitution of arm’s length profits

 (1) For the purposes covered by subsection (2), if an entity gets a *transfer pricing benefit from the attribution of profits to a *PE of the entity:

 (a) the amount of profits actually attributed to the PE is taken not to have been so attributed; and

 (b) instead, the *arm’s length profits are taken to have been attributed to the PE.

Note: There are special rules about documentation that affect when an entity has a reasonably arguable position about the application (or nonapplication) of this Subdivision: see Subdivision 284E in Schedule 1 to the Taxation Administration Act 1953.

 (2) The purposes covered by this subsection are:

 (a) if the *transfer pricing benefit arises under subparagraph 815220(1)(b)(i)—working out the amount (if any) of the entity’s taxable income for the income year; and

 (b) if the transfer pricing benefit arises under subparagraph 815220(1)(b)(ii)—working out the amount (if any) of a loss of a particular *sort for the income year; and

 (c) if the transfer pricing benefit arises under subparagraph 815220(1)(b)(iii)—working out the amount (if any) of the entity’s *tax offsets for the income year.

815220  When an entity gets a transfer pricing benefit

 (1) An entity gets a transfer pricing benefit from the attribution of profits to a *PE of the entity if:

 (a) the amount of profits (the actual profits) attributed to the PE differs from the *arm’s length profits for the PE; and

 (b) had the arm’s length profits, instead of the actual profits, been attributed to the PE, one or more of the following would, apart from this Subdivision, apply:

 (i) the amount of the entity’s taxable income for an income year would be greater;

 (ii) the amount of the entity’s loss of a particular *sort for an income year would be less;

 (iii) the amount of the entity’s *tax offsets for an income year would be less.

Nil amounts

 (2) For the purposes of this section:

 (a) treat an entity that has no taxable income for an income year as having a taxable income for the year of a nil amount; and

 (b) treat an entity that has no loss of a particular *sort for an income year as having a loss of that sort for the year of a nil amount; and

 (c) treat an entity that has no *tax offsets for an income year as having tax offsets for the year of a nil amount.

815225  Meaning of arm’s length profits

 (1) The arm’s length profits for a *PE of an entity are worked out by allocating the actual expenditure and income of the entity between the PE and the entity so that the profits attributed to the PE equal the profits the PE might be expected to make if:

 (a) the PE were a distinct and separate entity; and

 (b) the activities and circumstances of the PE, including the functions performed, assets used and risks borne by the PE, were those of that separate entity; and

 (c) the conditions that operated between that separate entity and the entity of which it is a PE were the *arm’s length conditions.

 (2) The conditions to which the *arm’s length conditions mentioned in paragraph (1)(c) relate are the conditions that would operate between the separate entity and the entity of which it is a *PE if the assumptions in paragraphs (1)(a) and (b) were made.

 (3) For the purposes of subsection (1):

 (a) the actual expenditure of an entity is taken to include losses and outgoings; and

 (b) the actual income of an entity is taken to include any amount that is, or is to be, included in the entity’s assessable income.

815230  Source rules for certain arm’s length profits

 (1) The *arm’s length profits for a *PE in Australia are taken, for the purposes of this Act, to be attributable to sources in Australia.

 (2) The *arm’s length profits for a *PE in an *area covered by an international tax sharing treaty are taken, for the purposes of this Act, to be attributable to sources in that area.

815235  Guidance

 (1) For the purpose of determining the effect this Subdivision has in relation to an entity, work out *arm’s length profits, and identify *arm’s length conditions, so as best to achieve consistency with:

 (a) the documents covered by this section; and

 (b) subject to paragraph (a), the documents covered by section 815135.

 (2) The documents covered by this section are as follows:

 (a) the Model Tax Convention on Income and on Capital, and its Commentaries, as adopted by the Council of the Organisation for Economic Cooperation and Development and last amended on 22 July 2010, to the extent that document extracts the text of Article 7 and its Commentary as they read before 22 July 2010;

 (b) a document, or part of a document, prescribed by the regulations for the purposes of this paragraph.

 (3) However, the document mentioned in paragraph (2)(a) is not covered by this section if the regulations so prescribe.

 (4) A document covered by section 815135 is to be disregarded for the purposes of this section if the regulations so prescribe.

 (5) Regulations made for the purposes of paragraph (2)(b), subsection (3) or subsection (4) may prescribe different documents or parts of documents for different circumstances.

815240  Amendment of assessments

  Section 170 of the Income Tax Assessment Act 1936 does not prevent the amendment of an assessment of an entity for an income year if:

 (a) the amendment is made within 7 years after the day on which the Commissioner gives notice of the assessment to the entity; and

 (b) the amendment is made for the purpose of giving effect to section 815215.

Subdivision 815DSpecial rules for trusts and partnerships

Guide to Subdivision 815D

815301  What this Subdivision is about

This Subdivision provides special rules about the way Subdivisions 815B and 815C apply to trusts and partnerships.

Table of sections

Operative provisions

815305 Special rule for trusts

815310 Special rules for partnerships

Operative provisions

815305  Special rule for trusts

  Subdivisions 815B and 815C apply in relation to the *net income of a trust in the same way those Subdivisions apply in relation to the taxable income of an entity other than a trust.

815310  Special rules for partnerships

 (1) Subdivisions 815B and 815C apply in relation to the *net income of a partnership in the same way those Subdivisions apply in relation to the taxable income of an entity other than a partnership.

 (2) Subdivisions 815B and 815C apply in relation to a *partnership loss of a partnership in the same way those Subdivisions apply in relation to a *tax loss of an entity other than a partnership.

Subdivision 815EReporting obligations for significant global entities

Guide to Subdivision 815E

815350  What this Subdivision is about

Significant global entities must give the Commissioner statements under this Subdivision.

Note: This Subdivision enables the implementation of measures issued by the Organisation for Economic Cooperation and Development relating to transfer pricing documentation and countrybycountry reporting (including Action 13 of the Action Plan on Base Erosion and Profit Shifting of the G20 and the Organisation for Economic Cooperation and Development)

Table of sections

Operative provisions

815355 Requirement to give statements

815360 Replacement reporting periods

815365 Exemptions

Operative provisions

815355  Requirement to give statements

 (1) You must give to the Commissioner a statement of each of the kinds referred to in subsection (3), in the *approved form, in relation to an income year if:

 (a) you were a *significant global entity during a period that includes the whole or a part of the income year that preceded that income year; and

 (b) you are, during that income year, any of the following:

 (i) an Australian resident;

 (ii) a resident trust estate for the purposes of Division 6 of Part III of the Income Tax Assessment Act 1936;

 (iii) a partnership that has at least one partner who is an Australian resident;

 (iv) a foreign resident who operates an Australian permanent establishment (within the meaning of Part IVA of the Income Tax Assessment Act 1936);

 (v) a nonresident trust estate (within the meaning of section 102AAB of the Income Tax Assessment Act 1936) that operates an Australian permanent establishment (within the meaning of Part IVA of that Act);

 (vi) a partnership that operates an Australian permanent establishment (within the meaning of that Part); and

 (c) you are not exempted under section 815365 from giving the statement; and

 (d) you are not included in a class of entities prescribed by the regulations.

Note: Under section 815360, the Commissioner may allow you to give statements in relation to a 12 month period other than an income year.

 (2) You must give the statement within 12 months after the end of the period to which it relates.

Note: Section 38855 in Schedule 1 to the Taxation Administration Act 1953 allows the Commissioner to defer the time for giving the statement.

 (3) The statements are to be of the following kinds:

 (a) a statement relating to the global operations and activities, and the pricing policies relevant to transfer pricing, of:

 (i) you; and

 (ii) if you were a *significant global entity during the preceding income year by virtue of your membership of a group of entities—the other members of that group;

 (b) a statement relating to your operations, activities, dealings and transactions;

 (c) a statement relating to the allocation between countries of the income and activities of, and taxes paid by:

 (i) you; and

 (ii) if subparagraph (a)(ii) applies—the other members of that group.

Note: These statements correspond to the following in Annexes I, II and III to Chapter V set out in the Guidance on Transfer Pricing Documentation and Countrybycountry Reporting of the Organisation for Economic Cooperation and Development and the G20:

(a) a statement under paragraph (a) corresponds to the master file (see Annexe I);

(b) a statement under paragraph (b) corresponds to the local file (see Annexe II);

(c) a statement under paragraph (c) corresponds to the countrybycountry report (see Annexe III).

815360  Replacement reporting periods

 (1) The Commissioner may, by notice in writing, allow you to give all statements, or specified kinds of statements, under section 815355 in relation to a 12 month period other than an income year.

 (2) A notice under subsection (1) is not a legislative instrument.

815365  Exemptions

Exemptions for particular entities

 (1) The Commissioner may, by notice in writing, exempt an entity from:

 (a) giving statements under section 815355; or

 (b) giving statements of a particular kind under that section.

 (2) A notice under subsection (1) is not a legislative instrument.

General exemptions

 (3) The Commissioner may, by legislative instrument, determine that section 815355 does not apply to a specified class of entity.

Division 820Thin capitalisation rules

Table of Subdivisions

 Guide to Division 820

820A Preliminary

820B Thin capitalisation rules for outward investing entities (nonADI)

820C Thin capitalisation rules for inward investing entities (nonADI)

820D Thin capitalisation rules for outward investing entities (ADI)

820E Thin capitalisation rules for inward investing entities (ADI)

820EA Some financial entities may choose to be treated as ADIs

820FA How the thin capitalisation rules apply to consolidated groups and MEC groups

820FB Grouping branches of foreign banks and foreign financial entities with a consolidated group, MEC group or single Australian resident company

820G Calculating the average values

820H Control of entities

820HA Controlled foreign entity debt and controlled foreign entity equity

820I Associate entities

820J Equity interests in trusts and partnerships

820JA Worldwide debt and equity concepts

820K Zerocapital amounts

820KA Costfree debt capital and excluded equity interests

820L Record keeping requirements

Guide to Division 820

8201  What this Division is about

This Division applies to foreign controlled Australian entities, Australian entities that operate internationally and foreign entities that operate in Australia.

Financing expenses that an entity can otherwise deduct from its assessable income may be disallowed under this Division in the following circumstances:

 for an entity that is not an authorised deposittaking institution for the purposes of the Banking Act 1959 (an ADI)—the entity’s debt exceeds the prescribed level (and the entity is therefore “thinly capitalised”);

 for an entity that is an ADI—the entity’s capital is less than the prescribed level (and the entity is therefore “thinly capitalised”).

Table of sections

8205 Does this Division apply to an entity?

82010 Map of Division

8205  Does this Division apply to an entity?

  The following diagram shows you how to work out whether this Division applies to an entity.

 

82010  Map of Division

  The following table sets out a map of this Division.

 

Map of Division

Item

This Subdivision:

sets out:

1

Subdivision 820B or 820C

(a) the meaning of maximum allowable debt for the Subdivision; and

(b) how an entity covered by the Subdivision would have all or a part of its debt deductions disallowed if the maximum allowable debt is exceeded; and

(c) the application of these rules in relation to a part of an income year.

2

Subdivision 820D or 820E

(a) the meaning of minimum capital amount for the Subdivision; and

(b) how an entity covered by the Subdivision would have all or a part of its debt deductions disallowed if the minimum capital amount is not reached; and

(c) the application of these rules in relation to a part of an income year.

3A

Subdivision 820FA

how this Division applies to a consolidated group or MEC group.

3B

Subdivision 820FB

special rules for grouping foreign bank branches with a consolidated group, MEC group or single Australian resident company.

4

Subdivision 820G

the methods of calculating the average value of a matter for the purposes of this Division.

5

Subdivision 820H

the rules for determining:

(a) whether or not an Australian entity controls a foreign entity (for the purposes of determining whether or not Subdivision 820B or 820D applies to that Australian entity); and

(b) whether or not an Australian entity is controlled by a foreign entity (for the purposes of determining whether or not Subdivision 820C applies to that Australian entity).

5A

Subdivision 820HA

the meaning of controlled foreign entity debt and controlled foreign entity equity for the purposes of this Division.

6

Subdivision 820I

the meaning of various concepts about associate entity for the purposes of this Division.

7

Subdivision 820J

the meaning of equity interests in trusts and partnerships for the purposes of this Division.

7A

Subdivision 820JA

worldwide debt and equity concepts.

8

Subdivision 820K

the meaning of zerocapital amount for the purposes of this Division.

8A

Subdivision 820KA

the meaning of costfree debt capital, and excluded equity interest, for the purposes of this Division.

9

Subdivision 820L

special record keeping requirements for the purposes of this Division.

Subdivision 820APreliminary

Table of sections

82030 Object of Division

82032 Exemption for private or domestic assets and nondebt liabilities

82035 Application—$2 million threshold

82037 Application—assets threshold

82039 Exemption of certain special purpose entities

82040 Meaning of debt deduction

82030  Object of Division

  The Object of this Division is to ensure that the following entities do not reduce their tax liabilities by using an excessive amount of *debt capital to finance their Australian operations:

 (a) *Australian entities that operate internationally;

 (b) Australian entities that are foreign controlled;

 (c) *foreign entities that operate in Australia.

Note: This Division applies in relation to debt deductions of an entity as reduced, if required, in accordance with Division 815 (about crossborder transfer pricing).

82032  Exemption for private or domestic assets and nondebt liabilities

  This Division does not apply to:

 (a) an asset that is used (or held for use) wholly or principally for private or domestic purposes; or

 (b) a *nondebt liability that is wholly or principally of a private or domestic nature.

82035  Application—$2 million threshold

  Subdivision 820B, 820C, 820D or 820E does not apply to disallow any *debt deduction of an entity for an income year if the total debt deductions of that entity and all its *associate entities for that year are $2 million or less.

82037  Application—assets threshold

 (1) Subdivision 820B, 820C, 820D or 820E does not apply to disallow any *debt deduction of an entity for an income year if:

 (a) the entity is an *outward investing entity (nonADI) or an *outward investing entity (ADI) for a period that is all or any part of that year; and

 (b) the entity is not also an *inward investing entity (nonADI) or an *inward investing entity (ADI) for all or any part of that period; and

 (c) the result of applying the following formula is equal to or greater than 0.9:

where:

average Australian assets:

 (a) of an *Australian entity—is the average value, for that year, of all the assets of the entity, other than:

 (i) any assets attributable to the entity’s *overseas permanent establishments; or

 (ii) any *debt interests held by the entity, to the extent to which any value of the interests is all or a part of the *controlled foreign entity debt of the entity; or

 (iii) any *equity interests or debt interests held by the entity, to the extent to which any value of the interests is all or a part of the *controlled foreign entity equity of the entity; or

 (iv) any debt interests that are *issued by *associates of the entity, that are *on issue, and that are held by the entity; or

 (v) any equity interests that the entity holds in associates of the entity; and

 (b) of a *foreign entity—is the average value, for that year, of all the assets of the entity that are:

 (i) located in Australia; or

 (ii) attributable to the entity’s *Australian permanent establishments; or

 (iii) debt interests held by the entity, to the extent to which the interests are covered by subsection (2); or

 (iv) equity interests held by the entity, to the extent to which the interests are covered by subsection (3);

  other than:

 (v) any debt interests that are issued by associates of the entity, that are on issue, and that are held by the entity; or

 (vi) any equity interests that the entity holds in associates of the entity.

average total assets of an entity is the average value, for that year, of all the assets of the entity, other than:

 (a) any *debt interests that are *issued by *associates of the entity, that are *on issue, and that are held by the entity; or

 (b) any *equity interests that the entity holds in associates of the entity.

Foreign entity—debt interest issued by an Australian entity

 (2) If a *foreign entity holds a *debt interest that:

 (a) was *issued by an *Australian entity; and

 (b) is *on issue;

this subsection covers the interest to the extent to which the interest is not attributable to any *overseas permanent establishments of the Australian entity.

Foreign entity—equity interest in an Australian entity

 (3) If a *foreign entity holds an *equity interest in an *Australian entity, this subsection covers the interest to the extent to which the interest is not attributable to any *overseas permanent establishments of the Australian entity.

82039  Exemption of certain special purpose entities

 (1) Subdivision 820B, 820C, 820D or 820E does not apply to disallow any *debt deduction of an entity for an income year if the entity meets the conditions in subsection (3) throughout the income year.

 (2) Subdivision 820B, 820C, 820D or 820E does not apply to disallow any *debt deduction of an entity for an income year that is an amount incurred by the entity during a part of that year, if the entity meets the conditions in subsection (3) throughout that part.

 (3) The conditions are:

 (a) the entity is one established for the purposes of managing some or all of the economic risk associated with assets, liabilities or investments (whether the entity assumes the risk from another entity or creates the risk itself); and

 (b) the total value of *debt interests in the entity is at least 50% of the total value of the entity’s assets; and

 (c) the entity is an insolvencyremote special purpose entity according to criteria of an internationally recognised rating agency that are applicable to the entity’s circumstances.

 (4) The condition in paragraph (3)(c) can be met without the rating agency determining that the entity meets those criteria.

Note 1: While an entity meets the conditions in subsection (3), it is treated for the purposes of this Division as not being a member of a consolidated group or MEC group (see section 820584).

Note 2: An entity that does not qualify for the exemption in this section may still be a securitisation vehicle under subsection 820942(2), in which case the value of its securitised assets will count towards its zerocapital amount under Subdivision 820K.

Multitier special purpose entities

 (5) An entity is taken to meet the conditions in subsection (3) throughout a period that is all or part of an income year, if the entity is one of 2 or more entities that together satisfy the condition that, assuming:

 (a) each of the entities had been a division or part of the same entity (the notional entity), rather than a separate entity, throughout that period; and

 (b) the notional entity had consisted only of those divisions and parts throughout that period;

the notional entity would meet the conditions in subsection (3) throughout that period.

82040  Meaning of debt deduction

 (1) Debt deduction, of an entity and for an income year, is a cost incurred by the entity in relation to a *debt interest issued by the entity, to the extent to which:

 (a) the cost is:

 (i) interest, an amount in the nature of interest, or any other amount that is calculated by reference to the time value of money; or

 (ii) the difference between the *financial benefits received, or to be received, by the entity under the *scheme giving rise to the debt interest and the financial benefits provided, or to be provided, under that scheme; or

 (iii) any amount directly incurred in obtaining or maintaining the financial benefits received, or to be received, by the entity under the scheme giving rise to the debt interest; or

 (iv) any other expense incurred by the entity that is specified in the regulations made for the purposes of this subparagraph; and

 (b) the entity can, apart from this Division, deduct the cost from its assessable income for that year;

 (2) A cost covered by paragraph (1)(a) includes, but is not limited to, any of the following:

 (a) an amount in substitution for interest;

 (b) a discount in respect of a security;

 (c) a fee or charge in respect of a debt, including application fees, line fees, service fees, brokerage and stamp duty in respect of document registration or security for the debt interest;

 (d) an amount that is taken under an *income tax law to be an amount of interest in respect of a lease, a hire purchase arrangement or any other *arrangement specified in that law;

 (e) any loss in respect of:

 (i) a reciprocal purchase agreement (otherwise known as a repurchase agreement);

 (ii) a sellbuyback arrangement;

 (iii) a securities loan arrangement;

 (f) any amount covered by paragraph (1)(a) that has been assigned or is dealt with in any way on behalf of the party who would otherwise be entitled to that amount.

 (3) To avoid doubt, the following amounts that are incurred by an entity in relation to a *debt interest issued by the entity are not covered by paragraph (1)(a):

 (a) losses and outgoings directly associated with hedging or managing the financial risk in respect of the debt interest;

 (b) losses incurred by the entity in relation to which the following apply:

 (i) the losses would otherwise be a cost covered by subparagraph (1)(a)(ii); but

 (ii) the benefits mentioned in that subparagraph are measured in a foreign currency or a unit of account other than Australian currency (for example, ounces of gold) and the losses have arisen only because of changes in the rate of converting that foreign currency or that unit of account into Australian currency;

 (c) salary or wages;

 (d) rental expenses for a lease if the lease is not a debt interest;

 (e) an expense specified in the regulations made for the purposes of this paragraph.

Subdivision 820BThin capitalisation rules for outward investing entities (nonADI)

Guide to Subdivision 820B

82065  What this Subdivision is about

This Subdivision sets out the thin capitalisation rules that apply to an Australian entity that has certain types of overseas investments and is not an authorised deposittaking institution (an ADI). These rules deal with the following matters:

 how to work out the entity’s maximum allowable debt for an income year;

 how all or a part of the debt deductions claimed by the entity may be disallowed if the maximum allowable debt is exceeded;

 how to apply these rules to a period that is less than an income year.

Table of sections

Operative provisions

82085 Thin capitalisation rule for outward investing entities (nonADI)

82090 Maximum allowable debt

82095 Safe harbour debt amount—outward investor (general)

820100 Safe harbour debt amount—outward investor (financial)

820105 Arm’s length debt amount

820110 Worldwide gearing debt amount—outward investor that is not also an inward investment vehicle

820111 Worldwide gearing debt amount—outward investor that is also an inward investment vehicle

820115 Amount of debt deduction disallowed

820120 Application to part year periods

Operative provisions

82085  Thin capitalisation rule for outward investing entities (nonADI)

Thin capitalisation rule

 (1) This subsection disallows all or a part of each *debt deduction of an entity for an income year (to the extent that it is not attributable to an *overseas permanent establishment of the entity) if, for that year:

 (a) the entity is an *outward investing entity (nonADI) (see subsection (2)); and

 (b) the entity’s *adjusted average debt (see subsection (3)) exceeds its *maximum allowable debt (see section 82090).

Note 1: This Subdivision does not apply if the total debt deductions of that entity and all its associate entities for that year are $2 million or less, see section 82035.

Note 2: To work out the amount to be disallowed, see section 820115.

Note 3: For the rules that apply to an entity that is an outward investing entity (nonADI) for only a part of an income year, see section 820120 in conjunction with subsection (2) of this section.

Note 4: A consolidated group or MEC group may be an outward investing entity (nonADI) to which this Subdivision applies: see Subdivisions 820FA and 820FB.

Outward investing entity (nonADI)

 (2) The entity is an outward investing entity (nonADI) for a period that is all or a part of an income year if, and only if, it is:

 (a) an *outward investor (general) for that period (as set out in items 1 and 3 of the following table); or

 (b) an *outward investor (financial) for that period (as set out in items 2 and 4 of that table).

 

Outward investing entity (nonADI)

Item

If:

and:

then:

1

the entity (the relevant entity) is one or both of the following throughout a period that is all or a part of an income year:

(a) an *Australian controller of at least one *Australian controlled foreign entity (not necessarily the same Australian controlled foreign entity throughout that period);

(b) an Australian entity that carries on a *business at or through at least one *overseas permanent establishment (not necessarily the same permanent establishment throughout that period)

the relevant entity is not a *financial entity, nor an *ADI, at any time during that period

the relevant entity is an outward investor (general) for that period

2

the entity (the relevant entity) satisfies this column in item 1

the relevant entity is a *financial entity throughout that period

the relevant entity is an outward investor (financial) for that period

3

(a) the entity (the relevant entity) is an *Australian entity throughout a period that is all or a part of an income year; and

(b) throughout that period, the relevant entity is an *associate entity of another Australian entity; and

(c) that other Australian entity is an *outward investing entity (nonADI) or an *outward investing entity (ADI) for that period

the relevant entity is not a *financial entity, nor an *ADI, at any time during that period

the relevant entity is an outward investor (general) for that period

4

the entity (the relevant entity) and another Australian entity satisfy this column in item 3

the relevant entity is a *financial entity throughout that period

the relevant entity is an outward investor (financial) for that period

Note 1: To determine whether an entity is an Australian controller of an Australian controlled foreign entity, see Subdivision 820H.

Note 2: The rules that apply to an outward investor (general) are different from those that apply to an outward investor (financial) in some instances. For example, see sections 82095 and 820100.

Adjusted average debt

 (3) The entity’s adjusted average debt for an income year is the result of applying the method statement in this subsection. In applying the method statement, disregard any amount that is attributable to the entity’s *overseas permanent establishments.

Method statement

Step 1. Work out the average value, for that year (the relevant year), of all the *debt capital of the entity that gives rise to *debt deductions of the entity for that or any other income year.

Step 2. Reduce the result of step 1 by the average value, for the relevant year, of all the *associate entity debt of the entity.

Step 3. Reduce the result of step 2 by the average value, for the relevant year, of all the *controlled foreign entity debt of the entity.

Step 4. If the entity is a *financial entity throughout the relevant year, add to the result of step 3 the average value, for the relevant year, of the entity’s *borrowed securities amount.

Step 5. Add to the result of step 4 the average value, for the relevant year, of the *costfree debt capital of the entity. The result of this step is the adjusted average debt.

Note: To calculate an average value for the purposes of this Division, see Subdivision 820G.

 (4) The entity’s *adjusted average debt does not exceed its *maximum allowable debt if the adjusted average debt is nil or a negative amount.

82090  Maximum allowable debt

Entity is not also an inward investment vehicle (general) or inward investment vehicle (financial)

 (1) The entity’s maximum allowable debt for an income year is the greatest of the following amounts if the entity is not also an *inward investment vehicle (general) or an *inward investment vehicle (financial) for all or any part of that year:

 (a) the *safe harbour debt amount;

 (b) the *arm’s length debt amount;

 (c) unless the entity has *worldwide equity of nil or a negative amount—the *worldwide gearing debt amount.

Note 1: The safe harbour debt amount differs depending on whether the entity is an outward investor (general) or an outward investor (financial), see sections 82095 and 820100.

Note 2: The worldwide gearing debt amount for an entity that is not also an inward investment vehicle (general) or an inward investment vehicle (financial) differs depending on whether the entity is an outward investor (general) or an outward investor (financial), see section 820110.

Entity is also an inward investment vehicle (general) or inward investment vehicle (financial)

 (2) The entity’s maximum allowable debt for an income year is the greatest of the following amounts if the entity is also an *inward investment vehicle (general) or an *inward investment vehicle (financial) for all or any part of that year:

 (a) the *safe harbour debt amount;

 (b) the *arm’s length debt amount;

 (c) unless subsection (3) applies to the entity—the *worldwide gearing debt amount.

Note 1: The safe harbour debt amount differs depending on whether the entity is an outward investor (general) or an outward investor (financial), see sections 82095 and 820100.

Note 2: The worldwide gearing debt amount for an entity that is also an inward investment vehicle (general) or an inward investment vehicle (financial) differs depending on whether the entity is an outward investor (general) or an outward investor (financial), see section 820111.

Inward investment vehicles that are not eligible for the worldwide gearing debt amount

 (3) This subsection applies to an entity, if:

 (a) the entity has *statement worldwide equity, or *statement worldwide assets, of nil or a negative amount; or

 (b) *audited consolidated financial statements for the entity for the income year do not exist; or

 (c) the result of applying the following formula is greater than 0.5:

  

where:

average Australian assets of an entity is the average value, for the statement period mentioned in subsection (4), of all the assets of the entity, other than:

 (a) any assets attributable to the entity’s *overseas permanent establishments; or

 (b) any *debt interests held by the entity, to the extent to which any value of the interests is all or a part of the *controlled foreign entity debt of the entity; or

 (c) any *equity interests or debt interests held by the entity, to the extent to which any value of the interests is all or a part of the *controlled foreign entity equity of the entity.

 (4) For the purposes of the definition of average Australian assets in subsection (3) the statement period is the period for which the *audited consolidated financial statements for the entity for the income year have been prepared.

 (5) For the purposes of the formula in paragraph (3)(c), if:

 (a) an amount is included in *statement worldwide assets in respect of an asset; and

 (b) the asset was acquired, held or otherwise dealt with by an entity for a purpose (other than an incidental purpose) that included ensuring that subsection (3) does not apply to an entity; and

 (c) as a result of the acquisition, holding or dealing with of the asset, the amount included in statement worldwide assets exceeds the amount (including nil) that would otherwise be so included;

apply the amount of the excess to reduce statement worldwide assets (or statement worldwide assets as reduced by a previous application of this subsection).

82095  Safe harbour debt amount—outward investor (general)

  If the entity is an *outward investor (general) for the income year, the safe harbour debt amount is the result of applying the method statement in this section. In applying the method statement, disregard any amount that is attributable to the entity’s *overseas permanent establishments.

Method statement

Step 1. Work out the average value, for the income year, of all the assets of the entity.

Step 1A. Reduce the result of step 1 by the average value, for that year, of all the *excluded equity interests in the entity.

Step 2. Reduce the result of step 1A by the average value, for that year, of all the *associate entity debt of the entity.

Step 3. Reduce the result of step 2 by the average value, for that year, of all the *associate entity equity of the entity.

Step 4. Reduce the result of step 3 by the average value, for that year, of all the *controlled foreign entity debt of the entity.

Step 5. Reduce the result of step 4 by the average value, for that year, of all the *controlled foreign entity equity of the entity.

Step 6. Reduce the result of step 5 by the average value, for that year, of all the *nondebt liabilities of the entity. If the result of this step is a negative amount, it is taken to be nil.

Step 7. Multiply the result of step 6 by 3/5.

Step 8. Add to the result of step 7 the average value, for that year, of the entity’s *associate entity excess amount. The result of this step is the safe harbour debt amount.

Example: AK Pty Ltd, a company that is an Australian entity, has an average value of assets (other than assets attributable to its overseas permanent establishments) of $100 million.

 The average values of its excluded equity interests, associate entity debt, associate entity equity, controlled foreign entity debt, controlled foreign entity equity and nondebt liabilities are $5 million, $10 million, $8 million, $5 million, $2 million and $5 million respectively. Deducting these amounts from the result of step 1 (through applying steps 1A to 6) leaves $65 million. Multiplying $65 million by 3/5 results in $39 million. As the average value of the company’s associate entity excess amount is $4.5 million, the safe harbour debt amount is therefore $43.5 million.

820100  Safe harbour debt amount—outward investor (financial)

 (1) If the entity is an *outward investor (financial) for the income year, the safe harbour debt amount is the lesser of the following amounts:

 (a) the *total debt amount (worked out under subsection (2));

 (b) the *adjusted onlent amount (worked out under subsection (3)).

However, if the 2 amounts are equal, it is the total debt amount.

Total debt amount

 (2) The total debt amount is the result of applying the method statement in this subsection. In applying the method statement, disregard any amount that is attributable to the entity’s *overseas permanent establishments.

Method statement

Step 1. Work out the average value, for the income year, of all the assets of the entity.

Step 1A. Reduce the result of step 1 by the average value, for that year, of all the *excluded equity interests in the entity.

Step 2. Reduce the result of step 1A by the average value, for that year, of all the *associate entity debt of the entity.

Step 3. Reduce the result of step 2 by the average value, for that year, of all the *associate entity equity of the entity.

Step 4. Reduce the result of step 3 by the average value, for that year, of all the *controlled foreign entity debt of the entity.

Step 5. Reduce the result of step 4 by the average value, for that year, of all the *controlled foreign entity equity of the entity.

Step 6. Reduce the result of step 5 by the average value, for that year, of all the *nondebt liabilities of the entity.

Step 7. Reduce the result of step 6 by the average value, for that year, of the entity’s *zerocapital amount. If the result of this step is a negative amount, it is taken to be nil.

Step 8. Multiply the result of step 7 by 15/16.

Step 9. Add to the result of step 8 the average value, for that year, of the entity’s *zerocapital amount.

Step 10. Add to the result of step 9 the average value, for that year, of the entity’s *associate entity excess amount. The result of this step is the total debt amount.

Example: GLM Limited, a company that is an Australian entity, has an average value of assets (other than assets attributable to its overseas permanent establishments) of $160 million.

 The average values of its relevant excluded equity interests, associate entity debt, associate entity equity, controlled foreign entity debt, controlled foreign entity equity, nondebt liabilities and zerocapital amount are $5 million, $5 million, $5 million, $9 million, $6 million, $5 million and $4 million respectively. Deducting these amounts from the result of step 1 (through applying steps 1A to 7) leaves $121 million. Multiplying $121 million by 15/16 results in $113.4375 million. Adding the average zerocapital amount of $4 million results in $117.4375 million. As the company does not have any associate entity excess amount, the total debt amount is therefore $117.4375 million.

Adjusted onlent amount

 (3) The adjusted onlent amount is the result of applying the method statement in this subsection. In applying the method statement, disregard any amount that is attributable to the entity’s *overseas permanent establishments.

Method statement

Step 1. Work out the average value, for the income year, of all the assets of the entity.

Step 1A. Reduce the result of step 1 by the average value, for that year, of all the *excluded