International tax remedial matters
In 2012 new rules were introduced for taxpayers with significant (but non-controlling) shareholdings in foreign companies as part of the Taxation (International Investment and Remedial Matters) Act 2012. As taxpayers have begun to apply the new rules some minor problems have been identified through correspondence with tax practitioners.
The proposed amendments are intended to correct these problems.
The first two amendments are taxpayer-friendly. The third addresses a potentially problematic interpretation but is likely to be consistent with how most taxpayers would apply the rules. It is therefore recommended that all three remedial amendments apply retrospectively, to the date of the relevant reforms.
Issue: Allowing taxpayers to continue to use certain foreign losses
Submission
(Matter raised by officials)
A small number of taxpayers have losses under the branch equivalent method that they are not able to access under the new foreign investment fund (FIF) rules (as the branch equivalent method has been replaced by another method which they cannot use). A transitional rule is required to enable such losses to be used to offset future income derived from these foreign companies.
Comment
The problem has arisen because the Taxation (International Investment and Remedial Matters) Act 2012 replaced the branch equivalent method for calculating FIF income with the attributable FIF income method (which exempts active income earned through foreign companies). Under the branch equivalent method, if a taxpayer invests in a foreign company which made losses, the losses could be carried forward to offset income from the foreign company in future years. These losses are not extinguished by the new rules, but can only be used when the taxpayer is able to apply the new attributable FIF income method. A small number of taxpayers who were previously using the branch equivalent method are unable to use the new attributable FIF income method (as they hold a less than 10% shareholding), and so cannot effectively access their losses. The amendment seeks to address this problem.
Recommendation
That the submission be accepted.
Issue: Ensuring the inter-group payment exemption is available when the Australian exemption also applies
Submission
(Matter raised by officials)
A remedial amendment is required to allow an inter-group payment exemption to apply when the paying company would have satisfied the requirements for the inter-group payment exemption, in the absence of the exemption for companies based in Australia.
Comment
Under the new rules introduced by the Taxation (International Investment, and Remedial Matters) Act 2012, an exemption is provided for companies that are resident and subject to tax in Australia. Payments of interest, rent and royalties from an “active” foreign company to a related foreign company are also exempt if both of the foreign companies are located in the same country.
These exemptions can disrupt each other in one case. That is, the exemption for certain payments between related companies does not work if the paying company qualifies for the Australian exemption. This is because the Australian exemption prevents the paying company from qualifying as an “active” business, even though it could qualify if the Australian exemption was ignored.
Recommendation
That the submission be accepted.
Issue: Clarifying that taxpayers who switch to the FDR method have FIF income in the first year that they use FDR
Submission
(Matter raised by officials)
An amendment is needed to clarify that there is an opening market value in the year that a taxpayer first uses the fair dividend rate (FDR) for a FIF, if they used a different method for that FIF in the preceding year. This amendment is likely to be consistent with how most taxpayers would apply the rules.
Comment
The new rules removed the branch equivalent and accounting profits methods. As a result, some taxpayers will switch to the FDR method. In such cases the rules require the taxpayer to calculate an opening market value by treating their shares to be sold and reacquired “immediately after the start” of the new income year.
The phrasing of this sale and reacquisition provision could possibly be interpreted as meaning the person does not have an opening market value for the purpose of the FDR at the beginning of the year. If this interpretation was correct, it would be contrary to the policy intent and would mean that the taxpayer would not have FIF income in the first year that they used the FDR method (although they would still have FIF income in subsequent years).
Recommendation
That the submission be accepted.