International tax: Treatment of Income Pursuant to s 324

Whether an amount of income 'subject to tax' pursuant to section 324 of the Income Tax Assessment Act 1936, where two controlled foreign corporations (CFCs) are a consolidated group (under Country A's tax law - being a listed broad exemption country for Australian tax purposes) and, as a result of that consolidation, the item is not included in gross income for the purposes of Country A's tax laws.

The relevant income, which is not being required to be included in the company group's gross income, is effectively exempt from Country A tax. As a result, the income is not included in the tax base of the Country A tax law and is, therefore, not 'subject to tax' pursuant to section 324 of the Income Tax Assessment Act 1936.

The taxpayer is an Australian resident shareholder in two Country A companies. The particular shareholding classifies the companies as CFCs for Australian tax purposes. The companies are, for the tax purposes of Country A, a group. The companies engage in various intra-group transactions. The Country A tax laws provide that amounts derived from an intra-group transaction shall not be gross income.

Section 324 of the Income Tax Assessment Act 1936 generally provides that a particular item of income is taken to be 'subject to tax' in a listed country (as defined in section 320 of the Income Tax Assessment Act 1936 ) if foreign tax is payable under a tax law of that country because the item is included in the tax base of that law.

Taxation Determination TD 96/38 provides guidance in respect to what situations are considered to satisfy the requirements of section 324 of the Income Tax Assessment Act 1936 . However, Taxation Determination TD 96/38 does not cover situations where an item of income arising from an intra-group transaction is not required to be included in gross income by the operation of certain provisions in the listed country.

The Explanatory Memorandum to the Taxation Laws Amendment (Foreign Income) Act 1990 (being the statute which inserted section 320 of the Income Tax Assessment Act 1936 ), explains that receipts which are specifically or implicitly exempt from tax in another country are not included in the tax base of a foreign tax law.

The relevant income, not being required to be included in the company group's gross income, is effectively exempt from Country A tax. As a result, the income is not included in the tax base of the Country A tax law and is, therefore, not 'subject to tax' pursuant to section 324 of the Income Tax Assessment Act 1936.