Issue
Will a non-portfolio dividend (within the meaning of section 317 of the Income Tax Assessment Act 1936 (ITAA 1936)) received by a taxpayer through its permanent establishment in Hong Kong be non-assessable non-exempt income under section 23AH of the ITAA 1936?
Decision
No. The dividend is not non-assessable non-exempt income under 23AH of the ITAA 1936 because it fails to satisfy the definition of 'foreign income' in subsection 23AH(15) of the ITAA 1936.
Facts
The taxpayer is an Australian resident company that carries on business at or through a permanent establishment in Hong Kong (the Hong Kong branch).
The taxpayer also owns 100% of the ordinary shares in a New Zealand resident subsidiary company. The Hong Kong branch contributes to the New Zealand company in exchange for a special class of ordinary shares issued by the New Zealand resident company.
The New Zealand resident company declares a dividend in respect of the special class of shares subscribed for by the Hong Kong branch.
The dividend will be a non-portfolio dividend within the meaning of section 317 of the ITAA 1936. The taxpayer does not receive the dividends in the capacity of a trustee.
Reasons for Decision
Subsection 23AH(2) of the ITAA 1936 provides: Subject to this section, foreign income derived by a company, at a time when the company is a resident in carrying on a business, at or through a PE of the company in a listed country or unlisted country is not assessable income, and is not exempt income, of the company.
The dividend payments received by the Hong Kong branch from the New Zealand company will only be non-assessable non-exempt income of the Australian resident company under section 23AH of the ITAA 1936 if the requirements in subsection 23AH(2) of the ITAA 1936 are satisfied and the dividends are not excluded from the operation of subsection 23AH(2) by subsection 23AH(7) of the ITAA 1936.
The requirements of subsection 23AH(2) of the ITAA 1936 will be met if: (i) the non-portfolio dividends derived by the Australian resident company constitute foreign income as defined in subsection 23AH(15) of the ITAA 1936, and (ii) the taxpayer is a company that is a resident of Australia carrying on business at or through a permanent establishment of the company in a listed country or unlisted country?
Foreign income
Subsection 23AH(15) of the ITAA 1936 defines foreign income, for the purposes of section 23AH of the ITAA 1936, as including an amount that: (a) apart from this section, would otherwise be included in assessable income under a provision of this Act (other than capital gains tax), and (b) is derived from sources in a listed country or unlisted country.
Otherwise assessable
Pursuant to section 23AJ of the ITAA 1936, a non-portfolio dividend (as defined in section 317 of the ITAA 1936) paid to a company is non-assessable non-exempt income where the company is an Australian resident that does not receive it in the capacity of a trustee, and the company that paid the dividend is not a Part X Australian resident (as defined in section 317).
The New Zealand company pays the non-portfolio dividend to the taxpayer via the taxpayers Hong Kong branch and the taxpayer does not receive the dividend in the capacity of a trustee. Although the dividends are paid to the Hong Kong branch, the branch is not a separate legal entity to the taxpayer. Consequently, the dividends are still considered to be 'paid to a company', in that the branch simply constitutes the taxpayer, trading in Hong Kong.
Section 23AJ of the ITAA 1936 is therefore satisfied, such that the non-portfolio dividend is non-assessable non-exempt income of the taxpayer.
Paragraph (a) of the definition of foreign income in subsection 23AH(15) of the ITAA 1936 is therefore not satisfied, as the non-portfolio dividends will not otherwise be included in assessable income.
Conclusion
The non-portfolio dividends do not qualify as foreign income as defined in subsection 23AH(15) of the ITAA 1936, and therefore cannot satisfy the requirements of subsection 23AH(2) of the ITAA 1936.
As the positive test has not been satisfied, it is unnecessary to consider whether the negative test in subsection 23AH(7) of the ITAA 1936 operates to exclude the amounts from the operation of the section.