Issue
Is income attributable under section 456 of the Income Tax Assessment Act 1936 (ITAA 1936) to a resident company that exercises de facto control over a foreign company where the resident company does not have either a direct attribution interest in the foreign company under section 356 of the ITAA 1936 or an indirect attribution interest in the foreign company under section 357 of the ITAA 1936?
Decision
No. Income will not be attributable under section 456 of the ITAA 1936 to a resident company that exercises de facto control over a foreign company where the resident company does not have either a direct attribution interest in the foreign company under section 356 of the ITAA 1936 or an indirect attribution interest in the foreign company under section 357 of the ITAA 1936.
Facts
The taxpayer is a resident Australian company for Australian tax purposes.
The foreign company is not treated as a resident of Australia.
The taxpayer does not have either a direct attribution interest in the foreign company under section 356 of the ITAA 1936 or an indirect attribution interest in the foreign company under section 357 of the ITAA 1936.
The taxpayer exercises de facto control over the foreign company.
Reasons For Decision
Section 456 of the ITAA 1936 will attribute income where a Controlled Foreign Company (CFC) has attributable income in respect of an attributable taxpayer based on the attributable taxpayer's attribution percentage of the attributable income.
As the taxpayer is an Australian entity that exercises de facto control over the foreign company, the foreign company is a CFC within the meaning of paragraph 340(c) of the ITAA 1936.
Subsection 361(1) of the ITAA 1936 states that an entity will be an attributable taxpayer in relation to a CFC where the entity: (a) is an Australian entity whose associate-inclusive control interest in the CFC is at least 10%; or (b) all of the following apply: (i) the CFC is a CFC only because of paragraph 340(c) of the ITAA 1936; (ii) the CFC is controlled by any group of 5 or fewer Australian entities; and (iii) is an Australian 1% entity and is included in the group of 5 or fewer Australian entities.
The 'associate-inclusive' control interest held by an entity is defined in section 349 of the ITAA 1936. It includes the direct control interest held by such entity. Section 350 of the ITAA 1936 defines what is a direct control interest in a company. Subsection 350(6) of the ITAA 1936 states:
If, at a particular time, a company is controlled by a group of 5 or fewer Australian entities, either alone or together with associates (whether or not any associate is also an Australian entity), each Australian entity in that group of 5 or fewer holds a direct control interest in the company equal to 100%.
As the taxpayer is an Australian entity that exercises de facto control over the foreign company, it is taken to have a 100% direct control interest in that company by virtue of subsection 350(6) of the ITAA 1936. Accordingly, it has an associate-inclusive control interest of 100% in the foreign company (which is a CFC). Therefore, the taxpayer will be an attributable taxpayer within the meaning of paragraph 361(1)(a) of the ITAA 1936.
The attribution percentage of an attributable taxpayer is the sum of the direct and indirect attribution interests held by the taxpayer in the CFC pursuant to section 362 of the ITAA 1936. As the taxpayer does not have any direct nor indirect attribution interest in the foreign company, the taxpayer's attribution percentage in the CFC will be nil.
As noted above, in order to attribute income under section 456 of the ITAA 1936 it is necessary for a CFC to have attributable income in respect of an attributable taxpayer based on the attributable taxpayer's attribution percentage of the attributable income.
The foreign company is a CFC and the taxpayer is an attributable taxpayer. However, as the taxpayer's attribution percentage is nil, it will not have any income attributed to it under section 456 of the ITAA 1936.