Australia has complex accruals taxation regimes that attribute certain types of income earned by foreign entities to Australian resident taxpayers where the Australian entity has a certain degree of control over the foreign entity. This is intended to prevent the deferral of tax through the sheltering of income in foreign tax havens. There are three accruals regimes:
Under the conduit foreign income rules, an Australian company that receives foreign income that is not subject to Australian tax (for example, as a result of a foreign income exemption or foreign tax credit or offset) can distribute such income to foreign shareholders free of dividend withholding tax even if it is repatriated as an unfranked dividend.
Australia’s foreign tax credit (“FTC”) system will be replaced by a new foreign income tax offset system, applicable for income years, statutory accounting periods and notional accounting periods (for CFCs, FIFs and transferor trusts) starting on or after 1 July 2008.
Broadly, the new foreign income tax offset rules allow Australian resident taxpayers to receive a non-refundable tax offset for foreign income tax paid on an amount that is included in their assessable income. The new system is better aligned to Australia’s broader taxation of foreign income and simplifies the process for claiming relief from double taxation.
Some key differences from the FTC system are as follows:
Currently, excess FTCs can be carried forward on a class basis for a maximum of 5 years and are utilised on a first-in, first out basis. This gives FTCs an effective life of 6 years (that is, the year in which it arose, and 5 subsequent years). Excess FTCs cannot be transferred to group companies outside the consolidation regime.
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This document is current as at 1 May 2008.