5 March 2010 - Reform of the controlled foreign company rules Consultation Paper - submission lodged 
 
The Institute has lodged a submission on Treasury's January 2010 Consultation Paper entitled Reform of the controlled foreign company rules.  
 
The Consultation Paper sets out the proposed high-level design of the reforms to modernise the controlled foreign company (CFC) provisions, including rewriting them into the Income Tax Assessment Act 1997 (ITAA 1997).  
 
The Institute’s key submission points include:

• exposure draft legislation on the proposed new CFC rules together with explanatory material should be released for consultation as soon as possible - also in the interests of a 1 July 2010 start date;
 

• in regard to the proposed active business test, clarification of what “in the ordinary course of the active conduct of a trade or business” by the entity means is required;
 

• a legislative definition of “control” for the purposes of the new CFC provisions is needed; and
 

• the concept of participation interest needs development.

• The Government should introduce enacting legislation for the repeal of the FIF rules as soon as possible to have effect from 1 July 2009
 

• No sunset provisions should be included in the Bill in regard to double tax relieving provisions - rather those provisions should be allowed to operate indefinitely
 

• Consultation should commence on the design of the proposed anti-roll up provision as soon as possible
 

• Treasury should provide guidance to taxpayers urgently on the progress of the design of the rules which will apply to foreign trusts.

• commercial income concept of passive income;
 

• tax law concept of passive income;
 

• attributable taxpayers and CFCs;
 

• attribution of attributable income; and
 

• statutory accounting periods.

• the income tax exemption for non-portfolio dividends paid by companies; and
 

• ownership or participation interests.

• Modifying the active income test conditions in the existing controlled foreign company (CFC) rules and enable the 'tainted income ratio' to be applied on a consolidated worldwide basis but if this was too wide then it should be applied on a consolidated basis across comparable tax countries.
 

• Modifying the types of income that would constitute passive income both for the purposes of the active income test and the calculation of attributable income.
 

• Broadly, 'membership interest', as defined in section 960-35 of the Income Tax Assessment Act 1997 (ITAA 1997), be used as the basis of ownership interest and the one concept of ownership interest be used consistently for the rewritten CFC rules, section 23AJ dividend exemption eligibility and non-portfolio dividend exemptions through chains of controlled foreign entities.
 

• The provisions under Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936) should be the appropriate tax provisions for foreign fixed trusts.

• The appropriateness of the operative principle for the controlled foreign entity (CFE) rules stated in the discussion paper
 

• Ideas for the definition of 'passive income'
 

• Whether the test of 'control' could be simplified by removal of the de facto control test and suggestion of changes to the definition of 'associates'
 

• Including the debt/equity rules in measuring the ownership interests for the CFE rules
 

• The treatment of trusts under the CFE rules and interaction with Division 6 of the ITAA 1936.
 

• Public company exemption; 
  
• Active investment exemption; 
  
• Distribution exemption; 
  
• Identification and measurement of interests 
  
• Branch-equivalent calculations.

• The kinds of interests and entities that attribution should apply to (Chapter 3)
 

• The types of income that the attribution regimes should target (Chapter 4)
 

• The methods for attributing income (Chapter 5), and 
  
• Options for a harmonised regime (Chapter 6).

• A change to an economic interests test for the purposes of the attribution rules should be carefully considered in light of additional compliance issues that could arise.
 

• The introduction of a purpose test as a complement to a range of exemptions that should be available under the revised anti-tax-deferral regimes is supported.
 

• The active income test should be retained, but with thresholds and the definition of what is tainted income revised so that it does not encompass commercial offshore activity.
 

• Passive income and base company income should be redefined so that the concepts do not encompass commercial activity offshore.
 

• The listed country exemption should be retained in order to minimise compliance costs.
 

• Taxpayers should be able to use any of the attribution methods to calculate their attributed income.
 

• Harmonising the regimes would, prima facie, appear to offer some benefits to taxpayers, although important factors such as the need to meet policy objectives and retention of positive features in the existing regime should be borne in mind.
 

• Of the three harmonisation options proposed in the Discussion Paper, Option C: merging some regimes (or aspects of regimes) is preferred.