Australia Consults On Reform Of Controlled Foreign Company Rules

by Mary Swire, Tax-News.com, Hong Kong

06 January 2010

As part of wider reforms to Australia's foreign source income anti-tax-deferral rules, originally announced in the 2009-10 budget, the Assistant Treasurer, Nick Sherry has released a consultation paper on reforms to the controlled foreign company (CFC) tax rules.

As part of the same reforms, draft legislation to repeal the foreign investment fund rules and deemed present entitlement rules was released for comment last month. The remaining parts of those reforms, to the transferor trust and anti-roll up rules, are still being developed.

The Australian Treasury, in the consultative paper, lays down the benchmarks of the new reform. There are, it says, legitimate commercial reasons why residents invest capital in foreign active businesses, which should be taxed at the same competitive level as other investments in that jurisdiction.

There will continue to be an “active business test”, where the active conduct of a trade or business by an entity “means the competitive participation by the entity in industrial, commercial or financial undertakings, evidenced by human activity through a permanent establishment”, the Treasury explained.

However, it continued, foreign passive investment should not be favoured over domestic passive investment. Foreign passive investment will continue to be treated the same as capital that is invested in Australia, and the benefit of deferral should be eliminated to remove any potential bias in favour of capital exported.

As a consequence, the policy objective of the CFC rules is to ensure that passive investment decisions of Australian resident taxpayers are not distorted by tax considerations, thereby protecting Australian tax revenue. In achieving this objective, however, the rules should also minimise compliance and administrative costs.

The actual policy giving effect to this objective is therefore to tax resident taxpayers on an accruals basis on their calculated share of the passive income accumulating in a foreign entity that they hold an interest in.

Releasing the paper, Nick Sherry explained that: "The existing CFC rules were designed to address integrity risks to the Australian tax base – but this must be balanced against other policy objectives such as equity, efficiency, simplicity and low compliance costs."

"These proposals will further improve the competitiveness of Australian businesses which have offshore operations by better targeting the rules to those areas at risk of inappropriate tax deferral while reducing red tape and compliance costs for those businesses."

He added that further input from interested parties will assist significantly in drawing up the final legislation. Submissions must be made by March 1, 2010.

Recommended