Commonwealth: Tax Laws Amendment (2007 Measures No. 4) Act 2007 (Cth)

Tax Laws Amendment (2007 Measures No. 4) Act 2007 Act No. 143 of 2007 as amended This compilation was prepared on 9 March 2010 [This Act was amended by Act No. 8 of 2010] Amendments from Act No. 8 of 2010 [Schedule 2 (item 25) repealed item 217 of Schedule 1 Schedule 2 (item 26) repealed item 42 of Schedule 4 Schedule 2 (items 25 and 26) commenced on 1 March 2010] Prepared by the Office of Legislative Drafting and Publishing, Attorney‑General's Department, Canberra Contents 1 Short title 2 Commencement 3 Schedule(s) Schedule 1—New foreign income tax offset rules Part 1—Main amendments Income Tax Assessment Act 1997 Part 2—FIF income Income Tax Assessment Act 1936 Income Tax Assessment Act 1997 Part 3—Transitional Income Tax (Transitional Provisions) Act 1997 Part 4—Consequential and other amendments A New Tax System (Goods and Services Tax) Act 1999 Bank Integration Act 1991 Fringe Benefits Tax Assessment Act 1986 Income Tax Assessment Act 1936 Income Tax Assessment Act 1997 Income Tax (Transitional Provisions) Act 1997 International Tax Agreements Act 1953 Taxation Administration Act 1953 Taxation (Interest on Overpayments and Early Payments) Act 1983 Part 5—Application Part 6—Savings provisions Part 7—Sunsetting Income Tax (Transitional Provisions) Act 1997 Schedule 2—Exchange of membership interests in MDOs Part 1—Amendments Income Tax Assessment Act 1997 Part 2—Application of amendments Schedule 3—Investment by superannuation funds in instalment warrants Superannuation Industry (Supervision) Act 1993 Schedule 4—Trustee beneficiary reporting rules Part 1—Main amendments Income Tax Assessment Act 1936 Part 2—Consequential amendments Income Tax Assessment Act 1936 Taxation Administration Act 1953 Part 3—Repeal of Acts A New Tax System (Ultimate Beneficiary Non‑disclosure Tax) Act (No. 1) 1999 A New Tax System (Ultimate Beneficiary Non‑disclosure Tax) Act (No. 2) 1999 Part 4—Application and transitional Schedule 5—Superannuation amendments Part 1—Main amendments Income Tax Assessment Act 1997 Income Tax (Former Non‑resident Superannuation Funds) Act 1994 Income Tax (Transitional Provisions) Act 1997 Retirement Savings Accounts Act 1997 Superannuation Industry (Supervision) Act 1993 Superannuation Legislation Amendment (Simplification) Act 2007 Taxation Administration Act 1953 Part 2—Technical corrections Income Tax Assessment Act 1997 Taxation Administration Act 1953 Part 3—Application Schedule 6—Specific listings of deductible gift recipients Income Tax Assessment Act 1997 Schedule 7—Minor amendments Part 1—Main amendments A New Tax System (Australian Business Number) Act 1999 A New Tax System (Goods and Services Tax) Act 1999 Crimes (Taxation Offences) Act 1980 Fringe Benefits Tax Assessment Act 1986 Income Tax Assessment Act 1936 Income Tax Assessment Act 1997 Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 Income Tax Rates Act 1986 Income Tax (Transitional Provisions) Act 1997 Taxation Administration Act 1953 Taxation (Interest on Overpayments and Early Payments) Act 1983 Part 2—Penalty unit conversion Schedule 8—Family trusts Income Tax Assessment Act 1936 An Act to amend the law relating to taxation, and for related purposes [Assented to 24 September 2007] The Parliament of Australia enacts: 1 Short title This Act may be cited as the Tax Laws Amendment (2007 Measures No. 4) Act 2007. 2 Commencement (1) Each provision of this Act specified in column 1 of the table commences, or is taken to have commenced, in accordance with column 2 of the table. Any other statement in column 2 has effect according to its terms. Commencement information Column 1 Column 2 Column 3 Provision(s) Commencement Date/Details 1. Sections 1 to 3 and anything in this Act not elsewhere covered by this table The day on which this Act receives the Royal Assent. 24 September 2007 2. Schedule 1, Parts 1 to 6 The day on which this Act receives the Royal Assent. 24 September 2007 3. Schedule 1, Part 7 30 June 2014. 30 June 2014 4. Schedules 2 to 4 The day on which this Act receives the Royal Assent. 24 September 2007 5. Schedule 5, Part 1 The day on which this Act receives the Royal Assent. 24 September 2007 6. Schedule 5, Part 2 Immediately after the commencement of Schedule 1 to the Superannuation Legislation Amendment (Simplification) Act 2007. 15 March 2007 7. Schedule 5, Part 3 The day on which this Act receives the Royal Assent. 24 September 2007 8. Schedule 6 The day on which this Act receives the Royal Assent. 24 September 2007 9. Schedule 7, item 1 The day on which this Act receives the Royal Assent. 24 September 2007 10. Schedule 7, items 2 to 6 1 July 2006. 1 July 2006 11. Schedule 7, items 7 to 104 The day on which this Act receives the Royal Assent. 24 September 2007 12. Schedule 8 The day on which this Act receives the Royal Assent. 24 September 2007 Note: This table relates only to the provisions of this Act as originally passed by both Houses of the Parliament and assented to. It will not be expanded to deal with provisions inserted in this Act after assent. (2) Column 3 of the table contains additional information that is not part of this Act. Information in this column may be added to or edited in any published version of this Act. 3 Schedule(s) Each Act that is specified in a Schedule to this Act is amended or repealed as set out in the applicable items in the Schedule concerned, and any other item in a Schedule to this Act has effect according to its terms. Schedule 1—New foreign income tax offset rules Part 1—Main amendments Income Tax Assessment Act 1997 1 After Division 768 Insert: Division 770—Foreign income tax offsets Table of Subdivisions Guide to Division 770 770‑A Entitlement rules for foreign income tax offsets 770‑B Amount of foreign income tax offset 770‑C Rules about payment of foreign income tax 770‑D Administration Guide to Division 770 770‑1 What this Division is about You may get a non‑refundable tax offset for foreign income tax paid on your assessable income. There is a limit on the amount of the tax offset. A resident of a foreign country does not get the offset for some foreign income taxes. You may also get the offset for foreign income tax paid on some amounts that are not taxed in Australia. 770‑5 Object (1) The object of this Division is to relieve double taxation where: (a) you have paid foreign income tax on amounts included in your assessable income; and (b) you would, apart from this Division, pay Australian income tax on the same amounts. (2) To achieve this object, this Division gives you a tax offset to reduce or eliminate Australian income tax otherwise payable on those amounts. Subdivision 770‑A—Entitlement rules for foreign income tax offsets Table of sections Basic entitlement rule for foreign income tax offset 770‑10 Entitlement to foreign income tax offset 770‑15 Meaning of foreign income tax, credit absorption tax and unitary tax Basic entitlement rule for foreign income tax offset 770‑10 Entitlement to foreign income tax offset (1) You are entitled to a *tax offset for an income year for *foreign income tax. An amount of foreign income tax counts towards the tax offset for the year if you paid it in respect of an amount that is all or part of an amount included in your assessable income for the year. Note 1: The offset is for the income year in which your assessable income included an amount in respect of which you paid foreign income tax—even if you paid the foreign income tax in another income year. Note 2: If the foreign income tax has been paid on an amount that is part non‑assessable non‑exempt income and part assessable income for you for the income year, only a proportionate share of the foreign income tax (the share that corresponds to the part that is assessable income) will count towards the tax offset (excluding the operation of subsection (2)). Note 3: For offshore banking units, the amount of foreign income tax paid in respect of offshore banking income is reduced: see subsection 121EG(3A) of the Income Tax Assessment Act 1936. Taxes paid on section 23AI or 23AK amounts (2) An amount of *foreign income tax counts towards the *tax offset for you for the year if you paid it in respect of an amount that is your *non‑assessable non‑exempt income under either section 23AI or 23AK of the Income Tax Assessment Act 1936 for the year. Note 1: Sections 23AI and 23AK of the Income Tax Assessment Act 1936 provide that amounts paid out of income previously attributed from a controlled foreign company or a foreign investment fund are non‑assessable non‑exempt income. Note 2: Foreign income taxes covered by this subsection are direct taxes (for example, a withholding tax on a dividend payment) and not underlying taxes, only some of which are covered by section 770‑135. Exception for certain residence‑based foreign income taxes (3) An amount of *foreign income tax you paid does not count towards the *tax offset for the year if you paid it: (a) to a foreign country because you are a resident of that country for the purposes of a law relating to the foreign income tax; and (b) in respect of an amount derived from a source outside that country. Exception for previously complying funds and previously foreign funds (4) An amount of *foreign income tax paid by a *superannuation provider in relation to a *superannuation fund does not count towards the *tax offset for the year if: (a) the tax was paid in respect of an amount included in the fund's assessable income under table item 2 or 3 in section 295‑320; and (b) the provider paid the tax before the start of the income year. Note: Table items 2 and 3 in section 295‑320 include additional amounts in the assessable income of superannuation funds that change their status from complying to non‑complying or from foreign to Australian. Exception for credit absorption tax and unitary tax (5) An amount of *credit absorption tax or *unitary tax you paid does not count towards the *tax offset for the year. 770‑15 Meaning of foreign income tax, credit absorption tax and unitary tax (1) Foreign income tax means tax that: (a) is imposed by a law other than an *Australian law; and (b) is: (i) tax on income; or (ii) tax on profits or gains, whether of an income or capital nature; or (iii) any other tax, being a tax that is subject to an agreement having the force of law under the International Tax Agreements Act 1953. (2) Credit absorption tax means a tax imposed by a law of a foreign country, or of any part of, or place in, a foreign country to the extent that the tax would not have been payable if the entity concerned or another entity had not been entitled to an offset in respect of the tax under this Division. (3) Unitary tax means a tax imposed by a law of a foreign country, or of any part of, or place in, a foreign country, being a law which, for the purposes of taxing income, profits or gains of a company derived from sources within that country, takes into account, or is entitled to take into account, income, losses, outgoings or assets of the company (or of a company that for the purposes of that law is treated as being associated with the company) derived, incurred or situated outside that country, but does not include tax imposed by that law if that law only takes those matters into account: (a) if such an associated company is a resident of the foreign country for the purposes of the law of the foreign country; or (b) for the purposes of granting any form of relief in relation to tax imposed on dividends received by one company from another company. Subdivision 770‑B—Amount of foreign income tax offset Guide to Subdivision 770‑B 770‑65 What this Subdivision is about The amount of your tax offset is based on the amount of foreign income tax you have paid. However, there is a limit on the maximum amount of your offset. The limit is the greater of $1,000 and an amount worked out under this Subdivision. This amount is based on a comparison between your tax liability and the tax liability you would have if certain foreign‑taxed and foreign‑sourced income and related deductions were disregarded. You may choose to use the limit of $1,000 and not work out this amount. There is an increase in the limit to ensure foreign income tax paid on some amounts that are not taxed always forms part of the offset. Table of sections Operative provisions 770‑70 Amount of foreign income tax offset 770‑75 Foreign income tax offset limit 770‑80 Increase in offset limit for tax paid on amounts to which section 23AI or 23AK of the Income Tax Assessment Act 1936 apply Operative provisions 770‑70 Amount of foreign income tax offset The amount of your *tax offset for the year is the sum of the *foreign income tax you paid that counts towards the offset for the year. Note 1: The amount of foreign income tax you paid may be affected by Subdivision 770‑C. Note 2: The amount of the offset might be increased under section 770‑230 of the Income Tax (Transitional Provisions) Act 1997, if you have pre‑commencement excess foreign income tax. 770‑75 Foreign income tax offset limit (1) There is a limit (the offset limit) on the amount of your *tax offset for a year. If your tax offset exceeds the offset limit, reduce the offset by the amount of the excess. (2) Your offset limit is the greater of: (a) $1,000; and (b) this amount: (i) the amount of income tax payable by you for the income year; less (ii) the amount of income tax that would be payable by you for the income year if the assumptions in subsection (4) were made. Note 1: If you do not intend to claim a foreign income tax offset of more than $1,000 for the year, you do not need to work out the amount under paragraph (b). Note 2: The amount of the offset limit might be increased under section 770‑80. (3) For the purposes of paragraph (2)(b), work out the amount of income tax payable by you, or that would be payable by you, disregarding any *tax offsets. (4) Assume that: (a) your assessable income did not include: (i) so much of any amount included in your assessable income as represents an amount in respect of which you paid *foreign income tax that counts towards the *tax offset for the year; and (ii) any other amounts of *ordinary income or *statutory income from a source other than an *Australian source; and (b) you were not entitled to any deductions that: (i) are *debt deductions that are attributable to an *overseas permanent establishment of yours; or (ii) are other deductions that are reasonably related to income covered by paragraph (a) for that year. Note: You must also assume you were not entitled to any deductions for certain converted foreign losses: see section 770‑35 of the Income Tax (Transitional Provisions) Act 1997. Example: If an entity has paid foreign income tax on a capital gain that comprises part of its net capital gain, only that capital gain on which foreign income tax has been paid is disregarded. 770‑80 Increase in offset limit for tax paid on amounts to which section 23AI or 23AK of the Income Tax Assessment Act 1936 apply Your offset limit under subsection 770‑75(2) is increased by any amounts of *foreign income tax that count towards the *tax offset for you for the year because of subsection 770‑10(2). Subdivision 770‑C—Rules about payment of foreign income tax Table of sections Rules about when foreign tax is paid 770‑130 When foreign income tax is considered paid—taxes paid by someone else 770‑135 Foreign income tax paid by CFCs and FIFs on attributed amounts Rules about when foreign tax is considered not paid 770‑140 When foreign income tax is considered not paid—anti‑avoidance rule Rules about when foreign tax is paid 770‑130 When foreign income tax is considered paid—taxes paid by someone else (1) This Act applies to you as if you had paid an amount of *foreign income tax in respect of an amount (a taxed amount) that is all or part of an amount included in your *ordinary income or *statutory income if you are covered by subsection (2) or (3) for an amount of foreign income tax paid in respect of the taxed amount. (2) You are covered by this subsection for an amount of *foreign income tax paid in respect of a taxed amount if that foreign income tax has been paid in respect of the taxed amount by another entity under an *arrangement with you or under the law relating to the foreign income tax. Example: You are a partner in a partnership and the partnership pays foreign income tax on the partnership income. (3) You are covered by this subsection for an amount of *foreign income tax paid in respect of the taxed amount to the extent that: (a) the taxed amount is taken, because of section 6B of the Income Tax Assessment Act 1936 (the 1936 Act), to be attributable to another amount of income of a particular kind or source; and (b) foreign income tax has been paid in respect of the other amount of income; and (c) the taxed amount is less than it would have been if that tax had not been paid. Example: Aust Co (an Australian resident) is the sole beneficiary of an Australian resident trust H and is presently entitled to all the income of trust H. Trust H owns shares in For Co (a foreign company). For Co pays a dividend to trust H and the dividend is subject to withholding tax in For Co's country of residence. Trust H allocates to Aust Co, the dividend, as well as other Australian source income trust H earned in the year (none of which was subject to foreign income tax). Aust Co is treated as having paid the foreign income tax paid by For Co under subsection 770‑130(3). The foreign income tax is treated as paid in respect of the amount included in Aust Co's assessable income that is attributable to the dividend. 770‑135 Foreign income tax paid by CFCs and FIFs on attributed amounts (1) This Division applies to an entity as if it had paid an amount of *foreign income tax worked out under subsection (7) in respect of an amount included in its assessable income if: (a) the amount is included in its assessable income as described in subsection (2); and (b) the conditions in subsections (3), (5) and (6) are satisfied. (2) An amount is included in an entity's assessable income as described in this subsection if: (a) the entity is a company and the amount is included under: (i) section 456 (a section 456 case) of the 1936 Act in relation to a *CFC and a statutory accounting period; or (ii) section 457 (a section 457 case) of that Act in relation to a CFC; or (iii) section 529 of that Act in relation to a foreign company (within the meaning of Part XI of that Act) (a foreign company case) in respect of a notional accounting period (within the meaning of that Part) (a notional accounting period); or (b) the amount is included under section 529 of that Act in relation to a foreign trust (within the meaning of Part XI of that Act) (a foreign trust case) in respect of a notional accounting period. Note: Section 456 of the 1936 Act includes, in the assessable income of certain Australian shareholders, amounts that are attributable to the profits of an Australian‑controlled foreign company. Section 457 does likewise when a controlled foreign company changes residence from an unlisted to a listed country or to Australia. Section 529 includes, in the assessable income of resident taxpayers, amounts that are attributable to FIF interests held in foreign companies and in foreign trusts. Tax paid condition (3) An amount of *foreign income tax, income tax or *withholding tax (the tax amount) must have been paid: (a) for a section 456 case—by the *CFC in respect of an amount included in the notional assessable income of the CFC for the statutory accounting period; or (b) for a section 457 case—by the CFC; or (c) for a foreign company case or a foreign trust case—by the foreign company or foreign trust in respect of an amount included in its notional income (within the meaning of Part XI of the 1936 Act) of the notional accounting period. Note: Section 770‑130 deems foreign income tax to have been paid in certain circumstances. (4) For the purposes of paragraphs (3)(a) and (b), the tax amount includes an amount that is taken to have been paid by the *CFC under subsection 393(4) of the 1936 Act (about tax paid on reinsurance premiums). Association condition (5) If the entity is a company, it must have an *attribution percentage of 10% or more: (a) for a section 456 case—in relation to the *CFC at the end of the statutory accounting period; or (b) for a section 457 case—in relation to the CFC at the residence‑change time (within the meaning of section 457 of the 1936 Act); or (c) for a foreign company case—at the end of the notional accounting period. Note: There is no association condition for a foreign trust case. Calculation method condition for FIFs (6) For a foreign company case and a foreign trust case, the amount included under section 529 of the 1936 Act must have been determined by the application of the calculation method set out in Subdivision D of Division 18 of Part XI of that Act (the calculation method). Amount of foreign income tax (7) The amount worked out under this subsection is: (a) for a section 456 case—the sum of all the tax amounts for the statutory accounting period multiplied by the company's *attribution percentage in relation to the *CFC at the time mentioned in paragraph (5)(a); or (b) for a section 457 case—the sum of all the tax amounts to the extent they are attributable to the amount included in the company's assessable income under section 457 of the 1936 Act; or (c) for a foreign company case or a foreign trust case—an amount worked out using the following formula: where: entity's share of calculated profit means the share of the calculated profit of the foreign company or foreign trust in respect of the notional accounting period to which the entity is entitled as determined under the calculation method. FIF's calculated profit means the calculated profit of the foreign company or foreign trust in respect of the notional accounting period as determined under the calculation method. Grossing‑up of attributed amount (8) For the purposes of this Act except this section and: (a) section 371 of the 1936 Act (for a section 456 case or a section 457 case); or (b) section 605 of that Act (for a foreign company case or a foreign trust case); the amount included in the entity's assessable income as described in subsection (2) is taken to be increased by the amount of tax worked out under subsection (7). Note: Section 371 of the 1936 Act records an amount in an attribution account when the amount is included in the assessable income of an attributable taxpayer in relation to a CFC. Section 605 does the same thing for taxpayers with interests in FIFs. Rules about when foreign tax is considered not paid 770‑140 When foreign income tax is considered not paid—anti‑avoidance rule Despite anything else in this Division, this Act applies to you as if you had not paid an amount of *foreign income tax to the extent that you or any other entity become entitled to: (a) a refund of the foreign income tax; or (b) any other benefit worked out by reference to the amount of the foreign income tax (other than a reduction in the amount of the foreign income tax). Subdivision 770‑D—Administration Table of sections 770‑190 Amendment of assessments 770‑190 Amendment of assessments (1) Section 170 of the Income Tax Assessment Act 1936 does not prevent the amendment of an assessment for the purpose of giving effect to this Division for an income year if: (a) an event described in subsection (2) (an amendment event) happens after the time you lodged your *income tax return for that year; and (b) the amendment is made at any time during the period of 4 years starting immediately after the amendment event. Note: Section 170 of that Act specifies the periods within which assessments may be amended. (2) The following are amendment events: (a) you pay an amount of *foreign income tax that counts towards your *tax offset for the year; (b) there is an increase in an amount of foreign income tax you paid that counts towards your offset for the year; (c) there is a reduction in an amount of foreign income tax you paid that counts towards your offset for the year. Part 2—FIF income Income Tax Assessment Act 1936 2 After subsection 535(4) Insert: (4A) Subsection (4) does not prevent the taxpayer from making an election under subsection (3) in relation to a FIF in relation to a notional accounting period if the taxpayer also makes a choice under subsection 559A(1) in relation to the FIF in relation to the notional accounting period. 3 After section 559 Insert: 559A Choice to work out notional income and notional deductions under Part X (1) The taxpayer may choose to work out the notional income and notional deductions of the FIF in accordance with subsection (3) if: (a) the FIF is a foreign company; and (b) the taxpayer's attribution percentage in relation to the FIF is 10% or more at the end of the relevant period; and (c) if the taxpayer has previously made a choice under this subsection in relation to the FIF in relation to a notional accounting period of the FIF—the taxpayer has made such a choice in relation to the FIF in relation to every notional accounting period of the FIF (if any) occurring between: (i) the end of the notional accounting period of the FIF for which the taxpayer first made such a choice in relation to the FIF; and (ii) the start of the relevant period. (2) For the purposes of this section: (a) treat the FIF as a FIF that is a CFC; and (b) treat the taxpayer as an attributable taxpayer in relation to the FIF throughout the relevant period; and (c) treat the relevant period as the statutory accounting period of the FIF. Main rule—work out notional income and notional deductions under Part X, etc. (3) For the purposes of working out the notional income and notional deductions of the FIF of the relevant period: (a) treat that notional income as the FIF's notional assessable income worked out under Part X for the relevant period; and (b) treat those notional deductions as the FIF's notional allowable deductions worked out under Part X for the relevant period; and (c) if the taxpayer is an AFI entity at a particular time in the relevant period—treat the FIF as an AFI subsidiary at that time. (4) In working out the FIF's notional allowable deductions for the purposes of paragraph (3)(b): (a) disregard sections 429 and 431 (which deal with losses); and (b) instead, include notional deductions (if any) from the notional income of the FIF of the relevant period worked out under section 572 (which deals with notional deductions for calculated losses for prior periods). (5) For the purposes of subsection (3), treat the FIF's commencing day mentioned in Subdivision C of Division 7 of Part X as the first day of the period over which, apart from this section, the profits or gains of a capital nature derived by the FIF during the relevant period would be determined. Application of sections 575 to 579 (6) For the purposes of subsection (3), apply sections 575 to 579 in relation to a taxpayer (the actual taxpayer), subject to the rules in subsections (7) and (8). (7) If the actual taxpayer has made a choice under subsection (1) in relation to a FIF (the first‑tier FIF), in working out the first‑tier FIF's notional assessable income for the purposes of paragraph (3)(a): (a) disregard paragraphs 384(2)(ca) and 385(2)(ca) (which deal with amounts included in notional assessable income under Part XI); and (b) instead, include in that notional assessable income the first‑tier FIF's notional income worked out under section 576. (8) If the taxpayer mentioned in paragraphs (1)(b) and (3)(c) is the first‑tier FIF mentioned in section 576 (because of the effect of section 576 on this section): (a) treat the references in those paragraphs to the taxpayer as references to the actual taxpayer (and not to the first‑tier FIF); and (b) if, as a result of paragraph (a), the actual taxpayer has made a choice under subsection (1) in relation to a FIF (the second‑tier FIF)—in working out the second‑tier FIF's notional assessable income for the purposes of paragraph (3)(a): (i) disregard paragraphs 384(2)(ca) and 385(2)(ca) (which deal with amounts included in notional assessable income under Part XI); and (ii) instead, include in that notional assessable income the second‑tier FIF's notional income worked out under section 579. Note: The actual taxpayer cannot make a choice under subsection (1) in relation to a third‑tier FIF, because the calculation method is not available in respect of a third‑tier FIF (see subparagraph 579(b)(ii)). Definitions (9) In this section: AFI entity has the same meaning as in section 326. AFI subsidiary has the same meaning as in Part X (see section 326). attributable taxpayer has the same meaning as in Part X (see section 361). attribution percentage has the same meaning as in Part X (see section 362). notional allowable deductions has the same meaning as in Part X (see section 382). notional assessable income has the same meaning as in Part X (see section 382). Income Tax Assessment Act 1997 4 After section 768‑530 Insert: 768‑533 Foreign company that is a FIF using CFC calculation method—treatment as AFI subsidiary under this Subdivision (1) This section applies if: (a) the foreign company is a *FIF; and (b) the holding company has made a choice under subsection 559A(1) of the Income Tax Assessment Act 1936 in relation to the foreign company in respect of a *notional accounting period of the foreign company; and (c) because of the choice, the foreign company is treated under paragraph 559A(3)(c) of that Act as an AFI subsidiary (within the meaning of that Act) in relation to that holding company at a particular time. Note: If the holding company makes a choice under subsection 559A(1) of the Income Tax Assessment Act 1936, the notional income and notional deductions of the foreign company (in its capacity as a FIF) is worked out under the FIF calculation method by reference to its notional assessable income and notional allowable deductions under Part X of that Act. (2) For the purposes of this Subdivision, treat the foreign company as an AFI subsidiary in relation to that holding company at that time. Part 3—Transitional Income Tax (Transitional Provisions) Act 1997 5 Before Division 820 Insert: Division 770—Foreign income tax offsets and foreign losses Table of Subdivisions 770‑A Transitional foreign losses (common rules) 770‑B Transitional foreign losses (special rules for consolidated groups) 770‑C Transitional foreign losses (special rules for CFCs) 770‑D Transitional foreign income tax offsets (common rules) 770‑E Transitional foreign income tax offsets (special rules for consolidated groups) Subdivision 770‑A—Transitional foreign losses (common rules) Table of sections Converting an overall foreign loss into a type of tax loss 770‑1 Converting a past foreign loss into a tax loss 770‑5 Convertible foreign loss 770‑10 Reducing the amount of an overall foreign loss of a class of assessable foreign income Utilising transitional foreign losses 770‑15 No special rules if convertible foreign losses total less than or equal to $10,000 or choice made 770‑20 Starting total for loss parcel 770‑25 Tax loss has foreign loss component 770‑30 Deduction limit for foreign loss component 770‑35 Offset limit to take account of deducted foreign loss component Converting an overall foreign loss into a type of tax loss 770‑1 Converting a past foreign loss into a tax loss (1) The Income Tax Assessment Act 1936 (the 1936 Act), the Income Tax Assessment Act 1997 (the 1997 Act) and this Act operate for the purposes of the income years mentioned in subsection (3) as if an entity that has a convertible foreign loss for an earlier income year under section 770‑5 had a tax loss for the earlier year equal to: (a) the amount (if any) that would have been the entity's tax loss for the earlier year under section 36‑10, 165‑70, 175‑35 or 701‑30 of the 1997 Act (about deducting past tax losses); plus (b) the amount of the entity's convertible foreign loss for the earlier year. Note 1: This is instead of an amount of tax loss worked out under section 36‑10, 165‑70, 175‑35 or 701‑30 of the 1997 Act. Note 2: This section does not affect the amount (if any) of an entity's taxable income for the year. An entity may be taken to have a tax loss for a year under this section, but also have a taxable income for the year. Note 3: This section has an expanded operation for consolidated groups: see section 770‑90. (2) The earlier year is taken for those purposes to be a loss year for the entity if the entity would not otherwise have a tax loss for that year. (3) The income years are: (a) the first income year starting on or after the first 1 July that occurs after the day on which the Tax Laws Amendment (2007 Measures No. 4) Act 2007 receives the Royal Assent (the commencement year); and (b) later income years. 770‑5 Convertible foreign loss (1) An entity has a loss to which this section applies (a convertible foreign loss) for an earlier income year covered by subsection (2) if: (a) the entity has incurred an overall foreign loss in respect of a class of assessable foreign income (within the meaning of former section 160AFD of the 1936 Act) for the earlier year, reduced to the extent that it has been taken into account under that former section in reducing the entity's assessable foreign income of the relevant class for an income year before the commencement year; and (b) a positive amount remains after reducing the overall foreign loss under section 770‑10. Note 1: For the classes of income, see former subsection 160AFD(8) of the 1936 Act. Note 2: There is a modification to this rule for losses transferred to a head company of a consolidated group: see subsection 770‑80(2). Note 3: Former section 160AFD of the 1936 Act allowed a past foreign loss to reduce assessable foreign income of the same class. (2) The income year must be one of the most recent 10 income years ending before the commencement year. (3) The amount of the convertible foreign loss for the earlier year is the sum of the positive amounts remaining after each overall foreign loss in respect of a class of assessable foreign income for the earlier year is reduced under section 770‑10. 770‑10 Reducing the amount of an overall foreign loss of a class of assessable foreign income Apply the following method statement to each overall foreign loss in relation to a class of assessable foreign income of an earlier income year. Method statement Step 1. If the entity is a company and the relevant class of assessable foreign income is the "all other assessable income" class—reduce the amount applicable under paragraph 770‑5(1)(a) to the extent (if any) that the loss is attributable to losses or outgoings incurred in gaining or producing income of a kind that would be the company's non‑assessable non‑exempt income if it were gained or produced in the commencement year. Note: For other entities, there is no reduction under step 1. Step 2. For income years other than the most recent 7 income years ending before the commencement year—reduce the result of step 1 by half. Note: Step 2 is modified for losses transferred to a head company of a consolidated group: see subsection 770‑80(3). Utilising transitional foreign losses 770‑15 No special rules if convertible foreign losses total less than or equal to $10,000 or choice made Section 770‑30 does not apply in relation to a tax loss an entity is taken by section 770‑1 to have if: (a) the amount worked out under section 770‑20 (the starting total) is less than or equal to $10,000; or (b) the entity chooses to reduce one or more tax losses the entity is taken by section 770‑1 to have had so that the starting total equals $10,000. 770‑20 Starting total for loss parcel The sum of the convertible foreign losses for each earlier year for which an entity is taken by section 770‑1 to have a tax loss is the starting total for all of those tax losses taken together (the loss parcel). Example: On 1 July 2008, Loss Co determines that it has incurred the following overall foreign losses: * Year ended 30 June 2002: $5,000 (with no amount of convertible foreign loss due to the operation of 770‑10); * Year ended 30 June 2004: $4,000 (with an amount of $2,000 being a convertible foreign loss); * Year ended 30 June 2005: $7,000 (with an amount of $3,000 being a convertible foreign loss); * Year ended 30 June 2007: $8,000 (with the entire amount being a convertible foreign loss). Loss Co does not have any other domestic tax losses for those income years (that is, the 2002, 2004, 2005 and 2007 income years are not loss years). Initially, Loss Co's starting total for the loss parcel is $13,000, which consists of the tax losses incurred in the year ended 30 June 2004, the year ended 30 June 2005 and the year ended 30 June 2007 (there is no convertible foreign loss incurred in the year ended 30 June 2002 because of section 770‑1 and therefore there is no tax loss included in the loss parcel for that year). The 2004, 2005 and 2007 income years will then be a new loss year for Loss Co (under subsection 770‑1(2)), because Loss Co did not otherwise incur a tax loss in those years. To avoid the operation of the deduction limit (under section 770‑30), Loss Co chooses under paragraph 770‑15(b) to reduce the starting total for the loss parcel to $10,000 by not converting $3,000 of its convertible foreign losses (which consists of $2,000 of the 2004 tax loss and $1,000 of the 2005 tax loss). Consequently, only the 2005 and 2007 income years are the new loss years for Loss Co. 770‑25 Tax loss has foreign loss component A tax loss an entity is taken to have under section 770‑1 has a separate component (the foreign loss component). The amount of the component is the amount of the convertible foreign loss. 770‑30 Deduction limit for foreign loss component (1) The amount of the foreign loss component of one or more tax losses in a loss parcel that any entity can deduct in an income year cannot exceed the amount worked out for the year using the table. Limit on deducting foreign loss component of a tax loss Item For this income year: The amount of the component that you can deduct cannot exceed: 1 The commencement year 1/5 of the starting total for the loss parcel 2 The first income year ending after the commencement year The difference between: (a) 2/5 of the starting total for the loss parcel; and (b) the amount of the foreign loss component of one or more tax losses in the loss parcel deducted for the income year mentioned in item 1 3 The second income year ending after the commencement year The difference between: (a) 3/5 of the starting total for the loss parcel; and (b) the amount of the foreign loss component of one or more tax losses in the loss parcel deducted for the income years mentioned in items 1 and 2 4 The third income year ending after the commencement year The difference between: (a) 4/5 of the starting total for the loss parcel; and (b) the amount of the foreign loss component of one or more tax losses in the loss parcel deducted for the income years mentioned in items 1, 2 and 3 Note: There may be a reduction of the limit for the head company of a consolidated group under section 770‑100. (2) This section does not limit the amount of the foreign loss component of a tax loss that an entity can deduct in a year later than the third income year ending after the commencement year. Note: For later years, any remaining undeducted tax loss may be deducted to the extent permitted by the general rules for tax losses. 770‑35 Offset limit to take account of deducted foreign loss component (1) This section affects the calculation of your offset limit for an income year under section 770‑75 of the 1997 Act. (2) This section applies for an income year if you have deducted an amount of the foreign loss component of one or more tax losses (see section 770‑25) in the income year. (3) In working out the amount referred to in subparagraph 770‑75(2)(b)(ii) of the 1997 Act for the year, you must assume (in addition to the assumptions set out in subsection 770‑75(4) of that Act), that you were not entitled to any deductions covered by subsection (2). Subdivision 770‑B—Transitional foreign losses (special rules for consolidated groups) Table of sections 770‑80 Transferred losses taken not to be refreshed for purposes of converting overall foreign loss 770‑85 Deduction limit not to restrict transfer of losses 770‑90 Transfer of losses not restricted where part of trial year occurs before commencement year 770‑95 Foreign loss component and starting total retained after transfer to head company 770‑100 Limit where foreign loss component utilised by joining entity 770‑105 Modified operation of Subdivision 707‑C of the 1997 Act for foreign loss component 770‑110 Application of Subdivision to MEC groups 770‑80 Transferred losses taken not to be refreshed for purposes of converting overall foreign loss (1) This section applies if: (a) a loss is transferred under section 707‑120 of the Income Tax Assessment Act 1997 (the 1997 Act) from a joining entity to a head company; and (b) the loss is an overall foreign loss in respect of a class of assessable foreign income (within the meaning of former section 160AFD of the Income Tax Assessment Act 1936 (the 1936 Act)). Note: Former section 160AFD of the 1936 Act allowed a past foreign loss to reduce assessable foreign income of the same class. (2) In applying section 770‑5, only have regard to the overall foreign loss if the income year in which it was actually incurred (disregarding subsection 707‑140(1) of the 1997 Act) was one of the most recent 10 income years ending before the commencement year. Note: Section 770‑5 is about the amount of an entity's convertible foreign losses. Section 707‑140 deems the head company of a group to have made a transferred loss in the year in which it is transferred. (3) A reduction must be made under step 2 of the method statement in section 770‑10 if the overall foreign loss was actually incurred (disregarding subsection 707‑140(1) of that Act) in an income year other than the most recent 7 income years ending before the commencement year. Note: Section 770‑10 is about reducing an entity's past foreign losses to arrive at the entity's convertible foreign loss for past years. 770‑85 Deduction limit not to restrict transfer of losses Section 770‑30 (deduction limit for foreign loss component) does not limit the transfer, under Subdivision 707‑A of the 1997 Act, of a tax loss that has a foreign loss component. 770‑90 Transfer of losses not restricted where part of trial year occurs before commencement year Section 770‑1 operates in relation to a trial year in the same way it operates in relation to the income years mentioned in subsection 770‑1(3) if: (a) a tax loss has a foreign loss component; and (b) it is necessary to determine whether an entity could utilise the tax loss for an income year consisting of the trial year; and (c) part of the trial year occurs before the start of the commencement year mentioned in subsection 770‑1(3). 770‑95 Foreign loss component and starting total retained after transfer to head company Where a tax loss having a foreign loss component is transferred under Subdivision 707‑A of the 1997 Act to a head company: (a) the tax loss has the same amount of foreign loss component after the transfer as it had immediately before the transfer; and (b) the starting total for the loss parcel to which the tax loss belongs (see section 770‑20) is the same after the transfer as it was immediately before the transfer; and (c) for the purposes of section 770‑30, the amount of the foreign loss component of one or more of the tax losses in the parcel that any entity has deducted for an income year is the same after the transfer as immediately before the transfer. Note 1: This section ensures a tax loss retains its foreign loss component, starting total and deduction history even though the head company is taken after the transfer to have made the loss for the income year in which the transfer occurs. Note 2: Section 770‑30 sets a limit on how much of an entity's past foreign losses may be deducted in each of the first 4 years after the commencement of this section. 770‑100 Limit where foreign loss component utilised by joining entity (1) This section applies where one or more tax losses having a foreign loss component are transferred under Subdivision 707‑A of the 1997 Act to the head company of a consolidated group. (2) The limit under subsection 770‑30(1) of the amount of the foreign loss component of the tax losses that the transferee can deduct for an income year (the deduction year) mentioned in an item in the table in that subsection is reduced by the amount (if any) worked out under subsection (3). (3) The amount of the reduction is the sum of each amount of the foreign loss component that has been deducted by other entities in respect of a non‑membership period mentioned in section 701‑30 of the 1997 Act, or income year, ending before the end of the deduction year. Note: Section 701‑30 of the 1997 Act sets out how an entity that is not a subsidiary member of a consolidated group for all of an income year calculates its tax liability or tax loss for the periods (called non‑membership periods) when it is not a member of a group. 770‑105 Modified operation of Subdivision 707‑C of the 1997 Act for foreign loss component (1) This section affects the way in which one or more tax losses in a bundle of losses transferred under Subdivision 707‑A of the 1997 Act can be utilised by the transferee in an income year if: (a) one or more of the tax losses has a foreign loss component (regardless whether at the time of transfer the bundle included a tax loss having a foreign loss component or an overall foreign loss in respect of a class of income (within the meaning of former section 160AFD of the 1936 Act)); and (b) section 770‑30 limits the amount of the foreign loss component that the transferee can deduct in the income year. (2) Subdivision 707‑C of the 1997 Act does not limit the utilisation of the foreign loss component for the income year. Note: This means that the available fraction does not apply to the foreign loss component of a tax loss in the first 4 years after commencement. Instead, the deduction limit in section 770‑30 applies. (3) For the purposes of working out under Subdivision 707‑C of the 1997 Act how much of the tax losses in the bundle the transferee can utilise in the income year, section 707‑310 of the 1997 Act has effect as if the first reference in paragraph (3)(b) of that section to the transferee's losses included a reference to the sum of the amounts of the foreign loss components for all loss parcels in the income year. Note: This affects the limit that Subdivision 707‑C of that Act sets on utilising other tax losses in the bundle (because that limit depends on the transferee's income and gains remaining after utilisation of losses that have not been transferred under Subdivision 707‑A of that Act): see subsection 707‑310(3) of that Act. 770‑110 Application of Subdivision to MEC groups This Subdivision has effect in relation to a MEC group in the same way in which it has effect in relation to a consolidated group. Subdivision 770‑C—Transitional foreign losses (special rules for CFCs) Table of sections 770‑160 Converting a past CFC loss 770‑165 Convertible CFC loss 770‑170 Reducing the amount of a CFC loss of a class of notional assessable income 770‑160 Converting a past CFC loss (1) The Income Tax Assessment Act 1936 (the 1936 Act) operates for the purposes of the statutory accounting periods mentioned in subsection (2) as if an eligible CFC (within the meaning of Division 7 of Part X of that Act) (an eligible CFC) that has a convertible CFC loss for an earlier statutory accounting period under section 770‑165 has a loss for the earlier period equal to the amount of the convertible CFC loss. Note: Part X of the 1936 Act deals with the attribution of the income of a CFC to attributable taxpayers. (2) The statutory accounting periods are: (a) the first statutory accounting period starting on or after the first 1 July that occurs after the day on which the Tax Laws Amendment (2007 Measures No. 4) Act 2007 receives the Royal Assent (the commencement period); and (b) later statutory accounting periods. 770‑165 Convertible CFC loss (1) An eligible CFC has a loss to which this section applies (a convertible CFC loss) for an earlier statutory accounting period covered by subsection (2) if: (a) the eligible CFC has a loss under section 426 of the 1936 Act for the earlier period in relation to notional assessable income of a class, reduced to the extent that it has been previously taken into account under section 431 of the 1936 Act in respect of a statutory accounting period before the commencement period; and (b) a positive amount remains after reducing the loss under section 770‑170. Note: For the classes of notional assessable income, see former subsection 424(1) of the 1936 Act. (2) The statutory accounting period must be one of the most recent 10 statutory accounting periods ending before the commencement period. (3) The amount of the convertible CFC loss for the earlier period is the sum of the positive amounts remaining after each loss in relation to notional assessable income of a class for the earlier period is reduced under section 770‑170. 770‑170 Reducing the amount of a CFC loss of a class of notional assessable income Apply the following method statement to each loss in relation to notional assessable income of a class for the earlier statutory accounting period. Method statement Step 1. Reduce the amount applicable under paragraph 770‑165(1)(a) to the extent (if any) that the loss relates to the "all other amounts" class of notional assessable income, except to the extent (if any) that the loss is attributable to losses or outgoings incurred in gaining or producing income of a kind that would be the company's notional assessable income or sometimes‑exempt income. Step 2. For statutory accounting periods other than the most recent 7 statutory accounting periods ending before the commencement period—reduce the result of step 1 by half. Subdivision 770‑D—Transitional foreign income tax offsets (common rules) Table of sections 770‑220 Converting excess foreign tax credits into pre‑commencement excess foreign income tax 770‑225 Pre‑commencement excess foreign income tax generated for a company by excess foreign tax credits relating to other income 770‑230 Increase in the foreign income tax offset 770‑220 Converting excess foreign tax credits into pre‑commencement excess foreign income tax (1) You have pre‑commencement excess foreign income tax from an income year if: (a) you have excess foreign tax credits in relation to a class of foreign income from an earlier income year under former section 160AFE of the Income Tax Assessment Act 1936 (the 1936 Act); and (b) the earlier income year is one of the most recent 5 income years ending before the first income year starting on or after the first 1 July that occurs after the day on which the Tax Laws Amendment (2007 Measures No. 4) Act 2007 receives the Royal Assent; and (c) the credits have not already been applied under former section 160AFE of the 1936 Act. Note: For the classes of income, see former subsections 160AF(7) and 160AFE(5) of the 1936 Act. Former section 160AFE of the 1936 Act determined whether an entity had excess foreign tax credits for an income year and whether it could use them to increase the foreign tax credit amount in a later income year. Under the former foreign tax credit system, the excess credits were worked out and, where applicable, applied to increase the foreign tax credit amount in relation to each of the classes of income listed in former subsection 160AF(7). (2) The amount of your pre‑commencement excess foreign income tax from an income year is the sum of the amounts set out in the table in subsection (3) for that year. (3) Column 2 of the following table specifies the class of income to which the excess foreign tax credits covered by subsection (1) relate. Column 3 sets the amount of pre‑commencement excess foreign income tax from that income year generated by those excess foreign tax credits. Conversion of excess foreign tax credits into pre‑commencement excess foreign income tax for an income year Item Excess foreign tax credits covered by subsection (1) relating to this class of income referred to in former subsection 160AF(7) of the 1936 Act Pre‑commencement excess foreign income tax generated 1 Passive income The amount of those excess foreign tax credits 2 Offshore banking income The amount of those excess foreign tax credits multiplied by the eligible fraction (within the meaning of section 121EG of the 1936 Act) 3 An amount included in assessable income under section 305‑70 of the 1997 Act (which is about the assessability of lump sums received from foreign superannuation funds) The amount of those excess foreign tax credits 4 Other income (a) For a company—the amount of those excess foreign tax credits, as reduced under section 770‑225; or (b) For an entity other than a company—the amount of those excess foreign tax credits Note: Section 121EG of the 1936 Act applies the eligible fraction to assessable OB income, allowable OB deductions and foreign income tax paid on assessable OB income. 770‑225 Pre‑commencement excess foreign income tax generated for a company by excess foreign tax credits relating to other income Reduce the amount of the excess foreign tax credits to the extent (if any) that they are attributable to foreign tax paid in respect of amounts that would be your non‑assessable non‑exempt income if they were derived in the commencement year. 770‑230 Increase in the foreign income tax offset (1) This section affects the amount of your tax offset under section 770‑70 of the Income Tax Assessment Act 1997 (the 1997 Act). Note: That section determines how much tax offset you can claim for foreign income tax you have paid. (2) Your tax offset for an income year (the current year) is increased in accordance with this section if: (a) the amount of your tax offset worked out under section 770‑70 of the 1997 Act falls short of your offset limit under section 770‑75 of that Act; and (b) you have pre‑commencement excess foreign income tax (see section 770‑220) from an earlier year of income that is one of the most recent 5 income years ending before the current year. (3) Increase your tax offset for the current year by adding your pre‑commencement excess foreign income tax covered by paragraph (2)(b) to the amount of your tax offset worked out under section 770‑70 of the 1997 Act. (4) Only increase the offset to the extent of the shortfall worked out under paragraph (2)(a). (5) You no longer have the pre‑commencement excess foreign income tax to the extent that it has been used to increase your offset limit. Subdivision 770‑E—Transitional foreign income tax offsets (special rules for consolidated groups) Table of sections 770‑285 Objects of this Subdivision 770‑290 Transferring subsidiary member's pre‑commencement excess foreign income tax to head company 770‑295 Where entity not subsidiary member for whole of income year 770‑300 Pre‑commencement excess foreign income tax lost on joining consolidated group 770‑305 Exit history rule does not treat leaving entity as having pre‑commencement excess foreign income tax 770‑310 Application of Subdivision to MEC groups 770‑285 Objects of this Subdivision The main objects of this Subdivision are: (a) to allow the head company of a consolidated group to apply, in relation to an income year, pre‑commencement excess foreign income tax of an entity (the joining entity) that becomes a subsidiary member of the group at a time (the joining time) if: (i) the income year starts at or after the joining time; and (ii) that pre‑commencement excess foreign income tax is from an income year ending before the joining time; and (b) to prevent the joining entity from applying pre‑commencement excess foreign income tax mentioned in subparagraph (a)(ii) to increase its own tax offset under Division 770 of the Income Tax Assessment Act 1997 (the 1997 Act). 770‑290 Transferring subsidiary member's pre‑commencement excess foreign income tax to head company (1) This section operates for the purposes of section 770‑220 in relation to an income year if: (a) an entity (the joining entity) becomes a subsidiary member of a consolidated group at a time (the joining time); and (b) the joining time is before or at the start of that income year; and (c) the joining entity has pre‑commencement excess foreign income tax (the transferred foreign income tax) from an earlier income year. (2) For those purposes: (a) the head company of the group is taken to have the transferred foreign income tax; and (b) if, apart from paragraph (a), the head company has pre‑commencement excess foreign income tax from the earlier year—the transferred foreign income tax is taken to be included in that pre‑commencement excess foreign income tax. (3) Subsection (2) also has effect for the purposes of a subsequent operation of this section. 770‑295 Where entity not subsidiary member for whole of income year (1) This section operates if: (a) an entity (the joining entity) is a subsidiary member of a consolidated group for some but not all of an income year (the joining year); and (b) there are one or more periods in the joining year (each of which is a non‑membership period) during which the entity is not a subsidiary member of any consolidated group. Note: Section 701‑30 of the 1997 Act treats each non‑membership period as a separate income year for some purposes. (2) Subsection (3) has effect for the purposes of section 701‑30 of the 1997 Act in relation to the joining entity. (3) In working out amounts for the joining entity under subsection 701‑30(3) of the 1997 Act in relation to each non‑membership period, assume that, if the joining year starts at the same time as the earliest of those non‑membership periods, section 770‑230 operates in relation to the joining entity for that non‑membership period. 770‑300 Pre‑commencement excess foreign income tax lost on joining consolidated group (1) For the purposes of section 770‑220 in relation to an income year ending after the time an entity becomes a subsidiary member of a consolidated group, the entity is taken not to have any pre‑commencement excess foreign income tax from an income year, or non‑membership period described in section 701‑30 of the 1997 Act, that ended before or at that time. (2) Subsection (1) does not affect the operation of section 770‑220 in accordance with section 770‑290. 770‑305 Exit history rule does not treat leaving entity as having pre‑commencement excess foreign income tax (1) This section operates in relation to an income year if: (a) an entity (the leaving entity) ceases to be a subsidiary member of a consolidated group before the end of that income year; and (b) the head company of the group has pre‑commencement excess foreign income tax from an earlier income year. (2) To avoid doubt, the leaving entity is not taken because of section 701‑40 of the 1997 Act (the exit history rule) to have that pre‑commencement excess foreign income tax. (3) It does not matter whether the head company has that pre‑commencement excess foreign income tax because of section 717‑10 of the 1997 Act or 770‑290 (whether in relation to the leaving entity or another entity) or because of another provision. 770‑310 Application of Subdivision to MEC groups This Subdivision has effect in relation to