Content area
Full text
The Taxation Laws Amendment Act (No 3) 1995 made several changes to the operation of the Controlled Foreign Companies (CFC) provisions in Pt X of the Income Tax Assessment Act (the Act). One significant change is the application of transfer pricing principles to the active income test, a fundamental concept relevant to the application of the CFC provisions. In this article we examine the change effected by the 1995 amendments.
Background
Sections 384 and 385 of the Act are the primary provisions which set out the amounts that are notional assessable income for the purposes of ascertaining the attributable income of unlisted country CFCs and listed country CFCs respectively. Whilst each of these provisions contains a long list of items of notional assessable income, the main heads, that is the provisions that contain the fundamental principles of the CFC provisions, are s 384(2)(a) and s 385(2)(a)(i). Broadly, there is an attribution:
(a) where an unlisted country CFC fails the active income test of the adjusted tainted income of the CFC (subject to modification as set out in Pt X) (s 384(2)(a)); and
(b) where a listed country CFC fails the active income test, notional assessable income includes adjusted tainted income that is eligible designated concession income (EDCI) (s 385(2)(a)(i). Both provisions depend on the CFC failing the active income test for amounts to be included in the CFC's notional assessable income. The active income test for listed and unlisted countries is set out in s 432 of the Act. A significant criterion of the active income test requires that the tainted income ratio for the CFC be less than five per cent (s 432(1)(f) of the Act). To fail this aspect of the active income test, a CFC must have gross turnover which is "tainted" as described in s 435 of the Act. In respect of a listed country CFC, the gross tainted turnover must also be EDCI to fail the active income test. Section 434 of the Act contains a detailed definition of what constitutes gross turnover. A fundamental aspect of gross turnover is that it is ascertained by a reference to the recognised accounts of the company. Consequently, if a CFC does not have an amount included in its...