Glossary

Active income

Active income is income derived from genuine business activities such as mining or manufacturing operations and the provision of commercial services. The location of such business activities tends to be based primarily on non-tax considerations like access to product markets and the supply of labour and other inputs.

Attribution rules

Anti-tax-deferral rules that seek to remove the inappropriate deferral benefit gained by residents from accumulating income offshore.

Balanced portfolio exemption

The balanced portfolio exemption provides an exemption for otherwise non-exempt FIF interests where the amount of non-exempt FIF interests is relatively small (10 per cent or less).

Base company income

Base company income includes tainted sales and services income. Generally, base company income is active income derived from a related-party transaction or from certain transactions in connection with the domestic jurisdiction. Base company income is often given the same treatment as passive income, that is, accruals taxation.

Branch-equivalent calculations

This method applies the Australian tax law, subject to certain modifications, to calculate the taxable income of the foreign entity as if it were an Australian resident.

Capital export neutrality (CEN)

An efficiency benchmark advocating residence-based taxation. That is, all capital owned by Australians should be taxed at Australian rates of tax whether it is invested in Australia or overseas. This promotes efficient capital allocation worldwide.

Capital import neutrality (CIN)

An efficiency benchmark advocating source-based taxation. That is, income earned by Australians overseas should not be subject to further tax in Australia regardless of the tax rate in the foreign country. This promotes neutrality in savings decisions and efficient savings.

Comparable tax (jurisdictional) approach

In its pure form, this approach exempts income derived from investments located in particular countries. In a modified form, this approach may only exempt certain income that is comparably taxed or subject to a certain level of foreign taxation.

Controlled foreign company (CFC) rules

Rules that subject controlling interests in foreign companies to accruals taxation.
A foreign company is a CFC if any of the following three tests are satisfied:

five or fewer Australian entities have together, directly or indirectly, a 50 per cent or more interest in the foreign company;
a single Australian entity has, directly or indirectly, a 40 per cent or more interest in the company, and the company is not controlled by anyone else; or
five or fewer Australian entities effectively control the company.

Deemed present entitlement

Rules in the general trust provisions that apply to interests in controlled foreign trusts and other interests in foreign trusts that are exempt from the FIF rules. The rules deem beneficiaries to be presently entitled to a share of profits accumulated in a foreign trust, based on their rights to receive distributions from the trust in the future.

(Eligible) Designated concession income (EDCI)

Certain income, being income that has been concessionally taxed in a listed country, that may be attributable to Australian taxpayers under the CFC rules.

Foreign investment fund (FIF) rules

Rules that subject certain interests to accruals taxation. These interests include non-control interests in foreign companies, interests in foreign trusts and beneficial interests in foreign life insurance policies.

Listed country

Countries listed for Australian tax purposes are Canada, France, Germany, Japan, New Zealand, the United Kingdom and the United States. Income from listed countries is subject to more concessional accruals taxation treatment.

Non-portfolio / portfolio

In general terms, a shareholder with an interest in a company (for example, in respect of voting power) that is equal to 10 per cent or more has a non-portfolio interest. A non-portfolio dividend is a dividend received in respect of such an interest. Other interests, and dividends in respect of such interests, are portfolio.

Passive income

Passive income is generally highly mobile income which can easily be shifted to a tax haven and includes dividends, interest, royalties, rents, annuities and capital gains.

Tainted income

Tainted income includes passive and base company income.

Tainted sales income

Sales income of a CFC where the goods sold were purchased from, or sold to:

an associate who is an Australian resident; or
an associate who is not an Australian resident but carried on business in Australia through a permanent establishment.

Tainted services income