Australia: Draft guidance on interaction of non-arm’s length income and capital gains, control and residency tests
Recent draft taxation determinations and a draft update released by ATO
Recent draft taxation determinations and a draft update released by ATO
The Australian Taxation Office (ATO) on 28 June 2023 released two draft taxation determinations regarding the interaction of the non-arm’s length income and capital gains provisions and whether an entity “controls” another entity, as well as a draft update to the practice compliance guideline for the central management and control test of residency.
- TD 2023/D1 outlines the ATO’s views on the interaction of the non-arm’s length income (NALI) provisions in Subdivision 295-H of the Income Tax Assessment Act 1997 and the capital gains tax (CGT) provisions in Part 3-1 (in particular, section 102-5) of that Act interact in determining the amount of statutory income that is NALI where a capital gain arises as a result of non-arm’s length dealings. In particular, the draft determination provides guidance as to how to calculate the amount of statutory income that is NALI where a superannuation fund makes a capital gain as a result of non-arm’s length dealings and provides a number of practical examples to demonstrate these calculations. The draft determination also outlines various alternative views on how the NALI and CGT provisions interact and why these alternative views are not supported.
- TD 2023/D2 provides guidance on the following specific issues that have emerged from the Commissioner’s administration of the discretion in subsection 328-125(6) of the Income Tax Assessment Act 1997 to determine that an entity does not “control” another entity. The draft determination analyzes whether the discretion may be exercised when a third entity has sole or primary responsibility for day-to-day management of the affairs of the test entity, but holds relatively insignificant or no interests in the income or capital of the test entity, or in shares carrying voting rights, as well as whether control percentage interests of between 40% and 50% may be disregarded because the remaining holders of interests in the test entity will together necessarily control the entity, irrespective of their number or relationship to each other.
- PCG 2018/9 provides the proposed addition of the draft risk assessment framework to assist foreign-incorporated companies in managing their compliance risks for the central management and control test of residency and provide certainty regarding the ATO’s compliance approach.
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