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Attributable FIF income method – election may be required!

Author: Annamaria Maclean and Sam Mathews

In the June 2012 Tax Alert we discussed the second stage of international tax reforms enacted in the Taxation (International Investment and Remedial Matters) Act 2012 and the impact these changes will have for taxpayers with interests in Foreign Investment Funds (FIFs). 

A key feature of the reform is the extension of the active income exemption to non-portfolio FIFs (being foreign investments between 10 – 50%) through the availability of the new attributable FIF income method, provided of course that the requirements for use are met.

The accounting profits and branch equivalent methods are repealed for income years beginning on or after 1 July 2011 and taxpayers using these methods will have to transition to one of the other calculation methods.  The FDR method will also become the default method across all FIF interests (i.e. both portfolio and non-portfolio FIFs).

When transitioning into a new calculation method, FIF interest holders should give careful consideration to which method is the most suitable and tax effective for their particular circumstances.

It is also important to consider the requirements that arise when a taxpayer seeks to adopt a new calculation method. The consistency requirements that apply where there is a change in calculation method provide that an election to use the attributable FIF income method may be required in certain circumstances.

An election is required before the end of the first income year or accounting period (unless the Commissioner agrees to retrospective election) if the interest holder is changing from the branch equivalent method and wishes to use the attributable FIF income method.  It does not appear that an election is required if the interest holder is instead transitioning from the accounting profits method or the previous grey list exemption although in the latter case it may be prudent to file an election in any case.

Given that the attributable FIF income method applies to a FIF’s accounting period, the election may be required before the end of the FIF’s accounting period.  This may be prior to the end of the income year where the interest holder’s income year and the FIF’s accounting period are not aligned.

The deadline for such an election to be made for the first year that the attributable FIF income method is available (i.e. income years beginning on or after 1 July 2011) is therefore tight and may in fact have lapsed for a number of FIFs prior to the new rules being enacted.  It may therefore be necessary to request that the Commissioner exercises the available discretion to allow a retrospective election.

For completeness we note that an election is not required where non-portfolio FIFs transition to the FDR method.

Tax Alert December 2012 Contents 

 

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