On 12 October 2016, the Australian Taxation Office (ATO) released for comment Draft Taxation Ruling TR 2016/D2 that provides guidance on applying the participation test in Subdivision 768-A when working out whether an equity distribution received by an Australian corporate tax entity from a foreign company is not assessable and not exempt (NANE) income.
The participation exemption (PE) makes distributions from foreign companies’ non-assessable, non-exempt income if the distribution is received by an Australian corporate entity that has a direct or indirect participation interest in the foreign company of at least 10%. The Draft Ruling addresses the time at which the Australian entity must hold the direct interest of at least 10%.
The participation test
- For the distribution to be NANE income, the Australian corporate tax entity must (amongst other things) have a direct or indirect participation interest in the foreign company, the sum of which is at least 10%.
- The Australian corporate tax entity will satisfy the participation test if it has a sufficient direct control interest in the foreign company within the meaning of section 350 of the ITAA 1936.
- Section 350 of the ITAA 1936 provides that the direct control interest that an entity ‘holds’ in another entity ‘at a particular time’ is equal to the percentage of share capital, rights to distribution or rights to vote that the entity ‘holds’ (or is ‘entitled to acquire’) in the other entity ‘at that time.’
