An IMR Foreign Fund will be exempt from Australian taxation on relevant investment income and gains (and will disregard related deductions and losses) if:
- it is taken to have a 'permanent establishment' (PE) in Australia only because it engages an Australian resident intermediary; and
- as a consequence of having an Australian PE, a deemed source rule has applied to give Australia taxing rights over the relevant income or gains.
Australia will only tax the fee for services charged by the Australian intermediary.
The conduit income rules will not apply to income, gains and losses from Australian assets which would be Australian sourced, independently of whether a foreign intermediary was engaged by the IMR Foreign Fund. However, the proposed ‘Final IMR’ rules may provide an exemption for income, gains and losses on portfolio interests in this case (see below).
There have been some changes and additions to the first exposure draft which are noted as follows:
- An entity must be widely held to qualify as an IMR Foreign Fund. The first exposure draft defined ‘widely held’ by adopting the definition of ‘widely held’ that applies to a ‘retail’ Managed Investment Trust (MIT) under Subdivision 12‑H of Part 2-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA) (ie 50 members, subject to the MIT participation interest rules). The second exposure draft definition of widely held is self contained within the new Subdivision 842-I and does not rely on the MIT definitions. The new definition is closer to the ‘wholesale fund’ definition of MIT. To be widely held under the new rules the entity must be one of the following:
- listed on an approved stock exchange;
- have at least 25 members;
- have a ‘specified entity’ holding a total participation interest of at least 25%; or
- be wholly owned by one of the above entities.
The ‘specified entities’ are now comprised of:
- foreign life insurance company;
- foreign superannuation fund with at least 50 members; and
- foreign government pension fund.
To qualify as an IMR Foreign Fund, the entity must also not breach the new concentration of ownership test. Under that test, 10 or fewer entities must not hold a total participation interest of 50% or more in the entity. In determining the number of entities the following entities are not counted: ‘specified entities’; IMR Foreign Funds; and entities wholly owned by certain widely held entities.
- The exemption will apply to an IMR Foreign Fund that is a corporate tax entity, which includes a limited partnership. If the IMR Foreign Fund is a partnership or trust:
- the general rules applicable to partnerships and trusts in Divisions 5 and 6 of Part III of the Income Tax Assessment Act 1936 will apply; and
- IMR income and gains (and related deductions and losses) will be disregarded in determining the share of net income of a non-resident partner or beneficiary.
- Unlike the MIT rules, subsidiaries of foreign government agencies are not included in the list of specified entities. Such entities may be exempt on certain Australian sourced income subject to the requirements of the sovereign immunity rules. (The Federal Government is consulting on proposed rules to codify the existing sovereign immunity law and administrative practice of the Australian Taxation Office – see Minister Shorten’s press release dated 20 April 2011 and attached Treasury proposals paper entitled ‘Options to codify the tax treatment of sovereign investments, April 2011’.)