The FIN 48 changes were originally announced to address the uncertainty arising out of the use by foreign funds of Australian intermediaries for taxation years up to and including the 2009-2010 tax year. In May 2011 it was announced that this temporary fix would extend to the 2010-2011 tax year.
The basic premise is that, if a foreign fund is using an Australian fund adviser, manager or other intermediary, and therefore a question arises as to whether or not it may have a permanent establishment in Australia, but it has not lodged an income tax return in Australia in respect of income attributable to that permanent establishment for the 2010-2011 income year or an earlier income year, then the Commissioner of Taxation will be precluded from raising an assessment. In this way, the Australian Government does not address the question of whether or not the fund has a permanent establishment and income of the fund is technically taxable in Australia, it simply uses administrative means to ensure that the foreign fund will not be required to pay tax in Australia on that income.
To give effect to this principle, it is proposed that a new Division 842 will be inserted into the Income Tax (Transitional Provisions) Act 1997.
Under this new Division the Commissioner is precluded from raising an assessment in respect of IMR income or an IMR loss of an IMR foreign fund in respect of the 2010-11 or earlier income year where:
- such fund had not lodged an income tax return in relation to that year; and
- the Commissioner has not, prior to 18 December 2010, made an assessment of the taxable income of the fund (or the trustee, where the fund is a trust).
An “IMR foreign fund” is an entity:
(a) that is a non-resident of Australia at any time during the income year;
(b) recognised under a foreign law as a collective investment vehicle;
(c) where members of the entity do not have day-to-day control of its operations;
(d) which does not carry on a trading business in Australia;
(e) which is widely held (as determined according to the “managed investment trust” definition in the Taxation Administration Act 1953); and
(f) not closely held (again, determined by reference to the “managed investment trust” definition).
“IMR Income” is assessable income attributable to a return or gain from a financial arrangement (as defined) which is treated as having a source in Australia by reason of being attributable to an Australian permanent establishment of the fund. An “IMR Loss” is the amount of the fund’s deductions for the income year to the extent to which they are attributable to gaining the fund’s IMR income.
The relief provided will not apply however if:
(a) the Commissioner is of the opinion that there has been fraud by the fund; or
(b) before 18 December 2010 the Commissioner notified the fund that an audit or compliance review would be undertaken.
For a foreign fund resident in a jurisdiction which has no double tax treaty with Australia, for example the Cayman Islands, the liability to taxation in Australia on revenue gains depends on the question of the source of the income, rather than the question of whether or not the fund has a permanent establishment in Australia. However, the exposure to Australian capital gains tax for such a fund is dependent on whether or not the fund has a permanent establishment in Australia. Therefore, this amendment may only provide limited certainty for funds in jurisdictions with which Australia does not have a double tax treaty. It is hoped that this position will be rectified when the proposed legislation is finalised.