On 7 March 2012 the Federal Government released a second exposure draft of legislation implementing the first and second elements of the Investment Manager Regime (IMR). This supersedes the first exposure draft, which was released on 16 August 2011 (and which was the subject of our legal update: Investment manager regime – draft legislation released).
The first stage of the IMR is comprised of 2 parts: the proposed ‘FIN 48’ measures (applying to income years up until 30 June 2011) and the proposed ‘conduit income’ measures (applying for the 2010-11 income year and later income years).
The FIN 48 and conduit income measures were first announced by the Federal Government on 17 December 2010 and 19 January 2011 respectively. A further announcement was made on 10 May 2011 which extended the operation of the FIN 48 measures by 1 year to 30 June 2011.
Submissions on the exposure draft legislation close on 4 April 2012.
‘Conduit income’ measures
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.
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- 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’.)
‘Fin 48’ measures
The FIN 48 amendments are intended to provide certainty of tax treatment for IMR Foreign Funds that have invested in Australia, where:
- The IMR Foreign Fund has not lodged a tax return for the 2010-11 or prior income years; and
- The Taxation Commissioner has not notified the IMR Foreign Fund before 18 December 2010 that an audit or compliance review will be undertaken.
Following consultation on the first exposure draft, the second exposure draft has been revised to clarify a number of points. Some of the points which apply to the FIN 48 exemption have been noted above in relation to conduit income. Specific revisions applicable to FIN48 include the following.
- It has now been clarified that the proposed exemption can apply regardless of whether the IMR Foreign Fund engaged an Australian intermediary (and thereby triggered the deemed source rules due to the presence of an Australian PE). Accordingly, in respect of portfolio interests (less than 10%), the FIN 48 rules applying to previous years should be equivalent to the proposed ‘Final IMR’ rules applying from 1 July 2011 (see below).
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- The definition of IMR Foreign Fund has been revised to remove unnecessary requirements for: (i) the entity to be recognised under a foreign law as a collective investment vehicle; and (ii) the members of the foreign entity to have day-to-day control.
‘Final IMR’ measures
On 16 December 2011 the Federal Government announced the final element of the IMR. Draft legislation has not yet been introduced in relation to these proposals. It is expected that, when such draft legislation is released, there will be a better appreciation of the ambit of this final element.
The proposed rules are to apply from 1 July 2011.
The key reforms to be introduced under these proposals are as follows.
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- Income, gains or losses, which have an Australian source, from portfolio interests or financial arrangements of a foreign managed fund, will be excluded from the calculation of the foreign fund's taxable income (and that of its non-resident investors). The exemption will not apply to:
- the extent that withholding tax or amounts (on interest, dividends, royalties and MIT fund payments) is currently payable on the income; or
- income or gains from an interest in taxable Australian property, other than a portfolio interest in a publicly traded company.
- The extension of the conduit income IMR rules so that they apply not only to portfolio interests (ie less than 10%) but also to non-portfolio interests (ie 10% or more) in non-Australian assets. The proposed exemption will apply to income, gains or losses from non-portfolio investments, which would otherwise be foreign sourced if the foreign fund were not using an Australian intermediary.
- The exemption will be restricted to foreign managed funds domiciled in countries that are recognised by Australia as engaging in effective exchange of information.