The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
Picture of Bill Shorten

Bill Shorten

Minister for Financial Services & Superannuation

14 September 2010 - 1 July 2013

Media Release of 19/01/2011


Investment Manager Regime

Australian fund managers will welcome the Federal Government's announcement today of changes to the income tax treatment of investment income of foreign funds, which will make it more likely foreign-based funds will use Australian-based fund managers.

Under the change, income from relevant investments of a foreign fund, that is taken to have a 'permanent establishment' in Australia, will be exempt from income tax. The change will apply to the 2010-11 and later income years.

Assistant Treasurer and Minister for Financial Services and Superannuation, Bill Shorten said "This change uses an Investment Manager Regime (IMR) framework to provide an exemption for offshore funds engaging domestic investment advisers. This change is an important step towards improving Australia's international standing as a financial services centre."

The change will align Australia's taxing rules with international practice, such as the United Kingdom's Investment Manager Exemption. The Assistant Treasurer said that the proposed amendments will help ensure Australia has a strong, competitive financial services industry.

The change addresses a key finding of the Johnson Report — that the tax law discouraged the use of Australian based investment advisers. Currently, Australia's taxing rules not only tax the fees earned by the intermediary, but can potentially tax the investment income of the fund even when the investor has no real presence in Australia. This places Australian fund managers at a disadvantage to foreign funds to the extent engaging a foreign fund manager would result in the investment income of the fund not being taxed.

The change announced today follows the Assistant Treasurer's announcement of December 2010 to amend the income tax laws to address concerns of foreign funds following the application of US accounting rules widely referred to as 'FIN 48'.

The Assistant Treasurer said that the Government would consult closely with the Financial Centre Taskforce (formerly the Australian Financial Centre Forum) and industry representatives in designing legislation to implement these changes, including appropriate integrity rules.

The Board of Taxation will continue to progress other aspects of the Johnson IMR recommendation. Its report to Government is due by 31 December 2011.

Further details of the changes are contained in the attachment below.

19 January 2011


Amendments where a foreign managed fund has a permanent establishment in Australia

These amendments are designed to address the situation where a foreign managed fund is taken to have a permanent establishment in Australia because of an Australian intermediary that is a dependent agent, branch or subsidiary of the foreign fund. In this case, potentially all or a part of the investment income (including capital gains) of the foreign fund may become attributable to the permanent establishment and be subject to tax.

Had the foreign fund engaged a foreign fund manager, no Australian tax would have applied to the investment income of the fund, except to the extent that income was otherwise taxable (for example, because it was sourced in Australia).

The Government is proposing amendments to the income tax law, applying from the 2010-11 and later income years, which will provide that to the extent the relevant investment income of a non-resident is taxed only because a foreign managed fund is taken to have a 'permanent establishment' in Australia, that income will be exempt from income tax.

Australia will only tax the arm's length fee for services provided by the Australian intermediary.

Meaning of foreign managed fund

A foreign managed fund broadly has the following features:

  • Not an Australian tax resident
  • Widely held (and not closely held)
  • Undertakes passive investment
  • Does not carry on or control a trading business in Australia.

While the specific definition of foreign managed fund will be developed in consultation with industry stakeholders, aspects of the proposed definition are already features of the law, for example the managed investment trust rules already contain widely held requirements.

Relevant investment income

The amendments cover the income, gains and losses arising from the following investments by foreign managed funds:

  • Portfolio interests in companies (including companies listed on the Australian Securities Exchange), portfolio interests in other entities (including units in a unit trust) and bonds, except to the extent the amount gives rise to a withholding tax liability
  • Financial arrangements (for example, derivatives) and foreign exchange transactions, except to the extent they are in respect of an underlying interest that is otherwise taxable (such as taxable Australian property).