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 16/12/2011

NO.168

Government Announces Final Element of Investment Manager Regime

Australia will aim to attract more foreign capital after the Government announced it would implement the third and final element of an investment manager regime (IMR), which was a key recommendation of the Johnson Report.

This announcement is the next step in building Australia's reputation as a financial services centre. It will be backdated to 1 July 2011.

The Minister for Financial Services and Superannuation, Bill Shorten, said "The IMR will provide certainty of tax treatment for the funds management sector, which in Australia has $1.8 trillion of funds under management (or 131 per cent of Australia's GDP) - $61 billion of which comes from offshore, and will further enhance Australia as a financial services centre in the Asia Pacific region."

The announcement means 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 fund's taxable income (and that of its non-resident investors).

The exemption will not apply to the extent that withholding tax is currently payable on the income. Furthermore, the exemption will not cover income or gains from an interest, other than a portfolio interest in a publicly traded company, in taxable Australian property.

The exemption will be restricted to foreign managed funds domiciled in countries that are recognised by Australia as engaging in effective exchange of information.

Mr Shorten said "Tax havens need not apply."

The third element of the IMR has been the subject of a Board of Taxation review. The Board's report - Review of an Investment Manager Regime as it relates to Foreign Managed Funds - can be found on the Board's website at www.taxboard.gov.au. The Government's response to the Board's recommendations can be found in the attachment.

Legislation for the first two stages of the IMR, announced in December 2010 and January 2011 respectively, is currently being finalised and is expected to be introduced into Parliament in the first half of 2012.

"I am announcing that, as recommended by the Board of Taxation, the Government has decided to extend the previously announced element 2 (which exempts from Australian tax the conduit income of foreign funds portfolio investments) to foreign non-portfolio investments of managed funds."

"The implementation of the IMR for managed funds ensures that Australia's taxing arrangements with regards to passive portfolio investments are in line with international norms and will make Australia a more attractive place to do business for foreign funds", Mr Shorten said.

The Government will consult extensively with industry and tax professionals on the development of the legislation to implement the final element of the IMR.

16 December 2011


Attachment

Government's response to recommendations of the Board of Taxation in its report - Review of an Investment Manger Regime as it relates to Foreign Managed Funds

  Board of Taxation's Recommendation Government response
1 The Board recommends that an IMR for foreign managed funds should be implemented using an exemption style approach The Government supports this recommendation.
2 The Board recommends the scope of the IMR for foreign managed funds should cover a broad set of collective investment vehicle (CIV) structures, including common contractual arrangements, and should not be limited to particular types of legal entity The Government supports this recommendation.
3 The Board recommends that:
  • foreign managed funds covered by the IMR should not be an Australian resident;
  • the operation of Australia's residence test be modified, only for the purposes of the IMR, such that a foreign managed fund will be deemed not be an Australian resident if the only reason it would be an Australian resident is because it uses an Australian intermediary;
  • the residence test for limited partnerships be amended, only for the purposes of applying the IMR, such that a limited partnership will be taken to be an Australian resident if the partnership is formed in Australia or the partnership carries on a business in Australia and has its central management and control in Australia;
  • the Government investigate whether the amendment to the resident test for limited partnerships should apply for all limited partnerships in the general tax law;
  • the general residence tests for trusts should be applicable in testing whether a trust is not a resident of Australia for the purposes of accessing the IMR for foreign managed funds;
  • a foreign managed fund eligible for the IMR under the modified residence test should be taken not to be an Australian resident for the purposes of applying all provisions in the tax law;
  • a foreign managed fund should not be taken to have a permanent establishment in Australia if the only reason it would have a permanent establishment is because it uses an Australian intermediary; and
  • the Government consider whether there should be consistent permanent establishment and residence tests for income tax and GST purposes, but only for the purpose of applying to foreign managed funds under the IMR.

The Government supports the recommendation that foreign managed funds covered by the IMR should not be an Australian resident.

The Government will consider the other matters covered in this recommendation following consultation on draft legislation to implement the IMR.

4

The Board recommends;

  • a widely held requirement be included as part of the eligibility criteria for foreign managed funds to access the IMR;
  • the widely held test should be able to look through direct investors in the foreign managed fund to assess whether the fund is widely held; and
  • the look through rules for the widely held test should be as simple as possible.
The Government supports this recommendation.
5 The Board recommends that foreign managed funds covered by the IMR should not carry on or control a trading business in Australia as defined in Division 6C of Part III of the ITAA 1936 The Government supports this recommendation.
6 The Board recommends that foreign managed funds covered by the IMR should not be subject to a ‘managed in Australia' requirement The Government supports this recommendation.
7

The Board recommends that:

  • the tax exemption provided under an IMR should be restricted to the disposal of investments that are of a portfolio nature;
  • the IMR exemptions should only extend to a prescribed list of eligible investments made by the foreign managed fund;
  • transactions in land, including transactions that result in the acquisition of land, should be excluded from the prescribed list of eligible investments. However the Government should consider allowing certain land related futures and options contracts to be part of the prescribed list eligible investments where they relate to a publicly quoted index;
  • portfolio investments in Australian entities which are listed on an Australian stock exchange should be included in the prescribed list of eligible investments, regardless of whether or not those entities are land rich;
  • portfolio investments in Australian entities which are not listed on an Australian stock exchange should only be included in the prescribed list of eligible investments where those entities are not land rich; and
  • withholding taxes should continue to apply to payments of interest, dividends, royalties and MIT fund payments paid to foreign managed funds on their Australian investments
The Government supports this recommendation other than that the IMR exemption should only extend to a prescribed list of eligible investments made by the foreign managed fund.  The Government will consider this matter following consultation on draft legislation to implement the IMR.
8 The Board recommends that a gain made by a foreign managed fund from the disposal of a non‑portfolio investment in non‑Australian assets (that is, conduit income) should not be subject to Australian tax if the only reason it is subject to Australian tax is because it uses an Australian intermediary The Government supports this recommendation.
9 The Board recommends that income derived by Australian investors from a foreign managed fund is not made exempt merely by virtue of the income being treated as exempt for the foreign managed fund under the IMR The Government supports this recommendation.
10

The Board recommends that:

  • integrity rules should not be introduced into the IMR for foreign managed funds to address deferral of taxation that would operate in addition to Australia's foreign source income attribution rules;
  • the Government consider whether any unique deferral opportunities arise from the design of the IMR and take this into account in the final design of the foreign source income attribution rules to ensure that any potential for such deferral is adequately addressed prior to the finalisation of those rules; and
  • that a post implementation review of the operation of the foreign source income attribution rules and the IMR for foreign managed funds following their introduction into law
The Government supports this recommendation.
11

The Board recommends that:  

  • foreign managed funds should be required to be resident of an information exchange country as a prerequisite for accessing the IMR;
  • foreign managed funds should lodge an annual information return with the Australian Taxation Office within six months of the end of the fund's accounting year, and that failure to do so would make the fund ineligible for the IMR for that income year;
  • the Commissioner of Taxation should be given a power to exercise discretion in extending the time in which the foreign managed fund can lodge its information return;
  • the information required to be disclosed in the annual information return should be further developed by the ATO and Treasury;
  • the required content of the information return be set out in regulations to the tax law; and
  • in developing the required content for the information returns, the ATO and Treasury should take into account the following principles:
  • the information should assist the ATO in identifying whether the foreign managed fund complies with the IMR eligibility requirements;
  • the information should be readily obtainable by the foreign managed fund; and
  • the information should not place overly burdensome or impractical reporting obligations on foreign managed funds
The Government supports this recommendation.
12

The Board recommends that:

  • no further measures should be incorporated into an IMR to ensure the appropriate taxation of Australian intermediaries;
  • Australia's transfer pricing rules should continue to operate where appropriate to tax Australian intermediaries on their arm's length fees for services provided to foreign managed funds;
  • the Government investigate whether there is a problem in the operation of the arm's length test within the transfer pricing rules, and if so, that any appropriate amendments be made; and
  • the ATO take into account a potential increase in APA applications following the introduction, and that it accords appropriate priority to this area in its allocation of resources

The Government will consider the recommendation that no further measures should be incorporated into an IMR in order to ensure the appropriate taxation of Australian intermediaries following consultation on draft legislation to implement the IMR.

The Government supports the recommendation that Australia's transfer pricing rules should continue to operate where appropriate to tax Australian intermediaries on their arm's length fees for services provided to foreign managed funds.

The Government will consider, as part of its review of the transfer pricing rules, the recommendation that it investigates the operation of the arm's length test within the transfer pricing rules.