The Government has today addressed a key area of investment uncertainty for US-based fund managers investing in Australia, by announcing a clear plan to deal with the "Fin 48" issue.
Assistant Treasurer Bill Shorten said "The Government's timely and decisive action will improve Australia's standing as a financial services centre."
US-based fund managers investing in Australia may be adversely affected by the recent application of certain US accounting rules to managed funds, widely referred to as 'FIN 48'. Under these rules, funds are required to make disclosures in their financial accounts in relation to uncertain tax positions, including for prior income years.
While those rules do not directly affect Australian tax outcomes, dealing with the requirements has underlined to foreign investors the uncertainty of Australia's tax rules, as identified in the Australian Financial Centre Forum Report, Australia as a Financial Centre: Building on our Strength (the 'Johnson Report'). The Government's actions today will act to improve investor certainty in relation to past transactions, where the impact of the accounting rules is greatest.
The Government will introduce amendments to the income tax laws to provide certainty of tax treatment for funds that have invested in Australia. Where a foreign managed fund has not lodged a tax return for the 2009-10 or prior income years in respect of certain investment income of the fund, the Australian Taxation Office will not be permitted to raise an assessment in respect of that income, except where the fund lodges a tax return disclosing such income. The amendments will take effect from today.
The Johnson Report found that the lack of certainty and consistency of the tax treatment of cross-border financial transactions meant that potential financial transactions, investment flows and new business opportunities are driven away from Australia.
"I will 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," Mr Shorten said.
In a further development, the Board of Taxation is today releasing a discussion paper that includes consultation on tax arrangements applying to collective investment vehicles. This consultation process is an important step in the Board of Taxation progressing other key aspects of the Johnson report recommendations.
17 December 2010
Attachment
Amendments to clarify the treatment of past investments of foreign managed funds
In order to improve investor certainty regarding the tax treatment of past investments by foreign managed funds, the Government is proposing amendments to the income tax laws, which will apply to a foreign fund (or relevant taxpayer, including trustee or investor of the fund) that has not lodged an Australian tax return for 2009-10 or prior income years in respect of the relevant income, gains or losses of the fund.
Under the amendments, the Commissioner is not permitted to raise an assessment in respect of the relevant income, gains or losses of the particular foreign managed fund. These amendments will apply from today.
These amendments will not apply to the extent a foreign fund (or relevant taxpayer) has been notified of an audit or a compliance review. In such cases, the Commissioner's ability to raise an assessment in respect of the relevant income, gains or losses will be unaffected. The amendments will also not apply to the extent the relevant income, gains or losses are derived by a resident investor.
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; and
- 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 and no‑trading 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; and
- 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).