Australia: Australian Tax Update - Recent Reforms Proposed in Australia: Managed Investment Funds

Last Updated: 1 February 2011
Article by Jock McCormack and Anshu Maharaj

Recent Developments Including Cases in Australia impacting Managed Investment Funds, Collective Investment Vehicles, Trusts and Disclosure of Uncertain Tax Positions (Fin 48)


In a speech given by the Assistant Treasurer, The Hon Bill Shorten MP, at an Australian Chamber of Commerce gathering in Hong Kong on 19 January 2011, he stated that Australia is in the process of creating 'a level playing field' in respect of financial services, particularly funds management.

 In creating such 'a level playing field' (ie a more competitive environment to attract global business and promote specialist financial services), there have been several important tax reviews/reforms recently announced or progressed in Australia such as:

  • the proposed reform and expansion of Collective Investment Vehicles (CIVs);
  • the re-write of the existing trust law provisions;
  • "reforms to encourage foreign managed funds to use Australian based fund managers – as part of the Investment Manager Regime (IMR) reforms; and
  • reforms to address the Fin 48 issue (uncertain tax positions).

 These reviews/reforms are outlined in more detail below.

Two key cases – Trusts tax concepts including fixed trusts, fixed entitlement and trust continuity

 There have been two recent cases considering important trust related tax issues - Colonial First State Investments Limited v Commissioner of Taxation [2011] FCA 16 (18 January 2011) (CFS' case) and FCT v Clark [2011] FCAFC 5, Full Federal Court 21 January 2011 (Clark's case).

 In CFS's case, Stone J made comments in respect of various trust tax issues including the income of the trust estate, share of income, fixed trusts, fixed entitlements and present entitlement. However, this case was decided in respect of its special facts and the dispute was heard in relation to a private binding ruling application made to the Commissioner where the dispute was confined to the questions asked as part of the ruling process. Accordingly, we would not expect the comments made in this case to form authoritative guidelines in respect of these trust tax issues. However taxpayers are on notice regarding the dangers of not satisfying the strict 'fixed trust' and 'fixed entitlement to the income and capital of the trust' requirements relevant for preserving trust losses and scrip for scrip rollover relief.

 In Clark's case, the Commissioner argued that there had effectively been a resettlement of the trust and therefore earlier capital losses could not be offset against realised capital gains. The majority of the Full Federal Court disagreed with the Commissioner and held that there had been a continuity of the trust.

 In particular, the majority referred to the High Court's decision in FCT v Commercial Nominees of Australia Ltd (2001) 47 ATR 220 and stated 'there had to be a continuum of property and membership, which could be identified at any time, even if different from time to time...In the present case, the Commissioner never contended, nor on the evidence could he, that there was a severance in the continuum of trust property and objects of the CU Trust. Their identity changed from time to time, but not their continuum' – refer to paragraph 87 of the decision.

Review of CIVs

 The Board of Taxation at the request of the Australian Government is currently reviewing the tax arrangements applying to CIVs vehicles including considering the following:

  • assessing the tax treatment of CIVs, having regard to the new managed investment trust (MIT) tax framework including whether a broader range of tax flow through vehicles should be permitted;
  • considering the nature and extent of, and reasons for, any impediments to investment into Australia by foreign investors through CIVs;
  • considering the benefits of extending tax flow through treatment for CIVs;
  • examining the treatment of Venture Capital Limited Partnership (VCLP) vehicles in a way that recognises its policy objectives;
  • review of the other CIV vehicles currently utilised in Australia (such as limited partnerships (LP) and Listed Investment Companies (LIC)) in light of the overall review of the CIV arrangements.

 We note the key policy objective underlying the establishment of the VCLP regime was to encourage foreign investment into the venture capital industry at the seed, early and expansion stages where there was pre-existing lack of foreign investment. However, the Board of Taxation notes that the VCLP regime is not currently widely used (as at September 2010 only 33 active registered VCLPs) due to the restrictive nature of the regime. A number of submissions have been previously made to the Board of Taxation in order to reform the VCLP regime – such as deemed capital account treatment for VCLP domestic limited partners, expanding the list of permitted investments, removing the $250M threshold limit etc. The Board of Taxation is also reviewing the LP and LIC regimes as part of their review of the CIV arrangements. In particular, they are seeking comments in respect of the following issues:

 In respect of LPs:

  •  what changes could be made to the limited partnership regime to provide for an appropriate LP CIV;
  • whether LPs are suitable vehicles for widely held, primarily passive, collective investments;
  • whether it is desirable to introduce changes to the LP regime, so that flow-through taxation is allowed for those idely held LPs that restrict their investment activities to primarily passive investments;
  • if flow-through were allowed for LPs marketed at the wholesale level or for sophisticated investors that restrict their investment activities to primarily passive investments, would it be appropriate not to require these LPs to be 'widely held' (as defined in the MIT regime)? What would be the rationale for allowing this when compared to MITs which are required to be widely held; and
  • apart from limiting the flow-through of losses, would there be a need, in light of integrity and investor protection considerations, to apply further restrictions to that modified LP regime? If so, what would be the nature of those restrictions?

 In respect of LICs:

  • whether the existing definition of LIC capital gains should be restricted to gains made on direct investments only and whether there are reasons to extend this definition to include all gains made in respect of permitted investments by LICs;
  • whether it is desirable to introduce further changes to the LIC regime to better obtain parity of tax outcome with direct investments in the underlying assets of the LIC?
  •  should an amended collective investment company regime be limited to listed vehicles or applied more broadly including other widely held non-listed investment companies defined in a similar way as the widely held rules for MITs;
  • instead of amending the LIC regime, should a new corporate CIV regime be introduced that provides parity of tax outcome with direct investments and how would that regime operate?
  • is there a trade-off between preserving character and source of income and simplifying distribution statements for investors that are more familiar with a dividend distribution statement? Are there minimal tax outcomes that would meet non-resident investor expectations without requiring complete tax flowthrough? Is there any way to preserve character and source of income under a new corporate CIV regime?

 As part of their review, the Board of Taxation has released a Discussion Paper in December 2010 and has requested submissions in respect of CIVs including the VCLP regime by 28 February 2011.

Rewrite of the trust laws

The Assistant Treasurer released a media release on 16 December 2010 announcing the re-write of the existing trust law provisions (currently in Division 6 of the Income Tax Assessment Act 1936) to address the major uncertainties that currently exist in respect of trusts; as highlighted in the decision of Federal Commissioner of Taxation v Bamford (2010) 240 CLR 481. There will be a public consultation process implemented before the rewrite and the initial consultation paper is proposed to be released in the early part of this year.

 Investment Manager Regime (IMR)

The Assistant Treasurer also recently issued a media release on 19 January 2011 to announce changes to the income tax treatment of investment income of foreign managed funds which will make it more attractive for foreign based funds to use Australian based fund managers.

The media release provides that to the extent that income from relevant investments of a non-resident is taxed only because the foreign managed fund is taken to have a 'permanent establishment' in Australia, that income will be exempt from income tax. 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 (eg the use of Australian based fund managers). The Government has announced that these amendments will generally apply from 1 July 2010.

The precise boundaries and application of this reform is unclear at this time and we must await the release of the relevant legislation before providing more specific advice.

 Fin 48 Issue – Uncertain tax positions

Further, the Assistant Treasurer issued a media release late last year (17 December 2010) to provide certainty of tax treatment for foreign managed funds that have invested in Australia to address the Fin 48 issue. In particular, 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 Tax 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. These amendments will apply from 17 December 2010.

© DLA Phillips Fox

DLA Phillips Fox is one of the largest legal firms in Australasia and a member of DLA Piper Group, an alliance of independent legal practices. It is a separate and distinct legal entity. For more information visit

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances.

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