The proposed FAF rules were introduced as part of a wider
package of reforms to Australia's foreign-source income
attribution rules that were announced in May 2009 Federal
Interestingly, it's predecessor provision, the Foreign
Investment Fund (FIF) rules have already been
repealed and no longer applies from 1 July 2010.
On 17 February 2011 the Assistant Treasurer released for public
consultation the second exposure draft legislation on the FAF rules
with submissions sought by 18 March 2011.
The main features of the proposed FAF rules as contained in the
exposure draft legislation are as follows:
The FAF rule applies to a resident investor that holds an
interest in a FAF at the end of the FAF's accounting
A FAF is a trust or company that is not a resident of
In addition the FAF must meet both of the following
Investment. The market value of all debt instruments held by the
FAF comprises 80% or more of the total assets the FAF, at the end
of the accounting period; and
Accumulation. This requirement is met if the FAF does not
distribute 80 per cent or more of its realised profits and gains
and so much of its unrealised profits and gains held in entities it
controls and is realised in those entities.
A foreign fund that does not satisfy either the Investment
requirement or the accumulation requirement will not be treated as
The notes accompanying the exposure draft indicate that
"debt interests" are designed to capture returns that are
interest like and are not linked to the performance of the
Subject to the final legislation, it possible that foreign funds
that invest predominately in equities may not be caught by these
Where an individual is caught by the FAF rules, they will
subject to Australian tax on an accruals basis:
The calculation will be based on the change in market value of the
interest in the FAF plus distributions from the FAF.
The current exemption in respect of temporary residents will
continue to apply.
The FAF rules will not apply to complying Australian
Proposed administrative treatment by the Australian Taxation
On 1 June 2011, the ATO announced that it will accept tax
returns as lodged during the period up until the proposed law
change is passed by Parliament.
After the new law is enacted, the ATO has indicated that
taxpayers will need to review their position for the income year
commencing 1 July 2011.
Those taxpayers who returned income in accordance with the
changes do not need to do anything more.
Those taxpayers who returned more income than they were
required to can seek an amendment and if a reduction in liability
results, interest on overpayment will be paid.
Those taxpayers who returned less income than required by the
changes will need to seek amendments. No tax shortfall penalties
will be applied and any interest accrued will be remitted to the
base interest rate up to the date of enactment of the law change.
In addition, any interest in excess of the base rate accruing after
the date of enactment will be remitted where taxpayers actively
seek to amend assessments within a reasonable timeframe after
We are now faced with a rather bizarre scenario:
How do you provide advice in respect of a law that may never
see the light of day in its current format;
Who is responsible for the additional compliance costs faced by
individuals as a result of the delay in enacting the FAF
Please contact Michael van Schaik, Associate Director,
Employment & Remuneration Services. Phone: +61 (0) 3 8635
Exemptions or concessions on stamp duty could apply when contemplating the purchase or transfer of NSW real estate.
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