Certain returns and gains of eligible foreign funds – ie IMR foreign funds – will be treated as non-assessable non-exempt income, or disregarded where the fund does not have a place of business in Australia but is treated as having a permanent establishment in Australia solely as a result of engaging an Australian-based investment manager who habitually exercises authority to negotiate and conclude contracts on behalf of the fund.
The draft legislation is based on the Federal Government's announcement on 19 January 2011. It delivers 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.
While the relief from Australian tax is quite specific and narrow, it will alleviate some concerns of foreign funds using Australian-based investment managers.
We expect the proposed legislation to progress and be passed into law in the coming months and will apply to the 2010/ 2011 income tax year and later years.
Other countries including the UK, Hong Kong and Singapore have comparable IMRs.
These proposed changes apply to exclude certain returns and gains from the calculation of an entity's taxable income (either at the fund level or at the beneficiary/ partner/member level if the fund is a transparent entity) where the following conditions are satisfied:
- the entity is an IMR foreign fund or the trustee of an IMR foreign fund; and
- the entity does not have a place of business in Australia, but is treated as having a permanent establishment in Australia solely as a result of engaging an Australianbased investment manager who habitually exercises a general authority to negotiate and conclude contracts on behalf of the entity.
In calculating the entity's taxable income, the following amounts are excluded:
- returns or gains relating to certain investments (referred to as 'IMR income') will be treated as non-assessable non-exempt income;
- deductions and losses relating to certain investments (referred to as 'IMR losses') are disregarded; and
- capital gains and losses relating to certain investments (referred to as 'IMR capital gains' and 'IMR capital losses', respectively) are also disregarded.
IMR foreign fund
An entity is an IMR foreign fund if:
- the entity is a non-resident of Australia;
- the entity is recognised under a foreign law as a collective investment vehicle (eg a company, trust, limited partnership or Common Contractual Fund);
- the members of the entity do not have day-to-day control over the operations of the entity;
- the entity does not carry on a trading business in Australia as defined in section 102M of the Income Tax Assessment Act 1936 (this provision generally prevents entities from carrying on an 'active' trading business other than trading in financial arrangements); and
- subject to the winding down provisions, the entity is widely held and not closely held. The widely held and closely held rules are based on the current Management Investment Trust provisions, which have been modified for these purposes.
Date of effect
These proposed changes are to apply to assessments for the 2010-11 income year and later income years.
Fin 48 Issue – un certain tax positions
Broadly, these proposed changes intend to provide certainty of tax treatment for foreign funds that have investments in Australia to address the Fin 48 issue. Where a foreign managed fund has not lodged a tax return for the 2010/11 or prior income years in respect of certain investment income of the fund, the Australian Tax Office (ATO) 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 proposed changes apply to provide an exemption to an IMR foreign fund from an assessment by the ATO in relation to certain amounts where the following conditions are satisfied:
- the income year is 2010/11 income year or an earlier income year;
- the fund has IMR income or IMR loss;
- the fund has not lodged an income tax return in relation to the income year or any previous income year; and
- the ATO has not made an assessment of the income of the fund (if a corporate tax entity) or trustee (if a trust) before 18 December 2010.
However, the exemption does not apply where:
- the ATO is of the opinion that there has been fraud by the IMR foreign fund; or
- before 18 December 2010, the ATO has notified the IMR foreign fund that an audit or compliance review would be undertaken.
We note that a similar exemption is included for beneficiaries and partners of IMR foreign funds who are non-Australian residents.
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