Australia: Investment manager regime – draft legislation released


FIN 48 created a headache both for the offshore funds industry and the Australian Government as it saw many overseas investment funds shy away from Australian investments and the use of Australian investment intermediaries due to uncertainties in the application of Australia's tax laws.  In December 2010, the Assistant Treasurer announced that amendments to Australia's tax laws (known as the "Investment Manager Regime") would be introduced so as to address this issue.  Further announcements regarding this issue and the measures to address it were made in January and May 2011.

On 16 August 2011 the Government released exposure draft legislation to implement the Investment Manager Regime in two parts.  The first part applies to income years up until 30 June 2011 (the "FIN 48" measure) and the second applies from 1 July 2011 (the "conduit income" changes).  Further refinements may be expected following the Board of Taxation's final report on the Investment Manager Regime, now expected on 30 September 2011.

What is FIN 48?

US Financial Accounting Standards Board Interpretation Number 48 - or FIN 48 - has, since December 2008, required an investment fund adopting US GAAP accounting standards to report "uncertain tax positions" in its financial statements.  A fund's value must then be reduced in its financial statements in accordance with the extent of the possible tax bill and the probability of the taxes being collected.

Why is FIN 48 a problem for funds investing in Australia?

Foreign funds trying to comply with FIN 48 have realized the uncertainty of Australia's tax rules. The Australian Financial Centre Forum's report on Australia as a Financial Centre (the Johnson Report).
reported that there are several causes of uncertainty:

  • Residency rules.  A foreign investment fund can be considered resident in Australia (and therefore taxable in Australia) if it carries on business in Australia and has its central management and control in Australia.  The location of "central management and control" can be nebulous, particularly in the modern day environment of virtual meetings.
  • Source rules.  This is particularly relevant for funds resident in jurisdictions with no double tax treaty with Australia as these funds will generally only be subject to taxation in Australia on Australian-sourced income and on capital gains attributable to a permanent establishment in Australia.  However, the source rules rely on case law and are difficult to apply with certainty to any given fact scenario.
  • Whether the fund has a permanent establishment in Australia.  If so, then under Australia's double tax treaties, this would generally entitle Australia to tax all gains attributable to that permanent establishment.  It is a question of degree as to whether the use of an Australian fund manager, adviser or other intermediary means that the foreign investment fund has a permanent establishment in Australia.

Accordingly, to comply with FIN 48, a foreign investment fund may need to conclude in its financial statements that all or some gains are potentially taxable in Australia and it must then measure  the potential taxation liability depending on the likelihood of the taxes being recovered.  This is naturally an undesirable outcome with the potential to deter  foreign investment funds investing in Australia or shy away from appointing an Australian manager.

What is the Australian Government's solution?

The Australian Government has announced legislative changes to address the uncertainty arising out of the use by foreign funds of Australian intermediaries.  The changes ensure that the use of Australian intermediaries will not of itself give rise to the foreign fund having a permanent establishment in Australia.

The FIN 48 changes

The FIN 48 changes were originally announced to address the uncertainty arising out of the use by foreign funds of Australian intermediaries for taxation years up to and including the 2009-2010 tax year.  In May 2011 it was announced that this temporary fix would extend to the 2010-2011 tax year.  

The basic premise is that, if a foreign fund is using an Australian fund adviser, manager or other intermediary, and therefore a question arises as to whether or not it may have a permanent establishment in Australia, but it has not lodged an income tax return in Australia in respect of income attributable to that permanent establishment for the 2010-2011 income year or an earlier income year, then the Commissioner of Taxation will be precluded from raising an assessment.  In this way, the Australian Government does not address the question of whether or not the fund has a permanent establishment and income of the fund is technically taxable in Australia, it simply uses administrative means to ensure that the foreign fund will not be required to pay tax in Australia on that income.

To give effect to this principle, it is proposed that a new Division 842 will be inserted into the Income Tax (Transitional Provisions) Act 1997.

Under this new Division the Commissioner is precluded from raising an assessment in respect of IMR income or an IMR loss of an IMR foreign fund in respect of the 2010-11 or earlier income year where:

  • such fund had not lodged an income tax return in relation to that year; and
  • the Commissioner has not, prior to 18 December 2010, made an assessment of the taxable income of the fund (or the trustee, where the fund is a trust).

An "IMR foreign fund" is an entity:

(a) that is a non-resident of Australia at any time during the income year;
(b) recognised under a foreign law as a collective investment vehicle;
(c) where members of the entity do not have day-to-day control of its operations;
(d) which does not carry on a trading business in Australia;
(e) which is widely held (as determined according to the "managed investment trust" definition in the Taxation Administration Act 1953); and
(f) not closely held (again, determined by reference to the "managed investment trust" definition).

"IMR Income" is assessable income attributable to a return or gain from a financial arrangement (as defined) which is treated as having a source in Australia by reason of being attributable to an Australian permanent establishment of the fund.  An "IMR Loss" is the amount of the fund's deductions for the income year to the extent to which they are attributable to gaining the fund's IMR income.

The relief provided will not apply however if:

(a) the Commissioner is of the opinion that there has been fraud by the fund; or
(b) before 18 December 2010 the Commissioner notified the fund that an audit or compliance review would be undertaken.

For a foreign fund resident in a jurisdiction which has no double tax treaty with Australia, for example the Cayman Islands, the liability to taxation in Australia on revenue gains depends on the question of the source of the income, rather than the question of whether or not the fund has a permanent establishment in Australia.  However, the exposure to Australian capital gains tax for such a fund is dependent on whether or not the fund has a permanent establishment in Australia. Therefore, this amendment may only provide limited certainty for funds in jurisdictions with which Australia does not have a double tax treaty. It is hoped that this position will be rectified when the proposed legislation is finalised.

The Conduit Income Changes

In January 2011 the Assistant Treasurer announced the "conduit income" changes to apply from 1 July 2011 where IMR foreign funds using Australian fund managers would not be subject to adverse tax consequences (see our legal update: New tax exemption for foreign funds using Australian investment managers).

The principle behind the conduit income changes is that a foreign fund's liability to taxation in Australia should not depend on whether or not it uses an Australian intermediary or a foreign intermediary.  An IMR foreign fund will therefore be exempt from Australian taxation on relevant investment income where it is taken to have a 'permanent establishment' in Australia only because it engages an Australian based investment manager.  Australia will only tax the fee for services provided by the Australian intermediary.

The amendments will cover the income, gains and losses arising from the following foreign investments by IMR foreign 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;
  • 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).A new Subdivision 842-I is intended to be inserted into the Income Tax Assessment Act 1997.  

Without the proposed relief being provided, the activities of the Australian investment manager could result in the fund being treated as having a permanent establishment in Australia so as to result in profits from investments managed by the Australian investment manager being subject to Australian tax.

If the foreign fund had a permanent establishment, apart from the activities of the Australian investment manager (eg. if it maintained a branch in Australia), it will continue to be subject to Australian tax on profits attributable to that branch. In addition, amounts subject to Australian withholding tax will not be eligible for exemption.

Although it is intended that the relief from Australian tax provided applies at either the fund level or at the beneficiary/partner/member level (where the fund is treated as transparent for tax purposes), it would not provide relief to an Australian resident taxpayer who is a beneficiary/partner/member of that fund.  Such resident beneficiaries/partners/members will remain taxable on their share of net income from the fund.


As identified above, there are a number of uncertainties in the application of Australia's taxation laws to foreign funds, and the Investment Manager Regime addresses some, but not all of them.  One of the challenges in applying the proposed new rules is qualifying the foreign fund under the widely held tests, in particular where a foreign manager uses multiple feeder funds.  Notwithstanding the challenges, the changes bring Australia closer in line with other key financial services centres and should remove a major hurdle preventing foreign funds from appointing Australian advisors.  

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.