Australia: The Investment Manager Regime – calling all foreign funds!

Last Updated: 18 January 2012
Article by Kirsten Fish

Key Points:

The Government has released its response to the Board of Taxation's report on Australia's Investment Manager Regime, and has announced the third and final element to its implementation.

A key finding of the 2009 Johnson Report (Australia as a Financial Centre – Building on our Strengths) was that perceived uncertainties in Australia's tax law discourage foreign managed funds from investing in Australia and using Australian-based intermediaries.

In particular, Australia's residency, source and permanent establishment (PE) rules can operate such that tax may be imposed on the investment income of foreign managed funds who engage Australian advisers – including where the fund has no real presence in Australia.

Announced by the Government in three stages, the introduction of an Investment Manager Regime (IMR) is intended to create certainty and thereby encourage greater cross-border investment activity and stimulate the growth of the Australian financial services sector.

The first element – targeting "FIN 48"

The United States' FIN 48 accounting rule requires identification and disclosure of uncertain tax positions, consideration of the technical merits of those positions, and provisions for tax liabilities if it is more likely than not that tax will be payable.

As a result of this requirement, and due to the perceived uncertainties in the Australian tax treatment of certain investments, many US-based funds began making provisions for potential Australian tax liabilities – resulting in a decline in their net asset values and unit redemption price. The interplay between the US accounting requirements and the Australian tax laws was discouraging investment in and through Australia.

In December 2010 the Government sought to address this issue announcing stage 1 of the IMR, proposing to amend the law to prohibit the Commissioner of Taxation from assessing certain widely held foreign funds on gains from portfolio investments (ie interests <10%) and income from certain derivatives. Once enacted, the Fin 48 measures will apply for the 2010-11 and prior income years.

The second element – Conduit Income Measure

While the first element of the IMR applied retrospectively, the second element was intended to address some of the uncertainties going forward.

Announced in January 2011, the second element of the IMR is intended to make gains from portfolio investments (ie. interests <10%) and income from certain derivatives exempt from Australian tax. The exemption will be available for certain widely held foreign funds. The exemption is designed to ensure that such income is not subject to Australian tax where the foreign managed fund merely engages an Australian intermediary and has no other Australian presence.

The third element

The third and final element of the IMR, announced 16 December, extends the scope of the second element, by making gains made by certain widely held foreign managed funds from the disposal of non-portfolio investments (ie. a holding of >10%) in non-Australian assets exempt from Australian tax.

Board of Taxation Report

Along with the final element of the IMR on 16 December the Government released the Report of the Board of Taxation. The report makes 12 recommendations regarding the IMR, the majority of which are supported by the Government.

These recommendations centre around:

  • Qualification as a foreign managed fund – being an arrangement for collective investment that: (i) is not an Australian resident; (ii) is widely held; and (iii) does not carry on a trading business (other than trading in certain securities);
  • Income eligible for exemption – being all portfolio investments (other than interests in Australian land held directly or indirectly through unlisted entities) and non-portfolio interests in non-Australian assets; and
  • Integrity measures – designed to ensure the exemption is not available directly or indirectly to Australian residents and that appropriate information is available to the ATO.

The majority of these are reflected in the existing announcements and previously released draft legislation for elements 1 and 2.

Further consideration is to be given by the Government to the Board's recommendation that the IMR exemption should only extend to a prescribed list of investments. It is expected that this issue will be addressed in the drafting of legislation to enact the proposed measures.


The Board of Taxation's recommendations will be welcomed by foreign fund managers currently struggling with the Australian taxation system. The recommendations are intended to clarify and simplify the tax rules applying to such investors and their implementation should encourage further investment in and through Australia.

Drafting has commenced on many aspects of the IMR and the recently announced third element changes are to be fine-tuned over the next few months. The Government has said it will consult extensively with industry and tax professionals on the development of the legislation to implement the regime, and it will be guided by the Board of Taxation's recommendations.

As usual, the devil will be in the detail, so fund managers should stay tuned for further updates on the legislation, expected to be introduced into Parliament in the first half of 2012.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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