Investment Manager Regime (IMR) – Second Exposure Draft Legislation released for public consultation – further, but not absolute, certainty for foreign managed funds
A second exposure draft (ED) legislation for the first two elements of the Investment Manager Regime (IMR) was released recently to address issues raised in submissions for the first ED legislation released in December 2010 and January 2011. Submissions on this second ED legislation are due on 4 April 2012.
The legislation for the final element of the IMR, announced on 16 December 2011, is yet to be drafted with no firm timetable announced for consultation on this legislation.
While we acknowledge the Government's commitment to consultation for the proper implementation of these reforms and welcome this timely announcement to provide further certainty for foreign managed funds, absolute certainty has still not been provided more than a year after the first ED legislation was released and this may be sufficient for foreign managed funds to look elsewhere in the short-to-medium term, to the detriment of the Australian asset management industry.
The purpose of the IMR is to attract overseas investors to Australia and promote Australia's asset management expertise to foreign funds, particularly those investors and funds from the Asia-Pacific region.
The IMR will apply to 'foreign funds', which are collective investment vehicles that satisfy the following criteria:
- The fund must not be an Australian resident, but must be resident in one of the countries with whom Australia has an exchange of information agreement;
- It must be 'widely held';
- It cannot carry on or control a trading business in Australia.
The 'widely held' definition was unclear in the first ED legislation and the second ED legislation now contains 'widely held' requirements for an 'IMR foreign fund'.
First element of IMR – 'FIN 48'
These amendments aim to provide certainty for US funds investing in Australia on their Australian income tax exposure due to concerns raised on reporting obligations in the US under FIN 48 (which deals with reporting uncertain tax positions).
The certainty provided for prior years was that where a foreign managed fund had not lodged an income tax return for the 2009-10 or prior income years in relation to certain investment income of the fund, the ATO would not be permitted to raise an assessment in respect of that income, except where the fund lodges an income tax return disclosing such income. The Government announced in the 2011-12 Federal Budget that this measure would be extended to the 2011 income year.
Second element of IMR
Under the current law, where a foreign fund uses an Australian intermediary (such as an Australian asset manager), there is uncertainty as to whether foreign source income and capital gains would be subject to Australian income tax due to the existence of a 'permanent establishment' (PE; generally defined as "a fixed place of business through which the business of an enterprise is wholly or partly carried on"). Under this element of the proposed new regime, foreign 'conduit income' will be exempt from Australian income tax where a fund is treated as having a PE only because it uses an Australian intermediary.
In making the original announcement on this element of the IMR regime, the then Assistant Treasurer, the Hon Bill Shorten MP, stated that the exemption will "align Australia's taxing rules with international practice, such as the UK's Investment Manager Exemption". It also addressed a key finding of the 'Johnson Report' of November 2009 from the Australian Financial Centre Forum ('Australia as a financial centre – building on our strengths') – that the uncertainty of the Australian income tax legislation discourages the use of Australian based investment advisers.
Third and final element of IMR
Foreign funds will be exempt from tax on all Australian sourced income, gains or losses from portfolio investments (i.e. investments where less than 10% is held) and certain financial arrangements.
Please refer to the Moore Tax News article published on 21 December 2011 and written by Stephen O'Flynn, Abi Chellapen and Andrew Cromb of Moore Stephens Melbourne (available in the Resource Centre on our website) and / or contact your Moore Stephens relationship partner.
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