Australia: Government Initiatives To Promote Australian Managed Funds

Since the Federal Election in November 2007 the Rudd Australian Government has proposed or acted upon several measures to promote Australia as a regional finance/ funds management hub, most particularly to attract foreign investment into Australian funds.

Australia/Japanese Double Tax Treaty – Australian REIT Distributions

The first measure taken by the Government involved including a 15% limit on certain distributions to Japanese residents from Australian Real Estate Investment Trusts (REITs) in the new Australia/ Japanese double tax treaty signed on 31 January 2008.

Withholding Tax Concession On Certain Distributions – Foreign Fund Investors

This Japanese initiative was quickly followed by a broader and more comprehensive withholding tax concession applicable to certain fund payments (other than dividends, interest and royalties) of Australian Managed Investment Trusts (MIT's), reducing from 30% in 2008 to 7.5% for the financial year commencing 1 July 2010. This initiative was particularly directed at Australian property trusts and infrastructure trusts suffering from the high cost of credit. Please see our DLA Phillips Fox Tax Update of June 2008 summarising key aspects of this Australian MIT withholding tax concession. For the current financial year (ie commencing 1 July 2009) the withholding tax rate is 15%.

Although the withholding tax initiative was warmly welcomed by Australian businesses, problems have been experienced with the potentially restrictive concept of an Australian MIT, most particularly as it relies on eligible MIT's being Managed Investment Schemes (MIS) under Australian Corporations Law. Most importantly, there has been some doubt raised as to whether the Australian MIT definition properly accommodates wholesale trusts which are often unregistered MIS.

Further, there are issues regarding the tracing rules and the 'widely held' requirement that necessitates an eligible MIT to;

  • Be listed on an Australian exchange;
  • Have at least 50 members, or
  • Where there are less than 50 members, one of the members should include for example:
    • A complying superannuation fund;
    • A MIS operated by a financial services licensee; or
    • An entity recognised under a foreign law as having similar status to an Australian MIS that has at least 50 members.

It is the last option available under foreign law that has created some opportunities and in certain cases challenges, for foreign (non-Australian) funds seeking to access this withholding tax concession.

Elective CGT Treatment – Underlying Assets Of Australian MIT's

In the 2009 Australian Budget and then subsequently by way of a Ministerial Press Release and a Treasury Discussion Paper, the Australian Government has proposed using the same Australian MIT concept for these funds to be allowed an election to have capital account treatment (ie capital gains tax) rather than revenue account treatment for their respective underlying assets ie equities, real property and infrastructure related interests in land.

The flow on benefits of the capital gains tax discount for Australian Superannuation Funds and individuals as well as 'flow through' trusts is a key benefit for many investors in Australian Managed Funds. We have been actively and heavily involved in several submissions for Australian industry groups and particular clients, including the Property Council of Australia and the Infrastructure Partnerships Australia.

Board Of Tax – Review Of Managed Funds

As if this were not enough, contemporaneous with these recent reforms, there has been a broader Australian Government sponsored Board of Taxation review of MIT's for which submissions were made and ongoing consultation has occurred through 2008/mid 2009. It is expected that the Board of Tax will report and make various recommendations on a broader MIT regime very soon. This review has covered broader trust issues including:

  • Transparent tax status
  • Tax deferred income
  • CGT concessions
  • Whether a more prescriptive and dedicated MIT tax regime should be established under Australian law.

We expect some significant outcomes from the broader Board of Tax review in the near future.

Broader Managed Funds Tax Issues – eg Permanent Establishment (PE), Source Rules

There has also been recent lobbying of the Australian Government on specific issues affecting foreign funds including PE issues and Australian source of income rules which we have on many occasions raised involving Australian managers associated with foreign funds (managers). Of note is the specific recognition of (and related relief afforded) Australian MIT's in the new Australian/New Zealand Double Tax Treaty signed on 27 June 2009.

The Future Outlook Is Promising

Whilst there is much happening in the taxation of Australian managed funds space at this time, there is also a unique opportunity to influence the debate and the future direction of Australian tax policy development to ensure that it is properly directed and appropriately encourages further foreign investment and foreign funds activity associated with Australia. We would be pleased to discuss or respond to any queries or comments you may have.

© DLA Phillips Fox

DLA Phillips Fox is one of the largest legal firms in Australasia and a member of DLA Piper Group, an alliance of independent legal practices. It is a separate and distinct legal entity. For more information visit

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances.

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