On 16 December 2011, the Government released their response to the final element of the Australia's proposed Investment Manager Regime ('IMR') outlined in the Board of Taxation's Report. The proposed start date for the IMR is 1 July 2011.
The major winners from the proposed IMR will be Australian asset managers and Australian listed and non-land rich unlisted entities seeking investment from foreign funds.
The IMR's purpose is to ensure that Australia is an attractive investment hub for overseas investors and promote Australia's asset management expertise to foreign funds. Arguably, the IMR does not really extend the exemptions from Australian tax available for foreign investment funds (with the exception of foreign funds which hold their investments on revenue account). Instead, it provides these funds with certainty on their Australian income tax exposure and it provides foreign funds with an incentive to use Australia's asset management expertise without concern that this may result in the fund being subject to Australian income tax.
Who will it apply to?
The IMR will apply to 'foreign funds'. These can be any of a variety of collective investment vehicles provided they satisfy the following criteria:
- The fund must not be an Australian resident, but must be resident in a country with whom Australia has an exchange of information agreement;
- It must be widely held; and
- It cannot carry on or control a trading business in Australia.
Previously announced measures
The Government has already released exposure draft legislation to implement the first two elements of the IMR regime. It is expected that the legislation enacting these two elements will be finalised and introduced into Parliament in the first half of 2012. The proposed amendments were as follows:
- Relief for US entities
Amendments aimed at providing increased certainty for US funds investing in Australia on their Australian tax exposure which would assist in simplifying the reporting obligations in the US under FIN 48 (which deals with reporting uncertain tax positions).
- Certainty that using an Australian asset manager will not
result in foreign sourced income being taxed in Australia
Amendments seeking to ensure that the foreign "conduit income" of foreign funds which make use of Australian intermediaries (such as Australian asset managers) are not subject to any Australian tax. Under the current law, where the foreign fund uses an Australian intermediary, there is uncertainty as to whether foreign sourced income and capital gains would be subject to Australian tax due to the existence of a permanent establishment.
Under the new regime, foreign conduit income will be exempt from tax regardless of whether an Australian intermediary is used. This provides an opportunity for Australian asset managers to promote their services to foreign funds.
The latest announcement – certain Australian sourced income to be exempt from tax
Last Friday the Government announced that 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. Although the headline looks very generous, in reality it appears as though only the following Australian sourced income will be exempt from Australian tax:
- Gains on disposal of portfolio interests in listed equities and certain financial arrangements; and
- Gains on disposal of portfolio interests in unlisted equities where the investee entity in question is not land-rich.
Returns from portfolio investments will remain subject to dividend, interest, royalty withholding taxes (at a rate of 10%-15%) and managed investment trust withholding tax (at 7.5%). Furthermore, gains on disposal of portfolio investments in unlisted land-rich entities will remain subject to tax if the investment is held on revenue account. It is noted that such disposals would not be taxed if the investment is held on capital account.
Where to from here?
There is definitely an opportunity for Australian asset managers and Australian entities to promote their services/investments to foreign funds. However, as the IMR is still in very preliminary stages, we would encourage taxpayers to be cautious in their marketing as often the devil is in the details (i.e. the final legislation).
Moore Stephens was involved in preparing a submission to the Board of Taxation on the discussion paper for the review of tax arrangements applying to collective investment vehicles. We will continue to be involved in discussions with the Government to ensure that the final legislation released will be advantageous for Australian asset managers and entities.
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