As requested by the Assistant Treasurer, the Board has brought forward its report on the design of an Investment Manager Regime (IMR) for foreign managed funds.
As noted in the Report of the Australian Financial Centre Forum Australia as a financial centre: Building on our strengths, Australia’s financial sector comprises a highly skilled workforce and a first class regulatory framework making it ‘;arguably the most efficient and competitive “full service” financial sector in the Asia-Pacific region‘. Despite these strengths, exports of Australian financial services are low by international standards with perceived tax uncertainties being a key impediment to cross-border activities.
The introduction of an IMR for foreign managed funds should assist in removing tax related impediments to international investment into Australia by foreign managed funds and impediments to the use of Australian intermediaries by these funds.
In view of the Government’s announcements of certain elements of an IMR for foreign managed funds in December 2010, January 2011 and May 2011, this report is particularly centred on the future tax treatment of investments by foreign managed funds (that is, for the 2011-12 and future income years). This includes:
- defining foreign managed funds in the context of the IMR;
- defining the type of investments made by foreign managed funds that should be covered by an IMR; and
- considering the potential integrity measures that might be needed to balance the objectives of providing certainty and enhancing the competitiveness of our financial sector with maintaining the integrity of the tax system.
The Board has made 12 recommendations.
The Board is mindful that the terms of reference require it to make recommendations that bring revenue neutral or near revenue neutral outcomes. Accordingly, the Board’s recommendations are subject to satisfactory revenue costings.
The Board recommends that an IMR for foreign managed funds should be implemented using an exemption style approach (Recommendation 1).
The Board recommends that foreign managed funds covered by the IMR should:
- comprise a broad set of collective investment vehicle (CIV) structures and arrangements, and should not be limited to particular types of legal entity (Recommendation 2);
- not be an Australian resident (Recommendation 3) – (in this context, the Board also recommends that certain modifications be made to Australia’s residence and permanent establishment tests for foreign managed funds accessing the IMR);
- be widely held (Recommendation 4);
- not carry on or control a trading business in Australia (Recommendation 5); and
- not be subject to a ‘;managed in Australia’ requirement (Recommendation 6).
The Board recommends that for foreign managed funds covered by the IMR, gains from the disposal of portfolio investments in a prescribed list of eligible investments should be exempt from tax (Recommendation 7). Portfolio investments will be those investments in which the foreign managed fund has a less than 10 per cent interest.
The Board also recommends that a gain made by a foreign managed fund from the disposal of a non-portfolio investment in non-Australian assets (that is, conduit income) should not be subject to Australian tax if the only reason it is subject to Australian tax is because it uses an Australian intermediary (Recommendation 8).
Regarding the protection of the Australian tax base, the Board recommends that:
- income derived by Australian investors from a foreign managed fund is not made exempt merely by virtue of the income being treated as exempt for the foreign managed fund under the IMR (Recommendation 9);
- integrity rules should not be introduced into the IMR for foreign managed funds to address deferral of taxation that would operate in addition to Australia’s foreign source income attribution rules, and that a post-implementation review be undertaken of these rules to ensure that inappropriate outcomes are not arising through the IMR rules (Recommendation 10); and
- foreign managed funds should be required to be resident of an information exchange country and to lodge annual information returns with the Australian Taxation Office (ATO) (Recommendation 11).
Finally, the Board recommends that Australia’s transfer pricing rules should continue to operate where appropriate to tax Australian intermediaries on their arm’s length fees for services provided to foreign managed funds (Recommendation 12).
The effect of these recommendations is for an IMR to be introduced which provides a definitive exemption from tax for disposals of portfolio investments made by foreign managed funds in listed or non-land rich entities, without the need to consider complex issues in the Australian tax law with respect to these portfolio investments (such as the capital / revenue distinction, permanent establishment and source rules).
The recommendations also provide certainty for foreign managed funds qualifying for the IMR that they will not be taken to be Australian resident, have an Australian permanent establishment or have Australian source income merely by virtue of engaging an Australian intermediary.
Further details on each of the Board’s recommendations are set out in this report.
The Board notes that its consideration of an IMR for foreign residents beyond foreign managed funds will be covered in its broader report of the taxation arrangements of CIVs due to the Government by 31 December 2011.