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Australia: Australia updating financial services tax concessions

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Eddie Ahn

March saw the release of draft legislation for the long awaited reforms to the Investment Manager Regime (IMR) and Offshore Banking Unit (OBU) concessions, as well as further progress on transfer pricing and exchange of tax information. On March 12, the Australian Government released the draft legislation for the third stage of the IMR reforms. These reforms remove tax impediments to investing in Australia in order to attract foreign investment and promote the use of Australian fund managers. The amendments in the draft legislation broaden the income tax and capital gains tax (CGT) exemptions under the IMR concessions to cover investments in Australian assets (excluding real property) that are of a portfolio nature. The changes also broaden the 'widely held' test to be more consistent with and expand on the corresponding test in the Australian managed investment trust provisions. Qualifying foreign entities will be eligible for the IMR concession if they directly invest in Australia or invest via an independent Australian fund manager.

The Australian Government also released draft legislation for the reforms to Offshore Banking Unit (OBU) regime on March 12. These reforms address a number of integrity concerns with the existing regime while ensuring the OBU regime targets mobile financial sector activity. Under the current OBU rules, assessable income from eligible offshore banking (OB) activities is effectively subject to a tax rate of 10%, rather than the current corporate tax rate of 30%. One of the key changes under the new rules is to modernise the list of eligible OB activities to include certain lending, trading, investment management, advisory and leasing activities.

On March 3, the Australian Government announced that Australia and Switzerland had agreed to the automatic exchange of certain tax information based on the OECD's common reporting standard (CRS). Under the agreement, the Australian Taxation Office (ATO) will automatically receive details of certain financial accounts such as investment income and balances held by Australians in Switzerland. Similarly, the Swiss Federal Tax Administration will receive details of Swiss residents that hold financial accounts in Australia. The CRS is to be implemented from 2017, with information exchanges to start in 2018.

In recent months the Australian Taxation Office (ATO) has issued several 'taxation rulings' and 'practice statements' to provide guidance on the new Australian transfer pricing rules that recently came into effect. Most recently, the ATO issued Practice Statement PS LA 2015/3 on February 26, which outlines the internal ATO approval processes in identifying the arm's-length conditions relating to cross-border transfer pricing and whether or not the analysis should be based on the actual commercial or financial relations of the relevant parties to a transaction.

In a goods and services tax (GST) context, the Federal Court recently handed down a decision in a test case concerning costs incurred to provide housing to workers and contractors in remote mining towns. The taxpayer, Rio Tinto, argued the costs were incidental to its mining activities and hence should give rise to an input tax credit (GST credit). The Court rejected this argument and held that the costs had a "direct and immediate" connection with residential leasing supplies which are input taxed.

Finally, the draft legislation for the managed investment trust (MIT) concession reforms is expected to be released for public consultation by the end of this month.

Eddie Ahn (eddie.ahn@dlapiper.com)

DLA Piper

Tel: +61 2 9286 8268

Website: www.dlapiper.com

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