The changes proposed in the draft legislation would exclude certain returns and gains from the calculation of an entity’s taxable income. The exclusion rests on the entity being an Investment Manager Regime (IMR) foreign fund which has no place of business in the country but which is treated as having a permanent establishment there because it employs an Australian-based fund manager to act on its behalf.
Taxpayers will also be provided with more certainty as a result of the reform, said Assistant Treasurer and Minister for Financial Services, Bill Shorten:
“The proposed changes in tax treatment provide certainty for businesses investing through Australian intermediaries.”
Such changes are seen as important given the size and value of the sector.
“The proposed amendments will support Australia’s managed funds industry, which stood at around $1.8 trillion (US$1.9 trillion) at the end of March 2011,” said Shorten.
If the criteria for exclusion are satisfied, IMR income and losses, as well as IMR capital gains and losses, are excluded from taxable income calculations.
IMR income is the term given to returns or gains related to certain investments, while IMR losses covers deductions or losses related to such investments and IMR capital gains and losses are the capital gains and losses related to those investments.
The Australian government has said the legislative changes should bring treatment into alignment with international norms.
“Australia’s taxation of foreign managed funds is not consistent with other financial centres, including the US, the UK, Hong Kong and Singapore,” said Shorten. “These new measures will help Australia retain $57 billion already invested here by foreign managed funds.”
An entity falls under the scope of the definition of IMR foreign fund if it satisfies a number of conditions. The entity must be a non-resident of Australia, recognised under a foreign law as a collective investment vehicle and the entity’s members must not have day to day control of managing the entity’s activities.
There are certain cases in which the exclusions would not apply.
“The exemption does not apply where the ATO is of the opinion that there has been fraud by the IMR foreign fund; or before December 18 2010, the ATO has notified the IMR foreign fund that an audit or compliance review would be undertaken,” said an alert from DLA Piper.
The legislation is expected to come into law at some point in the next few months, and will apply to the income tax year 2010/11 onwards.
