Australia Tax Alert - 27 August 2012
Parliament passes Investment Manager Regime legislation
By Peter Madden, Vik Khanna, Mark Hadassin, Alyson Rodi and David Watkins
On 23 August 2012, the Australian parliament passed amending legislation for Elements 1 and 2 of the Investment Manager Regime (IMR). It is expected the legislation will become enacted law shortly.
This amending legislation follows numerous announcements going back to December 2010 and two draft versions of the IMR rules (see also the tax alert dated 27 June 2012). The amending legislation addresses the "FIN 48" measure or Element 1 of the IMR, which will broadly provide an exemption for all eligible income and gains of widely held foreign funds for periods up to 30 June 2011 where the fund has not filed an Australian income tax return or had an assessment made of its Australian income tax liability. This legislation gives effect to the government announcement of 17 December 2010.
The measures also provide an exemption for all eligible income and gains of widely held foreign funds that otherwise would be Australian assessable income of the fund only because the income and gains are attributable to a permanent establishment in Australia that arises solely from the use of an Australian-based agent, manager or service provider. This measure is referred to as the "conduit income" measure or Element 2 of the IMR and will apply as from 1 July 2010, giving effect to the government announcement of 19 January 2011.
While the legislation has not addressed some of the shortcomings in the earlier draft, especially as regards the widely held and concentration tests, the government made the following comments on 23 August 2012:
Consultation with industry has highlighted that it is not possible at this stage to define in legislation all of the different investment entity structures operating in eligible offshore jurisdictions.
Where entities satisfy the policy intent of the measures in this legislation, the Government will use the regulation-making power provided in the legislation to ensure that they benefit from the IMR.
The Gillard Government will continue to engage with industry to ensure that the objectives of the legislation are delivered.
The Government remains committed to ensuring Australia's taxation arrangements for passive portfolio investments of managed funds are in line with those of other major financial centres such as the United States, the United Kingdom, Hong Kong and Singapore.
This statement reinforces the government's commitment to the IMR regime, and the government's intention to ensure that the policy goal of the measures is met.
Funds should immediately undertake an "IMR Fund Review" to test their fund structures and their Australian income to determine whether they benefit from the pre-30 June 2011 FIN 48 exemption. If the relevant tests are met, this should address FIN 48 issues that may otherwise arise in Australia. If a fund is unable to pass the tests as currently set out in Element 1 and 2 of the IMR legislation, the reasons for failure need to be identified and brought to the government's attention so as to pursue regulations that will allow the funds to qualify for the IMR, provided the policy intent of the measures is met.
At this stage, no draft legislation has been prepared for IMR Element 3 dealing with periods post-30 June 2011.