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Australia Tax Alert - 27 June 2012

Government releases investment manager regime legislation


By Peter Madden, Vik Khanna, Mark Hadassin, Alyson Rodi and David Watkins

On 21 June 2012, the Australian government introduced into Parliament amending legislation for Elements 1 and 2 of the investment manager regime (IMR). This follows numerous announcements going back to December 2010 and two draft versions of the IMR rules.

The amending legislation addresses the “FIN 48” measure or Element 1 of the IMR. This 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.

TThe 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 (PE) 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.

The FIN 48 and conduit income measures previously were included in exposure draft legislation released on 16 August 2011 and further draft legislation released on 7 March 2012. On 16 December 2011, the government announced it would implement the final stage (Element 3) of a comprehensive IMR with effect from 1 July 2011. Legislation for Element 3 has not yet been released.

The key concepts in the amending legislation are those of “IMR foreign fund” and “IMR income,” which are applied to both Element 1 and Element 2.

IMR foreign fund

In broad terms, to be an IMR foreign fund, a fund must:

  • Not be an Australian resident or a resident trust estate at any time during an income year;
  • Not carry on a trading business in Australia at any time during an income year (a trading business is one that is not a wholly “eligible investment business,” being broadly investing or trading in shares, bonds and a wide range of other financial instruments);
  • Satisfy the widely held test at all times during an income year; and
  • Not breach the “concentration test” at any time during an income year.

As regards the requirement that the fund not be an Australian resident, the Explanatory Memorandum to the legislation makes it clear that, in the case of a limited partnership fund, the extremely broad test of residence for a limited partnership under Australian domestic law is to be applied. Thus, the threshold issue for limited partnership funds is to ensure that nothing that occurs in Australia could result in the limited partnership fund being seen to carry on business in Australia and so be an Australian resident.

  1. In respect of the widely-held requirement, the test broadly includes the following:
  2. The fund is listed on an “approved stock exchange” (a wide list of global exchanges);
  3. The fund has at least 25 members;
  4. Certain “foreign widely held entities” have a direct or indirect interest in the fund of at least 25%. These foreign widely held entities include “foreign superannuation funds” with at least 50 members, life insurance companies and certain foreign government pension funds;
  5. All of the membership interests in the fund are held directly or indirectly by one or more of the entities in 1), 2) or 3); or
  6. The entity is of a kind specified in regulations.

Further, the fund cannot be tightly held: it must not breach the “concentration test.” The concentration test will be breached if 10 or fewer entities have a direct or indirect interest in the fund of 50% or more. In applying this test, the interests of certain entities are disregarded (i.e. disregard the interests held by various entities including another IMR foreign fund or foreign widely held entities).

For periods before 30 June 2011, there is no requirement that the fund be sufficiently resident in a country that has an exchange of information agreement with Australia and annual information returns will not be required.

IMR income

IMR income and IMR capital gains are, broadly, income and gains attributable to an eligible “financial arrangement,” being a financial arrangement other than:

  • Financial arrangements, including derivative financial arrangements, in respect of an entity where the IMR foreign fund has a total participation interest of 10% or more;
  • Derivative financial arrangements that relate to Australian real property or (broadly) an interest of 10% or more in shares in companies that are Australian land-rich; or
  • A financial arrangement that allows the IMR foreign fund a right to vote at a meeting of the board of directors, an ability to participate in the management decisions of the entity or deal with the assets of the entity (unless such rights arise as a result of a breach of the terms of the financial arrangement).

Amounts subject to withholding tax (e.g. interest) are not included in IMR income, such that the withholding tax provisions continue to apply in the normal manner.

FIN 48 exemption

The FIN 48 exemption is available to an IMR foreign fund that is a corporate taxpayer (broadly companies and corporate limited partnerships) provided that:

  • No income tax return has been filed for the June 2011 or earlier year
  • The Australian Taxation Office (ATO) has not, before 18 December 2010, made an assessment for any income year;
  • There has been no fraud; and
  • The ATO has not commenced an audit or compliance review before 18 December 2010.

Where the above tests are met, the FIN 48 exemption will treat IMR income and IMR capital gains as non-assessable and non-exempt income (NANE) of the IMR foreign fund. NANE income is not subject to tax in Australia. Losses will be disregarded where they relate to an eligible financial arrangement.

In respect of IMR foreign funds that are trusts or partnerships, the FIN 48 exemption would operate so that, in computing the net income attributable to a nonresident beneficiary or partner, the trust or partnership disregards IMR income, IMR capital gains, IMR deductions and IMR capital losses. Australian resident beneficiaries or partners will continue to be assessed under the trust or partnership provisions in the normal way.

Conduit exemption

The conduit income measure seeks to exempt income and gains from an eligible financial arrangement that, on general principles, does not have an Australian source but is treated as being Australian sourced by virtue of the connection with a PE in Australia, arising solely as a result of engaging an Australian resident intermediary. The conduit income should exempt IMR income and IMR capital gains of an IMR foreign fund where:

  • That fund has a PE in Australia solely as a result of engaging an Australian resident to habitually exercise a general authority to negotiate and conclude contracts on its behalf; and
  • Amounts are included in Australian assessable income of the fund only because they are treated as attributable to a PE (whether under a relevant double tax agreement or Australian domestic law) or relate to a CGT asset used in connection with a PE in Australia.


The draft legislation has unfortunately not addressed some of the shortcomings in the earlier draft, especially as regards the widely held and concentration tests. These issues may be addressed as part of Element 3 of the IMR. That said, funds will need to test their fund structure and their Australian income to conclude whether they benefit from the pre-30 June 2011 exemption. If the relevant tests are met and the draft legislation is enacted, this should address FIN 48 issues that may otherwise arise in Australia.

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