A second exposure draft of legislation to introduce an Investment Manager Regime (IMR) to Australia was released by the Minister for Financial Services and Superannuation, the Hon Bill Shorten MP on 7 March 2012. In this Australian Tax Brief we summarise the key objectives of the IMR and analyse some of the core requirements – including what is an IMR foreign fund and what IMR income is not subject to Australian tax.
Objectives of the IMR
The broad objectives of the investment manager regime are to ensure that:
- foreign resident funds are not subject to Australian tax on income or gains arising from non-portfolio securities which may otherwise have an Australian source - including because the foreign fund has a permanent establishment in Australia because it engages the services of an Australian based intermediary or entity
- Australian resident taxpayers continue to be subject to tax on their worldwide income
- the benefit of these rules is only available to foreign resident funds that are widely held and are not owned by a small group of investors.
The IMR is an important safe harbour for foreign funds in managing Australian tax risks and the related 'FIN 48' reporting requirements. Importantly, foreign funds need to understand the limits of these concessions to know when the fund and its investments is eligible to access these tax concessions. Otherwise ordinary Australian taxation principles apply which do not provide the same level of certainty.
What is an IMR foreign fund?
Based on the drafting, an IMR foreign fund must be an entity – that is a company, trust or partnership. The position for common contractual funds should be clarified as part of the consultation process.
An entity is an IMR foreign fund if the entity:
- is not an Australian resident at any time during the income year, and
- is not a resident trust estate for the purposes of subsection 95(2) of the Income Tax Assessment Act 1936 at any time during the income year, and
- does not carry on a business in Australia other than carrying on an eligible investment business (within the meaning of section 102M of the ITAA 1936) at any time during the income year, and
- is widely held at all times during the income year and does not have concentrated ownership (as per the concentration test).
What activities are permitted?
An eligible investment business is defined in section 102M of the ITAA 1936 to mean:
- investing in land for the purpose, or primarily for the purpose, of deriving rent, or
- investing or trading in any or all of the following:
- secured or unsecured loans (including deposits with a bank or other financial institution)
- bonds, debentures, stock or other securities
- shares in a company, including shares in a foreign hybrid company (as defined in the Income Tax Assessment Act 1997)
- units in a unit trust
- futures contracts
- forward contracts
- interest rate swap contracts
- currency swap contracts
- forward exchange rate contracts
- forward interest rate contracts
- life assurance policies
- a right or option in respect of such a loan, security, share, unit, contract or policy
- any similar financial instruments, or
- investing or trading in financial instruments (not covered by paragraph (b)) that arise under financial arrangements, other than arrangements specifically excepted by section 102MA.
What entities are widely held?
An entity will be widely held where:
- units or shares in the entity are listed for quotation in the official list of an *approved stock exchange, or
- the entity has at least 25 *members (ignoring objects of a trust), or
- one or more recognised widely held foreign entities has a total participation interest in the entity of more than 25%, or
- the entity is wholly owned, directly or indirectly, by one or more entities that satisfy the requirements in paragraph (a), (b) or (c), or
- the entity is an entity specified in the regulations, or
- the entity is one of the following (recognised widely held foreign entities):
- a life insurance company that is not an Australian resident at any time during the income year or
- a foreign superannuation fund, being a fund that has at least 50 members or
- an entity that is a fund established by an exempt foreign government agency for the principal purposes of funding pensions (including disability and similar benefits) for the citizens or other contributors of a foreign country.
What is the concentrated ownership test?
An entity that has concentrated ownership - 10 or fewer entities with a total participation interest in the entity of 50% or more – will not be widely held.
IMR exempt income
An IMR foreign fund that is a company will work out it’s taxable income, tax loss or net capital loss for an income year using the following rules:
(a) exclude the fund’s IMR income for the income year
(b) disregard the fund’s IMR deduction for the income year
(c) disregard the fund’s IMR capital gain for the income year
(d) disregard the fund’s IMR capital loss for the income year.
A trust that is an IMR foreign fund is taxed under the trust taxing rules in Division 6 of the Income Tax Assessment Act, 1936 (ITAA 1936). A non-resident beneficiary of a trust that is an IMR foreign fund will calculate its share of the trust's taxable income by disregarding the amounts noted at paragraph (a) – (d). The non-resident beneficiary must not itself be a trust or partnership.
A partnership that is an IMR foreign fund will work out it’s taxable income under the partnership taxing rules in Division 5 of the ITAA 1936. A non-resident partner will exclude the amounts noted at paragraph (a) – (d) in calculating its share of the net income of the partnership. The non-resident partner must not itself be a trust or partnership.
From 2012, these tax concessions also apply where the IMR foreign fund:
does not have a place of business in Australia, but has a permanent establishment in Australia solely as a result of engaging an entity that is a resident of Australia to habitually exercise a general authority to negotiate and conclude contracts on its behalf, and
amounts are included in the assessable income only because:
in respect of an entity that is resident in a country that has entered into an agreement (within the meaning of the International Tax Agreements Act 1953) with Australia - they are treated as having a source in Australia because the amounts are attributable to a permanent establishment of the fund in Australia, or
in respect of an entity that is resident in a country that has not entered into an agreement (within the meaning of the International Tax Agreements Act 1953) with Australia - the Commissioner makes a determination under Australia's domestic transfer pricing rules (as set out in section 136AE of the ITAA 1936).
What is IMR Income?
IMR income is generally the amount of the fund’s assessable income that is attributable to a return or gain from a financial arrangement unless the financial arrangement is excluded. The following financial arrangements are excluded:
any debt interest, equity interest or derivative where the IMR foreign fund has a participation interest of 10% or more
a derivative financial arrangement that relates to a direct or indirect interest in Australian real property
a financial arrangement which permits the IMR foreign fund to do any of the following (other than in circumstances where the issuer breaches the terms of the financial arrangement):
vote at a meeting of the Board of Directors (or other governing body) of the issuer of the financial arrangement, or
participate in making financial, operating or policy decisions in respect of the operation of the issuer of the financial arrangement, or
deal with the assets of the issuer of the financial arrangement.
What is an IMR deduction?
An IMR deduction is the amount of the fund’s deductions for the income year to the extent to which they are attributable to gaining the fund’s IMR income.
What is an IMR capital gain?
An IMR capital gain is the sum of the fund’s capital gains made in respect of CGT assets that are financial arrangements that have been used in carrying on a business through a permanent establishment in Australia or an option or right to acquire such assets. This would include non portfolio shares held through an Australian agent.
There is no opportunity for the revenue override rule to inadvertently tax an IMR capital gain because IMR income includes an IMR capital gain (an so these amounts are excluded whether they are IMR income or IMR capital gain).
What is an IMR capital loss?
An IMR capital loss of an IMR foreign fund is the sum of the fund’s capital losses made in the income year in respect of the same class of CGT assets.