On 16 August 2011 the Government released exposure draft legislation and an explanatory memorandum to introduce a limited Investment Manager Regime (IMR) exemption for foreign funds investing in Australia.
The IMR exemption is designed to relieve foreign funds from taxation where they have an Australian permanent establishment (PE) only because they engage Australian investment managers to conclude contracts on their behalf. Thus the foreign fund is not subject to tax by assessment in Australia on the profits from these investments on account of it having an Australian PE (withholding taxes may instead apply).
Excluding Australian investment managers from creating a PE thereby promotes the industry and removes an impediment to foreign funds accessing Australian investment expertise. The IMR exemption does not, however, alter the source of the income.
The exposure draft legislation asks the threshold question: is the entity an ‘IMR foreign fund’ with an Australian PE solely because it uses an Australian investment manager? If the answer is yes, ‘IMR income’ is treated as non-assessable, non-exempt (or an IMR loss is disregarded).
The IMR exemption applies where the entity does not have a place of business in Australia but is treated as having an Australian PE solely because it engages an Australian-based investment manager who habitually exercises a general authority to negotiate and conclude contracts on its behalf.
An IMR foreign fund is defined as an entity:
- that is not a resident of Australia;
- that is recognised under a foreign law as a collective investment vehicle;
- where members do not retain day-to-day control; and
- that does not carry on an active trading business (as defined in section 102M of the Income Tax Assessment Act 1936).
IMR income is income attributable to a financial arrangement (provided the foreign entity holds less than 10% of a debt or equity interest) that is assessable only because:
- various provisions of a double tax agreement (DTA) treat the income as having an Australian source; or
- the financial arrangement is a CGT asset used in carrying on a business through an Australian PE; or
- the financial arrangement is a CGT asset that is a specific option or right; or
- the Commissioner makes a determination about the source of the income.
Importantly, the IMR exemption does not alter the source of the income, it merely alters the effect of an Australian PE. For example, profits from ASX-list shares (held on revenue account) bought and sold under contracts executed in Australia by an Australian-based investment manager as agent for a foreign fund will continue to have an Australian source notwithstanding the PE is effectively disregarded. However, most DTAs allocate sole taxing rights to the country of residence in the absence of an Australian PE.
As such, the IMR exemption is of little benefit for investments made by foreign funds resident in non-DTA countries and primarily advantages foreign funds from, and investment managers working with, DTA countries.
The following matrix demonstrates the impact of these provisions:
| TREATY COUNTRY||NON-TREATY COUNTRY|
|Australian source: No PE|| Exempt from tax: No change||Taxed: No change|
|Australian source: PE||Exempt from tax: Change||Taxed: No change|
The IMR exemption is limited to entities that do not have an Australian PE aside from an Australian investment manager. Entities that have a PE for other reasons (eg other activities conducted through a fixed place of business) are unlikely to be eligible for this relief and may need to consider establishing a special purpose entity to engage with Australian investment managers.
The IMR dovetails with the considerable concessions made available to Managed Investment Trusts (MIT) by adopting a number of the MIT tests, including a requirement for the foreign fund to be widely held (and not closely held).
Submissions about the exposure draft are required by 30 August 2011. The Board of Taxation is due to report to Government on the taxation of managed funds more generally on 30 September 2011, with these provisions included in its remit.