11 Apr 2013

Exposure draft gives foreign funds last chance to shape Investment Management Regime

by Kirsten Fish, Anna-Maria Stephens, John Boyagi

Foreign funds seeking to access the IMR exemptions should immediately begin assessing whether they will qualify as an IMR foreign fund under the proposed new rules.

On 4 April 2013, the Government released exposure draft legislation containing the third and final element of the Investment Manager Regime (IMR). This change will significantly extend the existing tax exemption for certain investment income of qualifying widely held foreign funds (known as "IMR foreign funds").

The Exposure Draft sets out three key changes to the IMR rules:

  • expanding the IMR exemption to apply to Australian-sourced returns and gains from portfolio (ie <10%) investments;
  • modifying the existing IMR exemption to apply to conduit returns and gains from non-portfolio (ie ≥10% interest) investments in foreign assets, where the gains would otherwise be taxable in Australian solely as a result of the fund using an Australian investment manager or other intermediary; and
  • amending the eligibility criteria for "IMR foreign funds".

The story so far…

The first and second elements of the IMR were enacted in 2012.

The first element, known as the "FIN 48 Measure", addressed the uncertainty arising for IMR foreign funds as a result of the United States' FIN 48 accounting rule. The FIN 48 Measure effectively prevents the Commissioner of Taxation from assessing gains from portfolio investments and income from certain derivatives and other financial arrangements irrespective of their source. This element applies to income years up to and including 2010-11.

The second element exempts conduit foreign returns and gains of an IMR foreign fund from portfolio investments and certain derivatives and other financial arrangements. However, the exemption applies only where the gain would otherwise be taxable in Australia solely as a result of the foreign fund having an Australian permanent establishment due to the involvement of an Australian intermediary. It does not apply to Australian sourced income and gains.

Non-portfolio interests in foreign assets

The Exposure Draft proposes to extend the second element to apply to non-portfolio interests (ie, interests of 10% or more). As a result, gains from an investment in foreign assets through an Australian financial services intermediary will not be subject to Australian tax where the IMR foreign fund would not have been subject to tax had it invested directly in those assets.

This change aims to boost Australia's financial services industry, by removing a potential tax disincentive for engaging Australian intermediaries.

Portfolio interests in Australian assets

Importantly, the third element of the IMR exempts certain Australian-sourced returns and gains from Australian tax, irrespective of whether the IMR foreign fund has used an Australian intermediary.

This exemption will apply to certain financial arrangements that an IMR foreign fund has with entities in which it holds a portfolio interest. This change broadly seeks to align the IMR with the existing capital gains tax exemptions for non-residents, so that the tax outcome for IMR foreign funds is not affected by whether the asset is held on revenue or capital account.

Changes to the definition of "IMR foreign fund"

The Exposure Draft proposes modifying the current eligibility criteria for an IMR foreign fund. Key changes include:

Changes to the widely held and closely held tests: under the current rules, an entity must be "widely held" at all times, and must not breach the "concentration test" (to be renamed the "closely held test") during an income year.

The proposed new rules no longer focus only on direct investors, but trace through interposed entities to ultimate individual investors with direct or indirect interests in the fund. Concessionary tracing rules will apply to interests held by foreign life insurance companies, foreign superannuation funds and foreign government pension funds, making it easier to satisfy the requirements.

A fund will fail the closely held test where 10% or more of the economic interests are ultimately held by one member. This may mean that where a member has a non-portfolio stake in a foreign fund, the IMR exemption may not be available. This may be particularly problematic where a fund has a significant "seed investor".

Introduction of a "start-up phase" concession, to complement the "wind-down" concession, effectively giving a new fund up to 18 months to satisfy the widely held and closely held tests.

The fund must be a resident of an information exchange country at all times during the income year.

The fund must provide an annual information statement to the Commissioner of Taxation to access the IMR exemption. This statement must contain information regarding the fund's name, address, residence and its status as an IMR foreign fund. The statement must be provided within three months of the end of the income year. This is shorter than the originally recommended six month period.

Commencement and transitional issues

The proposed extension to the IMR is intended to apply from 1 July 2011.

The changes to the definition of "IMR foreign fund" are also likely to be applicable to earlier income years where relevant to the application of the current IMR rules.

However, as the Exposure Draft does not contain any transitional rules, it is not clear what the implications will be for a fund that satisfied the original definition, but fails the new tests. It is hoped that this will be addressed in the ongoing consultation process, and that such funds will continue to be treated as IMR foreign funds for a period, similar to the transitional concession given to managed investment trusts (MITs) affected by the change in those eligibility rules.


The proposed changes will be a welcome addition to the IMR and, if passed, will provide long-awaited certainty to foreign funds that have invested in Australia in anticipation of the finalised regime.

However, given the change in the eligibility criteria for "IMR foreign funds", foreign funds seeking to access the IMR exemptions should immediately begin assessing whether they will qualify as an IMR foreign fund under the proposed new rules.

Submissions on the Exposure Draft are due by 26 April.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.