Upcoming Mallesons seminarsForeign fund managers seeking to offer funds in Australia, and Australian residents that invest in offshore funds.
What do you need to do?Review the exposure draft, consider the impact of the proposed amendments on current or proposed offers or investments, and consider whether to make a submission to Treasury.
Kai-Chen Chang
Solicitor
Andrew Clements
Partner
T +61 3 9643 4089
Sydney
John Edstein
Betsy-Ann Howe
John King
Michelle Levy
Richard Snowden
Melbourne
Andrew Clements
David Wood
The Treasury has released exposure draft legislation (Exposure Draft) that provides for the repeal of the current foreign investment fund or “FIF regime” and the deemed present entitlement rules that apply to foreign trusts.
The Exposure Draft constitutes the first stage of the Government’s proposed amendments to reform and simplify the anti tax deferral measures in the existing law for investments in foreign investment funds. These amendments are part of the Government’s ongoing project of simplifying the tax rules to promote Australia as a regional financial centre.
The proposed amendments in the Exposure Draft are likely to remove some of the complexities faced by Australian residents investing in offshore investment funds.
For foreign managers, the proposed amendments may remove some of the current Australian tax obstacles to offering their product in Australia, and the disadvantages faced vis-à-vis Australian managers.
For Australian managers, the proposed amendments may provide more flexibility regarding the types of investments in foreign funds they can enter into, or the structure for their investments.
What are the proposed amendments?
The Exposure Draft provides for the existing foreign investment fund or “FIF” provisions to be repealed in their entirety. The FIF provisions previously applied to tax Australian residents on their investments in certain foreign companies and other types of investments on an accruals basis.
The Exposure Draft also provides for the complex rules relating to investments in certain types of foreign resident trusts, known as the “deemed present entitlement” rules, to be repealed. This is likely to simplify the tax consequences of investing in foreign trusts significantly.
Aside from these amendments, the Exposure Draft focuses mainly on the transitional issues associated with repealing the FIF and deemed PE rules. In particular, the Exposure Draft seeks to implement transitional provisions to ensure that taxpayers that have been taxed under these regimes are not subject to inappropriate consequences as a result of the repeal of the regimes.
The Exposure Draft does not contain information regarding from which income year these proposed amendments will apply from. If the Government does not intend the amendments to apply retrospectively, then it will be difficult to see how the proposed amendments could apply earlier than from the 2009/2010 income year and onwards.
What further amendments are expected?
Importantly, the Exposure Draft does not contain the proposed amendments that insert the “anti-roll-up fund” measures that the Government previously announced would effectively replace the FIF and deemed present entitlement rules.
It will be important for the Government, when drafting the terms of the “anti-roll-up fund” rules, to ensure that they are appropriately targeted and provide investors with certainty regarding whether and how they apply and do not become a form of defacto FIF rules.
The Exposure Draft also does not contain any amendments that deal with the proposed re-write of the controlled foreign company rules that was announced as part of the reform of the anti tax deferral regimes.
Submissions
A copy of the Exposure Draft is available here.
These measures were first announced by the Government earlier this year as part of the Federal Budget (see here).
Treasury has invited interested parties to make submissions on the Exposure Draft. The closing date for submissions is 5 February 2010.
The release of the Exposure Draft also follows the release of other exposure draft legislation last week, that provides for the measures to allow Australian managed investment trusts to elect to hold, for tax purposes, certain investments on capital and not revenue account (see here).