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Government announces the final element of the investment manager regime

The Minister for Financial Services and Superannuation, the Hon Bill Shorten MP, has today announced that the Government will implement the final element of the investment manager regime (“IMR”).

This final element of the IMR is a very welcome development and is expected to enable Australian managers/intermediaries to carry out a broad range of activities on behalf of foreign managed funds without exposing those foreign funds to adverse Australian tax consequences (e.g. Australian source or permanent establishment risks).

Concerns in relation to such Australian tax risks have been a significant impediment to date for foreign managed funds. By removing such uncertainties for foreign funds, the announced measures should help to promote the Australian investment management industry.

Three elements of the IMR

This is the third element of the IMR. The first two elements related to the “FIN 48 exemption” and the “interim IMR” (previously announced in December 2010 and January 2011, respectively). Further details in relation to those previously announced measures can be accessed here. The legislation in relation to these first two elements is currently being finalised and is expected to be introduced into Parliament in the first half of 2012.

Importantly, this third and final element of the IMR relates to the “full” IMR which was a key recommendation of the Johnson Report and is expected to significantly enhance Australia as a financial services centre, particularly in the Asia Pacific region.

The “full” IMR is expected to be the long term solution for the tax issues relating to foreign managed funds and should replace the announced FIN 48 measures going forward.

Summary of the “full” IMR

The key points in relation to the announced “full” IMR are as follows:

  • A foreign managed fund will be exempt from Australian taxation in relation to all income, gains or losses from portfolio interests or financial arrangements which have an Australian source. This would include the eligible Australian sourced trading gains of the foreign managed fund. Foreign sourced income will continue be outside the Australian tax net for a foreign managed fund.
  • The exemption will apply to both the foreign managed fund and its non-resident investors.
  • However, the exemption will not apply to the extent that withholding tax is currently payable on the income. The normal non-resident withholding tax rules will continue to apply (e.g. withholding tax relating to interest, dividend, royalties and MIT fund payments).
  • Furthermore, the exemption will not cover income or gains from an interest in taxable Australian property, other than a portfolio interest (i.e. less than 10%) in a publicly traded company (notwithstanding that the company may be land rich).
  • The exemption will be restricted to foreign managed funds domiciled in countries that are recognised by Australia as engaging in effective exchange of information (“EOI”). There is currently a broad list of EOI countries, which includes the US, UK, Canada, Cayman Islands, Singapore, Bermuda, Ireland, Jersey, Guernsey and the British Virgin Islands. However, the current EOI list does contain some significant exclusions in the context of the global managed funds industry (e.g. Luxembourg and Hong Kong are not currently EOI jurisdictions).
  • The IMR will apply retrospectively from 1 July 2011.

The IMR is expected to cover a broad range of portfolio interests or financial arrangements, and the Government will consider whether it is appropriate to adopt a prescribed list of eligible investments for IMR purposes.

Board of Taxation review

This third element of the IMR has been the subject of a Board of Taxation review. The Board's report - Review of an Investment Manager Regime as it relates to Foreign Managed Funds - can be found on the Board's website here.

The Government's response to the Board's recommendations can be found in the attachment to the accompanying Press Release here. Some of the key recommendations which are supported by the Government include the following:

  • Foreign managed funds covered by the IMR should not be an Australian resident. This should, for example, mitigate the exposure caused by the current inconsistency between the residency test for a company and a limited partnership for Australian tax purposes (e.g. a foreign limited partnership could be deemed to be an Australian resident by simply carrying on business in Australia).
  • The scope of the IMR for foreign managed funds is expected to cover a broad set of collective investment vehicle (“CIV”) structures, including common contractual arrangements, and should not be limited to particular types of legal entity. This should accommodate the varied structures adopted by some foreign managed funds.
  • A widely held requirement is to be included as part of the eligibility criteria for foreign managed funds to access the IMR. However, the widely held test should be able to look through direct investors in the foreign managed fund to assess whether the fund is widely held. This is expected to overcome one of the limitations in relation to the way in which the widely held test operates under the current MIT rules, where there is a very limited ability to look through member funds. This should enable the test to apply more appropriately to the typical feeder fund structures adopted by many foreign funds.
  • A gain made by a foreign managed fund from the disposal of non-Australian assets (whether represented by portfolio or non-portfolio interests) should not be subject to Australian tax if the only reason it is subject to Australian tax is because it uses an Australian intermediary. This is consistent with the principle that all conduit income should be exempt from Australian tax and the objective of establishing Australia as a regional financial centre. The “interim IMR” will also be extended to cover this.
  • Some compliance obligations may be imposed on foreign managed funds in order to access the IMR (e.g. foreign managed funds may be required to lodge an annual information return with the Australian Taxation Office within six months of the end of the fund's accounting year). However, these obligations are not intended to be overly burdensome or impractical.

The Government has announced that it will consult extensively with industry and tax professionals on the development of the legislation to implement the final element of the IMR.

The full Press Release outlining the final element of the IMR can be accessed here.

Who does this affect?

Foreign funds that invest in Australia and particularly those which are considering appointing local managers or intermediaries, as well as Australian based investment managers seeking investment mandates from foreign funds.

​What do you need to do?

Consider the proposed exemption and whether it can assist in the management of the investments made by a particular foreign fund.


  • Cory Hillier - Senior Associate | Email

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