Exposure Draft Legislation – Investment Manager Regime

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On 31 January 2014, the Government released a third version of exposure draft legislation for the final element of the Investment Manager Regime (IMR 3).  By way of background. the IMR as a whole seeks to encourage foreign investment in Australia, by improving the operation of Australian tax laws in relation to foreign investors and foreign managed funds.

The (third version) exposure draft legislation is designed to remove existing tax impediments to foreign investment by ensuring that a broader category of income and gains of qualifying foreign funds are exempt from Australian tax.   More specifically, where a foreign fund meets the definition of an “IMR foreign fund” its Australian sourced capital gains and revenue gains in respect of passive portfolio investments (with certain exceptions) will be exempt from Australian tax.

An “IMR foreign fund” is defined as a fund that:

  • Is not an Australian resident at any time during the income year;
  • Is a resident in an information exchange country at all times during the income year;
  • Does not undertake (or control) a trading business in Australia at any time during the year; and
  • Is an IMR widely held entity or satisfies the IMR widely held test.

To obtain the IMR concession, the IMR foreign fund must give an annual information statement to the Commissioner each year. The rules do not apply in relation to Australian residents.

To satisfy the widely held conditions, the foreign fund must be an IMR widely held entity, satisfy the IMR widely held test or be prescribed in the regulations. An IMR widely held entity includes, for example, certain listed entities, managed investment trust, life insurance companies, foreign pension funds and foreign sovereign wealth funds.

To satisfy the widely held test, a foreign fund must have at least 25 members, and:

  • No member of the fund holds an interest in it of 10% or more, or
  • The sum of any 10 or fewer of the fund’s members’ interests in it must not be 50% or more.

The proposed IMR 3 rules also retain the relief for inadvertent breaches of short duration. Under this rule, a fund that breaches the widely held test can retain its status as an IMR foreign fund for an income year, provided that it is not in breach for more than 30 days in the income year, and the fund (or an entity responsible for the fund) and its associates were unable to prevent the breach from occurring.

The IMR 3 exemption is to apply from the 2011/12 income year.

Public submissions in respect of the exposure draft legislation closed on 14 February 2014.

The IMR reforms continue play a significant role in the financial services landscape.  As the industry and stakeholders await the Government’s next move, foreign funds should consider whether they qualify as an IMR foreign fund and if so, whether all/some of their investments are covered by the exemption.