Appendix A: List of Board's recommendations

Parent Report
Report on an IMR for Foreign Managed Funds

Recommendation 1

The Board recommends that an IMR for foreign managed funds should be implemented using an exemption style approach.

Recommendation 2

The Board recommends that the scope of the IMR for foreign managed funds should cover a broad set of CIV structures and arrangements, including common contractual arrangements, and should not be limited to particular types of legal entity.

Recommendation 3

The Board recommends that:

  • in order to be eligible for the IMR, a managed fund must not be an Australian resident;
  • the operation of Australia’s residence test be modified, only for the purposes of it applying to a foreign managed fund under the IMR, such that a foreign managed fund will be deemed not to be an Australian resident if the only reason it would be an Australian resident is because it uses an Australian intermediary;
  • the residence test for limited partnerships should be amended, only for the purposes of it applying to a foreign managed fund under the IMR, such that a limited partnership will be taken to be Australian resident if:
    • the partnership is formed in Australia; or
    • the partnership carries on business in Australia and has its central management and control in Australia;
  • the Government investigate whether the amendment to the residence test for limited partnerships should apply for all limited partnerships in the general tax law, and not only to limited partnerships seeking to access the IMR;
  • the general residence test for trusts (in subsection 95(2) of Division 6 of Part III of the ITAA 1936) should be applicable in testing whether a trust is not a resident of Australia for the purposes of accessing the IMR for foreign managed funds;
  • a foreign managed fund eligible for the IMR under the modified residence test should be taken not to be an Australian resident for the purposes of applying all provisions in the tax law;
  • a foreign managed fund should not be taken to have a permanent establishment in Australia if the only reason it would have a permanent establishment is because it uses an Australian intermediary; and
  • the Government consider whether there should be consistent permanent establishment and residence tests for income tax and GST purposes, but only for the purpose of applying to foreign managed funds under the IMR.

Recommendation 4

The Board recommends that:

  • a widely held requirement be included as part of the eligibility criteria for a foreign managed fund to access the IMR;
  • 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; and
  • the look through rules for the widely held test should be as simple as possible to create certainty and to not impose undue compliance burdens on foreign managed funds.

Recommendation 5

The Board recommends that to be eligible for the IMR, a foreign managed fund should not carry on or control a trading business in Australia (as defined in Division 6C of Part III of the ITAA 1936).

Recommendation 6

The Board recommends that a ‘managed in Australia’ requirement not be incorporated into the IMR for foreign managed funds.

Recommendation 7

The Board recommends that:

  • the tax exemption provided under an IMR should be restricted to the disposal of investments that are of a portfolio nature;
  • a foreign managed fund will have a portfolio investment if it has a less than 10 per cent interest in that investment;
    • in implementing the portfolio investment requirement, further consideration be given to any integrity issues that would need to be addressed;
  • the IMR exemptions should only extend to a prescribed list of eligible investments made by the foreign managed fund;
  • transactions in land, including transactions of any nature which result in the acquisition of land, should be excluded from the prescribed list of eligible investments which qualify for IMR exemption;
    • however, the Government should consider allowing certain land related futures and options contracts to be part of the prescribed list of eligible investments where they relate to a publicly quoted index;
  • portfolio investments in Australian entities which are listed on an Australian stock exchange should be included in the prescribed list of eligible investments, regardless of whether or not those entities are land-rich;
  • portfolio investments in Australian entities which are not listed on an Australian stock exchange should only be included in the prescribed list of eligible investments where those entities are not land-rich; and
  • withholding taxes should continue to apply to payments of interest, dividends, royalties and MIT fund payments paid to foreign managed funds on their Australian investments.

Recommendation 8

The Board recommends that a gain made by a foreign managed fund from the disposal of non-portfolio investments in non-Australian assets (that is, conduit income) should not be subject to Australian tax if the only reason it is subject to Australian tax is because it uses an Australian intermediary.

Recommendation 9

The Board recommends that income derived by Australian investors from a foreign managed fund (both directly and indirectly) is not made exempt merely by virtue of the income being treated as exempt for the foreign managed fund under the IMR.

Recommendation 10

The Board recommends that:

  • integrity rules should not be introduced into the IMR for foreign managed funds to address deferral of taxation that would operate in addition to Australia’s foreign source income attribution rules;
  • the Government consider whether any unique tax deferral opportunities arise from the design of the IMR for foreign managed funds, and take this into account in the final design of the foreign source income attribution rules to ensure that any potential for such deferral is adequately addressed prior to the finalisation of those rules; and
  • the Government should undertake a post-implementation review of the operation of the foreign source income attribution rules and the IMR for foreign managed funds following their introduction into law to ensure that inappropriate deferrals of tax are not being carried out through the IMR rules.

Recommendation 11

The Board recommends that:

  • as an integrity measure, foreign managed funds should be required to be resident of an information exchange country as a prerequisite for accessing the IMR;
  • foreign managed funds should lodge an annual information return with the ATO within six months of the end of the fund’s accounting year, and that failure to do so would make the fund ineligible for the IMR for that income year;
  • the Commissioner of Taxation should be given a power to exercise discretion in extending the time in which the foreign managed fund can lodge its information return;
  • the information required to be disclosed on the annual information return should be further developed by the ATO and Treasury;
  • the required content of the information return be set out in regulations to the tax law, so that changes can be made expeditiously where required; and
  • in developing the required content for the information returns, the ATO and Treasury should take into account the following principles:
    • the information should assist the ATO in identifying whether the foreign managed fund complies with the IMR eligibility requirements;
    • the information should be readily obtainable by the foreign managed fund; and
    • the information should not place overly burdensome or impractical reporting obligations on foreign managed funds.

Recommendation 12

The Board recommends that:

  • no further measures should be incorporated into an IMR for foreign managed funds to ensure the appropriate taxation of Australian intermediaries; and
  • Australia’s transfer pricing rules should continue to operate where appropriate to tax Australian intermediaries on their arm’s length fees for services provided to foreign managed funds;
  • the Government investigate whether there is a problem in the operation of the arm’s length test within the transfer pricing rules, and if so, that any appropriate amendments be made; and
  • the ATO take into account a potential increase in APA applications following the introduction of an IMR, and that it accords appropriate priority to this area in its allocation of resources.