1.1 The Board’s discussion paper discussed an IMR which operates under an exemption style approach for foreign managed funds. Specifically, a tax exemption would be provided for specific investments undertaken by investors defined as foreign managed funds with particular characteristics. The exemption would cover the foreign managed fund where it makes the investments directly or using an Australian intermediary.
1.2 It was proposed that this approach would obviate the need to provide specific clarification in respect of relevant revenue/capital, source, permanent establishment and attribution issues in the tax law which the Johnson report identified as giving rise to uncertainties.
1.3 Stakeholders were asked to comment on the appropriateness of an exemption style approach for an IMR applicable to foreign managed funds, and whether any other alternatives were more appropriate.
Views in submissions
1.4 Submissions were broadly supportive of an exemption style approach and suggested that this approach was simpler than amending each problematic area of the tax law in a ‘;piece-meal’ fashion.
An exemption style IMR would provide an income tax exemption for specified investments by defined investors and if designed appropriately, should largely overcome the tax uncertainties faced by foreign investors as outlined by the Board in the CIV Discussion Paper.
The Institute of Chartered Accountants in Australia
1.5 A number of submissions suggested instituting an exemption regime similar to those found in competing jurisdictions such as Singapore, Hong Kong and the United Kingdom. It was argued that if an Australian IMR was to have similar characteristics to those found in these jurisdictions it would provide investors with a familiar framework, which would encourage utilisation of the regime.
… given that IMRs are already used in many jurisdictions (under various different names), its concepts are well known by many of our trading partners. Thus, utilising a consistent model with our trading partners would also help to promote understanding and certainty in investment transactions through Australia that are carried out by investors familiar with those concepts.
Pitcher Partners Advisors
The international context
1.6 In considering the appropriateness of an exemption style approach for an IMR, the Board considered tax treatments in other jurisdictions.
1.7 Broadly, most jurisdictions do not tax the gains of foreign investors from the sale of shares, bonds and other marketable securities, particularly given their portfolio nature. Such jurisdictions generally consider that marketable securities held by foreign funds (that are collective investment vehicles) are passive investments and are often capital in nature. Where a foreign investor has a substantial interest in a resident company or holds real property in the investment country, some jurisdictions impose tax.
1.8 Gains arising from the disposal of a range of market-traded securities are exempted in different jurisdictions. The United Kingdom, United States, Hong Kong and Singapore all consistently exempt the disposal gains from sale of equities, bonds, debentures and futures. It is not uncommon for any dealing with interests in real property to remain taxable in these jurisdictions.
1.9 In addition, other jurisdictions allow foreign funds to establish discretionary management advisory businesses in their jurisdiction without creating a taxable presence there.
1.10 These jurisdictions have recognised the mobility of the relevant capital, and responded to competitive pressures with other jurisdictions seeking to attract foreign capital.
1.11 The Board notes, however, that the tax rules introduced in some jurisdictions are designed taking into account the particular characteristics of their economies. For these reasons, although it is appropriate to compare Australia’s tax rules with the tax regimes operating in other jurisdictions, Australia’s tax rules will need to take into account the particular characteristics of the Australian economy.
1.12 Further details on tax treatments under regimes comparable to an IMR operating in other jurisdictions are set out in Appendix B.
Board’s consideration
1.13 The Board considers that an exemption style IMR provides advantages over other methods of providing foreign managed funds with the same tax outcomes.
1.14 Adopting an exemption style approach provides a clear signal to industry that Australia has removed significant impediments to foreign managed funds investing in Australia or using Australian intermediaries. Signalling this by instituting a clear legislative regime may support greater entry of foreign managed funds into the Australian capital market than would otherwise be the case if an IMR were introduced in the form of a number of ‘;piece-meal’ adjustments to existing tax rules.
1.15 An exemption style regime would provide the funds management industry with a clear tax framework and the tax certainty required to support increased levels of foreign portfolio investment into Australia and increased use of Australian intermediaries for conduit investments. The Board considers that this will enhance Australia’s status as a leading regional financial centre and support growth and employment in the Australian managed funds industry.
1.16 Under an exemption style regime, tax outcomes for the investor would be set out in the specific regime so the investor would not need to work through the multiple tax issues under the current law. This approach is consistent with that adopted in the United Kingdom, Hong Kong and Singapore.
1.17 The Board also considers that introducing an exemption style IMR should be less complex to implement and administer than piece-meal changes to existing concepts in the tax law such as the revenue/capital distinction, permanent establishment, residence and source. Such tax concepts have been established based on both statute and case law – attempting to amend the operation of these rules to guarantee certain outcomes for foreign managed funds would likely be very difficult.
Recommendation 1:
The Board recommends that an IMR for foreign managed funds should be implemented using an exemption style approach.