Australia’s Investment Manager Regime – Third and Final Element of Changes Announced

On 16 December 2011, the Federal Government announced the implementation of the third and final element of the Investment Manager Regime (IMR), which, once enacted will apply retrospectively from 1 July 2011.

The proposed IMR changes are intended to remove a major export barrier for Australian-based fund managers, and align the Australian tax treatment of passive portfolio investments with international standards.

In the announcement, the Minister for Financial Services and Superannuation, Bill Shorten stated that “the IMR will provide certainty of tax treatment for the funds management sector, which in Australia has $1.8 trillion of funds under management – $61 billion of which comes from offshore, and will further enhance Australia as a financial services centre in the Asia Pacific region.“

Both Government and the Australian investment management industry have high expectations for the IMR changes to attract more foreign capital and further promote the domestic managed funds industry.

The changes to be implemented under the third IMR element include:

• Foreign managed funds and non-resident investors will be exempt from Australian taxation in relation to their Australian sourced income and gains/losses derived from portfolio interests (being less than 10%) or financial arrangements.

• The exemption is limited to the following:

1. Australian withholding taxes in respect of interest, dividends, royalties and MIT fund payments will continue to apply as a final tax to such income and gains/losses received by foreign managed funds and non-resident investors.
2. Australian tax will apply in respect of income and/or gains derived in relation to taxable Australian property, (subject to the exclusion for portfolio interests in publicly traded companies).

• The exemption will apply to foreign managed funds resident in countries that are recognised by Australia as engaging in effective exchange of information, including the Bermuda, the British Virgin Islands, Canada, Cayman Islands, Guernsey, Jersey, Singapore, Ireland, USA and UK.

The legislation for the third IMR element is expected to be introduced into Parliament in the first half of 2012, following a consultation process with both industry and tax professionals.