Interim investment management regime and FIN 48 solution for foreign funds announced

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16 August 2011 – On 16 August 2011, the Government released exposure draft legislation seeking to address two key measures relevant to foreign funds and their Australian based intermediaries.

The first measure relates to the application of US accounting standard ‘FIN 48’ and US-based fund managers investing in Australia.  Under recent changes to FIN 48, foreign funds may become retrospectively exposed to Australian taxation in respect of certain investment income with an uncertain tax position.  The exposure draft seeks to amend the tax treatment of such foreign Investment Manager Regime funds by effectively exempting such income from Australian tax.  If enacted, the exposure draft will have retrospective effect and apply for the 2010-11 and prior income years.

The second measure relates to the Australian tax treatment of certain investment income of foreign funds where those funds are taken to have a permanent establishment in Australia.  Under the exposure draft, the income of a foreign Investment Manager Regime fund which would otherwise be taxable in Australia by virtue of the fact that the foreign fund engages a domestic investment manager and is treated as having a ‘permanent establishment’ in Australia will be exempt.  The exemption, if enacted will apply to the 2011-12 and later income years.

Overall, the exposure draft amendments will provide certainty to foreign funds investing in Australia, encourage foreign funds to engage Australian based intermediaries and facilitate further investment in Australia as a financial hub.  As the legislation is still in draft form, the Government is awaiting submissions from the public until 30 August 2011.  The Government is also awaiting a report by the Board of Taxation in relation to the Investment Manager Regime and foreign managed funds which should provide further clarity on this area.