The final tranche of the Investment Manager Regime (IMR) concessions have at last been released for comment. The IMR concessions will place an individual foreign investor that invests into Australia through a foreign fund in the same tax position in relation to profits, gains and losses as if they were made directly (rather than through the fund). The regime is also designed to ensure that when a foreign investor invests through an independent Australian fund manager it will be in the same position, in relation to profits, gains and losses, as if it had invested directly. IMR entities (generally foreign resident funds making passive portfolio style investments) will be exempt from income tax (including capital gains tax) in relation to gains or profits made on the disposal of those portfolio investments. The concession applies to direct investments (such as shares, stock, units) and derivative instruments relating to such direct investments. The amendments will apply from 1 July 2015 (that is, the 2015 16 income year). The key to accessing IMR tax certainty is in understanding and confirming that the IMR entity is indeed eligible. This depends, in part, on whether the IMR entity is a widely held entity. This includes an entity that is:
- a specified widely held entity; or
- an entity where the underlying investors (that is, looking through interposed entities to find an individual with a heartbeat) do not hold 20% or more of the IMR entity; or
- an entity where 5 or fewer members (again on a look through basis) do not hold 50% or more of the IMR entity.
There are two discrete concessions, being the direct and indirect IMR concession. Either may apply but they each produce the same result.
- The IMR entity must not have a permanent establishment in Australia to access the direct IMR concession.
- Where the IMR entity has a permanent establishment in Australia arising from the engagement of an independent Australian fund manager, the indirect IMR concession may be available.
An independent Australian fund manager must satisfy the following requirements:
- the managing entity must be an Australian resident and carry out investment management activities (within the ordinary meaning of that term) for the IMR entity in the ordinary course of its business;
- the managing entity must, having regard to the Organisation for Economic Co-operation and Development (OECD) transfer pricing guidelines, receive an amount equivalent to arm’s length level of remuneration for its services; and
- the IMR entity must be widely held; or
- no more than 70 per cent of the managing entity’s income for the income year is received from the IMR entity or its ‘connected entities’ as defined.
These rules have been greatly anticipated and will provide much needed certainty for foreign funds and their investors once implemented. Submissions close on 9 April 2015.