The Assistant Treasurer announced yesterday that the proposed foreign accumulation fund or FAF rule, that was to replace the foreign investment fund or FIF rules that were repealed last year, will not apply for the 2010-2011 income year.

The proposed foreign accumulation fund or FAF rule has been proposed as a replacement to the foreign investment fund rules that were repealed last year.  Based on the Exposure Drafts that have been released to date, the FAF rule will operate as a targeted anti-avoidance rule that applies to Australian investors that invest in foreign accumulation fund that invest primarily in debt interests.

This announcement suggests that the 2010-2011 income year will effectively be a “hiatus” from the foreign accruals regimes, as neither the FIF rules nor the proposed FAF rule that was to replace it will apply during this year.

This will be a welcome announcement for those fund managers that invest in foreign funds, or who are seeking to offer foreign funds into Australia, in the lead up to year end.

It means that Australian trust managers who manage trusts that invest in foreign funds that may be subject to the FAF rules will not need to distribute amounts to take into account any anticipated income from the application of the FAF rule.  It also means that any interim arrangements that had been entered into to prevent the FAF rule from applying once it is enacted for this year may no longer be necessary.

It will be crucial for fund managers that may be affected by the FAF rule to continue to monitor the development of the proposed FAF rule.  Treasury emphasised in its announcement its continuing commitment to enact the FAF rule in future and the ongoing consultation process it is performing in order to ensure that the FAF rule is appropriately drafted.