The Government on 21 June 2012 introduced into Parliament a new Bill containing the first two elements of the Investment Manager Regime (“IMR”).


The first exposure draft was released on 16 August 2011 and a second exposure draft was released on 6 March 2012, further details of which can be accessed here.

The Bill constitutes the first two elements of the IMR, which are broadly designed to:

  • FIN 48 - address the impact of the application of US accounting rules – widely referred to as “FIN 48” – on managed funds investing in or through Australia. These apply to the 2010-2011 year and prior years;
  • Conduit Income - exclude from Australian tax, for 2010-11 and later income years, certain income of widely held foreign funds that is taxable only because the fund uses an Australian based agent, manager or service provider. This was directed at foreign income and Australian capital gains both which would have otherwise been outside the scope of Australian tax but for the funds use of a local manager; and
  • remove uncertainty as to the tax treatment of “conduit income” of managed funds.  

The Tax Laws Amendment (Investment Manager Regime) Bill 2012 and the corresponding Explanatory Memorandum can be accessed here and here.

Conduit income of 2010-11 and later income years

The amendments introduced by Schedule 1 to the Bill prescribe rules about the taxation of certain widely held foreign funds with investment income or losses which are treated as being attributable to a permanent establishment in Australia solely because the fund retains the services of an Australian based agent, manager or service provider.

The amendments apply to an “IMR foreign fund” that is a corporate tax entity, a trust or a partnership. An entity will be an IMR foreign fund if it:

  • is not a resident of Australia at any time during the income year;
  • is not a resident trust estate at any time during the income year;
  • does not carry on a trading business in Australia at any time during the income year;
  • is “widely held” at all times during the income year; and
  • does not breach the “concentration test” at any time during the income year.  

Where conditions of the amendments are satisfied:

  • returns or gains relating to financial arrangements are non-assessable non-exempt income or disregarded; and
  • deductions and losses relating to financial arrangements are disregarded; and
  • capital gains relating to financial arrangements are disregarded; and
  • capital losses relating to financial arrangements are disregarded.  

Requirements for flow- through vehicles

This tax treatment will extend to foreign resident beneficiaries or foreign resident partners of foreign funds that receive or are attributed amounts through one or more interposed trusts or partnerships. It is noted that the structure of the foreign fund will dictate the level at which the measures apply to exclude IMR amounts:

  • Where a fund is a taxable entity (such as companies or corporate limited partnerships), the exclusion occurs at the fund level.
  • Where a fund is a flow through entity (such as partnerships and trusts), the exclusion will occur at the trustee level and the foreign resident beneficiary level or at the foreign resident partner level in the case of a partnership.  

However, Australian resident investors will not obtain any concession from this measure and the tax treatment of any income received from a fund by an Australian resident will remain unchanged.

A comparison of key features of new law and current law is below:

Click here to view table.

These amendments will apply to the 2010-11 and later income years.

FIN 48

The amendments in relation to this element are designed to clarify the taxation treatment of certain income for the 2010-11 and earlier income years of foreign funds which have not lodged a tax return or have had an assessment made of their income tax liability. Australian investors will not gain any tax benefit from this measure and will remain taxable on any income received from foreign funds.

Where the conditions of the amendments are met, certain types of investment income and gains will be exempt from Australian tax. In addition, losses or outgoings in respect of certain investments will be disregarded.

The amendments apply to an “IMR foreign fund” that is a corporate tax entity, a trust or a partnership (see above).

Requirements for amounts to be disregarded

For income, deductions, gains or losses of a foreign fund to be disregarded, relevant entities must satisfy the requirement of not having lodged a tax return, or having an assessment made or having received a notification of an audit or compliance review.

We note that there is no requirement that the amount must be assessable income only because the fund has a permanent establishment in Australia that arises solely as a result of engaging an Australian resident entity to habitually exercise a general authority to negotiate and conclude contracts on its behalf.

Requirements for flow-through vehicles

Where the IMR foreign fund is a flow through vehicle, for an amount to be disregarded in the calculation of the foreign beneficiary’s or non-resident partner’s share of the net income or partnership loss:

  • the trust and beneficiary or the partnership and partner must not have lodged an income tax return in relation to the 2010-11 or any earlier income years;
  • the beneficiary or partner must not have had, before 18 December 2010, an assessment made of tax payable for any income year; and
  • the trust or partnership must not have been notified before 18 December 2010 of an audit or compliance review.  

We note that where the fund is a corporate tax entity, the above requirements apply to the IMR fund. For flow through entity, the requirement that there has been no tax return lodged applies both to the foreign fund and the relevant beneficiary or partner.

A comparison of key features of new law and current law is below:

Click here to view table.

These amendments will apply to the 2010-11 and earlier income years.

The Bill introduced is an interim step along the path to a full Investment Manager Regime. The final phase of the Investment Manager Regime has not yet being released by the Government.

It should be noted that the Bill has not changed significantly since the exposure draft and so many of the issues that were raised in respect of the exposure draft remain in the Bill. These include particularly tracing issues and the reliance on a broader interpretation of the provisions to allow tracing through feeder funds. We have been in contact with Treasury and it is hoped many of these issues will be corrected as part of the consultation process for the “full” IMR that was confirmed by the Government in December 2011. Details regarding the full IMR can be accessed here.