Government releases second round of draft legislation in relation to the "full" IMR.

The Treasurer has today released the second exposure draft for the third and final element of the Investment Manager Regime ("IMR")

The exposure draft follows industry consultation, including submissions received on the earlier exposure draft. Our prior alert in respect of the earlier exposure draft can be accessed here.

While the Government has confirmed that the necessary integrity aspects of the draft legislation have been retained, several changes have been made to the legislation to address concerns that were raised by industry, including:

  • enabling more flexible tracing through certain entities for the purposes of the widely held and closely held tests;
  • the introduction of provisions to deal with temporary (30 day) inadvertent breaches of the widely held and closely held tests;
  • capping of manager held interests to 20%;
  • revised start up and wind down provisions to allow funds time to seek (or redeem) investors; and
  • allowing funds to hold non-portfolio interests offshore.

These refinements will be welcomed by the funds management industry which found the first iteration too restrictive. However some of the onerous previous restrictions remain such as requiring the fund to be in an Exchange of Information Country and the need for annual reporting.

In this regard, some of the concerns which were raised have been addressed as follows:

  • There was previously a concern that the IMR was a "cliff edge" regime. This meant that if one of the requirements was not satisfied on any particular day (even if inadvertent) then the fund was not eligible for the IMR exemptions for the whole income year. The new rules propose to introduce an additional rule for inadvertent breaches of short duration. Under this rule, a fund that breaches the widely held or closely held tests can retain its status as an IMR foreign fund for an income year, provided that it is not in breach for more than 30 days in the income year, and the fund (or an entity responsible for the fund) and its associates were unable to prevent the breach from occurring.
  • There was also a concern that the prescribed list of foreign widely held entities was too narrow. The amendments introduce new rules for applying the widely held and closely held test when the interests in the fund are held by "IMR widely held entities"(which include certain foreign resident and Australian resident entities, which are broadly consistent with those entities that are recognised as "qualifying investors" for the purposes of the management investment trust ("MIT") rules). The existence of those entities essentially enables the foreign fund to access the concessional notional member counting rule when determining whether the widely held and closely held tests are met.

The continued adoption of the closely held test (which requires no member to hold a 10% or greater interest), and the proposed new test that the manager and its associates must not hold a 20% or greater interest, will continue to cause concern for many foreign funds. 

However, on the whole, it is anticipated that the "full" IMR will provide greater flexibility and tax certainty to managers of foreign funds. This is on the basis that the "full" IMR will allow managers to engage Australian intermediaries (such as brokers or other service providers) without subjecting the relevant foreign fund to Australian tax.

Managers of foreign funds should, however, review the terms of this second exposure draft closely. In particular, the "full" IMR still imposes certain limitations (described above, as "integrity aspects") on the foreign funds that they are able to obtain the benefit of the exemption.

The "full" IMR exemption applies from the 2011-12 income year. These changes will also apply to the previously enacted element 2 (dealing with conduit income) or "IMR 2"

Consultation with Treasury closes 13 September 2013

A copy of the press release is available here.