The Government has today introduced into Parliament a Bill for the long awaited final “third” element in the Investment Manager Regime (IMR) (being, “IMR 3” or the “full” IMR). This follows releases of a number of exposure drafts and extensive industry consultation with Treasury.

Our prior alerts in respect of the exposure drafts can be accessed here.

The “full” IMR was one of the key recommendations from the report by the Australian Financial Centre Forum (the Johnson Report) in 2009 and seeks to provide an exemption for foreign investors (including qualifying funds) that invest into Australia either directly (in the case of widely held funds) or indirectly (for general investors) who use local independent Australian managers.

The IMR 3 has many similarities with the UK IME regime.

Background to IMR 3

The first element of the IMR (dealing with the so called “FIN 48 issues”) and the second element of the IMR (in essence dealing with local intermediaries managing foreign assets of foreign funds) has been passed. However, neither of the above changes dealt with the issue of the broader class of foreign investors deriving Australian sourced gains on revenue account for the period post 2011 particularly where such Australian source arose from using local intermediaries.

The most recent version of IMR 3 comes after extensive consultation with Government and should be large stimulus to facilitate foreign portfolio investment in Australia by removing tax impediments to investing in Australia that might otherwise arise.

Schedule 7 to the Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to implement IMR 3 by introducing a new Subdivision 842-I.

Importantly the provisions are back dated to 2011 to ensure foreign investors which have invested over the period to today are not penalised.

Context of amendments

The IMR 3 regime provides two concessions.

  • The first is designed to place foreign investors that invest into Australia through a foreign fund in the same income tax position in relation to disposal gains and disposal losses as they would be if they had made the investment directly (rather than through the fund) (the direct concession).
  • The second is designed to ensure that a foreign investor that invests through an independent Australian fund manager will be in the same position, in relation to disposal gains and losses, as if they had invested directly (the indirect concession).

Summary of new law

These amendments replace the existing Subdivision 842-I with a new regime that allows foreign entities to qualify for the IMR concession either by the direct or indirect concession.

An entity may independently qualify for the direct concession or the indirect concession. While the tax consequences of either concession are the same, the indirect investment concession applies to a broader range of investment transactions. The result is that gains on Australian portfolio assets are no longer taxable even if Australian sourced - removing a significant uncertainty for foreign investors.

The second impediment arises for foreign entities investing through an independent Australian fund manager. To the extent use of such a manager constitutes an Australian permanent establishment (PE) certain returns or gains from these investments would have an ‘Australian source’ and so, in the absence of these amendments, would typically be taxable in Australia.

What is the IMR concession?

The IMR concession disregards specific Australian income tax consequences arising from investments made by foreign entities, including individuals, companies, beneficiaries of non-resident trusts and partners in partnerships. In essence such income from gains whether on capital or revenue account are now exempt from Australian tax.

However they do not change the rules regarding the imposition of withholding tax on those Australian investments – that is, interest or dividend withholding tax will continue to apply as per the ordinary case.

What entities qualify for the concession?

An entity will only be an IMR entity in relation to an income year if it is not an ‘Australian resident’ and not a ‘resident trust for CGT purposes’ at all times during the year. That is it applies broadly to foreign residents (no matter what jurisdiction they reside in).

An entity which initially qualifies as an IMR entity will need to assess on an ongoing basis that it continues to meet the requirements.

Assets covered

The first limb of the IMR concession applies to disposal gains and losses arising from financial arrangements and to gains and losses arising from derivative financial arrangements (as generally defined). However a financial arrangement will not be an IMR financial arrangement if it is, or relates to, a ‘CGT asset’ that is ‘taxable Australian real property’ or an ‘indirect Australian real property interest’.

Thus for example gains arising from the disposal of portfolio equity interests in companies and in other entities (such as units in a unit trust), gains arising from the disposal of bonds and foreign exchange gains made under forward contracts qualify for the IMR concession.

Further, the IMR financial arrangement must not relate, either directly or indirectly, to the IMR entity carrying on a ‘trading business’ in Australia (within Division 6C).

Qualifying for the direct investment concession

An IMR entity may qualify for the direct investment concession in relation to an income year if:

  • it is an IMR widely held entity during the whole of the year (or all of the part of the year that it exists);
  • the interest of the entity in the issuer of, or counterparty to, the IMR financial arrangement does not fail the 10% test (ie the interest must be less than 10%) during the whole of the year; and
  • none of the returns, gains or losses from the arrangement are attributable to a ‘permanent establishment’ in Australia.

The definition of a ‘permanent establishment’ is set out in either the applicable international tax agreement (based on the residency of the IMR entity) or, if no such agreement applies in relation to the IMR entity, subsection 6(1) of the ITAA 1936.

What is an IMR widely held entity?

An entity may qualify as an IMR widely held entity by coming within a designated class of entity (that is considered ordinarily to be widely held) or by passing a form of closely held test.

Specific widely held entities include foreign life insurance and pension and superannuation funds, foreign government pension funds and the like.

Alternatively, an entity may qualify as an IMR widely held entity if it satisfies either of the following tests (the total participation interest tests):

  • no entity has a ‘total participation interest’ of 20 per cent or more in the IMR entity; or
  • there are no five or fewer entities with a combined ‘total participation interest’ of at least 50 per cent in the IMR entity.

The concept of a ‘total participation interest’ includes a ‘direct participation interest’ as defined in section 960-190 and an ‘indirect participation interest’ as defined in section 960-185. As such it is possible to trace through a range of entities that may invest in an IMR entity to determine each entity’s total participation interest in the IMR entity in order to meet the tests. In this regard the interposed entity is effectively ignored in making the calculation.

Foreign investors need only trace so far as is needed to ensure the tests are met.

The ability to trace through different entities up a chain is a major advantage of the regime and will ensure feeder fund structures are now not disadvantaged.

Special rules for starting up, winding down and temporary circumstances outside an IMR entity’s control

Specific rules apply when the IMR entity is starting up or winding down. If an IMR entity has never satisfied the total participation interests test, then it is still taken to be an IMR widely held entity provided it is being actively marketed with the intention of satisfying the total participation interest tests. It will be a question of fact whether an IMR entity is being actively marketed and this requires evidence of ongoing genuine attempts to obtain third party investment to meet the total participation interests test. There is no express time limit on how long an IMR entity can be actively marketed however more than 18 months may become problematic.

Similarly if an IMR entity’s activities and investments are being wound down, then it will be taken to continue to be widely held even if it no longer satisfies the total participation interests test.

In some cases, an IMR entity may temporarily breach the total participation interest tests due to a reason beyond its control – eg where a key investor withdraws. In such a case the IMR entity may continue to be treated as being widely held if it is fair and reasonable to do so and thus will provide an opportunity for the IMR entity to rectify the breach of the total participation interests test without losing the benefit of the IMR concession.

Qualifying for the indirect investment concession

An IMR entity may qualify for the indirect investment concession in relation to an income year if:

  • the IMR financial arrangement is made on the IMR entity’s behalf by an independent Australian fund manager; and
  • if the issuer, or counterparty to, the IMR financial arrangement is an Australian resident or a resident trust for CGT purposes — then the interest in the entity does not fail the 10% portfolio test (ie the interest is less than 10%).

What is an independent Australian fund manager?

To qualify as an independent Australian fund manager, the managing entity must be an Australian resident and carry out investment management activities for the IMR entity in the ordinary course of its business. This means, for example, that Australian brokers that buy and sell securities on the Australian Securities Exchange for foreign investors as part of their ordinary stockbroking function would be considered as providing such services and therefore could be independent Australian fund managers.

In addition, 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.


  • the IMR entity must be an IMR widely held entity; or
  • no more than 70 per cent of the managing entity’s income for the income year is received from the IMR entity or an entity ‘connected with’ the IMR entity (‘the 70 per cent or less test’).

If an independent Australian fund manager has a right to receive part of the profits of the IMR entity in an income year and the value of that entitlement exceeds 20 per cent of the net value of the IMR concession for that year (the 20 per cent profit test), then the IMR concession may be reduced by the amount of the fund manager’s entitlement. However there are exclusions to mitigate the reduction for certain amounts assessed to the manager and by way of an averaging (to allow for breaches in some years).

Transitional Rules

Taxpayers can choose to apply the rules from the 2015-2016 year or in prior years back to 1 July 2011.

Investors that choose to apply these transitional arrangements need not notify the Commissioner of Taxation about this choice but need to keep sufficient business records to evidence of this choice.

A copy of the Bill is available here.