The Government has today released revised exposure draft legislation for the long awaited final “third” element in the Investment Manager Regime (IMR) (being, “IMR 3” or the “full” IMR). This follows two prior releases and extensive industry consultation with Treasury.

Our prior alerts in respect of the earlier exposure drafts can be accessed herehere and 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 the Board of Taxation in 2011 and seeks to provide an exemption for foreign investors (including qualifying funds) that invest into Australia either directly or (indirectly) by using local independent managers.

Background to IMR 3

The Johnson Report had found that various uncertainties and the scope of Australia’s tax system acted as an impediment to foreign funds investing in Australia. The introduction of an IMR, with clear and comprehensive statutory rules was proposed as the means of addressing the impediments and to encourage use of Australian financial service intermediaries. In this regard, it had been found that, despite having a significant funds management industry in Australia, only a small percentage of funds under management were from foreign investors.

To date legislation dealing with 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. These can be summarised as follows:

  • Element 1 (FIN 48) (IMR 1) - addressed the 'FIN48' issue by amending the law to effectively exempt foreign funds (wherever located) from Australian tax on passive investments. They restricted the Commissioner of Taxation's ability to raise assessments in respect of income of a widely held foreign managed fund for the 2010-11 and prior income years;
  • Element 2 (Conduit income) (IMR 2) - addressed the tax uncertainty where a widely held foreign managed fund engaged an Australian-based financial services intermediary with respect to foreign investments and Australian assets that were only subject to capital gains tax. The provisions ensured that income from such investments would be exempt from Australian tax if the only reason it was taxable was because the foreign fund engaged the financial services intermediary. The change applied from the 2010-11 income year.

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.

A prior consultative draft of IMR 3 legislation was released in January 2014 however it contained a number of deficiencies. Those issues have largely now been addressed by the latest IMR 3 draft. The IMR 3 is based on the UK IME regime and a number of the legislative conditions have been drawn from that regime.

IMR 3 – “Full" IMR

There are two broad concessions offered;

  • A direct concession – namely where a foreign investor invests directly without engaging a local manager to manage the asset. In this case the nature of the investor is quite limited in that it needs to meet certain widely held tests.
  • An indirect concession – namely where a local manager is engaged – in this case the stipulations regarding the nature of the foreign investor are far less onerous and so apply to a broader class.

Direct Concession

A foreign investor (termed an IMR entity) may qualify for the direct IMR concession in relation to an income year if:

  • it is a widely held entity during the whole of the year. Broadly an IMR entity is widely held if no member of the entity has a total participation interest in the entity of 20 per cent or more; or there are no five or fewer members who have a combined participation interest of at least 50 per cent. Certain tracing rules allow look through to underlying individuals in determining whether the relevant thresholds are met. Further certain other entities (eg foreign life insurance companies) are assumed to be widely held and so may qualify a fund in which it invests as similarly widely held. There are also some concessions for starting up and winding down funds and temporary membership breaches;
  • the interest of the entity in the issuer of, or counterparty to, the IMR financial arrangement does not exceed the ‘non-portfolio interest test’ threshold. The ‘non-portfolio interest test’ requires the holding entity and its associates to hold direct participation interests of less than 10 per cent. This is to ensure that the IMR concession applies in respect of passive, rather than active business income assets; and
  • none of the returns, gains or losses from the arrangement are attributable to a ‘permanent establishment’ in Australia (this adopts either the relevant Treaty test – or if no treaty the definition in the Income Tax Assessment Acts).

Indirect Concession

An foreign investor may qualify for the indirect IMR 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 — then the interest in the entity does not exceed the ‘non-portfolio interest test’ threshold (as above).

To qualify as an independent Australian fund manager, 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. Further the managing entity must receive an amount equivalent to arm’s length level of remuneration for its services.

In addition, to ensure the relationship between the IMR entity and managing entity is genuinely independent, either:

  • 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 associates).

It should also be noted that if the independent Australian fund manager as well as any entities connected with the fund manager have a right to receive, either directly or indirectly, more than 20 per cent of IMR entity’s profits for that year, then the IMR concession is reduced by an equivalent amount.


Generally the provisions apply from the 2015-16 income year and later income years. However a taxpayer may choose to apply the new provisions (with the exception of the direct concession), to assessments for the 2011-12, 2012-13, 2013-14 and 2014-15 income years.


By allowing either a direct or indirect concession the Government has significantly broadened the class of taxpayer that can take advantage of the concession – however investors will need to carefully trace through the requirements to ensure they will meet the various hurdles in each test.

Consultation with Treasury closes 9 April 2015.

A copy of the press release is available here