Significant changes to the taxation of funds have been announced but not enacted over the past few years. The announcements have created tremendous uncertainty for fund managers managing both inbound and domestic investment vehicles.
Late last year, the Federal Government sought to provide some stability by clarifying the status of several proposed tax reform measures. Some proposals were scrapped and other key measures identified with a way forward.
The announcements provide an opportunity for the funds industry to focus on the major reforms that have now been prioritised by the Government.
1) INBOUND INVESTMENT VEHICLES - INVESTMENT MANAGER REGIME
The Government has committed to proceeding with the implementation of a full investment manager regime (IMR) and will likely amend the existing rules to allow more funds to access to the concessions provided under the IMR.
Broadly, the IMR:
- prescribes the treatment of returns, gains, losses and deductions on certain investments of widely held foreign funds. The concessions contained in the IMR apply where the returns or gains would otherwise be assessable only because they are attributable to a permanent establishment in Australia which arises solely from the use of an Australian-based agent, manager or service provider
- prescribes the taxation treatment of certain returns, gains, losses and deductions for 2010/11 and earlier income years of widely held foreign funds which have not lodged a tax return and have not had an assessment made of their income tax liability.
2) DOMESTIC INVESTMENT VEHICLES - FURTHER CHANGES TO THE TAXATION OF MANAGED INVESTMENT TRUSTS
The Government is proceeding with introducing further changes to the taxation of managed investment trusts (MIT). These changes are intended to take effect from 1 July 2014. Aspects of the MIT taxation system have already been introduced, namely the making of an irrevocable election by eligible MITs for CGT treatment on certain assets and a reduced withholding tax rate of 15% for fund payments made to certain non-resident investors.
The anticipated changes include:
- allowing an over or under distribution of net income that is not caused intentionally by the trustee to be carried forward, subject to certain integrity measures
- introducing an arm’s length dealing rule in place of the existing corporate unit trust rules
- allowing eligible MITs to use an “attribution method” of taxation in place of the present entitlement method.
3) INTERNATIONAL ATTRIBUTION RULES - NOT PROCEEDING WITH CHANGES
The Government will not be proceeding with the introduction of foreign source anti-tax deferral (attribution) rules which had previously been contemplated. With every investment strategy involving offshore investments, it has been necessary over the recent past to consider the potential application of the proposed foreign investment fund (FAF) rules and potential changes to the controlled foreign company (CFC) rules to the investment strategy contemplated.
By confirming that the Government will not be pursuing FAF and CFC changes, investment managers reviewing offshore investments can concentrate on current CFC provisions with some assurance that the rules are unlikely to be materially altered in the immediate future.
The Government announcements late last year have provided some much needed relief by specificall dentifying the measures that they will and will not be pursuing. The rate of change also seems to have momentarily slowed. This will mean fund managers can focus instead on their core business.
- The Government has identified a range of tax measures that they will and will not be pursuing
- Implementation of a full investment manager regime and further changes to the taxation of managed investment trusts is now anticipated
- Foreign source anti-tax deferral (attribution) rules will not be going ahead