Global Tax Alert | 4 February 2014
Australia releases Investment Manager Regime Final Element 3 Exposure Draft with submissions due 14 February 2014
On 31 January 2014, the Australian Government released the third Exposure Draft (ED) law to implement the final stage on an Australian Investment Manager regime (IMR 3) for foreign widely held funds.1
The third ED has substantially been reworked from the first and second versions on IMR3 issued on 4 April 2013 and 31 July 2013 respectively.2 IMR 3 is proposed to apply from the 2011-2012 income year.
Broadly, the purpose of IMR 3 is to exempt from Australian income tax gains or losses made by an entity (that meets the definition of an “IMR foreign fund”) in relation to portfolio interests in equities and interests in other financial interests (e.g., certain debts).
Several changes have been made in this third ED, including:
- • The different treatments of an “IMR foreign fund” depending on whether it is a corporate tax entity trust or partnerships have been removed.
- • There is now just one rule which defines if an entity is an “IMR foreign fund” and broadly states that it will be an entity at all times during the income year that: (i) is not an Australian resident or a resident trust estate (ii) is a resident of an information exchange country at all times during the income year (iii) does not carry on or control a trading business (as defined) in Australia (iv) any of the following conditions are satisfied:
- The entity is an “IMR widely held entity:” This definition has expanded and includes certain listed entities, life insurance companies, pension funds and sovereign wealth funds. This is a positive change which removes the requirements for qualifying IMR widely held entities to trace through their ownership structure. However, for non-IMR widely held entities, such as hedge funds, some degree of tracing through its ownership structure will still be required to determine if these entities are relevantly widely held.
- The entity satisfies the “IMR widely held test:” An entity will satisfy the IMR widely held test if it has at least 25 members and does not breach the closely held requirements.
In determining the members, tracing is required through interposed entities to the individual members. However, there are certain tracing concessions and counting rules where an IMR widely held entity or a collective investment vehicle (as defined) with a wide membership has an interest in the IMR foreign fund.
An IMR foreign fund will not satisfy the “widely held test” if it is considered “closely held”. An entity will be closely held if there is a member of the entity with a total participation interest of 10% or more in it, or, 10 or fewer members of the entity have a total participation interest of 50% or more in it. This should be considered in light of fund managers that are individuals.
A welcome change from the previous ED was the removal of the condition that the fund manager's participation interest in the entity had to be less than 20%, otherwise the entity would be considered to be closely held.
There continues to be concessions to the “widely held test” for unpreventable circumstances of short duration of 30 days where the entity may breach the “widely held test” as well as for the start-up and wind down years.
- The entity is an entity of a kind specified in the regulations.
- Legislated requirements for an IMR foreign fund to provide notifications of IMR status to beneficiaries and partners have also been removed. However, the annual reporting requirement remains which requires an entity that is responsible for the day-to-day management of an IMR foreign fund to provide a statement to the Commissioner no later than three months after the end of an income year.
In addition, the third ED on IMR 3 also redrafts the IMR 2 concession (known as the conduit income measure) although the substance and effect of the conduit measure remains largely unchanged.
The third ED does not have any accompanying explanatory memorandum and therefore further detailed analysis will be required and any new and / or remaining issues are likely to be discussed in submissions on IMR 3 ED, which are due by 14 February 2014. Some of the outstanding issues that still exist include:
- • A widely held foreign fund must still meet the requirement that it is a resident of an information exchange country. Some foreign funds may be domiciled in an information exchange country but may not be considered to be a resident of that country if they are not liable to tax in that country.
- • Interests held by endowment funds may not be recognized as a “participation interest” and may cause otherwise widely held entities to fail the “widely held test.”
- • 10% individual interests in the closely held requirements and not satisfying the “widely held test.”
It appears that this tight submission deadline is to allow for a potential introduction in the autumn sittings of Parliament, scheduled to take place between March – June 2014.
2 For details on the first ED on IMR, see EY Global Tax Alert, Australian Investment Manager Regime Exposure Draft law released: Submissions due 26 April 2013, issued 3 April 2013.
For additional information with respect to this Alert, please contact the following:
Ernst & Young (Australia), Brisbane
- • Michael Chang
+61 7 3011 3126
Ernst & Young (Australia), Melbourne
- • Peter J. Janetzki
+61 3 8650 7525
- • Dale Judd
+61 3 9655 2769
Ernst & Young (Australia), Sydney
- • Daryn Moore
+61 2 9248 5538
- • Antoinette Elias
+61 2 8295 6251
Ernst & Young LLP, Australian Tax Desk, New York
- • Michael Anderson
+1 212 773 5280