An exemption is available for your FIF interests in:
- an entity that is treated as a corporation and is subject to tax on its worldwide income, and
- a company or trust that is treated as a regulated investment company or real estate investment trust (REIT)
for the purposes of the United States Internal Revenue Code 1986.
Subject to the conditions outlined below, an exemption is also available for your FIF interests in:
- a limited partnership or a limited liability company formed under a United States law or United States State law, and
- a common trust fund recognised under the United States Internal Revenue Code 1986. [subsection 513(2)]
Note: 'Entity' in the following text refers to limited partnerships, limited liability companies and common trust funds.
Your FIF interests in the entity are exempt if:
- your interest in the entity is held for the sole purpose of investing in
- a business conducted in the USA, or
- real property located in the USA, and
- the entity does not
- have an interest in income or gains from non-USA sources
- hold an interest in a FIF not resident in the USA, or
- hold real property outside the USA. [subsection 513(3)]
Alternatively, your FIF interests in the entity are exempt where:
- the entity's interests in
- income or gains from non-USA sources
- non-USA FIFs, and
- non-USA real property
does not exceed 5% of the total value of all interests held by the entity in other entities, and
- the value of assets held by the entity that:
- produce income from sources outside the USA, or
- if disposed of would give rise to a gain from a source outside the USA
does not exceed 5% of the value of assets held by the entity. [subsection 513(4)]
Use the entity's accounting records to determine the values of FIF interests and assets when considering whether this condition for exemption is satisfied. [section 513.]
Exemption for complying superannuation entities, certain assets of life insurance companies and certain fixed trusts [Division 11A]
Complying superannuation entities
If you are the trustee of a complying superannuation entity, you are exempt from taxation under the FIF rules. Complying superannuation entities include complying superannuation funds, complying approved deposit funds (ADFs) and pooled superannuation trusts (PSTs) which take their meaning from the Superannuation Industry (Supervision) Act 1993.
If you are a superannuation entity that becomes non-complying, the exemption will not be available for each year that you are non-complying. Whether you are non-complying is to be determined in accordance with the Superannuation Industry (Supervision) Act 1993.
Virtual PST assets or segregated exempt assets
If you have an interest in a FIF that is a virtual PST asset or a segregated exempt asset, you are exempt from taxation under the FIF rules for that interest. Broadly, virtual PST assets are assets that support the complying superannuation business of life insurance companies. Income derived on virtual PST assets is concessionally taxed. Segregated exempt assets are assets that support the immediate annuity and current pension business of life insurance companies. Income derived on those assets is not taxed. [paragraph 519A(a) and subsection 519B(1)]
Fixed trusts
If you are the trustee of a fixed trust where all the fixed entitlements to shares of the income and capital of the trust at the end of the year of income are held by trustees of complying superannuation entities, virtual PST assets or segregated exempt assets of life insurance companies, you are exempt from taxation under the FIF rules. This exemption may also apply to a chain of fixed trusts. [paragraph 519B(3)(a)]
The purpose of this exemption is to ensure that if complying superannuation entities pool their investments through a fixed trust, the investment will not be subject to the FIF rules.
There is a limited concession that allows the FIF exemption to continue to apply to the trust if a complying superannuation entity becomes non-complying. If a complying superannuation entity becomes non-complying, the FIF exemption may continue to be available to the trust provided:
- the non-complying superannuation entity was a complying superannuation entity when it became a beneficiary of the trust, and
- the entitlements of all non-complying superannuation entities are not more than 5% of the market value of the trust.
In relation to the first point, it does not matter if a complying superannuation entity is later notified that it was non-complying for the year in which it became a beneficiary of the trust.
In relation to the second point, if the interests of the beneficiaries that are non-complying superannuation entities exceed the 5% threshold, the exemption will not apply to the trust in each year that the threshold is exceeded. In these circumstances, all beneficiaries (including complying and non-complying superannuation entities) will effectively become liable to tax on any FIF income of the trust. [paragraphs 519B(4) (a) and (c)]
Will this exemption apply to a chain of trusts?
This exemption can apply to a chain of fixed trusts. A fixed trust whose only beneficiary is a fixed trust that qualifies for the FIF exemption will also qualify for the FIF exemption. A fixed trust whose beneficiaries comprise fixed trusts that qualify for the FIF exemption, complying superannuation entities (and potentially non-complying superannuation entities entitled to not more than 5% of the assets of the fixed trust), virtual PST assets and segregated exempted assets will also qualify for the exemption.
Note: This exemption applies only to assessments for income years beginning on or after 1 July 2003.