House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)

Who is Covered by the Foreign Investment Fund Measures?

Overview

This chapter explains:

hat is a FIF or a FLP;

hat constitutes an interest in a FIF or a FLP; and

hose interest in a FIF or a FLP will be subject to the FIF measures.

Explanation

What is a FIF?

A FIF is any foreign company or foreign trust. [Subsection 481(1)]

A company is a foreign company if it is not a resident of Australia. Whether a company is a resident of Australia is a question of fact which must be determined by reference to the definition of a "resident of Australia" in subsection 6(1) of the Principal Act and the residency provisions of any relevant double taxation agreement.

A trust estate is a foreign trust if the trust estate:

s not an Australian trust or a resident Part IX entity; and

id not result from:

will, a codicil or an order of a court that varied or modified the provisions of a will or a codicil; or

ntestacy or a court order that varied or modified the application of the provisions of the law relating to the distribution of the estates of persons who die intestate. [Subsection 481(3)]

What is an Australian trust?

A trust estate will be an Australian trust at a particular time if:

ithin the past 12 months, the trustee was a resident of Australia or the central management and control of the trust was in Australia. (It is a question of fact whether a trustee is a resident of Australia. This issue is to be determined by reference to the definition of a "resident of Australia" in subsection 6(1); or

he trust is a corporate unit trust for the purposes of Division 6B of Part III or a public trading trust for the purposes of Division 6C of Part III, and in either case, a resident unit trust (broadly, for taxation purposes, corporate unit trusts and public trading trusts are treated in the same way as companies). [Section 473]

What is a resident Part IX entity?

A trust estate is a resident Part IX entity at a particular time if the trust estate:

as established in Australia; or

ad its central management and control in Australia at any time during the past 12 months,

and the trust estate would have been an eligible entity for the purposes of Part IX. [Section 477]

What is an eligible entity for the purposes of Part IX?

An eligible entity for the purposes of Part IX is:

fund that is a complying or non-complying approved deposit fund;

fund that is a complying or a non-complying superannuation fund; or

unit trust that is a pooled superannuation trust.

Bare Trusts

Where an interest in a FIF is held by a trustee for a person who has an absolute entitlement to that interest, which may be exercised against the trustee, the interest in the FIF is considered to be vested in the person who has the absolute entitlement and not as vested in the trustee. Also, any acts of the trustee are deemed to be the acts of the person who has the absolute entitlement. [Subsection 484(1)]

Where a person would have been absolutely entitled to the interest in the FIF as against the trustee, but has a legal disability (for example, due to a physical or mental infirmity, or as a minor) that person will nevertheless be taken to be absolutely entitled to the interest in the FIF. [Subsection 484(2)]

What is a FLP?

A FLP is a life assurance policy issued by an entity that was a non-resident of Australia at any time in the year of income other than an Australian policy subject to the life assurance provisions of the Principal Act. [Subsection 482(2)]

A life assurance policy is a policy which provides for a payment of money upon death, other than death by accident or specified sickness, or the happening of a specified event which relates to the ending or continuing of a human life. A life assurance policy also includes an instrument which grants an annuity for a term dependent upon human life. [Subsection 482(2)]

The measures will only apply to certain life policies. The three categories of policies to be excluded are:

hose which provide life cover, or life and permanent disability cover only;

hose policies issued before 1 July 1992 which cannot, after this date, be cancelled, surrendered or redeemed and for which the terms have not, after this date, been altered in a material respect; and

contract of reinsurance of pure life cover between a resident insurer and a non-resident reinsurer. [Subsection 482(2)]

What is an interest in a FIF?

Meaning of 'an interest in a foreign company'

An interest in a foreign company is:

share in the company including an ordinary, a preference, a bonus, a deferred and a redeemable preference share other than an eligible finance share; or

n instrument that confers an entitlement to acquire such a share (including an entitlement arising from an option or convertible note). [Subsection 483(1)]

Eligible finance shares

Shares held by banks as substitutes for debt will not be subject to the FIF measures. These debt substitutes are referred to as 'eligible finance shares' and are excluded from being an interest in a FIF. [Paragraph 483(1)(a)]

The definition of what constitutes an eligible finance share is provided by section 327 of the Principal Act. Section 327 notes that a share in a company is an eligible finance share if all the following conditions are satisfied:

a)

he shareholder is an Australian Financial Institution (AFI) or an AFI subsidiary;

b)

he share was issued to the shareholder by the company in the ordinary course of business carried on by the shareholder;

c)

he shareholder is not an associate of the company; and

d)

aving regard to:

i)

he manner in which the amount of dividends in respect of the share are to be calculated; and

ii)

he conditions applicable to the payment of dividends in respect of the share; and

iii)

ny other relevant matters;

the payment of the dividends in respect of the share may reasonably be regarded as equivalent to the payment of interest on a loan where the interest accrues at intervals not exceeding 12 months and is paid not later than 12 months after it accrues.

Meaning of 'an interest in a foreign trust'

An interest in a foreign trust is:

n interest in the corpus or income of the trust (including a unit in a unit trust); or

n instrument that confers an entitlement to acquire such an interest (including an entitlement arising from an option or convertible note). [Subsection 483(2)]

What is an interest in a FLP?

A taxpayer has an interest in a FLP if the taxpayer is the person who has the legal title to the FLP.[Subsection 483(3)]

Taxpayers whose interests in a FIF or FLP will be subject to the FIF measures

The FIF measures will apply to a taxpayer's interest in a FIF for a notional accounting period that ended in the taxpayer's year of income (see Chapter 2 for an explanation of a notional accounting period) if:

he taxpayer had an interest in a FIF at the end of the year of income (the year of income ending on or after 30 June 1993); and

he taxpayer was a resident at any time in that year of income. [Subsection 485(3)]

The measures will apply to a taxpayer's interest in a FLP if the taxpayer had the interest at any time during the notional accounting period of the FLP that ends in the taxpayer's year of income and the taxpayer was a resident at any time in that year of income. [Subsection 485(4)]

The measures will not apply to an interest in a FLP if the taxpayer disposes of that interest before 30 June 1993. [Subsection 485(5)]

For the purposes of the above residency test only, a taxpayer who is a trustee of a:

orporate unit trust that is also a resident unit trust;

public trading trust that is also a resident unit trust; or

resident Part IX entity,

is treated as a resident of Australia. [Subsection 485(6)]

Where a taxpayer is a resident throughout a part or parts of the year of income in which the notional accounting period of the FIF or FLP ended, then the amount of foreign investment fund income assessable to the taxpayer is worked out using the following formula:

Foreign Investment Fund Income * (Number of days of residence / Total number of days)
Where:

Foreign investment fund income means the amount of foreign investment fund income that accrued to the taxpayer from the FIF or FLP during the notional accounting period;

Number of days of residence means the number of days throughout the year of income in which the taxpayer was a resident of Australia; and

Total number of days means the total number of days in the year of income (usually 365). [Paragraph 529(2)(b)]

Clause making the amendment

Clause 27: Inserts Part XI containing the Foreign Investment Fund measures.