Explanatory Memorandum
(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)Exemption for Balanced Investment Portfolio in FIFs
Overview
Taxpayers who invest in a wide spread of shares in foreign companies - for example, by following one of the international indices, may generally find that very few of their investments are subject to FIF taxation. This occurs because the range of eligible activities for the active business exemption and the specific exemptions for shares in certain banking, real estate and insurance companies will exempt most companies on the index. Investments in non-eligible activities may typically be less than 5 per cent of the investor's investment portfolio. Because these cases of portfolio diversification involve minimal scope for deferral but otherwise require substantial compliance costs, an exemption is to be provided for investments if non-eligible activities are not more than 5 per cent of the taxpayer's total investments in FIFs.
Explanation
Division 14 provides an exemption for the taxpayer's interests in FIFs which would otherwise be subject to FIF taxation if the value of those interests is not more than 5 per cent of the taxpayer's total portfolio of FIF interests (excluding those interests exempted by Divisions 2 and 11). [Section 525]
There are no restrictions on the type of FIFs that are eligible for this 'balanced portfolio' exemption. The FIFs may include non-eligible activities such as financial services or may not be listed on any stock exchange, approved or otherwise. They may also include trusts.
An Australian resident must look at the end of the notional accounting period of each FIF that ends during his or her year of income to determine if the interest in the FIF would be subject to FIF taxation if the exemption provided by this Division did not apply. [Subsection 525(1)]
The definition of a notional accounting period of a FIF is set out in section 486. Generally, it is the year of income of the taxpayer unless the taxpayer elects for the FIF's accounting period.
To measure whether the interests in FIFs that would be subject to FIF taxation are more than 5% of the taxpayer's total interests in FIFs the value of each FIF is taken at the higher of its cost or its market value at the end of the taxpayer's year of income. [Subsection 525(2)]