Explanatory Memorandum
(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)General outline and financial impact
Investment manager regime
Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 to prescribe the treatment of returns, gains, losses and deductions, on certain investments of widely held foreign funds. The amendments will apply where the returns or gains would otherwise be assessable income of the fund 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. This measure is often referred to as the 'conduit income' measure or 'Element 2' of the investment manager regime (IMR).
Schedule 2 to this Bill amends the Income Tax ( Transitional Provisions ) Act 1997 to prescribe the taxation treatment of certain returns, gains, losses and deductions for the 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. This measure is often referred to as the 'FIN 48' measure or 'Element 1' of the IMR.
Date of effect : Schedule 1 of the Bill applies to assessments for the 2010 -11 income year and later income years. Schedule 2 of the Bill applies for the 2010-11 income year and previous income years
The amendments may have a retrospective impact but are of a beneficial nature to affected entities.
Proposal announced : The measures were announced by the then Assistant Treasurer and Minister for Financial Services and Superannuation in Media Release No. 027 of 17 December 2010 (Schedule 2) and in Media Release No. 010 of 19 January 2011 (Schedule 1).
Financial impact : These measures represent part of the IMR package of reforms which were included in the 2010-11, 2011-12 and 2012-13 Budgets. Prior to the introduction of the IMR, income tax payable by foreign managed funds was estimated to be $50 million per annum over the forward estimate period. The portion of this revenue impact which is attributable to the measures in this Bill is unquantifiable but small.
Human rights implications : This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 3, paragraphs 3.1 to 3.5.
Compliance cost impact : These measures will reduce compliance costs and transaction costs for foreign managed funds and foreign investors, as well as reduce administrative costs for the Australian Taxation Office.
Summary of regulation impact statement
Regulation impact on business
Impact : Clarifying the Australian tax treatment of prior year investments by foreign managed funds so as to mitigate the impact of United States Financial Accounting Standards Board Interpretation Number 48 Accounting for Uncertainty in Income Taxes (FIN 48) and removing the tax impediment to foreign funds engaging Australian managers that occurs because a fund is taken to have a permanent establishment in Australia will affect:
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- foreign managed funds (and investors in those funds) that are currently investing, or considering investing, via Australia; and
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- the domestic funds management industry - that is, Australian based intermediaries, such as Australian investment advisers, fund managers, brokers and other financial service providers, that provide services to managed funds.
Overall, these changes will provide clarity and tax certainty regarding the tax treatment of certain portfolio investment income of foreign managed funds. The changes will maintain Australia's attractiveness as an investment destination and will benefit financial services businesses (such as funds managers and brokers).
Main points:
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- The Regulation Impact Statement considers taxing arrangements for foreign managed funds investing in or via Australia. It deals with two issues which have arisen in relation to the existing arrangements, namely:
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- consequences foreign managed funds face, complying with US accounting rules; and
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- impediments to foreign funds using Australian-based financial intermediaries to manage (primarily offshore) assets.
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- These two issues, if left unchecked, have the potential to impede Australia's development as a regional financial centre.
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- By introducing rules to provide clarity regarding the treatment of certain portfolio investment income of foreign managed funds for the 2010-11 and prior income years, the changes will enable funds subject to FIN 48 to determine whether to make or vary tax provisions.
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- These changes will also provide timely guidance to the Commissioner of Taxation regarding the administration of the law in respect of prior year investment income.
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