International measures

Interim Investment Manager Regime

The Government will extend its previously announced interim Investment Manager Regime (IMR) arrangements to address uncertainty regarding the taxation arrangements for certain portfolio investment income of foreign managed funds.

From 2009, the United States FIN 48 (now ASC 740-10) accounting standard required funds to make financial account disclosures on uncertain tax positions, including for prior income years. This affected foreign funds investing in Australian equities and other securities, which could yield profits regarded as Australian sourced income. As a result, many foreign funds simply stopped investing in Australia and some invested indirectly using synthetics.

Under this measure, the Government will amend the law so that where a "foreign managed fund" has never lodged an Australian tax return and has not been notified of an audit or review by the Australian Taxation Office (ATO), the ATO will generally not raise an assessment in respect of certain portfolio investment income of the fund for the 2010-11 or prior income years. This measure, which was initially announced on 17 December 2010 to apply for the 2009-10 and prior income years, has now been extended to the 2010-11 income year.

The concept of a "foreign managed fund" will be subject to further consultation but is stated to have the following broad features:

• Not an Australian tax resident.
• Widely held (and not closely held).
• Undertakes passive investment.
• Does not carry on or control a trading business in Australia.

The proposal covers income and realised gains and losses arising from the following investments by foreign managed funds including:

• portfolio interests in companies (including companies listed on the ASX), portfolio interests in other entities (including units in a unit trust) and bonds, except to the extent the amount gives rise to a withholding tax liability, and
• financial arrangements (for example, derivatives) and foreign exchange transactions, except to the extent they are in respect of an underlying interest that is otherwise taxable (such as "taxable Australian property").

The Government's actions seek to improve investor certainty in relation to the treatment of past transactions of foreign managed funds. This means that exposure to tax on certain gains or profits realised until 30 June 2011 (the 2010-11 income year) are closed off. However, for unrealised gains or profits on investments held as at 30 June 2011 that are realised after this date, or profits realised on investments acquired after 30 June 2011, we await the outcome of the Board of Taxation's review of the IMR as it relates to foreign managed funds. The Board is due to report to Government by 30 September 2011.

MIT withholding tax

The Government indicated that it will update the list of countries reported in the Taxation Administration Regulations 1976 whose residents are eligible to access the reduced 7.5 per cent rate of withholding tax on certain distributions from Australian managed investment trusts (MITs). The list will be updated to include Belize, the Cayman Islands, the Commonwealth of the Bahamas, the Principality of Monaco, the Republic of San Marino, the Republic of Singapore, St Christopher and Nevis and St Vincent and the Grenadines.