The regulatory landscape for the Australian funds management industry in 2011 continues to change dramatically, particularly in relation to taxation and product disclosure. This article provides an overview of the key developments.
Encouraging foreign investment in Australian funds under the MIT tax regime
Managed investment trusts (MITs) currently receive beneficial tax treatment in two key respects:
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a concessional withholding tax of 7.5% (reduced from 30%) applies to distributions of rental income and realised capital gains from a MIT to an investor that is domiciled in a country with which Australia has an ‘exchange of information’ agreement
[1] -
MITs can elect to hold eligible assets such as shares, units and land on capital account, ensuring that distributions arising from the disposal of these assets are taxed under the capital gains tax regime, which includes a capital gains discount of 50% for individuals and trusts and 33 1/3% for complying superannuation funds for disposals of assets held for more than 12 months.
From 1 July 2011, a new tax system for MITs is scheduled to commence (although draft legislation has not yet been released at the time of writing). The main features of the new system include an attribution system of taxation under which investors will be taxed only on the income that the trustee allocates to them on a fair and reasonable basis (replacing the current “present entitlement” system), and an ability for trustees to carry forward small under or over distributions to the next tax year without having to issue revised distribution statements. Please refer to our Alert from
13 May 2010 for further details of these proposals. The new laws will require amendments to fund constitutions and trust deeds, so fund managers should be monitoring these changes closely.
To qualify as a MIT, a fund must meet a number of requirements:
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the trustee of the fund must be an Australian resident, or the central management and control of the fund must be in Australia;
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the fund cannot be a trading trust (ie it must be a passive investment vehicle);
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a substantial proportion of the investment management activities in relation to Australian assets must be carried on in Australia (this is a new requirement added last year that applies only to the withholding tax concession);
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the fund must be a managed investment scheme;
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the fund must be widely held, which in the case of a wholesale fund means 25 members (note that tracing through eligible widely held members is allowed in calculating the number of members);
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a foreign individual investor must not own more than 10% of the fund, and in the case of a wholesale fund 10 or fewer investors (other than eligible widely held investors) cannot own a total of 75% or more of the fund.
Last year the definition of MIT was amended to make it clear that it extends to unregistered wholesale funds and government-owned funds, not just retail registered schemes.
Encouraging foreign funds to use Australian fund managers
On 19 January 2011,
the Federal government announced changes to the income tax treatment of investment income of foreign funds which are designed to encourage foreign funds to use Australian-based fund managers.
Currently, a foreign fund that engages an Australian-based fund manager might be taken to have a permanent establishment in Australia. This may result in Australian tax being imposed on income earned on its investments, including offshore assets.
Under the proposed changes, to apply to the 2010-11 and later income years, if relevant investment income of a non-resident is taxed only because a foreign managed fund is taken to have a permanent establishment in Australia, that income will be exempt from income tax.
A “foreign managed fund” will need to be widely-held, undertake passive investment and not carry on or control a trading business in Australia. It is expected that the definition of a foreign managed fund will draw on existing concepts used in the MIT definition.
“Relevant investment income” will include income, gains and losses from portfolio interests in companies, trusts and bonds (except to the extent the amount gives rise to a withholding tax liability) and from certain financial arrangements (for example, derivatives) and foreign exchange transactions.
Proposed new FAF rules may encourage foreign funds to offer their products to Australian investors
This new, limited integrity measure replaces the much broader and punitive foreign investment fund (FIF) regime, and is designed to prevent the offshore accumulation of profits and gains by Australian residents derived from low-risk investments.
An Australian resident who holds an interest in a FAF will be required to include FAF attributable income in their assessable income, regardless of whether it is distributed.
In broad terms, a FAF is a foreign company or trust that holds debt interests with a market value of at least 80% of the total market value of the entity’s assets, and which distributes less than 80% of its realised profits and gains.
This limited definition of a FAF creates the opportunity for a broad range of foreign funds, including funds that hold significant debt interests or accumulate income or both, to be designed and offered to Australian investors in a way that does not attract the FAF rules.
Australian investors in foreign funds that are not FAFs will only be subject to Australian income tax on distributions from the fund or gains on realisation of the investment.
Shorter, simpler Product Disclosure Statements
The start date of 22 June 2011 for 8 page PDSs for “simple managed investment schemes” and superannuation products is rapidly approaching. Our Alert from
24 June 2010 contains details of the new disclosure rules.
Issues that fund managers are grappling with include:
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the requirement of only one scheme per PDS
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the fact that much of the content of the 8 page PDS will comprise generic information common to managed investment schemes generally, while information (including risks) specific to the fund will be contained in the IBR (incorporated by reference) document on the website, which investors may not read
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the likely need for a second website document that contains additional information about the fund that cannot be included in the IBR document because the regulations do not specifically “require or permit” the information to be IBR.
Managers and their advisers are also awaiting guidance from ASIC, in the form of revised regulatory guides, as to how ASIC will administer the new disclosure requirements.
For further information
Michael Hodgson | Special Counsel
T +61 2 8233 9756
[1] There are over 40 such countries, including low tax jurisdictions, and the list is growing.
The material contained in this publication is no more than general comment. Readers should not act on the basis of the material without taking professional advice relating to their particular circumstances.
