Thursday, August 18th, 2011
Sign of relief for FIN 48 US disclosing funds and offshore collective investment funds

With a resilient economy and equally strong financial services industry, Australia is seen as an attractive destination by offshore investors. However, Australia has been lagging behind its APAC counterparts in providing an attractive tax destination and providing certainty for offshore investors.

Several recommendations have been made as part of the Johnson Report and the Government is gradually addressing these recommendations with various reviews being underway in relation to the:

• Introduction of an Investment Manager Regime;
• Review of collective investment vehicles including a separate Managed Investment Trust regime tax code and a separate assessment of venture capital investment vehicles; and
• Developing an Islamic Finance framework including tax amendments to reduce hurdles in investing in Islamic finance products.

Draft measures have recently been released to provide interim certainty for foreign funds. The proposed measures are twofold. Firstly, the proposed measures will reduce US accounting disclosure requirements for US-based funds in relation to their Australian investments. US-based funds are required to disclose their uncertain tax positions (including any potential Australian tax exposure). With the proposed changes, less extensive tax uncertainty disclosure will be required in relation to their Australian operations and the US-based funds will benefit from a retrospective application of the new rules.

Secondly, offshore collective investment funds, which contracts with Australian-based investment managers to act on their behalf, will also benefit from the draft measures. Currently, there is a risk that foreign sourced income and capital gains of the offshore collective investment funds be subject to Australian tax due to them having a deemed permanent establishment by the virtue of engaging an Australian-based investment manager. This uncertainty will now be removed and certain income and gains of collective investment funds will not be subject to Australian tax from the 2011 Australian financial year onwards.

These proposed changes, in essence, mirror the Australian conduit foreign income for corporates; however the changes are not meant to have widespread application given that they will apply to widely held foreign funds with passive operations and no other form of permanent establishment in Australia (except for the Australian-based investment manager nexus). This will not necessarily quench the feud between the Australian Taxation Office and offshore private equity firms. As an aside, the Australian Taxation Office has five reviews in progress and is expected to conduct seven additional reviews and follow-up audits in relation to transactions undertaken by offshore private equity firms.


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Machel Advisory Services

Machel Advisory Services is a boutique advisory firm with focus on the funds management and private equity sector. If you want to further discuss this article, please email us at [email protected]

Yanese Chellapen
P: 03 8635 1987


Australian tax, investment manager regime, FIN 48, tax uncertainty, collective investment vehicles, Australian PE, Australian permanent establishment



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