Improving tax certainty for non residents by hjkuiw354

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									                                                                                           19 May 2010




Improving tax certainty for non
residents
Conduit income arrangements
The Australian Government is committed to developing Australia as a leading regional financial
services centre. Tax uncertainties and the scope of the Australian tax system have been identified by
the Australian Financial Centre Forum (the 'Forum') as a significant restraint on cross-border business
– refer to Australia as a financial centre: Building on our strengths (the 'Johnson Report'). The key
areas of uncertainty include:

•     The Australian common law source rules. These determine the source of any gain based on the
      relevant facts and can produce uncertain outcomes and result in gains made by an offshore
      fund. They are subject to Australian tax even though the gains may not have a substantial
      economic connection with Australia.

•     The application of deemed permanent establishment ('PE') rules to offshore funds. The use of an
      Australian fund manager/intermediary may create a PE in Australia and thereby bring offshore
      capital gains made on offshore equities into the Australian tax net – that is, gains made on the
      disposal of an offshore fund’s non Australian equities are deemed to have a connection with
      Australia.

•     The Australian common law principles which distinguish capital versus revenue gains and which
      are likely to generate conflicting opinions in any given situation. The Johnson Report specifically
      noted ’what constitutes a capital gain as against revenue for tax purposes has been a major
      issue for the financial sector, and the funds management sector in particular'. This has also been
      a major cause for concern for many offshore funds in light of Financial Accounting Standards
      Board Interpretation No. 48 reporting obligations.

•     With respect to limited partnerships ('LP') in particular, uncertain rules in relation to the
      meaning of 'carrying on a business'. There is a greater risk that LPs will have a connection with
      Australia compared to a foreign company or limited liability company (where central
      management and control must be established in Australia to create Australian residency). There
      is a risk that an offshore LP fund may be found to be carrying on business in Australia where the
      fund:

             o   buys and sells exchange traded investments in Australia, or enters into over the
                 counter contracts in Australia, or

             o   engages an Australian related party advisor or fund manager to act as an agent for
                 the offshore fund.




ME_86118046_1 (W2003)
                                                                                              Minter Ellison
                                                                         Investment Manager Regime   page 2


The New Reforms
The Australian Government has announced that it would like to improve certainty regarding conduit
arrangements for managed funds. This is to be achieved through:

•     The introduction of an investment manager regime ('IMR') in Australia, and

•     A review of the tax treatment of collective investment vehicles by the Board of Taxation having
      regard to the managed investment trust ('MIT') tax framework, and including whether a broader
      range of tax flow-through vehicles should be permitted.

Minter Ellison welcomes the Australian Government's support for the recommendations in the Johnson
Report including the introduction of an IMR. We look forward to working together with Treasury, the
Board of Taxation, Industry and our clients to offer solutions that will provide a framework to allow
Australia to develop as the leading regional financial services centre and which provides greater tax
certainty once implemented.



Investment Manager Regime
Johnson Report Recommendations

The Johnson report recommends the introduction of an IMR based on the following principles:

        (a)     The IMR would have wide application, to both retail and wholesale funds and to other
                areas of financial services beyond funds management, but would be confined to entities
                operating within the financial sector.

        (b)     For non resident investors using an independent resident investment adviser, fund
                manager, broker, exchange or agent:
                (i)     investments in all foreign assets would be exempt from any tax liabilities in
                        Australia, and

                (ii)    investments in Australian assets would for tax purposes be treated the same as
                        if the investments were made directly by the non resident without the use of
                        any Australian intermediary.
        (c)     For non resident investors using a dependent intermediary acting at arms length:

                (i)     investments in all foreign assets would be exempt from any tax liabilities in
                        Australia, and
                (ii)    investments in Australian assets would be treated as they are currently, subject
                        to an agreed de minimis exemption to cater for global investment strategies
                        that may include a nominal portion of Australian assets. Any Australian assets
                        under this de minimis exemption would for tax purposes be treated the same as
                        if the investments were made directly by the non resident without the use of
                        any Australian intermediary.
The location of central management and control in Australia of entities that are part of the regime will
not of itself give rise to Australian tax residency of those entities.



Australian Government's Response
The Australian Government supports this recommendation in-principle and intends to respond through
a two stage process.

Stage 1: The Australian Government on 11 May 2010 (as part of the 2010/11 Federal Budget)
released a Consultation Paper on the taxation of the conduit income of managed funds. The Australian
Government will now commence a consultation process in this first stage. The closing date for
submissions in relation to the Consultation Paper is Tuesday, 22 June 2010.




ME_86118046_1 (W2003)

ME_86118046_1 (W2003)
                                                                                              Minter Ellison
                                                                         Investment Manager Regime   page 3


Stage 2: The design of an IMR will be considered by the Board of Taxation as part of its broader
review of the taxation of collective investment vehicles. Outcomes of the Stage 1 process will assist
the Board of Taxation as it considers the design issues relating to an IMR.


Consultation Paper
The introduction of an IMR is a welcome reform and would bring Australia in line with other major
financial centres including the UK, US, Japan, Singapore and Hong Kong.
The main elements of the proposed IMR for offshore funds are:
        (a)     no Australian tax on income earned on offshore assets (that is, conduit income)
        (b)     neutral tax treatment for direct investments and investments made through an
                independent intermediary, and
        (c)     neutral tax treatment for direct investments that have only a small proportion of
                Australian assets and similar investments via a dependent intermediary acting at arm’s
                length (such as a branch).



The purpose of Stage 1 is to look at providing greater certainty for offshore funds as to the tax
treatment of investment transactions undertaken through Australia and the circumstances in which
conduit income relief should be available. As outlined in the Consultation Paper, the general principles
in providing conduit income relief are:

•     where the intermediary in the conduit country adds no economic value, the conduit country
      should not tax the investment. That is, the offshore fund is not connected to the conduit country
      (so taxation is not supported by residence taxation) and the income is not economically
      connected with the conduit country (so taxation is not supported by source taxation).

•     Where the returns on the investment are attributable to the funds management activities of the
      intermediary, the conduit country should be entitled to tax only those returns.

•     Appropriate taxation of resident savings should be safeguarded. Where conduit relief unduly
      compromises the ability to tax Australian resident investors (that is, resident savings), the
      design of conduit relief — or even the provision of conduit relief — should be reconsidered.

Under an IMR a foreign investor investing in offshore equities through the use of an Australian
intermediary should not be subject to Australian tax on the disposal of their offshore investments.
This is consistent with the principle that non-residents should only be subject to tax on their Australian
sourced income.

As part of the Stage 1 consultation process, the Australian Government notes that a number of key
design issues will be raised including:

•     the Australian source rules

•     whether a PE is created

•     whether the fund qualifies as an Australian tax resident, and

•     the distinction between revenue and capital gains.

Although the Australian Government emphasises that the Stage 1 consultation process is limited to
conduit income rules for managed funds, we consider that the consultation process will inevitably and
necessarily need to consider each of these key issues to ensure that these rules apply consistently to
foreign investors investing in either foreign assets or Australian assets. We consider that these issues
will be raised as part of Stage 1 to ensure consistency in the tax policy underlying Australia's source of
income rules, deemed PE rules, and the capital versus revenue distinction for foreign investors
generally.




ME_86118046_1 (W2003)

ME_86118046_1 (W2003)
                                                                                              Minter Ellison
                                                                         Investment Manager Regime   page 4


For example, the Consultation Paper provides that with respect to conduit income:
        "[t]o the extent that returns on the investment are attributable to funds management activities
        or other expertise of an Australian intermediary, under the source principle, Australia should
        be entitled to tax those returns. Assessing the economic contribution made by the
        intermediary will necessitate an understanding of what transactions, structures and activities
        are commonly entered into by the intermediary and how this is related to value added in
        Australia."


This ‘value added’ approach to the question of the source of income potentially departs from existing
common law principles of source of income. The Australian Taxation Office in ATO ID 2004/904:
Income tax Assessability of profits from carrying on a business as a share trader by a non-resident
state that the relevant question is where the profits were made not why, meaning the place where
the contract is concluded is critical. Accordingly, to effectively consult on the source of conduit
income, it is imperative that the consultation process consider the potential impact on the source rules
generally.

As noted in the Consultation Paper:
        "Taxation rules should be administrable and avoid unnecessary complexity and compliance
        costs. If minimising conduit taxation requires disturbing well-established and long-standing
        concepts and principles on an ad hoc basis, the case for changing current arrangements may
        be weakened."



Portfolio versus non portfolio investments
The Consultation Paper notes that it is intended that conduit relief be limited to portfolio income flows.
That is, investments where the foreign investor does not hold a controlling interest and has an interest
of less than 10% in the underlying asset. Accordingly, the proposed IMR should ensure that an
offshore fund does not pay Australian tax on the disposal of its portfolio interest in foreign securities.
The position for non-portfolio interests in foreign securities may differ and will be the subject of
further consultation.

The Stage 1 consultation process provides a valuable opportunity for foreign funds and their advisors
to make submissions and identify the key areas of tax uncertainty that should be addressed as part of
these tax reforms.
The closing date for submissions in relation to the Consultation Paper is Tuesday, 22 June 2010.



Board of Taxation Review of the taxation treatment of collective
investment vehicles
The Assistant Treasurer announced that the Government will ask the Board of Taxation to review the
tax treatment of collective investment vehicles, having regard to the MIT tax framework and including
whether a broader range of tax flow-through vehicles should be permitted.

As part of the review, the Board will also examine the treatment of Venture Capital Limited
Partnership vehicles. The detailed Terms of Reference of the review, including the dates for reporting
to Government, will be released in the near future.
A separate Tax Brief will be issued once further details are known.




ME_86118046_1 (W2003)

ME_86118046_1 (W2003)
                                                                                          Minter Ellison
                                                                      Investment Manager Regime   page 5


Australian Tax contacts


Sydney                              Melbourne                        Brisbane
Karen Payne                         Jeff Faure                       William Thompson
T +61 2 9921 8719                   T +61 3 8608 2847                T +61 7 3119 6221
karen.payne@minterellison.com       jeff.faure@minterellison.com     william.thompson@minterellison.
                                                                     com
Garry Beath                         Alan Kenworthy
T +61 2 9921 4906                   T +61 3 8608 2390
garry.beath@minterellison.com       alan.kenworthy@minterellison.
                                    com
Peter Capodistrias                  Adrian Varrasso
T +61 2 9921 4447                   T +61 3 8608 2843
peter.capodistrias@minterellison.   adrian.varrasso@minterellison.
com                                 com




ME_86118046_1 (W2003)

ME_86118046_1 (W2003)

								
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