Australia offers tax exemptions for some foreign funds

On 25 June 2015, legislation containing the third and final element of Australia’s Investment Manager Regime (IMR 3) was enacted into law.

The object of the IMR is to encourage particular kinds of investment made into or through Australia by certain foreign entities that have wide membership* or that use Australian fund managers. This is achieved by providing non-Australian entities such as hedge funds with an Australian income tax exemption for returns or gains crystallised on disposal of their investments.

Non-Australian residents qualify for the IMR exemption for an income year either by investing directly in Australia (direct IMR concession), or by investing in Australia via an Australian fund manager (indirect IMR concession).

While the concessions are aimed at foreign funds, the indirect IMR concession also provides significant opportunities for Australian fund managers.

Consequences of IMR concessions

If a fund is entitled to the IMR concessions, returns or gains it makes from the disposal of shares, or returns or gains from loans or derivatives, will be exempt from Australian income tax. 

Amounts that are subject to withholding tax, such as dividends or interest, are not entitled to the IMR concessions. These amounts would continue to be subject to the regular Australian withholding tax law.

IMR example

  • A US limited partnership (LP) invests in listed Australian shares.
  • It receives unfranked dividends of A$100,000 on those shares and, for the year ended 30 June 2016, makes a gain of A$500,000 on the disposal of some of those shares.
  • Assuming it satisfies the requirements for either or both of the direct and indirect IMR concessions, the gain of A$500,000 should be exempt from Australian income tax.
  • However, the dividends could still be subject to Australian dividend withholding tax.
  • The domestic rate of withholding tax on unfranked dividends is typically 30% but this could be reduced under Australia’s tax treaties (if applicable).

Relevance for foreign funds

The IMR concessions are clearly relevant to foreign funds investing in Australia. Such funds should be undertaking an IMR review to assess historical exposures to Australian tax and to determine whether the various conditions associated with the concessions are met.

Looking forward, there is also an opportunity for foreign funds to consider whether they should engage an Australian resident fund manager with a view to relying on the indirect IMR concession.

The above is a simplified overview of the new regime. We would welcome the opportunity to discuss further how this could benefit your fund.

* Widely held entities include large pension funds and funds where no member supplies more than 20% of the assets.

Source: Excerpts taken from Deloitte’s summary to AIMA Australia members.

10th March 2016

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Mark Bennett

Mark Bennett

Managing Director, Fund Services (Australia)

T+61 (0) 2 9005 0404