1.1 Taxation of funds1.2 Recent developments1.3 Taxation of funds resident unitholders/investors in a resident fund1.4 Taxation of resident unitholders/investors in a non-resident fund1.5 Taxation of non-resident unitholders/investors in a resident fund1.6 Taxation of Financial Arrangements (TOFA)1.7 Taxation of fund management/custodian companies1.8 Entitlement to income1.9 Double tax agreements1.10 Other tax-favored vehicles1.11 Transfer taxes, stamp duty, capital duty1.12 Goods and services tax1.13 Recent developments1.14 Information Exchange Countries (IECEOI) countries (as at 15 April 2013 1 January 2012)
1.1 Taxation of funds
Collective investment undertakings in Australia can take a number of forms:
- trusts (listed or unlisted)
- corporate (public/listed or private)
limited partnerships (LP).
- listed investment companies (LIC)
The most popular vehicles are trusts structured as unit trusts. The type of unit trust most commonly adopted is generally referred to as an investment trust (in order to distinguish it from other types of unit trusts such as family trusts and those which carry on an active business).
Investment trusts are generally flow through vehicles and not subject to tax on their income or capital gains. Investors are generally presently entitled (see Section 1.8) to a share of the income of the trust estate, and are assessed on that share of the trust’s notional taxable income.
Investment trusts that carry on an active business (as opposed to passive investment activities) may be subject to tax as a company.
Currently, investment companies are taxed at a rate of 30 percent on income (including capital gains) with a dividend imputation system that provides shareholders with a full credit for company tax paid (at the corporate rate of 30 percent) where the dividends paid to shareholders are fully franked dividends, that is, from taxed profits.
LICs and LPs are not widely used for collective investment purposes in Australia.
LICs are corporate vehicles and are taxed in the same manner as other Australian companies as outlined above (with the key difference being that certain shareholders in a LIC may benefit from discounts applicable to capital gains on the disposal of investment assets (see Section 1.3 below)).
LPs are generally deemed to be companies for Australian tax purposes and are taxed in a similar manner to Australian companies (as outlined above).
There is no wealth tax or gift/inheritance tax in Australia.
back to top
1.2 Recent developments
The Australian Government is currently undertaking a wide-ranging review of the Australian tax system. The findings of these review/inquiry activities will influence tax reform and policy for the immediate and longer-term future. Some specific review activities relevant to investment trusts include a review of the tax treatment of Australian managed funds and consideration of initiatives to improve Australia's attractiveness as a regional financial services investment hub. Some key changes that have been introduced recently include:
- The introduction of the Investment Manager Regime Rules (‘IMR Rules’) which have prescribed treatment of of returns, gains, losses and deductions on certain investments of widely held foreign funds.
- Amendments to the concessional withholding regime for Managed Investment Trusts (MIT), being certain investment funds that meet specific criteria. To qualify as a MIT the trust must be an Australian resident, constitute a "managed investment scheme" as defined in the Corporations Act 2001, and not be a trading trust. A substantial portion of the investment management activities of the trust must be carried on in Australia, and the trust must be "widely held" and not "closely held". MIT withholding tax rate has been increased from 7.5% to 15% applying to income years commencing on or after 1 July 2012 (a concessional withholding tax rate of 10% applies for MITs investing in newly constructed energy efficient buildings).
- The ability to elect for deemed capital gains tax (CGT) treatment with respect to gains and losses on the disposal of certain assets (including shares in a company, units in a trust and land, as well as rights or options over these assets).
- Taxation of Financial Arrangements (TOFA) rules that are intended to simplify the tax treatment of financial arrangements (see Section 1.6 below).
- The repeal of the foreign investment fund (FIF) rules, which impacted on offshore investments held by Australian investment trusts.
Further reform initiatives are currently in progress, including:
- further reforms to the MIT regime
- introduction of the foreign accumulation fund (FAF) rules, a targeted integrity rule that will apply to certain offshore investments
- reform and modernization of the controlled foreign company (CFC) rules
- modifications to the investment manager regime (IMR)
- further reforms affecting the taxation of trusts.
Developments arising from these reform activities could impact on the taxation of investment trusts in the future (see Section 1.13 for details).
back to top
1.3 Taxation of funds resident unitholders/investors in a resident fund
An Australian individual resident unitholder in an Australian investment fund will be subject to tax in Australia as follows.
Distributions of income and/or net capital gains by the fund (that form part of the taxable income of the fund) will be taxed as ordinary income (subject to the CGT concessions discussed below) of the unitholder at their marginal rate of tax as follows (applicable for year ending 30 June 2013):
|0 - 18,200
|18,200 - 37,000
||19% on excess over $18,200|
|37,001 - 80,000
||$3,572 plus 32.5% on excess over $37,000|
|80,001 - 180,000
||$17,547 plus 37% on excess over $80,000|
||$54,547 plus 45% on excess over $180,000|
In addition, a Medicare levy of 1.5 percent is currently payable by most residents thus bringing the highest marginal rate (in most circumstances) up to 46.5 percent.
Non-individual resident unitholders will be taxed at their applicable rates of taxation on the distributions of income. Australian corporates are subject to a tax rate of 30 percent. Australian complying superannuation funds are subject to a tax rate of 15 percent. Australian trusts and partnerships are generally flow-through vehicles and the income is taxed in the hands of the beneficiaries/partners.
Gains derived by Australian resident unitholders on the disposal of units in a fund are generally subject to income tax as outlined above (subject to CGT concessions applying from 21 September 1999).
For capital gains derived on assets acquired prior to 21 September 1999, individuals, trusts, and complying superannuation funds may elect to be assessed either on the indexation basis (except that indexation is frozen at 21 September 1999) or they may elect to obtain a 50 percent discount on the gain (33 1/3 percent discount for complying superannuation funds), where the relevant asset has been held for at least 12 months.
For assets acquired after 21 September 1999 that have been held for at least 12 months, the abovementioned entities can benefit from the CGT discount to gains derived from the disposal of the assets.
Corporate unitholders are not eligible for the CGT discount.
Dividends paid by Australian investment companies are included in the taxable income of Australian individual investors. The taxable income includes any franking credits attached to the dividend (reflecting the tax paid by the company paying the dividend). The franking credit also gives rise to a rebate against the tax payable by the resident investor on their taxable income.
Any gains arising from the disposal of shares in an investment company are included in the taxable income of Australian resident investors.
Where the shares in the investment company are held on capital account the CGT concessions outlined above will apply to certain shareholders.
Shareholders of a LIC will be taxed on a similar basis to shareholders in other Australian companies. However, only 50 percent of any dividend (attributable to a net capital gain made by the LIC from the disposal of assets held for at least 12 months) paid by the LIC will be included in the taxable income of individuals, trusts, and partnerships. Shareholders, which are complying superannuation entities or life insurance companies (subject to certain conditions), will be taxed on only two-thirds of the dividends they receive from the LIC (attributable to net capital gains).
Income distributions by a LP will be taxed as a dividend for Australian tax purposes in the hands of the limited partners.
Any gains arising from the disposal of interests in a LIC/LP are included in the taxable income of Australian resident investors.
Where the shares in the LIC/LP are held on capital account the CGT concessions outlined above will apply to certain shareholders.
There is no specific relief that encourages investment by Australian residents in local rather than foreign funds, except for the pooled development fund regime and the ESVCLP regime that promote collective investment funds to be channelled into small and medium Australian companies (refer to 1.10 below).
back to top
1.4 Taxation of resident unitholders/investors in a non-resident fund
For the purposes of this document, it is assumed that the non-resident fund is organized as a foreign trust or company.
Where a resident invests in a non-resident trust and the non-resident trust distributes income (including capital gains) to the resident investor, the investor’s share of the taxable income of the non-resident trust (including capital gains) will generally be included in the investor’s taxable income. The foreign sourced income will be grossed up for any foreign tax paid.
A unitholder in a non-resident unit trust will generally be entitled to a foreign tax offset for foreign taxes paid by the trust either on its income and/or gains or on the distribution of net income to the beneficiary.
The foreign tax offset allowed is limited to the lower of the Australian tax otherwise payable on the foreign income or the foreign tax paid (no limitation where the foreign tax credit amount for a year is less than AUD1,000). Any excess credits cannot be carried forward into subsequent income years.
Where a resident invests in a non-resident company and the non-resident company pays a dividend to the resident investor, the dividend will generally be included in the investor’s taxable income. The foreign sourced income will be grossed up for any foreign tax paid.
Where the investor is an Australian company and has a non-portfolio interest (a 10 percent or more voting interest in the foreign company), the dividend will be tax exempt in Australia.
A foreign tax offset is generally available for foreign tax paid on the dividend payment to an Australian non-company investor (that is, withholding tax).
Similarly, a foreign tax offset will generally be available for foreign taxes paid by a foreign fund organized as a company on the dividend payment to an Australian company investor where the Australian company investor has a portfolio interest (less than 10 percent voting interest in the foreign company) (that is, withholding tax). Where the Australian company investor has a non-portfolio interest (a 10 percent or more voting interest in the foreign paying company), no foreign tax offset arises, as the dividend will be tax exempt in Australia.
Most of the double taxation agreements which Australia has negotiated provide that relief from double taxation will be available on the above basis also.
The limitations on the amount of foreign tax offsets claimable are the same as outlined above for investments in foreign trusts.
Any gains arising from the disposal of interests in a foreign trust or company are included in the taxable income of Australian resident investors.
Where the interest in the foreign trust/company is held on capital account the CGT concessions outlined above will apply to certain shareholders.
Where a resident investor has a significant/controlling interest in a non-resident fund, the Australian CFC provisions may operate to attribute (on an annual basis) the investor’s share of tainted income derived by the non-resident fund. Tainted income generally includes income from passive sources (for example, interest or dividends), from sales to related parties or from services provided to parties connected with Australia. As part of a review of the tax rules applying to foreign investments, the Government has announced that these rules will undergo changes. Further developments could impact on the tax treatment of significant/controlling interests in offshore investments held by Australian taxpayers (see Section 1.13).
Certain investments in offshore funds may also qualify to be treated as a foreign hybrid. Foreign hybrids are typically entities that would ordinarily be treated as companies for Australian tax purposes but are treated as partnerships for foreign tax purposes (that is, the members of the entity are taxed instead of the entity itself). Foreign hybrids can include foreign limited partnerships, foreign limited liability partnerships, U.S. limited liability companies, and other similar entities. The operation of the foreign hybrid rules means that these entities will be treated as flow through partnerships (instead of companies) for Australian tax purposes.
back to top
1.5 Taxation of non-resident unitholders/investors in a resident fund
To the extent to which a resident investment fund’s income is sourced in Australia, corresponding distributions to non-resident unitholders will generally be subject to tax. The rate of tax and method of payment will depend upon the type of vehicle and income concerned.
- Interest: the fund is generally required to withhold tax at 10 percent. This is a final tax. There are exemptions in limited circumstances.
- Dividends: in relation to dividends which are paid out of profits that have not previously been subject to company tax, the fund is generally required to withhold tax at 30 percent although double tax treaties to which Australia is a party generally reduce this to 15 percent. This is a final tax. Where the dividends have franking credits attached, withholding tax is not required to be deducted from the franked portion of the dividend.
- Certain unfranked dividends that are paid to non-residents may be exempt from dividend withholding tax under conduit foreign income rules.
- Foreign superannuation funds, which are exempt from income tax in their own country, are not subject to Australian interest or dividend withholding tax.
- Other: the fund is generally required to withhold tax on other income. Tax is withheld at different rates depending on the type of investor. This is not a final tax, that is, the unitholder is required to pay tax at year-end by way of assessment with a credit for any tax previously withheld/paid by the fund. Other income includes capital gains, however only capital gains relating to Australian real property (whether held directly or indirectly through an interposed entity) realized by an Australian resident trust are taxable on distribution to non-resident unitholders. If the activities of a fund give rise to gains on revenue account this concession for non-residents may not be available.
- Interest/dividends: same as outlined above for non-MIT trusts.
- Other: the rate which applies will depend on whether or not distributions are made to residents of 'information exchange countries' (see Section 1.14 for these countries). For the year commencing 1 July 2012 and onwards, distributions of other income made by MITs to residents of information exchange countries will be subject to a final tax rate of 15 percent (MITs with investments in newly constructed energy efficient buildings will be subject to a 10% final tax).. Other income includes capital gains, however only capital gains relating to Australian real property (whether held directly or indirectly through an interposed entity) realized by an Australian resident trust are taxable on distribution to non-resident unitholders. If the activities of a fund give rise to gains on revenue account this concession for non-residents may not be available.
- For distributions of other income made by MITs to residents of non-information exchange countries, a final rate of 30 percent applies for the 30 June 2009 year and onwards.
The withholding tax applicable to dividends paid by an investment company to non-resident shareholders is the same as outlined above for non-MIT trusts.
Assuming that the non-resident investor holds their interest on capital account, the categories of assets to which non-residents are liable to CGT is restricted to Australian real property held directly or indirectly through an interposed entity and the disposal of business assets used in an Australian branch/permanent establishment.
Broadly, non-resident investors will only be subject to Australian CGT on disposal of interests in an Australian investment entity if they (and their associates) own 10 percent or more of the entity (at the disposal time or in any continuous 12-month period in the two years leading up to the disposal) and the underlying assets of the entity which are attributable to Australian real property comprise more than 50 percent of the total assets of the fund (by market value).
Please refer to Section 1.13 for details of the Investment Manager Regime which may apply to certain foreign funds that invest in Australia.
back to top
1.6 Taxation of Financial Arrangements (TOFA)
The government has enacted legislation which is intended to simplify the tax treatment of financial arrangements, predominantly by allowing for a greater linkage with accounting principles/treatment in determining the applicable tax treatment. The application of these rules can impact on the timing of recognition of taxable income from financial arrangements (as compared to previous practice). A significant consequence is that capital gains tax (CGT) treatment is not available to any gains to which TOFA applies. The TOFA rules apply to certain entities from 1 July 2010 onwards (unless a taxpayer elected to early adopt from 1 July 2009).
Generally, a managed investment scheme will be subject to the TOFA rules where it holds assets exceeding AUD100 million, or otherwise elects into the TOFA regime. However, the TOFA rules are unlikely to have a significant impact on Australian managed funds that invest in equities or real property (where the default methodologies will apply). Funds that have significant investments in financial securities such as derivatives and hedging instruments will need to consider the impact of the application of the TOFA rules to their investments.
back to top
1.7 Taxation of fund management/custodian companies
The fund manager is generally subject to tax in the same manner as any other Australian resident entity. Usually the fund manager will be a company and thus currently subject to tax on income (including net capital gains) at a flat rate of 30 percent.
There is a tax incentive available for fund managers that are registered as Offshore Banking Units. These fund managers will be taxed at 10 percent on the fees earned for managing non-resident investors’ non-Australian investments.
back to top
1.8 Entitlement to income
The income arises to the unitholder when the unitholder is presently entitled, that is, has a vested and indefeasible interest in the income of the trust. Under the trust deed, unitholders are usually deemed to be presently entitled on a monthly, quarterly, semi-annual, or annual basis. The physical distribution of income usually follows within a few months of the date of present entitlement.
The trust deed generally requires that the income and/or gains of the trust are distributed. If the unitholder is not presently entitled to all income and gains of the trust, then the trustee will be subject to tax in respect of some or all of the taxable income of the trust.
It should be noted that the above treatment only applies to funds organized as trusts and most funds management activity in Australia is carried on through trusts, that is, unit trusts. Collective investment vehicles organized as a company may accumulate after tax income and/or gains and the shareholders will only become entitled to any income and taxable accordingly, on payment of a dividend.
back to top
1.9 Double tax agreements
A non-resident investment fund resident in a country with which Australia has concluded a double tax agreement will generally be entitled to the benefits of the agreement, except to the extent that it maintains a permanent establishment in Australia. If the investment fund maintains a permanent establishment in Australia, the fund’s income attributable to that establishment will generally be subject to tax in the same manner as that of an Australian resident investment fund. The foreign unitholders of such a fund will generally also be denied the benefit of the relevant agreement as such foreign unitholders will be deemed also to be operating through a permanent establishment in Australia, subject to the comment below regarding deemed source rules. The IMR regime may impact on this treatment for certain offshore funds.
In relation to Australian resident investment funds deriving income from a country with which Australia has concluded a double tax agreement, corresponding rules will apply to those described above.
In certain circumstances, it may be possible to "look-through" a non-resident fund to the ultimate foreign investors in the non-resident fund when applying Australia's double tax agreements.
Subject to satisfying certain conditions, where a non-resident unitholder is presently entitled to foreign source income (determined in accordance with Australian domestic tax law) derived from a widely held unit trust from funds management activities carried on through a permanent establishment in Australia, Australian domestic source rules will apply instead of the deemed source rules included in Australia’s treaties. This means that non-resident unitholders would not be subject to Australian income tax in respect of foreign source income attributable to a permanent establishment in Australia.
Currently, there are 44 double tax agreements that have been entered into by Australia.
back to top
1.10 Other tax-favored vehicles
A pooled development fund regime has been established to channel collective investment funds into Australian companies which are small to medium size enterprises (companies with total assets of no more than AUD50 million). The pooled development fund must be registered and must be an Australian company.
The 2006 Federal Budget announced that the pooled development fund program will be closed to new registrations (closure effective from 21 June 2007 and is intended to be phased out over a number of years). A new investment vehicle called an early stage venture capital limited partnership (ESVCLP) has replaced pooled development funds (see below).
Pooled development funds are taxed at a rate of 15 percent on income derived from investments in small to medium sized enterprises (and 25 percent on other income), and shareholders can elect to be exempt from tax on franked dividends.
There is no capital gains tax on the sale of shares in pooled development funds. Any gain on this kind of disposal does not represent ordinary income in the hands of investors.
The pooled development fund regime extends to allow certain superannuation funds to be fully exempt from income and capital gains tax in relation to pooled development fund investments, while receiving a refundable tax credit in relation to exempt franked dividends received.
The ESVCLP provides flow through tax treatment to domestic and foreign partners, with revenue and capital gains being exempt from tax. Investors arenot able to deduct investment losses.
The restrictions placed on ESVCLPs and their funds include:
- a maximum fund size of AUD100 million
- investments in a single company cannot exceed 30 percent of an ESVCLP’s committed capital
- prior to investment, the total assets of the investee company cannot exceed AUD50 million
- when the investee company’s total assets exceed AUD250 million, the ESVCLP must divest itself of its holdings in the investee company
- other reporting and regulatory requirements.
Further, limited partnerships that meet certain requirements may qualify as a venture capital limited partnership (VCLP) or an Australian venture capital Fund of funds (AFOF). Such limited partnerships are also accorded flow through tax treatment and tax exemptions may be available to non-resident investors on their share of the related profits or gains arising.
The Board of Taxation (BoT) has reviewed the taxation of collective investment vehicles, including ESVCLP, VCLP and AFOF regimes. It is expected that the BoT’s report will be released at the same time the Government releases its response to the report.
The Government has announced its response to the BoT’s review of the VCLP regime, including a number of legislative amendments to be made including:
- lowering the minimum investment capital required for entry into the ESVCLP program from $10 million to $5 million to facilitate increased funding from “angel” investors; and
- administering the VCLP and ESVCLP programs as a single regime to provided clearer entry for investors and managers wishing to use these investment vehicles.
back to top
1.11 Transfer taxes, stamp duty, capital duty
Stamp duty is imposed by each State and Territory of Australia on certain types of transactions and instruments. Each State and Territory has its own legislation with different provisions, exemptions, and rates of duty. The legislation is not uniform although the provisions taxing certain types of transactions are similar.
The stamp duty treatment of dealings in collective investment funds will differ depending on whether the fund is a trust or a company, whether the company or fund is listed and whether the fund is a private or public unit trust scheme as defined in the relevant duties legislation.
Marketable securities duty is imposed in New South Wales and South Australia on transfers of shares in unlisted companies incorporated in these jurisdictions and transfers of units in unlisted trusts where the unit register is kept in these jurisdictions. The rate of duty is 0.6 percent of the greater of the consideration and market value of the shares or units transferred. The duty does not apply to issues of shares or units.
Marketable securities duty is scheduled to be abolished in New South Wales from 1 July 2013. South Australia has set no date for abolition.
Transfers of shares in listed companies and units in listed trusts are not subject to marketable securities duty.
The acquisition of interests in companies and trusts with landholdings held directly or indirectly through downstream entities may be subject to duty at rates of up to 7.25 percent of the unencumbered value of the land (land and goods in New South Wales, Western Australia and South Australia) to which the entity is entitled.
Broadly, a company or a trust is a landholder if it has landholdings with an unencumbered value of AUD500,000 or more (Northern Territory and Tasmania), AUD1 million or more (Victoria and South Australia) and 2 million or more (New South Wales, Queensland and Western Australia), or if it has any landholdings in the Australian Capital Territory.
In Tasmania, the Fund’s landholdings in all places comprise 60 percent or more of the unencumbered value of all its property (less certain excluded property). Broadly, the types of property excluded from the calculation are cash, money on deposit, short-term loans and loans to related persons.
Generally, the acquisition of a 50 percent or greater interest in a landholder (including interests previously acquired or interests held by associated persons) will trigger a liability for duty. For private unit trusts with land in Victoria, the acquisition of an interest of 20 percent or more in the trust will trigger a liability for duty.
In Queensland, the land rich provisions apply only to unlisted companies.
In New South Wales, Western Australia, Victoria, Queensland, South Australia and the Northern Territory, landholder duty also applies to acquisitions of 90 percent or more of listed companies and trusts.
Queensland and South Australia have specific trust provisions which impose duty on dealings in units in certain trusts at transfer rates of up to 5.75 percent of the unencumbered value of the underlying property in the trust multiplied by the percentage interest acquired. The duty applies to transfers, issues, and redemptions of units.
In Queensland duty at rates of up to 5.75 percent is imposed where a person acquires an interest in a unit trust that is not a public unit trust scheme which owns underlying property in Queensland directly or indirectly through other trusts. A public unit trust is defined to be a listed unit trust, a widely held unit trust, a wholesale unit trust, a pooled public investment unit trust, or a declared public unit trust (as each of those terms are defined).
However, the acquisition of a majority interest (50 percent or more) in certain public unit trusts that hold or have an indirect interest in land in Queensland will also attract duty at transfer rates.
In South Australia, duty at rates of up to 5.5 percent is imposed where a person acquires an interest in a unit trust scheme that is not a registered managed investment scheme or an approved deposit fund or pooled superannuation trust, which directly owns underlying property in South Australia.
back to top
1.12 Goods and services tax
A goods and services tax (GST) has been in operation in Australia since 1 July 2000. The GST is a broad based consumption tax, imposed generally on taxable supplies and taxable importations at the rate of 10 percent.
The Australian GST system shares many common elements with European value-added tax systems. The basic principles under the GST system are that:
- a supplier has a GST liability for any taxable supplies it makes if it is required to be registered for GST
- a supplier is generally required to be registered where it carries on an enterprise and its current or projected annual turnover is AUD75,000 or more (exclusive of GST)
- certain supplies are excluded from the definition of taxable supplies including GST-free supplies (equivalent to zero-rated supplies) and input taxed supplies (equivalent to exempt supplies)
- as a general rule, the taxpayer must be registered to recover GST. Registered taxpayers are entitled to recover input tax credits being credits for the GST they incur on acquisitions made for a creditable purpose
- Australia is unique as it has a system of reduced input tax credits for certain specified acquisitions that relate to making financial supplies. There are currently two prescribed reduced input tax credit rates:
- A rate of 55% (introduced 1 July 2012), broadly applies to services acquired on or after 1 July 2012 by “recognised trust schemes”. Recognised trust schemes are broadly, managed investment schemes and superannuation funds (excluding securitisation trusts, mortgage funds and self-managed superannuation funds) where the trustee is separately registered for GST and makes taxable supplies to the trust in its own capacity.
- A rate of 75% applies to certain acquisitions by a “recognised trust scheme”, broadly, brokerage, investment management and certain administration services. The 75% rate also applies to certain acquisitions by trusts that are not “recognised trust schemes”. Acquisitions relevant to investment trusts are set out below.
- brokerage and trade execution services for securities, including arranging fees
- securities and unit registry services to securities and unit issuers
- origination and broking services in relation to loans
- loan application, management, and processing services
- responsible entity, trustee, and custodial services
- portfolio management services
- facilitation or arranging for the supply of an interest in a security (but not including units in a unit trust unless the unit trust is a managed investment scheme)
- certain debt collection services
- certain administrative functions in relation to investment funds, such as, document handling, processing services, report production and distribution, record maintenance and distribution, mailing services, member inquiry services, and some compliance services.
Further, under the Australian GST system, trusts (including investment funds) are recognized as entities and therefore may be required to separately register for GST purposes. Consequently, separate supplies can be made between third party suppliers and a trustee of a fund (in its independent capacity) and then subsequently between the trustee and the fund.
Input taxed supplies include financial supplies, which include dealings by a registered entity in certain defined interests such as shares, units in a trust fund, interests under superannuation funds, life insurance and other forms of securities (for example, debentures). Accordingly, supplies made by an investment fund will normally be input taxed financial supplies.
A trust (such as an investment fund) that holds investments in Australian securities will not generally be able to recover the GST charged on purchases that it makes. In addition, the investment fund will generally be required to account for reverse charge GST on services it acquires from outside Australia.
A trust that directly invests in real property will generally be able to recover most if not all of the GST charged on purchases that it makes (except purchases that relate to issuing units in the trust).
A trust may make GST-free, taxable and input taxed supplies. Where an acquisition relates to making both input taxed supplies and GST-free or taxable supplies, the trust may be able to claim GST on purchases to the extent that they relate to GST-free or taxable supplies. The method of apportionment must be fair and reasonable given the circumstances of the enterprise.
Certain financial supplies may qualify for GST-free classification, where they involve, broadly:
- a non-resident counterparty that is not in Australia or
- securities in a non-resident entity.
Certain financial supplies may qualify for GST-free classification, where they involve, broadly:
- a non-resident counterparty that is not in Australia or
- securities in a non-resident entity.
If a supply is GST-free no GST is payable on the supply but the fund is entitled to input tax credits for the GST paid on its purchases that relate to the supply. Where a supply is both input taxed and GST-free, the GST-free treatment prevails.
back to top
1.13 Recent developments
The Australian Government has recently undertaken a wide-ranging review of the Australian tax system. Some specific review activities relevant to investment trusts include a review of the tax treatment of Australian managed funds and consideration of initiatives to improve Australia's attractiveness as a regional financial services investment hub (See Investment Manager Regime, below). These recommendations are currently undergoing a process of consultation, and developments arising from this consultation could impact on the taxation of funds in the future.
The tax arrangements governing the MIT regime are still under review, with the expected start date of any changes being pushed back to 2014. The Government has proposed to alter the rules applying to MITs, most significantly by codifying the industry practice of rolling forward "under" and "over" distributions within a threshold of 5 percent, with anything above the 5 percent threshold subject to additional statutory rules. Also proposed is the provision of an elective "attribution" system of taxation for qualifying MITs to replace the current present entitlement to income concept.
The FIF provisions have been repealed, effective from 1 July 2010, so funds may now be able to hold non-controlling interests in foreign entities without being required to accrue amounts under the FIF rules. These anti-deferral rules will be replaced by the proposed FAF integrity rules (see below).
The Australian Government proposes to introduce the FAF provisions, which is an integrity rule that will apply to certain offshore investments. The proposed rules are narrower in scope as compared to the FIF regime that was repealed, as the FAF rules are intended to apply to foreign funds that accumulate (or roll up) interest-like returns which it receives.
The government has proposed changes to the CFC regime in order to reduce complexity and compliance costs for certain taxpayers. While the government has released exposure draft legislation for consultation, there is currently no set time for the implementation of any changes.
On September 13, 2012, the Tax Laws Amendment (Investment Manager Regime) Bill 2012 was enacted into law in Australia, becoming Act No. 126 of 2012. The Bill amends the Income Tax Assessment Act 1997 to prescribe the treatment of returns, gains, losses and deductions on certain investments of widely held foreign funds.
The legislation prevents the ATO from raising assessments for certain investment income of foreign managed funds for the 2010-2011 income year and previous income years. This aims to address the concerns raised by foreign funds in relation to the US accounting rules widely referred to as FIN48. Furthermore, the legislation ensures that foreign funds that use Australian intermediaries are not subject to Australian tax on certain income that, in the absence of an Australian intermediary, would otherwise be foreign source income. Australian resident investors will not benefit from the new tax concessions.
In order qualify as an “IMR Foreign Fund” and thus, benefit from the new legislation, the fund should meet the following conditions:
- The foreign fund is not an Australian resident at any time during the income year;
- The foreign fund does not carry on a “trading business” in Australia at any time during the income year;
- The entity is ’widely held’ and, in addition, does not breach the “concentration test” at any time during the income year.
On 4 April 2013 the Government released the third and final tranche of draft legislation for consultation. This element is expected to provide a broader exemption going forward for IMR foreign funds in relation to Australian sourced investment income arising from Australian assets that are held on revenue account.
On 24 October 2012, the Government released Taxation of Trust Income – Options for Reform, proposing to reform in Division 6 of the Income Tax Assessment Act 1936.
This paper follows an initial consultation paper, Modernising the Taxation of trust income- options for reforms (released 21 November 2011) which outlined three possible models for taxing trust income. Taxation of Trust Income – Options for Reform paper expands on two of the suggested models in the previous paper.
The two models articulated in this policy options paper are:
- Economic benefits model (EBM) - formerly the 'trustee assessment and deduction' model
- Proportionate assessment model (PAM) - formerly the 'proportionate within class' model
The paper also canvasses two issues that will affect the scope of new arrangements for taxing trust income;
- the treatment of tax preferred amounts
- the possible exclusion of bare trusts
The proposed start date for the reform of trust taxation has been deferred one year from 1 July 2013 and is now due to commence on 1 July 2014.
Given that most funds are structured in the form of a trust, any changes to the taxation of trust income will be relevant for funds in Australia (to the extent that they are not MITs).
The Government released draft legislation on 8 March 2013 proposing to remove eligibility of the 50% discount on capital gains earned after 8 May 2012 by non-residents on Taxable Australian Property. Non-residents will still be entitled to a discount on capital gains accrued prior to 8 May 2012 (after offsetting any capital losses), provided they choose to value the asset as at that time.
back to top
1.14 Information Exchange Countries (IEC) countries (as at 15 April 2013)
- Antigua and Barbuda
- British Virgin Islands
- Cayman Islands
- Cook Islands
- Czech Republic
- Isle of Man
- Netherlands Antilles
- New Zealand
- Papua New Guinea
- San Marino
- South Africa
- Sri Lanka
- St Kitts and Nevis
- St Vincent and the Grenadines
- The Republic of Korea
- Turks and Caicos Islands
- United Kingdom
- United States of America
1A recognized trust scheme has been defined as a managed investment scheme within the meaning of section 9 of the Corporations Act 2001, or an approved deposit fund, a pooled superannuation trust, a public sector superannuation scheme or a regulated superannuation fund (other than a self managed superannuation fund) within the meaning of the Superannuation Industry (Supervision) Act 1993.
© 2014 KPMG Australia Pty Limited, an Australian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.