Timeframe for legislation to repeal Foreign Investment Fund (FIF) rules

In his address to open the Bank of New York Mellon’s first Australian branch in Sydney on 29 September 2009, the Hon. Nick Sherry confirmed his intention to introduce legislation to repeal the FIF rules “very early” in the 2010 calendar year.

This follows on from the initial announcement in the 2009/10 Federal Budget by his predecessor, the Hon. Chris Bowen, in relation to the proposed changes to the existing foreign source income attribution regimes (including the Controlled Foreign Company (CFC) and transferor trust rules). It follows extensive consultation with the financial services sector subsequent to this initial announcement and the feedback that swift action in this regard was desired to provide additional certainty.

The initial announcement in May this year also mentioned that the FIF rules were to be replaced “… with a specific, narrowly defined anti avoidance rule that applies to offshore accumulation or roll up funds”.

Moore Stephens commends the Government on their initiative to improve the international competitiveness of the Australian Funds Management industry by removing the FIF compliance burden. However, we are keen to see the proposed anti-avoidance rules that will replace the FIF regime as the devil is always in the detail.

Who will be affected by the proposed rules?

The proposed rules will have an impact on taxpayers holding interest in foreign entities that are not subject to attribution under the CFC rules or the trust taxation regime contained in Division 6 of the Income Tax Assessment Act 1936. Generally, this will be the case where the taxpayer (including associates) does not control the foreign entity.

Why are the rules important?

The new rules may reduce compliance costs by negating the need to:

• document the application of the exempting provisions; or
• calculate the attributable income under the FIF provisions.

However, we will need to analyse the proposed law when released to ensure that taxpayers are not inadvertently disadvantaged by the amendments.

Board of Taxation review into Managed Investment Trusts (MIT’s) received for consideration

In the same speech, Sherry also confirmed that he has received the Board of Taxation’s review into MIT’s and is currently considering the recommendations made. The review was conducted at the Government’s request in February 2008, which, according to Bowen, “… is a key part of the Government’s commitment to make Australia the financial services hub of Asia.”

Why are the rules important?

The application of the trust taxation provisions to MIT’s and Trusts is contentious and uncertain. This represents a risk for both the investment vehicle and the unitholders. Also, while there has been significant interest from overseas investors for Australian investments, these investors have found it difficult to understand the application of Division 6. The introduction of a separate regime for MITs will provide greater certainty and clarity for all taxpayers, particularly foreign investors.

We await the outcome of the Government’s response to the Board of Taxation’s MIT review and will provide more details when they are released.