The proposed FAF rules were introduced as part of a wider package of reforms to Australia's foreign-source income attribution rules that were announced in May 2009 Federal Budget.

Interestingly, it’s predecessor provision, the Foreign Investment Fund (FIF) rules have already been repealed and no longer applies from 1 July 2010.

Background

On 17 February 2011 the Assistant Treasurer released for public consultation the second exposure draft legislation on the FAF rules with submissions sought by 18 March 2011.

The main features of the proposed FAF rules as contained in the exposure draft legislation are as follows:

• The FAF rule applies to a resident investor that holds an interest in a FAF at the end of the FAF’s accounting period;
• A FAF is a trust or company that is not a resident of Australia
• In addition the FAF must meet both of the following requirements:
  Investment. The market value of all debt instruments held by the FAF comprises 80% or more of the total assets the FAF, at the end of the accounting period; and
  Accumulation. This requirement is met if the FAF does not distribute 80 per cent or more of its realised profits and gains and so much of its unrealised profits and gains held in entities it controls and is realised in those entities.
• A foreign fund that does not satisfy either the Investment requirement or the accumulation requirement will not be treated as a FAF
• The notes accompanying the exposure draft indicate that “debt interests” are designed to capture returns that are interest like and are not linked to the performance of the underlying assets:
  Subject to the final legislation, it possible that foreign funds that invest predominately in equities may not be caught by these rules.
• Where an individual is caught by the FAF rules, they will subject to Australian tax on an accruals basis:
  The calculation will be based on the change in market value of the interest in the FAF plus distributions from the FAF.
• The current exemption in respect of temporary residents will continue to apply.
• The FAF rules will not apply to complying Australian superannuation funds.

Proposed administrative treatment by the Australian Taxation Office (ATO)

On 1 June 2011, the ATO announced that it will accept tax returns as lodged during the period up until the proposed law change is passed by Parliament. 

After the new law is enacted, the ATO has indicated that taxpayers will need to review their position for the income year commencing 1 July 2011.

• Those taxpayers who returned income in accordance with the changes do not need to do anything more.
• Those taxpayers who returned more income than they were required to can seek an amendment and if a reduction in liability results, interest on overpayment will be paid.
• Those taxpayers who returned less income than required by the changes will need to seek amendments. No tax shortfall penalties will be applied and any interest accrued will be remitted to the base interest rate up to the date of enactment of the law change. In addition, any interest in excess of the base rate accruing after the date of enactment will be remitted where taxpayers actively seek to amend assessments within a reasonable timeframe after enactment.

Comment

We are now faced with a rather bizarre scenario:

1. How do you provide advice in respect of a law that may never see the light of day in its current format;
2. Who is responsible for the additional compliance costs faced by individuals as a result of the delay in enacting the FAF rules?

Questions
Please contact Michael van Schaik, Associate Director, Employment & Remuneration Services.
Phone: +61 (0) 3 8635 1835
Email: mvanschaik@moorestephens.com.au


Contact

Michael van Schaik
T +61 3 8635 1800
mvanschaik@moorestephens.com.au

www.moorestephens.com.au