What are foreign funds
Foreign pension funds and sovereign wealth funds are collectively referred to as foreign funds.
Foreign funds are amongst the largest private capital investors globally. When these funds invest into Australia, they generally invest directly or through private equity funds, or other collective investment vehicles.
Foreign pension funds
Foreign pension funds are investment funds established and managed outside Australia for the purpose of providing retirement benefits for their members. These funds invest in a diverse range of assets including public and private companies, investment trusts and bonds.
Whether a fund is considered foreign depends on key factors such as its country of establishment and the location of its central management and control.
Sovereign wealth funds
Sovereign wealth funds are state-owned investment funds established by foreign governments. Sovereign wealth funds are often funded from government revenues, reserves, surpluses or the proceeds from the sale of government assets. The purpose of these funds is generally to invest in a diversified portfolio of assets on behalf of their government to generate returns for the collective benefit of citizens.
For more information about applying for early engagement or a private ruling for sovereign entities seeking exemption for returns on certain investments in Australia, see: Sovereign immunity.
About our program of work
The Private capital program has responsibility over foreign funds. The program is funded by the Tax Avoidance Taskforce and it seeks to give the community confidence that investments using private capital, including foreign funds investing into Australian assets are paying the right amount of tax.
Our work is aligned with the public and multinational businesses three-tier model, which helps us understand the tax system in operation and guide our areas of focus for compliance. These are:
- domestic tax positions and structures
- claiming other tax concessions or rates
- foreign government investment.
The way we assess risk, however, isn't limited to the above tier-three focus areas and can cover any other focus areas within the three-tier model if applicable.
While the three-tier model covers the key drivers of tax performance, there may be times where potential non-compliance is detected but not covered by the model. We may choose to investigate the matter even though it isn't currently included in the model.
Our approach to foreign funds
Foreign funds invest a significant amount of capital into a wide range of Australian assets including land, businesses, equities and critical infrastructure.
The establishment of the program recognises the scale of private capital investments, including foreign fund investment in Australia, as well as the unique features and the tax issues related to the entities and structures that are often used.
Our approach to foreign funds consists of various risk-based reviews that focus on key stages of the investment lifecycle.
Pre-acquisition
When Australian investment requires foreign investment approval from the Treasurer (the decision maker), we support the Treasurer by:
- having a dedicated team that is consulted on foreign investment proposals
- considering all tax risks associated with the proposed transaction through a foreign fund's perspective
- recommending conditions or requesting further information to mitigate these risks.
For further information, see foreigninvestment.gov.auExternal Link and refer to guidance note 12.
Through this approach, we assist the Treasurer in deciding whether an action is contrary to the national interest.
Holding period
During this period, we focus on:
- acting on risks identified in the pre-acquisition stage
- monitoring and detecting new or emerging risks during the holding period stage of the investment.
During the holding period, we encourage foreign funds to:
- work with us to understand any areas of concern
- understand our likely approach to the treatment of risks and potential taxing points at divestment.
Pre-exit and exit
Foreign investment conditions may require engagement with us before asset divestment. If we've identified exit-related risks, we:
- will request engagement prior to divestment
- may seek security guarantees to protect Australian tax revenues, if required.
Our work and engagement with foreign funds aims to ensure they meet their Australian tax obligations.
We identify and address international and domestic tax risks associated with foreign fund investments as part of our support to other corporate tax measures and assurance programs such as the Top 100 and the Top 1,000 combined assurance program.
Our support can help resolve tax technical issues relating to foreign funds investments in Australia and work towards an agreement on the tax position the funds intend to take. This also helps reduce the likelihood of a compliance review.
Foreign funds can talk to us about their investments by emailing PGPrivateEquity@ato.gov.au.
Public advice and guidance
The following public advice and guidance products are available:
- Law Companion Ruling LCR 2015/15 Managed Investment Trusts: the non-arm's length income rule in sections 275/605, 275-610 and 275-615 of the Income Tax Assessment Act 1997
- Law Companion Ruling LCR 2020/2 Non-concessional MIT income
- Law Companion Ruling LCR 2020/3 The superannuation fund for foreign residents withholding tax exemption and sovereign immunity
- Practical Compliance Guideline PCG 2017/4 ATO compliance approach to taxation issues associated with cross-border related party financing arrangements and related transactions
- Taxpayer Alert TA 2017/1 Re-characterisation of income from trading businesses
- Taxpayer Alert TA 2020/3 Arrangements involving interposed offshore entities to avoid interest withholding tax
- Taxation Determination TD 2010/20 Income tax: treaty shopping – can Part IVA of the Income Tax Assessment Act 1936 apply to arrangements designed to alter the intended effect of Australia's International Tax Agreements network?
- Taxation Determination TD 2010/21 Income tax: can the profit on the sale of shares in a company group acquired in a leveraged buyout be included in the assessable income of the vendor under subsection 6-5(3) of the Income Tax Assessment Act 1997?
- Taxation Determination TD 2011/24 Income tax: is an 'Australian source' in subsection 6-5(3) of the Income Tax Assessment Act 1997 dependent solely on where purchase and sale contracts are executed in respect of the sale of shares in an Australian corporate group acquired in a leveraged buyout by a private equity fund?