Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 7 - Changes to the FIF measures
Summary of the amendments
7.1 The amendments will make the following two changes to the foreign investment fund (FIF) measures:
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- the exemption for approved country funds (section 513) is to be repealed; and
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- the Bogota, Colombo, Zimbabwe and Bratislava stock exchanges are to be added to the list of approved stock exchanges used for the purposes of obtaining market values for FIF interests.
7.2 The country fund exemption (ie, section 513 of the Principal Act and Schedule 11 of the Income Tax Regulations) is to be repealed with effect for notional accounting periods of FIFs commencing on or after 1January 1997. [Item 5 of Schedule 2]
7.3 The Bogota, Colombo, Zimbabwe and Bratislava stock exchanges are to be added to the list of approved stock exchanges in Schedule 12 of the Income Tax Regulations effective from the release of the IP (ie, 24December 1996). [The Income Tax Regulations are to be amended]
Background to the legislation
7.4 A specific exemption from the FIF measures is provided for investments in approved country funds to allow portfolio diversification in emerging markets that do not allow direct investment by Australian residents. Australian investors can therefore invest in these emerging markets through an approved fund without being subject to the FIF measures. The list of approved country funds is prescribed in Schedule 11 of the Income Tax Regulations. There is also a list of approved country funds in Schedule 6 of the Principal Act that applied when the FIF measures were first introduced.
7.5 The country fund exemption is no longer justified following recent reforms in emerging markets that have resulted in substantial investment liberalisation. The exemption can therefore be repealed.
7.6 The list of approved stock exchanges serves two purposes. First, the value of FIF interests quoted on an approved stock exchange can be used as a valuation method for the market value method, one of three methods allowed under the FIF measures for determining FIF income. Secondly, the sectoral classifications provided by approved stock exchanges offer a simple method of qualifying for the active business exemption in the FIF measures. The list of approved stock exchanges is prescribed in Schedule12 of the Income Tax Regulations.
Explanation of the amendments
7.7 The provisions in the Principal Act dealing with the country fund exemption are to be repealed. [Items 1, 2, 3 & 4 of Schedule 2] Amendments to the Income Tax Regulations adding further exchanges to the list of approved stock exchanges and repealing the list of approved country funds are still to be drafted.