Tax and Superannuation Laws Amendment (2015 Measures No. 1) Act 2015 (70 of 2015)

Schedule 7   Investment Manager Regime

Part 1   Main amendments

Income Tax Assessment Act 1997

1   Subdivision 842-I

Repeal the Subdivision, substitute:

Subdivision 842-I - Investment manager regime

Guide to Subdivision 842-I

842-200 What this Subdivision is about

This Subdivision sets out rules about the taxation of some foreign residents (known as IMR entities) that invest into or through Australia.

Income and capital gains from IMR financial arrangements are not subject to Australian income tax. Deductions and capital losses from IMR financial arrangements are disregarded for the purposes of this Act.

Table of sections

Object of this Subdivision

842-205 Object of this Subdivision

IMR concessions

842-210 IMR concessions apply only to foreign residents etc.

842-215 IMR concessions

842-220 Meaning of IMR entity

842-225 Meaning of IMR financial arrangement

IMR widely held entities

842-230 Meaning of IMR widely held entity

842-235 Rules for determining total participation interests for the purposes of the widely held test

842-240 Extended definition of IMR widely held entity - temporary circumstances outside entity's control

Independent Australian fund managers

842-245 Meaning of independent Australian fund manager

842-250 Reductions in IMR concessions if independent Australian fund manager entitled to substantial share of IMR entity's income

Object of this Subdivision

842-205 Object of this Subdivision

The object of this Subdivision is to encourage particular kinds of investment made into or through Australia by some foreign residents that have wide membership, or that use Australian fund managers.

IMR concessions

842-210 IMR concessions apply only to foreign residents etc.

(1) This Subdivision applies only for the purposes of working out the assessable income of an entity (the foreign entity ) that:

(a) is a foreign resident; and

(b) is not a trust or partnership.

(2) Despite subsection (1), this Subdivision applies in relation to a partnership or trust, to the extent necessary to work out an amount included in the assessable income of the foreign entity.

Note 1: This Subdivision applies, for example, in working out the net income of a partnership or trust, to the extent necessary to work out the assessable income, attributable to that partnership or trust, of a partner or beneficiary who is a foreign resident.

Note 2: This Subdivision could operate in relation to an entity (if it is a partnership or trust) and/or one or more partnerships or trusts interposed between the entity and the foreign resident.

842-215 IMR concessions

Concessions relating to IMR financial arrangements

(1) The following consequences apply to an *IMR entity for an income year in relation to an *IMR financial arrangement if the requirements of subsection (3) or (5) are met in relation to the year:

(a) what would otherwise be the entity's assessable income for the year is *non-assessable non-exempt income of the entity, to the extent that it is attributable to a return or gain:

(i) from the arrangement (if the arrangement is a *derivative financial arrangement); or

(ii) from the entity disposing of, ceasing to own or otherwise realising the arrangement;

(b) an amount is not deductible by the entity for the year, to the extent that it is attributable to an outgoing or loss:

(i) from the arrangement (if the arrangement is a derivative financial arrangement); or

(ii) from the entity disposing of, ceasing to own or otherwise realising the arrangement;

(c) disregard a *capital gain or *capital loss that is from a *CGT event that happens in the year in relation to the arrangement.

Further concessions relating to permanent establishments

(2) Without limiting subsection (1), the following further consequences apply to an *IMR entity for an income year if the requirements of subsection (5) are met in relation to the year:

(a) income that relates to or arises under the *IMR financial arrangement, and that would otherwise be the entity's assessable income for the year, is *non-assessable non-exempt income of the entity, to the extent that the income:

(i) if the entity is resident in a country that has entered into an *international tax agreement with Australia containing a *business profits article - is treated as having a source in Australia because it is attributable to a permanent establishment (within the meaning of the relevant international tax agreement) of the entity in Australia; or

(ii) if subparagraph (i) does not apply - is treated as having a source in Australia because of subsection 815-230(1);

(b) an amount is not deductible by the entity for the year, to the extent that it is attributable to gaining income that is non-assessable non-exempt income of the entity because of paragraph (a);

(c) disregard a *capital gain or *capital loss that is from a *CGT event that relates to or arises under the IMR financial arrangement, and that happens in the year in relation to a *CGT asset that:

(i) is covered by item 3 of the table in section 855-15 in relation to the entity; or

(ii) is covered by item 4 of the table in section 855-15 in relation to the entity because it is an option or right to *acquire a CGT asset covered by item 3 of that table in relation to the entity.

Direct investment by IMR widely held entity

(3) The requirements of this subsection in relation to the year are that:

(a) during the whole of the year, the *IMR entity is an *IMR widely held entity; and

(b) during the whole of the year, the interest of the entity in the issuer of, or counterparty to, the *IMR financial arrangement does not pass the *non-portfolio interest test (see section 960-195); and

(c) none of the returns, gains or losses for the year from the arrangement are attributable to:

(i) if the entity is a resident of a country that has entered into an *international tax agreement with Australia containing a *permanent establishment article - a permanent establishment (within the meaning of the relevant international tax agreement) of the entity in Australia; or

(ii) otherwise - a *permanent establishment of the entity in Australia; and

(d) the IMR entity does not, during the year, carry on in Australia a trading business (within the meaning of section 102M of the Income Tax Assessment Act 1936) that relates (directly or indirectly) to the arrangement; and

(e) subsection 842-225(2) does not apply to the IMR financial arrangement.

(4) For the purposes of paragraph (3)(a), disregard any part of the year during which the entity did not exist.

Indirect investment through independent Australian fund manager

(5) The requirements of this subsection in relation to the year are that:

(a) the *IMR financial arrangement was made, on the *IMR entity's behalf, by an entity that is an *independent Australian fund manager for the IMR entity for the income year (see section 842-245); and

(b) if the issuer of, or counterparty to:

(i) the IMR financial arrangement referred to in paragraph (a), if it is a *financial arrangement; or

(ii) otherwise - the IMR financial arrangement to which that arrangement relates;

is an Australian resident, or a *resident trust for CGT purposes - during the whole of the year, the interest of the entity in the issuer or counterparty does not pass the *non-portfolio interest test (see section 960-195); and

(c) the IMR entity does not, during the year, carry on in Australia a trading business (within the meaning of section 102M of the Income Tax Assessment Act 1936) that relates (directly or indirectly) to the arrangement.

Withholding taxes etc.

(6) If what would otherwise be the *IMR entity's assessable income is *non-assessable non-exempt income of the entity because of subsection (1) or (2), for the purposes of determining an entity's liability to pay, in relation to that income:

(a) *withholding tax; or

(b) an amount that must be withheld under Division 12 in Schedule 1 to the Taxation Administration Act 1953 (even if the amount is not withheld);

assume that any *independent Australian fund manager for the IMR entity is not a *permanent establishment of the IMR entity.

(7) For the purposes of subparagraphs (2)(a)(i) and (3)(c)(i), an entity is taken to be a resident of a country that has entered into an *international tax agreement with Australia if the entity is such a resident within the meaning of that agreement.

842-220 Meaning of IMR entity

An entity is an IMR entity for an income year if the entity:

(a) is not an Australian resident at all times during the income year; and

(b) is not a *resident trust for CGT purposes for the income year.

842-225 Meaning of IMR financial arrangement

(1) A *financial arrangement is an IMR financial arrangement unless it is or relates to a *CGT asset that is:

(a) *taxable Australian real property (see section 855-20); or

(b) an *indirect Australian real property interest (see section 855-25).

(2) Without limiting subsection (1), a sub-underwriting arrangement that is not a *financial arrangement is an IMR financial arrangement if it was entered into by an *IMR entity for the purpose of providing for the entity to invest or trade in a financial arrangement that is an IMR financial arrangement under subsection (1).

IMR widely held entities

842-230 Meaning of IMR widely held entity

(1) An IMR widely held entity is any of the following:

(a) a *foreign life insurance company;

(b) an entity that is covered by paragraph 12-402(3)(a), (b), (c), (d), (f), (g) or (h) in Schedule 1 to the Taxation Administration Act 1953;

(c) an entity of a kind specified in regulations made for the purposes of this paragraph.

(2) Without limiting subsection (1) of this section, an entity is an IMR widely held entity if:

(a) either:

(i) no other entity has a *total participation interest in the entity of 20% or more (see section 842-235); or

(ii) there are not 5 or fewer other entities the sum of whose total participation interests in the entity is 50% or more (see section 842-235); or

(b) the entity has never satisfied the requirements of paragraph (a), but investment in the entity is being actively marketed with the intention that the entity satisfies the requirements of that paragraph; or

(c) the reason for failing to satisfy the requirements of paragraph (a) relates to the entity's activities and investments being wound down.

842-235 Rules for determining total participation interests for the purposes of the widely held test

(1) For the purposes of subsection 842-230(2), apply the rules in this section in determining an entity's *total participation interest in another entity (the test entity ).

(2) If an entity has, through one or more interposed entities, an *indirect participation interest in the test entity, treat each of those interposed entities as having a *total participation interest in the test entity of nil.

(3) If the test entity is a trust, do not treat an object of the trust as having a *direct participation interest or *indirect participation interest in the test entity.

(4) Treat the following (the affiliated entities ):

(a) an entity;

(b) each of the entity's *affiliates;

as together being one entity, that has all of the interests and rights of the affiliated entities.

Note: Such interests and rights may give rise to a participation interest in the test entity.

(5) If an entity (the nominee ) has interests and rights in the capacity of nominee of another entity:

(a) treat the nominee as not having those interests and rights; and

(b) instead, treat the other entity as having those interests and rights (in addition to the other entity's interests and rights apart from this subsection).

(6) If an entity that has a *direct participation interest or *indirect participation interest in the test entity is an entity covered by:

(a) subsection 842-230(1); or

(b) paragraph 12-402(3)(e) in Schedule 1 to the Taxation Administration Act 1953 (foreign collective investment vehicles with a wide membership);

treat the entity's *total participation interest in the test entity as nil.

(7) The application of subsection (6) to an entity that has a *direct participation interest or *indirect participation interest in the test entity does not affect the *total participation interest in the test entity of any other entity that has a direct participation interest or indirect participation interest in the test entity.

(8) In determining a *direct participation interest of one entity in another entity, disregard paragraph 350(1)(b) of the Income Tax Assessment Act 1936 (rights of shareholders to vote or participate in certain decision-making).

(9) If the test entity is an *IMR entity and another entity is an independent fund manager for the test entity, in determining the *total participation interest of the other entity, or any entity *connected with the other entity, in the test entity, disregard any direct or indirect entitlements (including contingent entitlements) of the other entity, or connected entity, to remuneration from the test entity:

(a) to the extent that the remuneration is subject to income tax in relation to the income year for which the consequences (if any) under subsection 842-215(1) or (2) are being determined in relation to the test entity; and

(b) to the extent that the remuneration is subject to taxation in relation to that income year under a *foreign law.

Example: Assume that 4 entities have interests in an IMR entity, as follows:

(a) a life insurance company has a 55% interest;

(b) an endowment fund has a 5% interest;

(c) company A has a 25% interest. It has 2 shareholders (who are not affiliated): shareholder Y holds 60% of the shares and shareholder Z holds 40%;

(d) company B has a 15% interest. It has several shareholders.

The IMR entity is an IMR widely held entity because:

(e) under subsection 842-235(6), the life insurance company has a total participation interest of nil, as it is covered by paragraph 12-402(3)(a) in Schedule 1 to the Taxation Administration Act 1953; and

(f) the endowment fund has a total participation interest below the 20% threshold in subparagraph 842-230(2)(a)(i); and

(g) under subsection 842-235(2), company A's 25% interest is divided between shareholder Y (15%) and shareholder Z (10%), and company A is treated as having a total participation interest in the IMR entity of nil; and

(h) company B's 15% interest is below the 20% threshold, so none of its shareholders can have a total participation interest above that threshold. (In these circumstances, it is not necessary to determine the total participation interests for each of those shareholders.)

(Treating the life insurance company's 55% interest as a total participation interest of nil ensures that no summing of the other total participation interest can exceed the 50% threshold in subparagraph 842-230(2)(a)(ii).)

842-240 Extended meaning of IMR widely held entity - temporary circumstances outside entity's control

Without limiting section 842-230, an entity is an IMR widely held entity if:

(a) apart from a particular circumstance, the entity would be an *IMR widely held entity because of section 842-230; and

(b) the circumstance is temporary; and

(c) the circumstance arose outside the entity's control; and

(d) it is fair and reasonable to treat the entity as an IMR widely held entity, having regard to the following matters:

(i) the matters in paragraphs (b) and (c);

(ii) the nature of the circumstance;

(iii) the actions (if any) taken by the entity to address or remove the circumstance, and the speed with which such actions are taken;

(iv) any other relevant matter.

Independent Australian fund managers

842-245 Meaning of independent Australian fund manager

(1) An entity (the managing entity ) is an independent Australian fund manager for an *IMR entity for an income year if:

(a) the managing entity is an Australian resident; and

(b) the managing entity carries out investment management activities for the IMR entity in the ordinary course of *business; and

(c) the managing entity's remuneration for carrying out those activities is what the remuneration would be between parties dealing at *arm's length; and

(d) one or more of the following applies:

(i) the IMR entity is an *IMR widely held entity;

(ii) 70% or less of the managing entity's income, for the income year, is income received from the IMR entity or entities *connected with the IMR entity;

(iii) if the managing entity has been carrying out investment management activities for 18 months or less - it takes all reasonable steps to ensure that the proportion of its income received from the IMR entity or entities connected with the IMR entity, for the income year in which that 18 month period ends, will be reduced to 70% or less.

(2) In applying paragraph (1)(c), have regard to the documents covered by section 815-135.

842-250 Reductions in IMR concessions if independent Australian fund manager entitled to substantial share of IMR entity's income

(1) The application of section 842-215 to an *IMR entity for an income year is modified, as provided by subsection (4) of this section, if:

(a) an entity is an *independent Australian fund manager for the IMR entity; and

(b) that entity, or another entity *connected with the entity, has a direct or indirect right to receive part of the profits of the IMR entity for the year; and

(c) the sum of the amounts that the entity, and any other entity connected with the entity, receive for the year in connection with the entity being that independent Australian fund manager exceeds 20% of the amount (the unadjusted concessional amount ) worked out under subsection (3); and

(d) the requirements of subsection 842-215(3) in relation to the year are not met.

(2) However, this section does not apply if:

(a) the circumstances giving rise to the requirements of paragraph (1)(c) being met arose outside the control of:

(i) the *IMR entity; or

(ii) the *independent Australian fund manager or any entity *connected with the independent Australian fund manager; and

(b) the independent Australian fund manager, or an entity connected with the independent Australian fund manager, is taking steps to address those circumstances.

(3) Work out the unadjusted concessional amount as follows:

unadjusted concessional amount formula

where:

amount not assessable or exempt is the sum of:

(a) the amount (the 842-215(1)(a) amount ) of the *IMR entity's income for the income year that is, or would (apart from this section) be, *non-assessable non-exempt income of the IMR entity because of paragraph 842-215(1)(a); and

(b) the amount (the 842-215(2)(a) amount ) of the IMR entity's income for the income year that is, or would (apart from this section) be, non-assessable non-exempt income of the IMR entity because of paragraph 842-215(2)(a), and not because of paragraph 842-215(1)(a).

amounts not deductible is the amount obtained by adding together:

(a) the sum of the amounts that are not deductible by the *IMR entity for the income year because of paragraph 842-215(1)(b); and

(b) the sum of the amounts that are not deductible by the IMR entity for the income year because of paragraph 842-215(2)(b), and not because of paragraph 842-215(1)(b); and

(c) the sum of the amounts that would otherwise be deductible by the IMR entity for the income year under section 8-1 if the income in relation to which they were incurred were not income that is *non-assessable non-exempt income of the IMR entity because of paragraph 842-215(1)(a); and

(d) the sum of the amounts that would otherwise be deductible by the IMR entity for the income year under section 8-1 if the income in relation to which they were incurred were not income that is non-assessable non-exempt income of the IMR entity because of paragraph 842-215(2)(a), and not because of paragraph 842-215(1)(a).

disregarded capital gains is the amount obtained by adding together:

(a) the sum (the 842-215(1)(c) amount ) of the amounts of the *capital gains that:

(i) are from *CGT events that happen in the income year; and

(ii) are, or would (apart from this section) be, disregarded in relation to the *IMR entity, because of paragraph 842-215(1)(c); and

(b) the sum (the 842-215(2)(c) amount ) of the amounts of the capital gains that:

(i) are from CGT events that happen in the income year; and

(ii) are, or would (apart from this section) be, disregarded in relation to the IMR entity because of paragraph 842-215(2)(c), and not because of paragraph 842-215(1)(c).

disregarded capital losses is the amount obtained by adding together:

(a) the sum of the amounts of the *capital losses that:

(i) are from *CGT events that happen in the income year; and

(ii) are disregarded in relation to the *IMR entity because of paragraph 842-215(1)(c); and

(b) the sum of the amounts of the capital losses that:

(i) are from CGT events that happen in the income year; and

(ii) are disregarded in relation to the IMR entity because of paragraph 842-215(2)(c), and not because of paragraph 842-215(1)(c).

(4) Apply the sum referred to in paragraph (1)(c) to reduce (including reduce to zero) the following amounts:

(a) the 842-215(1)(a) amount;

(b) the 842-215(2)(a) amount;

(c) the 842-215(1)(c) amount;

(d) the 842-215(2)(c) amount.

Do not apply the sum to reduce an amount referred to in a paragraph (other than paragraph (a)) unless the sum has been applied to reduce to zero the amount referred to in each paragraph preceding that paragraph.

(5) If the 842-215(1)(c) amount or the 842-215(2)(c) amount relates to more than one *capital gain, a reduction of the amount under subsection (4) is taken to reduce each of the capital gains by the following amount:

Reduction of capital gains formula

(6) Without limiting the circumstances in which the requirements of paragraph (1)(c) are not met, those requirements are taken not to be met in relation to the *IMR entity for an income year if they are not met in relation to the IMR entity for a period (a qualifying period ) of up to 5 consecutive income years including the income year (but not including any future income years).

(7) In ascertaining for the purposes of subsection (6) whether the requirements of paragraph (1)(c) are not met in relation to the *IMR entity for a qualifying period, assume that the qualifying period is the income year referred to in subsection (1).

(8) For the purposes of paragraphs (1)(b) and (c) (including paragraph (1)(c) as affected by subsections (6) and (7)), disregard any direct or indirect entitlements (including contingent entitlements) of the *independent Australian fund manager, or any entity *connected with the independent Australian fund manager, to remuneration from the *IMR entity:

(a) to the extent that the remuneration is subject to income tax in relation to the income year referred to in subsection (1); and

(b) to the extent that the remuneration is subject to taxation in relation to that income year under a *foreign law.