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Wednesday, 27 June 2012
Page: 8305


Mr BUCHHOLZ (Wright) (10:13): I rise today to speak on Tax Laws Amendment (Investment Manager Regime) Bill 2012. The bill constitutes the first of two elements of the investment manager regime broadly designed to address the impact of the application of the United States accounting rules, referred to as FIN 48, on managed funds investing in or through Australia. This applies to the 2010 and 2011 years and prior. They also exclude Australian tax for 2010-11 and later income years, certain income of widely held foreign funds that is taxable only because the fund uses an Australian based agent, manager or service provider. This was directed at foreign income and Australian capital gains, both of which would have otherwise been outside the scope of Australian tax but for the funds use of a local manager. The regime is also designed to remove uncertainty as to the tax treatment of conduit income of managed funds.

The amendments ensure that the foreign funds that use Australian intermediaries are not subject to Australian tax on certain income that in the absence of an Australian intermediary would otherwise be a foreign source of income. This tax treatment will extend to foreign resident beneficiaries or foreign resident partners of foreign funds that receive or are attributed amounts through one or more interposed trusts or partnerships. Australian resident investors will not obtain any concession from this measure and the tax treatment of any income received from a fund by an Australian resident will remain broadly unchanged under this bill.

Where the conditions of amendments are met, certain types of investment income and gains will be excluded from Australian tax. In addition, losses or outgoings in respect of certain investments will be disregarded. These amendments will apply to the 2010-11 period and later income years.

I will also mention that this bill, in its interim step along the path to a full investment manager regime, has not changed significantly since the exposure draft was released. The establishment of an investment manager regime was one of the centrepieces of the Johnson report recommendations on Australia as a financial centre released in January 2010.

I support the recommendations made by the Johnson report and particularly the parts of that report which pertain to this bill, including the establishment of an investment manager regime. For the past 18 months Australian fund managers have continuously told the Australian government that overseas investors will only invest through Australia once legislation has passed parliament, so it is pleasing to see that this government has finally moved towards getting something right.

The Johnson report highlighted that the sooner we act the sooner we empower our financial services sector to access market growth on our doorstep and establish Australia as a genuinely world-class financial services hub. Despite these strengths, the Johnson report observed that the sector could benefit from becoming more export oriented. So the underlying principles of this bill are fundamentally sound and are supported by recommendations in the Johnson report.

One of the key initiatives aimed at making the sector more outward oriented was the investment manager regime. The establishment of an investment manager regime is strongly supported by the Australian financial services industry and the Financial Services Council. The investment manager regime would be particularly beneficial to smaller, specialised and boutique Australian fund managers. In the past, larger fund managers have been able to establish offshore operations in other financial centres such as Luxembourg, Singapore and Hong Kong to get around export barriers of the Australian tax system. However, this has never been a cost-effective option for smaller yet highly sophisticated and very talented fund managers. These smaller players would now be able to compete more effectively against larger locally based competitors and overseas competitors, which would enhance choice and competition in the Australian market.

It should be noted that these changes have been the subject of significant consultation with industry through the release of two exposure drafts in August 2011 and then in March 2012. Stakeholders, including the Financial Services Council, the Law Council and Deloitte, consider that the current provisions of the bill have been significantly enhanced and improved through the consultation period and now provide more clarity around important technical issues, such as the definition of a 'widely-held fund' and the operation of the provision designed to deal with the FIN 48 rule.

This legislation has two schedules, which contain the first two elements of the investment manager regime. Schedule 1 will prescribe the tax treatment of conduit income of widely-held foreign funds. The amendment will apply to 2010-11 and later years. The amendments are designed to ensure that the complex tax issues that can currently arise do not operate to discourage foreign funds from engaging the services of an Australian intermediary—for instance, an investment manager. These amendments will ensure that investment income of a foreign entity is not subject to tax in Australia simply because it engages an Australian adviser, where that income would not otherwise have been an Australian source. Schedule 2 will address the uncertainty surrounding the impact of the United States accounting standards, particularly ASC 740-10, and the amendments are often referred to at that stage simply as a FIN 48 measure. The measures will apply to the 2010-11 and earlier income years. The amendments in schedule 2 remove the potential for uncertainty regarding the Australian taxation treatment of certain foreign fund incomes and will allow foreign investors to move forward in their arrangement with confidence in their Australian tax position relating to the earlier years. The proposed amendments are designed to clarify taxation treatments of certain income for foreign funds, which have not lodged a tax return or had an assessment made of their income tax liability. Where the conditions of the provisions are met, certain types of investment income and gains will be exempt from Australian tax. In addition, losses or outgoings in respect of certain investments will be disregarded.

Schedule 1 establishes the investment manager regime by allowing income of an overseas-based fund manager to be treated as non-assessable. Non-exempt income in Australia would be where the income is derived from an investment made overseas that is being made through an Australia-based fund manager. An example—and this will hopefully make this a lot clearer—would be a Singapore-based fund that wishes to make an investment in a portfolio, say in a Japanese bond. The fund would like to engage, say, an Australia-based specialist firm fund manager with specific expertise in the Japanese bond market. Historically that would have been prohibited from a tax perspective. This piece of legislation addresses that, so that we can open up opportunities for some of our fund managers to play a role in facilitating some of those trades. Currently the Singapore-based fund would be considered to have a permanent Australian establishment solely because it was using the Australia-based fund manager, and any income from this investment arrangement, known as 'conduit income', would therefore be subject to Australian tax. This tax outcome hinders Australian fund managers from competing in international markets.

The changes in this bill will ensure that overseas-based funds are not considered to have permanent Australian establishment solely because they are engaging an Australian fund manager to manage its portfolio and the conduit income that would not normally be subject to Australian tax rules. Therefore these measures would allow Australia-based fund managers to compete more effectively for investment mandates from overseas-based manager funds. The Australia-based fund manager would still be liable for the Australian tax on the fee and the other income it derived from the arrangement with the overseas-based fund. It will be liable for the Australian tax on any investment that it makes here in Australian, but not the latter. The bill also contains integral measures to ensure that Australian-resident investors cannot avoid tax by investing in overseas-based funds. Schedule 1 would apply from 2010-11 income year onwards to reflect the date on which the government first announced it would implement this measure.

The measures in schedule 2 FIN 48 are designed to address the consequences of the United States Financial Accounting Standards Board's Interpretation No. 48, Accounting for Uncertainty in Income Taxes or, more simply put, FIN 48. The need for these measures arose from the Australian self-assessment tax system where not all tax positions are formally approved by the Australian Taxation Office. The self-assessment system meant that entities would have to make an accounting provision for tax even though no tax was to be paid to the ATO. FIN 48 has a particular impact on overseas funds with United States reporting requirements, which have a presence in Australia or derive income that could be considered to have an Australian source, as the tax treatment of the income of these overseas funds is not formally approved by the ATO and may be subject to an appeal from the ATO. The measure in schedule 1 of this bill addresses the issue prospectively. Initially, the FIN 48 rule applied only to United States public companies, but since December 2009 it has also applied to private entities that prepare US accounts, including many overseas-based managed funds. The measure in schedule 2 would apply to income of overseas based funds which would otherwise be an assessable income of that fund only where the fund has not lodged an income tax return here in Australia and where the Commissioner of Taxation has not made an assessment or notified the fund of an audit or review. In these cases the changes would ensure that the income of overseas based funds would be treated as non-assessable, non-exempt income. The measure applies for the 2010-11 year and previous years to provide retrospective protection and certainty to taxpayers.

In conclusion I say that I support this bill, which establishes an interim investment manager regime, because it will help to facilitate Australia's world-class financial services industry to grow and to export its services to overseas investors—especially those in the Asia-Pacific region, which is a growth area for this nation. The measures in this bill have long-term positive revenue impacts, as they will result in Australian-based funds managers attracting more investment and in mandates from overseas-based funds which are currently not utilising Australian firms due to the uncertainty of the current taxation arrangements. These Australian firms would therefore earn more fees, increase profitability, pay more tax and potentially employ more people. This is a good measure, and as a consequence I commend this bill to the Federation Chamber.