The Australian government announced on 17 December 2010 that it would introduce new laws to provide certainty of tax treatment for foreign managed funds that have invested in Australia. The new rules will apply to a foreign fund (or relevant taxpayer, including trustee or investor of the fund) that has not lodged an Australian tax return for 2009-10 or prior income years in respect of the relevant income, gains or losses of the fund.

The Australian government will amend the income tax laws to prevent the Commissioner from raising an assessment in respect of the relevant income, gains or losses of the particular foreign managed fund. However, the Commissioner will not be prevented from raising an assessment in respect of the relevant income, gains or losses where the fund has lodged a tax return disclosing such income or where the foreign fund (or relevant taxpayer) has been notified of an audit or a compliance review. These concessions will also not apply where the relevant income, gains or losses are derived by a resident investor.

Australian tax rules tax non-resident investors on certain land rich capital gains and on income that is Australian sourced. Foreign funds have had to deal with the uncertainty of whether gains or losses on the disposal of their Australian investments are income or capital and, where the gain is income, whether the gain is Australian sourced. Both the capital/income demarcation and source of income are difficult factual issues and this means that the reporting of the tax position could be uncertain for foreign managed funds. The government's approach is to provide 'safe harbour relief ' for 'foreign managed funds' that derive 'relevant investment income' rather than introducing rules to codify the source or the capital /income demarcation.

Therefore in order to access the concessions the 'foreign managed fund' will be required to have the following features:

The specific definition of 'foreign managed fund' will be developed in consultation with industry stakeholders. Although aspects of the proposed definition such as the 'widely held' and 'no trading' requirements are already contained in the rules relating to managed investment trusts. In order for the concessions to be effective those rules will require some adjustments in this context, particularly in relation to the widely held tracing requirements.

The concept of 'relevant investment income' will include income, gains and losses arising from:

This is welcome and timely announcement for the December 2010 accounts and is another step by the Australian government to improve Australia's standing as a financial services centre. However, foreign fund managers should monitor and participate in the consultation process to ensure that their funds qualify for the concession and in particular the widely held requirements.