Inserts for
Exposure Draft Bill 2011: Exemption for certain income attributable to a permanent establishment

EXPOSURE DRAFT (16/08/2011)

Commencement information	
Column 1	Column 2	Column 3	
Provision(s)	Commencement	Date/Details	
1.  Schedule	The day this Act receives the Royal Assent.		
2.  			
3.  			

Schedule—Investment management regime
  
Income Tax Assessment Act 1997
1  After Subdivision 842‑B
Insert:
Subdivision 842‑I—Investment management regime: foreign managed funds
Guide to Subdivision 842‑I
842‑200  What this Subdivision is about
This Subdivision includes rules about the taxing arrangements for certain foreign funds which have investment income or losses which are treated as being attributable to a permanent establishment in Australia solely because the fund retains an Australian based investment manager.
Where the conditions in this Subdivision are satisfied:
•	returns or gains relating to certain investments (known as IMR income) are non‑assessable non‑exempt income; and
•	deductions and losses relating to certain investments (known as IMR losses) are disregarded; and
•	capital gains relating to certain investments (known as IMR capital gains) are disregarded; and
•	capital losses relating to certain investments (known as IMR capital losses) are disregarded.
Table of sections
842‑205  Objects of this Subdivision
	(1)	The objects of this Subdivision are to:
	(a)	encourage the competitiveness of Australian based investment managers; and
	(b)	to ensure that non‑residents are not inappropriately subjected to Australian tax solely because they retain an Australian based investment manager.
	(2)	This is achieved by:
	(a)	treating certain income as *non‑assessable non‑exempt income; and 
	(b)	disregarding certain deductions; and
	(c)	disregarding certain *capital gains and *capital losses; and 
	(d)	ensuring that such amounts continue to be taken into account when they are derived or incurred by a resident of Australia.
842‑210  Certain amounts in respect of IMR foreign funds and trustees of IMR foreign funds are disregarded
	(1)	Subsection (2) applies in relation to an income year of an entity if:
	(a)	the entity is an *IMR foreign fund or the trustee of an IMR foreign fund; and
	(b)	the entity does not have a place of business in Australia, but is treated as having a permanent establishment in Australia solely as a result of engaging an Australian based investment manager who habitually exercises a general authority to negotiate and conclude contracts on behalf of the entity.
	(2)	In working out the entity’s taxable income for the income year (or the amount in respect of which a trustee is assessed and liable to pay tax) apply the following rules:
	(a)	treat the entity’s *IMR income for the income year as *non‑assessable non‑exempt income;
	(b)	disregard the entity’s *IMR loss for the income year;
	(c)	disregard the entity’s*IMR capital gain for the income year;
	(d)	disregard the entity’s*IMR capital loss for the income year.
842‑215  IMR foreign fund
		An entity is an IMR foreign fund in relation to an income year if:
	(a)	the entity is not a resident of Australia at any time during the income year; and
	(b)	the entity is recognised under a *foreign law as being used for collective investment by means of pooling the contributions of its *members as consideration to acquire rights to benefits produced by the entity at all times during the income year; and
	(c)	the members of the entity do not have day‑to‑day control over the operation of the entity at any time during the income year; and
	(d)	the entity does not carry on a trading business in Australia for the purpose of section 102M of the Income Tax Assessment Act 1936 at any time during the income year; and
	(e)	subject to section 842‑230 (wind‑down phases), the entity is widely‑held for the purposes of section 842‑235 at all times during the income year; and
	(f)	subject to section 842‑230 (wind‑down phases), the entity is not closely held for the purpose of section 842‑240 at any time during the income year.
842‑220  IMR income and IMR loss
	(1)	The IMR income of an *IMR foreign fund for an income year is the amount of the fund’s assessable income for the income year to the extent that:
	(a)	the assessable income is attributable to a return or gain from a *financial arrangement covered by section 842‑225; and
	(b)	amounts are included in the assessable income only because:
	(i)	the income or gains of the fund are treated as having a source in Australia because of Article 21 of the 2003 United Kingdom Convention (within the meaning of the International Tax Agreements Act 1953) or a corresponding provision of another agreement (within the meaning of that Act), or subsections 11(3), 11S(2) or 11ZF(2) of that Act; or
	(ii)	the Commissioner makes a determination under section 136AE of the Income Tax Assessment Act 1936; or
	(iii)	the financial arrangement is a *CGT asset covered by item 3 of the table in section 855‑15; or
	(iv)	the financial arrangement is a CGT asset covered by item 4 of the table in section 855‑15 because it is an option or right to *acquire a CGT asset covered by item 3 of that table.
	(2)	The IMR loss of an *IMR foreign fund for an income year is the amount of the fund’s deductions for the income year to the extent to which they are attributable to gaining the fund’s *IMR income.
	(3)	To avoid doubt, disregard subsection 842‑210(2) for the purposes of this section.
842‑222  IMR capital gain and IMR capital loss
	(1)	The IMR capital gain of an *IMR foreign fund for an income year is the amount of the fund’s *capital gains made in the income year that:
	(a)	are capital gains from *CGT assets covered by subsection (3); and
	(b)	are attributable to a return or gain from a *financial arrangement covered by section 842‑225.
	(2)	The IMR capital loss of an *IMR foreign fund for an income year is the amount of the fund’s *capital losses made in the income year that:
 	(a)	are capital losses from *CGT assets covered by subsection (3); and
	(b)	are attributable to a *financial arrangement covered by section 842‑225.
	(3)	A *CGT asset is covered by this subsection if:
	(a)	it is covered by item 3 of the table in section 855‑15; or
	(b)	it is covered by item 4 of the table in section 855‑15 because it is an option or right to *acquire a CGT asset covered by item 3 of that table.
	(4)	To avoid doubt, disregard subsection 842‑210(2) for the purposes of this section.
842‑225  Financial arrangements covered by this section
	(1)	A *financial arrangement is covered by this section unless subsection (2), (3) or (4) applies.
	(2)	A *financial arrangement is not covered by this section if:
	(a)	the *financial arrangement is:
	(i)	a *debt interest or an *equity interest issued by an entity; or
	(ii)	a *derivative financial arrangement that relates to a debt interest or an equity interest issued by an entity; and
	(b)	the *IMR foreign fund has a *total participation interest in the entity of 10% or more.
	(3)	A *financial arrangement is not covered by this section if:
	(a)	the *financial arrangement is a *derivative financial arrangement that relates to a *CGT asset; and
	(b)	the CGT asset is:
	(i)	*taxable Australian real property (see section 855‑20); or
	(ii)	an *indirect Australian real property interest (see section 855‑25).
	(4)	A *financial arrangement is not covered by this section if its terms allow the *IMR foreign fund to:
	(a)	vote at a meeting of the Board of Directors (or other governing body) of the issuer of the financial arrangement; or
	(b)	participate in making financial, operating or policy decisions in respect of the operation of the issuer of the financial arrangement; or
	(c)	deal with the assets of the issuer of the financial arrangement.
	(5)	Subsection (4) does not apply if the only situation in which the terms of the *financial arrangement allow the *IMR foreign fund to do a thing mentioned in paragraph (4)(a), (b) or (c) is where the issuer breaches the terms of the financial arrangement.
842‑230  Wind‑down phases
		Treat the requirements in paragraphs 842‑215(1)(e) and (f) as being satisfied if the entity ceases to exist during the income year, and was an *IMR foreign fund in relation to the previous income year.
842‑235  Widely‑held requirements
	(1)	The purpose of this section is to apply subsections 12‑402(1A), (2), (3), (4), (5), (6) and (7) and section 12‑402A in Schedule 1 to the Taxation Administration Act 1953 to this Subdivision for the purpose of determining whether an entity is widely‑held for the purposes of paragraph 842‑215(1)(e).
	(2)	An entity is widely‑held for the purpose of this section if it satisfies the requirements in:
	(a)	subsections 12‑402(1A), (2), (3), (4), (5), (6) and (7) in Schedule 1 to the Taxation Administration Act 1953 subject to the modifications in subsections (3) and (4); and
	(b)	section 12‑402A in Schedule 1 to the Taxation Administration Act 1953 subject to the modifications in subsections (3) and (4).
	(3)	For the purposes of subsection (2), treat the entity as a trust, and membership interests in the entity as units in the trust.
	(4)	For the purposes of subsection (2), the modifications in this subsection are as follows:
	(a)	disregard the words “, at the time the payment mentioned in paragraph 12‑400(1)(a) is made” in subsection 12‑402(1A); and
	(b)	disregard the words “in Australia” in paragraph 12‑402(1A)(a); and
	(c)	treat an entity as being covered by subsection 12‑402(3) if it is an *IMR foreign fund in relation to the income year for the purpose of section 842‑215.
842‑240  Entity must not be closely‑held
	(1)	The purpose of this section is to apply section 12‑402B in Schedule 1 to the Taxation Administration Act 1953 to this Subdivision for the purpose of determining whether an entity is closely‑held as mentioned in paragraph 842‑215(1)(f).
	(2)	An entity is closely held for the purpose of this section if it satisfies the requirements in paragraphs 12‑402B(1)(b) and (c) in Schedule 1 to the Taxation Administration Act 1953 subject to the modification in subsection (3).
	(3)	For the purpose of subsection (2), treat the entity as a trust, and membership interests in the entity as units in the trust.
2  Subsection 995‑1(1)
Insert:
IMR capital gain has the meaning given by subsection 842‑222(1).
3  Subsection 995‑1(1)
Insert:
IMR capital loss has the meaning given by subsection 842‑222(2).
4  Subsection 995‑1(1)
Insert:
IMR foreign fund has the meaning given by section 842‑215.
5  Subsection 995‑1(1)
Insert:
IMR income has the meaning given by subsection 842‑220(1).
6  Subsection 995‑1(1)
Insert:
IMR loss has the meaning given by subsection 842‑220(2).
7  Application
The amendments made by this Schedule apply to assessments for the 2010‑11 income year and later income years.