2013‑2014‑2015

The Parliament of the
Commonwealth of Australia

HOUSE OF REPRESENTATIVES

EXPOSURE DRAFT

Tax Laws Amendment (Investment Manager Regime) Bill 2015

No.      , 2015

(Treasury)

A Bill for an Act to amend the law relating to taxation, and for related purposes

Contents
1	Short title	1
2	Commencement	1
3	Schedules	1
Schedule 1—Investment manager regime	2
Part 1—Main amendments	2
Income Tax Assessment Act 1997	2
Part 2—Other amendments	11
Income Tax Assessment Act 1936	11
Income Tax Assessment Act 1997	11
Income Tax (Transitional Provisions) Act 1997	12

A Bill for an Act to amend the law relating to taxation, and for related purposes
The Parliament of Australia enacts:
1  Short title
		This Act may be cited as the Tax Laws Amendment (Investment Manager Regime) Act 2015.
2  Commencement
		This Act commences on the day this Act receives the Royal Assent.
3  Schedules
		Legislation that is specified in a Schedule to this Act is amended or repealed as set out in the applicable items in the Schedule concerned, and any other item in a Schedule to this Act has effect according to its terms.
Schedule 1—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 concession
842‑220	IMR concession applies only to foreign residents etc.
842‑225	IMR concession
842‑230	Meaning of IMR entity
842‑235	Meaning of IMR financial arrangement
IMR widely held entities
842‑250	Meaning of IMR widely held entity
842‑260	Rules for determining members and total participation interests for the purposes of the widely held test
842‑265	Extended definition of IMR widely held entity—temporary circumstances outside entity’s control
Independent Australian fund managers
842‑270	Meaning of independent Australian fund manager
842‑275	Reductions in IMR concession if independent Australian fund manager entitled to share of IMR entity’s profits
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 concession
842‑220  IMR concession applies 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:	Section 842‑225 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:	Section 842‑225 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.
842‑225  IMR concession
	(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 (2) or (3) 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.
Direct investment by IMR widely held entity
	(2)	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) in Australia; or
	(ii)	otherwise—a *permanent establishment of the entity in Australia.
Indirect investment through independent Australian fund manager
	(3)	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 842‑270); and
	(b)	if the issuer of, or counterparty to, the IMR financial arrangement 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).
842‑230  Meaning of IMR entity
		An entity is an IMR entity for an income year if:
	(a)	the entity:
	(i)	is a foreign resident at all times during the income year; and
	(ii)	is not a *resident trust for CGT purposes for the income year; and
	(b)	the entity:
	(i)	does not carry on a trading business (within the meaning of section 102M of the Income Tax Assessment Act 1936) in Australia at any time during the income year; and
	(ii)	does not control, and is not able to control, directly or indirectly, the affairs or operations of such a trading business in Australia at any time during the income year.
842‑235  Meaning of IMR financial arrangement
		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).
IMR widely held entities
842‑250  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 for which there are *membership interests is an IMR widely held entity if:
	(a)	either:
	(i)	no *member of the entity has a *total participation interest in the entity of 20% or more (see section 842‑260); or
	(ii)	there are no 5 or fewer members the sum of whose total participation interests in the entity is 50% or more (see section 842‑260); or
	(b)	investment in the entity is being actively marketed with the intention that the entity satisfies the requirements of paragraph (a) within 18 months after the entity accepts its first member; or
	(c)	both of the following apply:
	(i)	the reason for failing to satisfy the requirements of paragraph (a) relates to the entity’s activities and investments being wound down;
	(ii)	the entity has sent notices to the entity’s members notifying them of the decision to wind down the entity’s activities and investments.
	(3)	However, if paragraph (2)(a) does not apply to the entity at the end of the period referred to in paragraph (2)(b), paragraph (2)(b) ceases to apply to the entity, and is taken never to have applied to the entity.
842‑260  Rules for determining members and total participation interests for the purposes of the widely held test
	(1)	For the purposes of subsection 842‑250(2), apply the rules in this section in determining:
	(a)	the *members of an entity (the test entity); and
	(b)	the *total participation interest in the test entity of each of those members.
Membership of the test entity
	(2)	If an individual has a *membership interest in the test entity indirectly, through one or more interposed entities:
	(a)	treat the individual as a *member of the test entity; and
	(b)	do not treat any of those interposed entities as a member of the test entity.
	(3)	If the test entity is a trust, do not treat an object of the trust as a *member of the trust.
	(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 and/or a membership 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).
Total participation interests of members
	(6)	If a *member of the test entity is an entity covered by:
	(a)	subsection 842‑250(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 member’s *total participation interest in the test entity as nil.
	(7)	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).
842‑265  Extended definition of IMR widely held entity—temporary circumstances outside entity’s control
		Without limiting section 842‑250, 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 842‑250; 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
842‑270  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 is taking all reasonable steps to ensure that the proportion of its income, for the income year, received from the IMR entity or entities connected with the IMR entity will be reduced to 70% or less of that income.
	(2)	In applying paragraph (1)(c), have regard to the documents covered by section 815‑135.
842‑275  Reductions in IMR concession if independent Australian fund manager entitled to share of IMR entity’s profits
	(1)	The application of section 842‑225 to an *IMR entity for an income year is modified, as provided by subsection (2) 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 all those profits for the year that the entity and any entities connected with that entity has a direct or indirect right to receive would, if expressed as a right to a percentage of the profits of the IMR entity for the year (the entity’s profit percentage), exceed 20% of those profits for the year; and
	(d)	the requirements of subsection 842‑225(2) in relation to the year are not met.
	(2)	The following are reduced by the entity’s profit percentage:
	(a)	the extent to which what would otherwise be the *IMR entity’s assessable income for the year is *non‑assessable non‑exempt income of the IMR entity because of paragraph 842‑225(1)(a);
	(b)	the extent to which any deduction of the IMR entity for the year is disregarded because of paragraph 842‑225(1)(b);
	(c)	the extent to which a *capital gain or *capital loss that is from a *CGT event that happens in the year in relation to an *IMR financial arrangement of the entity is disregarded because of paragraph 842‑225(1)(c).
	(3)	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 an entity if the Commissioner so determines under subsection (4).
	(4)	If the entity applies to the Commissioner in the *approved form for a determination under this subsection, the Commissioner must, by notice in writing to the entity:
	(a)	determine that the requirements of paragraph (1)(c) are taken not to be met in relation to the entity, if the Commissioner is satisfied that:
	(i)	it is intended that the requirements will not be met in relation to the entity at a time within 5 years after the determination is made; and
	(ii)	with that intention, investment in the entity is being actively marketed; or
	(b)	refuse to make such a determination, if the Commissioner is not so satisfied.
	(5)	An entity that is dissatisfied with a decision of the Commissioner refusing to make a determination under subsection (4) in relation to the entity may object against the decision in the manner set out in Part IVC of the Taxation Administration Act 1953.
Part 2—Other amendments
Income Tax Assessment Act 1936
2  Section 94T
Before “For”, insert “(1)”.
3  At the end of section 94T
Add:
	(2)	In determining whether the partnership carries on business in Australia for the purposes of subparagraph (1)(f)(i), if, for the year of income, the partnership is an IMR entity (within the meaning of the Income Tax Assessment Act 1997, but disregarding subparagraph 842‑230(a)(i) of that Act), disregard business that:
	(a)	is carried on by the partnership (either by itself directly or by another entity on its behalf); and
	(b)	solely relates to IMR financial arrangements (within the meaning of that Act).
Income Tax Assessment Act 1997
4  Section 11‑55 (after table item headed “GST”)
Insert:
investment manager regime		
IMR concession		842‑225	
5  Subsection 995‑1(1)
Repeal the following definitions:
	(a)	definition of IMR capital gain;
	(b)	definition of IMR capital loss;
	(c)	definition of IMR deduction.
6  Subsection 995‑1(1)
Insert:
IMR entity has the meaning given by section 842‑230.
IMR financial arrangement has the meaning given by section 842‑235.
8  Subsection 995‑1(1)
Repeal the following definitions:
	(a)	definition of IMR foreign fund;
	(b)	definition of IMR income.
9  Subsection 995‑1(1)
Insert:
IMR widely held entity has the meaning given by sections 842‑250 and 842‑265.
independent Australian fund manager has the meaning given by section 842‑270.
11  Subsection 995‑1(1)
Repeal the following definitions:
	(a)	definition of non‑IMR Division 6E net income;
	(b)	definition of non‑IMR net capital gain;
	(c)	definition of non‑IMR net income;
	(d)	definition of non‑IMR partnership loss;
	(e)	definition of non‑IMR partnership net income;
	(f)	definition of pre‑2012 IMR capital gain;
	(g)	definition of pre‑2012 IMR income.
Income Tax (Transitional Provisions) Act 1997
12  Before section 842‑210
Insert:
842‑207  Application of replacement version of Subdivision 842‑I
	(1)	The new Subdivision 842‑I applies:
	(a)	to assessments for the 2015‑16 income year and later income years; and
	(b)	if an entity chooses to apply the new Subdivision 842‑I to assessments for the 2011‑12, 2012‑13, 2013‑14 and 2014‑15 income years—to the entity’s assessments for those income years.
	(2)	However, in applying the new Subdivision 842‑I under paragraph (1)(b) of this section in relation to the entity, assume that the requirements of subsection 842‑225(2) are not met in relation to any of the 2011‑12, 2012‑13, 2013‑14 and 2014‑15 income years.
	(3)	The way the entity’s income tax return is prepared is sufficient evidence of the making of the choice.
	(4)	In this section:
new Subdivision 842‑I means Subdivision 842‑I (Investment manager regime) of the Income Tax Assessment Act 1997, as substituted by Schedule 1 to the Tax Laws Amendment (Investment Manager Regime) Act 2015.
Note:	The new Subdivision 842‑I replaced a previous version of that Subdivision, which applied in relation to assessments for the 2010‑11 income year (see item 17 of Schedule 1 to the Tax Laws Amendment (Investment Manager Regime) Act 2012).
842‑209  Modified definition of IMR foreign fund for the purposes of earlier income years
	(1)	This section applies for the purposes of:
	(a)	this Subdivision (apart from section 842‑207); and
	(b)	Subdivision 842‑I (Investment manager regime) of the Income Tax Assessment Act 1997, as inserted by Schedule 1 to the Tax Laws Amendment (Investment Manager Regime) Act 2012.
	(2)	For the purposes of subsection 842‑210(2) of this Act, treat an entity as an IMR foreign fund if, and only if:
	(a)	subject to subsection (4) of this section, it is an IMR entity (within the meaning given by section 842‑230 of the Income Tax Assessment Act 1997, as inserted by the new IMR Act); and
	(b)	subject to subsection (5) of this section, it is an IMR widely held entity (within the meaning given by sections 842‑250 and 842‑260 of the Income Tax Assessment Act 1997, as inserted by the new IMR Act); and
	(c)	the entity chooses to be treated as an IMR foreign fund for those purposes.
	(3)	Either of the following is sufficient evidence of the making of the choice:
	(a)	the way the entity’s income tax return is prepared;
	(b)	if the entity will not be required to lodge a tax return if the entity makes the choice—not lodging a tax return.
	(4)	Treat the requirement in subparagraph 842‑230(b)(ii) of the Income Tax Assessment Act 1997, as inserted by the new IMR Act, as being met.
	(5)	Treat subsection 842‑250(1) of the Income Tax Assessment Act 1997, as inserted by the new IMR Act, as not applying to the entity.
	(6)	In this section:
new IMR Act means the Tax Laws Amendment (Investment Manager Regime) Act 2015.