Tony Smith (Casey, Liberal Party, Deputy Chairman , Coalition Policy Development Committee) Share this | Link to this | Hansard source

I rise on behalf of the coalition to speak on the Tax Laws Amendment (Investment Manager Regime) Bill 2012. Let me say at the outset that the coalition supports this bill and what underlines it. I will speak very briefly on it. It was introduced into the House last Thursday. In summary it establishes an investment manager regime. It has two schedules as the minister introducing it last Thursday outlined. I will deal with each of them briefly and make some concluding remarks about the manner in which the government has handled this up until this point.

Schedule 1 establishes the investment manager regime by allowing income of an overseas based managed fund to be treated as non-assessable, non-exempt income in Australia where that income is derived from an investment made overseas that has been made through an Australian based fund manager. As was outlined in the minister's introductory speech, the purpose of this schedule is to allow Australian based fund managers to compete more effectively for investment mandates from overseas based managed funds.

An example that has been put forward is if you have a Singapore based fund that wishes to make an investment in a portfolio of Japanese bonds and the fund would like to engage an Australian based fund manager with specific expertise in Japanese bonds to manage that portfolio. Without the changes envisaged in this bill, the Singapore based fund will be considered to have a permanent Australian establishment solely because it was using an Australian based fund manager, and any income from this investment arrangement known as 'conduit income', as outlined in the minister's second reading speech, would be therefore subject to Australian tax rules.

The changes contemplated in schedule 1 would ensure that the overseas based fund is not considered to have a permanent Australian establishment solely because it has engaged an Australian fund manager to manage its portfolio, and the conduit income would not be subject to Australian tax rules. The explanatory memorandum naturally outlines some more of the intricate detail with respect to this but, as I said a few minutes ago, the outcome will be that Australian based fund managers will be able to compete more effectively for investment mandates from overseas based managed funds. ,Schedule 2 is designed to deal with, as the minister outlined in his second reading speech, removing uncertainty surrounding the impact of the United States accounting standard ASC 740-10 or, as the minister outlined, the amendment often referred to as FIN 48. Essentially, this schedule is designed to remove some uncertainty in that respect and, initially, these rules apply only to US public companies, but since the end of December 2009, they have also applied to private entities that prepare US accounts. So this schedule is also a necessary change to remove any uncertainty in that respect.

As I said at the outset, the opposition supports this bill. As was pointed out by the minister, they flow from the Johnson report and they have been in the public domain for a considerable period of time. Indeed, these recommendations were released way back at the beginning of 2010. Minister Shorten first announced he would legislate to introduce what we are discussing today in December 2010 and January 2011. In conclusion, I point out that, obviously a significant period of time has elapsed since the minister's announcement. The Financial Services Council said at the beginning of 2011:

The announced changes will provide tax certainty for foreign investors investing in Australian managed funds. It will take away the uncertainty that currently exists which can result in foreign investors being unfairly taxed.

The importance of this change cannot be underestimated—it removes a major barrier to Australian based fund managers attracting foreign investment.

They went on to say:

This will give Australian based fund managers the certainty they need when competing internationally and is a major step towards Australia becoming a real global financial centre.

I quoted from the Financial Services Council media release of 19 January—that is back at the time of the recommendations; even prior to the minister's announcement.

There has been a delay between the report's release, the minister's announcement of action and the debate of this legislation. As I have said, the opposition supports this. The delay has meant that the benefits of this have not flowed as early as they could have but, as I said at the outset, the opposition supports this legislation. It will have a beneficial impact.

Andrew Leigh (Fraser, Australian Labor Party) Share this | Link to this | Hansard source

The finance sector, unlike other sectors of the economy, acts as the lifeblood of all firms. When finance operates effectively, start-up firms are able to obtain financing for new ideas; firms that hit a rough patch but have good long-run prospects are able to borrow; and expanding firms benefit greatly. The finance sector that is sclerotic hurts the entire economy.

So it is a good thing that the opposition are supporting this bill, which is aimed at ensuring that Australia can be a finance sector hub. I will focus on the high-level arguments for Australia being a finance sector hub and leave some of the detail to my colleague the member for Shortland. When the finance sector goes bad, things go very bad for the entire economy. In Australia we can look back to the state banks of Victoria and South Australia; in the United States they can look back to the savings and loans crises of the 1980s; and, of course, in the acronym 'GFC', the F stands for 'financial'.

When things are going well, as they are with the pool of superannuation assets in Australia, a finance industry produces a range of good jobs, in which people have a role of efficiently allocating funds across the economy. Australia is well placed for that. We speak many languages; one in four Australians are born overseas; one in two has a parent born overseas or were themselves born overseas. That depth of language talent—although, I believe it should be greater—is a great source of strength for the finance industry in Australia. The trust that underpins good markets and the efficient operation of firms is absolutely critical.

The Johnson report concluded that Australia had arguably the most efficient and competitive financial services in the Asia-Pacific. They noted that, even amidst mining boom mark 2 with terms of trade at all-time highs, the finance service sector was the largest single contributor to GDP of any sector of the economy and employed in excess of 400,000 Australians. It is recognised as one of the most sophisticated and stable in the world.

The federal government established the Australian Financial Centre Forum in September 2008 as part of our commitment to position Australia as a leading financial services centre. That report, known as the Johnson report but formerly called Australia as a financial centre: building on our strengths, was released on 15 January 2010 and made a number of recommendations relating to the taxation of foreign funds in Australia.

The Henry tax review, also released in 2010, recommended that:

Taxation arrangements applying to Australian managed funds and related services should be improved to provide greater certainty that conduit income will not be subject to Australian tax.

As the explanatory memorandum notes, the bill is:

… designed to ensure that the complex tax issues that previously arose do not discourage foreign funds from engaging the services of an Australian intermediary.

The amendments ensure that 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 foreign source income. It is recognised on both sides of this House as an important step towards building Australia as a finance sector hub in the Asia-Pacific.

I commend the bill to the House.

Scott Buchholz (Wright, Liberal Party) Share this | Link to this | Hansard source

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.

Bill Shorten (Maribyrnong, Australian Labor Party, Minister for Financial Services and Superannuation) Share this | Link to this | Hansard source

Firstly, I thank those members who have taken part in the debate on this bill in a rare moment when the opposition is following the government's lead and agreeing. I am grateful for that. They should try it more often.

Mr Buchholz interjecting—

They should try it more often. It doesn't hurt. In fact, they could lie back and enjoy it.

This bill introduces the first two elements of an investment manager regime, which was a key recommendation of the Johnson report by the Australian Financial Centre Forum into Australia's financial services sector. The bill will provide for greater certainty for the tax treatment of foreign funds. Foreign-managed funds use various types of entities and complex structures through which moneys raised from various individuals and institutions are invested. These entities and complex structures raise various and in many cases quite complex tax issues. Because of these complex issues and to ensure that the provisions of the bill address the legitimate concerns of the funds management industry, the government have consulted widely in the development of the measures in this bill.

The consultations included those on the issue of a consultation paper in 2010, exposure draft legislation in 2011 and a second exposure draft earlier this year. Our government consulted Australian and international tax advisers, representatives of the Australian financial sector and representatives of foreign funds, including but not limited to: the Australian Financial Centre Taskforce, formerly the Australian Financial Centre Forum; the Financial Services Council; the United States Managed Funds Association; and London and Asian fund managers. In addition, there have been numerous meetings with expert practitioners, including leading lawyers, accountants and financial advisers.

I thank the various organisations which have contributed to the consultation process on the measures in the bill. The government are committed to ensuring that the IMR legislation achieves its policy objectives, and we will continue to engage with industry to ensure that the objectives of the legislation are delivered. I am grateful for the Treasury Department's work on the bill. Treasury's consultation with industry has highlighted that it is not possible to define in legislation all of the different investment entity structures operating in eligible offshore jurisdictions. Where entities satisfy the policy intent of the measures in this legislation, the government will use the regulation-making power provided in the legislation to ensure that they benefit from the IMR.

Our government will consult with industry in developing these regulations as it has with the legislation. Our government remain committed to ensuring Australia's taxation arrangements for passive portfolio investments are in line with those of major financial centres such as the United States, the United Kingdom, Hong Kong and Singapore.

Schedule 1 to the bill will prescribe the tax treatment of conduit income of widely-held foreign funds. The amendments are designed to ensure that the complex tax issues that can currently arise do not operate to discourage foreign funds from encouraging the services of an Australian intermediary, for instance, an investment manager. These amendments will ensure that the investment income of a foreign entity is not subject to tax in Australia simply because it engages an Australian adviser where the income would not otherwise have an Australian source. This will encourage employment in our Australian financial services sector, particularly in highly skilled jobs.

Schedule 2 to the bill will address the uncertainty surrounding the impact of the United States accounting standard ASC740-10, otherwise known as FIN 48. This measure will remove the potential for uncertainty regarding the Australian tax treatment of certain foreign fund income in previous income years and will allow foreign investors to move forward in their arrangements with confidence regarding their Australian tax position relating to earlier years.

Our proposed amendments are designed to clarify the taxation treatment of certain income of foreign funds which have not lodged a tax return or have 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.

These amendments will support the Australian funds management industry and are in line with the government's objective to secure Australia's position as a financial services centre. They are in line with the other significant pieces of legislation and policy decisions of this government to encourage a thriving and robust financial services industry in Australia. This bill deserves the support of the House. I commend the bill to the House.

Question agreed to.

Bill read a second time.

Ordered that this bill be reported to the House without amendment.

Federation Chamber adjourned at 10:32.