Exemption for interests of 10% or more in Australian FIFs

2012 amendment to the Income Tax Act 2007 allows an exemption for interests of 10% or more in Australian foreign investment funds.

Section EX 35 of the Income Tax Act 2007

Key features

A person with an income interest of 10% or more in a company that is resident and subject to income tax in Australia (and meets certain other conditions), will not have any income or loss attributed to them from that Australian company.

Detailed analysis

A person with an income interest of 10% or more in a foreign company will not have an attributing interest in a FIF if the company is resident and subject to tax in Australia and meets the other requirements in section EX 35.

"Resident in Australia" means resident in Australia according to the Income Tax Act 2007. (See, for example, section YD 3.) There is also a requirement that the FIF is treated as a resident of Australia under every tax treaty between Australia and another country. This requirement might not be satisfied if, for instance, the FIF was incorporated in Australia but was managed from another country. In that case, it would be common for a tax treaty to treat the FIF as resident in the other country and Australia would lose worldwide taxing rights over the FIF.

For a FIF to be "subject to tax" requires one of two things. In the first instance the FIF can itself be subject to Australian income tax. Alternatively, the FIF can be part of a consolidated group for Australian tax purposes, if that consolidated group (through the "head company") is itself subject to Australian income tax. It is not sufficient for a person with an income interest in the FIF to be subject to Australian tax on the FIF's income.

A FIF will not qualify for the section EX 35 Australian exemption if the FIF has had its liability for Australian income tax reduced due to one of the following concessions that are provided under Australian tax law:

  • an exemption for income that is derived from business activities carried on outside Australia; or
  • the special tax rules that apply to Australian offshore banking units.

A person will not qualify for the exemption from the FIF rules in section EX 35 if they are a portfolio investment entity, a superannuation scheme, a unit trust, a life insurer or a group investment fund.