The measure, included in the Tax Laws Amendment (2008 Measures No. 5) Bill 2008, amends the eligible investment business rules in Division 6C of the 1936 Act.

Commenting on the matter, Bowen said: “This measure forms a key part of the Rudd government’s election commitment to make Australia a funds management hub in the Asia-pacific region. The changes are an interim step pending the outcome of the Board of Taxation review of the tax arrangements applying to managed funds."

He added: “The government has undertaken extensive consultation with industry and key stakeholders on the design of this measure, both prior to its announcement in the 2008-09 Budget and on the draft legislation.”

Widely held public unit trusts that limit their activities to eligible investment business as defined in the Division 6C rules are able to retain trust taxation treatment. Otherwise, these trusts are public trading trusts and taxed like companies. Eligible investment business is defined as investing in land primarily for the purpose of deriving rent or profiting from trading in certain financial instruments.

“The current eligible investment business rules are complex and uncertain, imposing compliance costs on Australian managed funds, which may impede the industry’s international competitiveness,” Bowen observed.

The amendments to Division 6C will: clarify the scope and meaning of investing in land for the purpose of deriving rent; introduce a 25% safe harbour allowance for non-rental income from investments in land for rent; expand the range of financial instruments that a managed fund may invest in or trade; and provide a 2% safe harbour allowance at the whole of trust level for other non-trading income.

“These amendments will make it easier for managed funds to comply with the law and reduce the scope for such trusts to breach Division 6C inadvertently, thus lowering compliance costs for industry, the Australian Taxation Office and investors,” Bowen explained.

“The government has been mindful not to pre-empt the Board of Taxation review and therefore more significant policy changes have not been contemplated at this time," he added.