Australia’s Assistant Treasurer, Nick Sherry, has released, for public consultation, draft legislation that will repeal the foreign investment fund (FIF) rules and deemed present entitlement (DPE) rules.
In general, residents of Australia are taxable on their worldwide income. To ensure residents cannot accumulate income offshore, and thereby defer or avoid Australian tax, attribution rules apply to tax residents on an accruals basis on their share of certain income accumulating offshore in foreign entities.
Foreign companies not controlled by Australian residents and widely-held fixed foreign trusts are subject to the FIF rules. If the foreign entity is not eligible for any of the FIF exemptions, calculations are required to be performed in respect of attributable income.
On the other hand, closely-held foreign trusts are subject to the DPE rules. Ordinarily, all of the foreign trust’s income, including active and comparably taxed income, is attributed to Australian resident beneficiaries (according to their present and future entitlement) on a branch-equivalent basis.
The repeal of the FIF and DPE rules represents part of the wider reforms to Australia's foreign source income anti tax-deferral rules that were announced in the 2009-10 budget. Draft legislation to give effect to the remaining reforms so that the controlled foreign company rules will also apply to closely-held trusts, and to modernize the transferor trust rules, is currently being developed.
"The repeal of these rules will reduce costs, cut red tape and improve the competitiveness of Australian businesses," Sherry said. "These important reforms will assist Australian managed funds and other businesses to compete internationally and increase services exports."
"Small and medium-sized businesses wanting to expand offshore to access markets will also benefit from lower compliance costs," he added. "The changes will also simplify the law and bring consolidation of the two income tax acts a significant step closer."
The government is seeking submissions from interested parties on this exposure draft, with a closing date of February 5, 2010.
A comprehensive report in our Intelligence Report series giving a country-by-country analysis of offshore investment funds, stock exchanges and trusts, with an analysis of the US QI regime, is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report9.asp
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