Replacing the grey list exemption with an Australian exemption

(Clauses 5, 8(1), 9(1), 15(1), 19(1), 24, 31, 32 and 34)

Summary of proposed amendments

The exemption for rights of 10% or more in FIFs that are resident in one of eight grey list countries is replaced with an exemption for rights of 10% or more in FIFs that are resident and subject to tax in Australia and that do not receive certain Australian tax concessions.

Application date

The proposed changes would apply to income years beginning on or after 1 July 2011.

Key features

Under the changes proposed in the Bill, the section EX 35 exemption will require an investor to have a direct income interest of 10% or more in a FIF that is resident and subject to tax in Australia. The FIF must not have had its liability for Australian tax reduced by an exemption related to income earned outside of Australia or from the concession for offshore banking units. The new provision is designed to accommodate cases where the FIF is not technically subject to tax in Australia because it is taxed as part of an Australian consolidated group in such a way that the head company pays tax on behalf of the FIF.

The exemption in section EX 35 does not apply to investments held by portfolio investment entities, superannuation schemes, unit trusts, life insurers or group investment funds. This is consistent with the exclusions from the existing grey list exemption.

Background

As part of last year’s CFC reforms the exemption for CFCs located in eight grey list countries was replaced with an exemption for CFCs that are resident and subject to tax in Australia. (Section EX 22)

Consistent with this change, the Bill replaces the remaining grey list exemption for FIFs with an exemption for FIFs that are resident and subject to tax in Australia.