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In media release No 2011/010, issued 19 January 2011, the Assistant Treasurer and Minister for Financial Services and Superannuation, Bill Shorten, announced a change to the income tax treatment of certain investment income of foreign funds, which he says will make it more likely foreign-based funds will use Australian-based fund managers.

Under the change, income from relevant investments of a foreign fund that is taken to have a "permanent establishment" in Australia, will be exempt from income tax. The change will apply to the 2010-11 and later income years.

The change addresses a key finding of the Johnson Report - that the tax law discouraged the use of Australian based investment advisers. Currently, Australia's taxing rules not only tax the fees earned by the intermediary, but can potentially tax the investment income of the fund even when the investor has no real presence in Australia. This places Australian fund managers at a disadvantage to foreign funds to the extent engaging a foreign fund manager would result in the investment income of the fund not being taxed.

The Board of Taxation will continue to progress other aspects of the Johnson Investment Manager Regime (IMR) recommendations. Its report to Government is due by 31 December 2011.

Further details of the changes are contained in the attachment to the media release.


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