Foreign Investment Fund (FIF) rules

Hi,

I am wondering if anyone here understands the Foreign Investment Fund (FIF) tax rules?

My understanding is that when the NAV increases you need to declare this increase in your accessible income on a yearly basis (vs CGT which you only declare when in the year you sell). Then when you sell the investment, you reduce the amount of tax owed by the amount you have already paid (I think).

Does this mean in the year you sell the investment, you only have to pay tax on the NAV increase for that year?

Also when dividends are paid, this cause a drop in the NAV. So do you declare a tax loss, in accessible income, for the decrease in NAV? Then declare a profit for the dividend?

Also how does this compare with a traditional Australian capital asset, like property or shares, where you only need to pay tax in the final year? I would assume that delaying the tax paid would generally be better (due to compounding effects), however if you delay the tax, then in the year it comes due you will be pushed in to higher tax brackets.

To top off the confusion, the FIF rules only come into effect when the total holdings in FIFs is over $50,000. So does any one know what happens when you start of with investments < $50K and then the NAV increases to be over this?


Been trying to find these answers on the ATO site, but no luck so far.
Thanks for any help,
Ash

 

There is very few people that understands the full implications of the FIF legislation.

You need to talk to specialist International Taxation advisors if you think it applies to you.

Basically if the "fund" does not carry on an active business or does not qualify for exemptions through activities such as banking or insurance then you need to check further.

There are also exceptions for listed companies (not trusts) that have holdings in other entities that engage in exempt activities.

Where you have been assessed, generally the NAV should notionally be reduced by the amount of retained profits on which you have paid tax. You should not pay tax twice, but you may pay it early !!!

I find it amazing the huge income or CGT concessions given to non-residents investing in Australia and yet the FIF rules provide a huge penalty to Australian residents investing overseas.

Cheers,

Rob

 

Thanks Rob,

The PDS of the funds I have invested in, mention the FIF rules in the taxation section, so I assumed they apply.

I do not suppose you can recommend any Tax experts in the Brisbane area?

Ash.

 

Ah ... you are investing in an Australian resident trusts or Managed Investment Scheme I surmise from you mentioning a PDS ?

If so, this is not so bad for compliance as the fund will inform you what types of income are attributed to you - much easier than directly investing offshore for your tax return. They are required to work out all this and give you a disrtibution statement.

I don't know any Brissy Tax Agents, but this issue should be more straightforward for them - and cheaper for you than having to retain an International Taxation Lawyer !!!!

Cheers,

Rob

 

Starting to Sounds easier.

PDS was the wrong word, it is actually a Prospectus. The two funds are run by Man Investments, and The Company is registered in the Cook Islands. The Funds will not be paying dividends until 2016.

Just trying to work out what my disclosure requirements will be, which was my reason for the initial question.

Thanks for the info.

 

Now you have me worried again ...

The fund is located in a low tax jurisdiction.

Worldwide income of Australian residents are taxed on Aus, with a credit for tax paid overseas.

Any attempt to defer income to prevent tax here may be prevented by the FIF rules in this case.

I think you actually do need specialist advice on this particular one.

Cheers,

Rob

 

Confusing rules. I think that is why the prospectus talks about the FIF Rules. Wish the ATO site was a bit clearer about them.

I think the idea is that I pay tax on the increase in value of my interest in the company, at the end of every year.

Thanks for your help Rob, I think I will have to find a professional to talk to.

Cheers,
Ash.

 

Yep, the company is in a low tax jurisdiction so it pays next to no tax on profits.

If it paid a dividend to you, then you would be assessed here as a resident, so it retains the profits - attempting to defer tax for you.

BUT FIF rules will assess you on the profits earned even though you never received it.

When you eventually receive the dividend you won't be taxed on it again, nor should you be if you sell the share regarding the value that represents thos profits.

There are many exemptions and conditions which is why it is worth getting specialist advice.

Good luck,

Rob