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Chapter 31: Conduit investment through Australia

The challenge for taxation policy

To consider the implications for the two types of conduit income:

  • Foreign income derived by non-residents through Australian resident entities. The level of Australian tax levied on conduit income can affect the location of activities undertaken by funds managers and resident entities with substantial non-resident participation.
  • Australian income derived through a non-resident company (the so-called ‘triangular case’).
A strategy for reform
  • Allow conduit income to flow through Australia without further tax to the extent that this can be done without undermining the taxation of Australian residents or the tax bases of other countries.
  • Consider allowing an appropriate proportion of franking credits on Australian income to flow through to Australian shareholders where income is derived through non-resident companies.
Key policy issues How should conduit treatment be provided for collective investment vehicles that invest on behalf of non-resident investors? How should conduit income derived by other resident entities be taxed by Australia? Should franking credits be available to residents investing in Australia via non resident entities — the ‘triangular case’?
Reform Options Option 1
A flow-through treatment for all CIVs.

Option 2
Use special arrangements termed Non-resident Investment Funds.

Extend the current conduit provisions (the Foreign Dividend Account) to a broader range of foreign source income (the Foreign Income Account - FIA).

Consider whether conduit income should be taxed at a comparable rate to that on Australian sourced income.

Consider whether the FIA should
record total foreign income or only the non-residents’ proportion of the foreign income.

Allow franking credits to flow through non-resident companies.