Neil Lamb calls for a new look at Australia's controlled foreign company (CFC) rules, to support outbound investment.
In the 2016-17 Federal Budget, the Government announced that two new collective investment vehicles (CIV) would be introduced to better facilitate foreign investment into Australia. However, there has been little said around reforms to outbound investment. Such reforms are particularly timely as large institutional investors and superannuation funds broaden their lens and seek global opportunities for investment.
Australian investors in search of offshore investment often encounter difficulties at the outset as a result of investment vehicles which are either unknown in Australia or which are not catered for by Australian tax legislation. Whilst large players in the Australian market, as smaller investors on the world scale, institutional investors are seldom in a position to dictate the parameters of an offshore CIV.
In particular, multi-class investment vehicles are often problematic for Australian investors and can give rise to the risk of investors being taxed under the controlled foreign company (CFC) rules on a percentage of the CIV’s investment income which far exceeds the investor’s economic interest in the CIV. Since the CFC rules were introduced with effect from 1 July 1990 there has been limited reforms that would take account of foreign CIVs. Further, exposure draft legislation released by the former Assistant Treasurer which proposed to reform the current CFC rules, including the exemption from the rules for complying superannuation funds did not proceed.
While noting the broader debate around Base Erosion Profit Shifting (BEPS), it’s clear that reform is required in this area to continue to support offshore investment and to ensure tax is not an impediment to investment.