AUSTRALIAN-BASED FUND MANAGERS ARE INCREASINGLY WELL CREDENTIALED TO ADVISE FOREIGN FUNDS.

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1 MARCH 2012 TAX UPDATE AUSTRALIAN-BASED FUND MANAGERS ARE INCREASINGLY WELL CREDENTIALED TO ADVISE FOREIGN FUNDS. RELEASE OF SECOND EXPOSURE DRAFT LEGISLATION IN RESPECT OF THE FIRST TWO ELEMENTS OF THE NEW INVESTMENT MANAGER REGIME (IMR). IMR Overview On 7 March 2012, the Australian Government released a second exposure draft of legislation (Subdivision 842-I) implementing the first two elements of the IMR. The first exposure draft was released on 16 August The IMR delivers changes to the income tax treatment of certain investment income of foreign managed funds, which will make it more attractive for foreignbased funds to use Australian based fund managers. In particular, the exposure draft legislation seeks to implement measures to alleviate the impact of US accounting standard "FIN 48" and to address the situation where an eligible foreign managed fund is taken to have a permanent establishment in Australia due to the use of an Australian advisor, eg investment manager. The third and final element of the IMR was announced on 16 December 2011 and is mainly aimed at providing an income tax exemption for income, gains or losses, that have an Australian source, from portfolio interests or financial arrangements of an eligible foreign managed fund. Other countries including the UK, Hong Kong and Singapore have comparable IMRs. Certain returns, gains or losses of an Australian permanent establishment of an IMR Foreign Fund treated as nonassessable or disregarded Under these provisions, certain returns and gains of eligible foreign funds (ie IMR foreign funds) will be treated as non-assessable, non-exempt income or

2 disregarded where the fund does not have a place of business in Australia but is treated as having a permanent establishment in Australia solely as a result of engaging an Australian-based advisor who habitually exercises a general authority to negotiate and conclude contracts on behalf of the fund. While the relief from Australian tax is very specific and narrow, it will alleviate some concerns of foreign funds utilising Australian-based advisors. We expect the proposed legislation to progress and to be passed into law in the coming months and will apply to the 2010/2011 income tax year and later years. Requirements These proposed changes apply to exclude certain returns and gains from the calculation of an entity's taxable income (either at the fund level or at the beneficiary/partner/member level if the fund is a transparent entity) where the following conditions are satisfied: The entity is an IMR foreign fund (requirements further below) or is a foreign resident beneficiary or partner of an IMR foreign fund. The fund does not have a place of business in Australia, but is treated as having a permanent establishment in Australia solely as a result of engaging an Australian based advisor who habitually exercises a general authority to negotiate and conclude contracts on behalf of the entity. The returns or gains are treated as having an Australian source because the relevant return or gain is attributable to the Australian permanent establishment. In calculating the entity's taxable income, the following amounts are excluded: Returns or gains relating to certain financial arrangements (referred to as "IMR income") will be treated as non-assessable, non-exempt income. Deductions and losses relating to certain financial arrangements (referred to as "IMR losses") are disregarded. Capital gains and losses relating to certain financial arrangements (referred to as "IMR capital gains" and "IMR capital losses", respectively) are also disregarded. Eligible financial arrangements A financial arrangement (as defined in the Taxation of Financial Arrangement provisions in Division 230 of the Income Tax Assessment Act 1997 (Cth)) will generally be covered by the IMR provisions, except where: The IMR foreign fund holds an interest (both direct and indirect) in the issuing entity of 10% or more; or The financial arrangement is a derivative financial arrangement relating to Australian real property or certain indirect interests in Australian real property; or The financial arrangement allows the IMR foreign fund to vote at a meeting of the board of directors (or other governing body) of the issuing entity or have control/influence over the operations or assets of the issuer. IMR foreign fund An entity is an eligible IMR foreign fund if: The entity is a non-resident of Australia The entity does not carry on a trading business in Australia as defined in section 102M of the Income Tax Assessment Act 1936 (Cth) (this provision generally prevents entities from carrying on an "active" trading business other than trading or investing in financial arrangements); and Subject to the winding down provisions, the entity is widely held and not closely held (ie does not breach the "concentration test"). The widely held and closely held rules are based on the current Management Investment Trust provisions, which have been modified for these purposes. A fund will satisfy the widely held requirement if it is listed, has at least 25 members or where certain foreign entities (life insurance company, superannuation fund with over 50 members or a government pension fund) hold more than 25% of the interests in the fund. An entity will also satisfy the widely held requirement if it is wholly owned by other entities that satisfy the widely held test.

3 A fund will be closely held if 10 or fewer entities hold 50% or more of the interests in the fund. Date of effect These proposed changes are to apply to assessments for the income year and later income years. Fin 48 Issue uncertain tax positions Broadly, these proposed changes intend to provide certainty of tax treatment for foreign funds that have investments in Australia to address the FIN 48 issue. Where a foreign managed fund has not lodged a tax return for the 2010/11 or prior income years in respect of certain investment income of the fund, the Australian Tax Office (ATO) will not be permitted to raise an assessment in respect of that income, except where the fund lodges a tax return disclosing such income. Requirements These proposed changes apply to provide an exemption to an IMR foreign fund from an assessment by the ATO in relation to certain amounts where the following conditions are satisfied: The income year is 2010/11 income year or an earlier income year. The fund has IMR income or IMR loss. The fund has not lodged an income tax return in relation to the income year or any previous income year. The ATO has not made an assessment of the income of the fund (if a corporate tax entity) or trustee (if a trust) before 18 December However, the exemption does not apply where: The ATO is of the opinion that there has been fraud by the IMR foreign fund; or Before 18 December 2010, the ATO has notified the IMR foreign fund that an audit or compliance review would be undertaken. We note that a similar exemption is included for beneficiaries and partners of IMR foreign funds who are non-australian residents. Third and final element - exemption for Australian-sourced income from portfolio interests Under the proposed third element of the IMR, income, gains or losses, which have an Australian source, from portfolio interests (less than 10% interest) or financial arrangements of an IMR foreign fund, will be excluded from the calculation of the fund's taxable income (and its non-resident investors). The exemption will not apply to the extent that withholding tax is currently payable on the income. Also, the exemption will not cover income or gains from an interest in taxable Australian property (eg Australian real property), other than a portfolio interest in a publicly traded company. The exemption will be restricted to foreign managed funds domiciled in countries that are recognised by Australia as engaging in effective Exchange of Information (EOI). Further countries have been added as EOI countries including Singapore and the Cayman Islands effective 1 July 2011, and Belgium and Malaysia effective 1 January Bahrain, Andorra and Liberia have also recently signed EOI agreements, bringing our total EOI countries to approximately 60. See Schedule 1 for the list of EOI countries. Significantly, Korea, Hong Kong and Luxembourg are not currently EOI countries. The draft legislation for this element has not yet been released, but the changes are proposed to be operative from 1 July 2011.

4 SCHEDULE 1 EOI countries as at 1 January 2012 Anguilla Guernsey Poland Antigua and Barbuda Hungary Romania Argentina India Russia Aruba Indonesia San Marino Bahamas Ireland Singapore Belgium Isle of Man Slovakia Belize Italy South Africa Bermuda Japan Spain British Virgin Islands Jersey Sri Lanka Canada Kiribati St Christopher and Nevis Cayman Islands Malaysia St Vincent and Grenadines China Malta Sweden Czech Republic Mexico Taipei Denmark Monaco Thailand Fiji Netherlands Turks and Caicos Islands Finland Netherlands Antilles UK France New Zealand USA Germany Norway Vietnam Gibraltar Papua New Guinea

5 MORE INFORMATION Contact your nearest DLA Piper office: SYDNEY Jock McCormack T jock.mccormack@dlapiper.com Peter Charteris T peter.charteris@dlapiper.com Louise Boyce Special Counsel T louise.boyce@dlapiper.com Anshu Maharaj T anshu.maharaj@dlapiper.com Eddie Ahn T eddie.ahn@dlapiper.com MELBOURNE Dr Gerry Bean T gerry.bean@dlapiper.com PERTH Brian Pass T brian.pass@dlapiper.com BRISBANE Paul Baxter T paul.baxter@dlapiper.com Peter Burden Special Counsel T peter.burden@dlapiper.com CANBERRA Caroline Atkins T caroline.atkins@dlapiper.com AUTHORS AUSTRALIA Jock McCormack T jock.mccormack@dlapiper.com James Newnham T james.newnham@dlapiper.com Eddie Ahn T eddie.ahn@dlapiper.com DLA Piper is a global law firm operating through various separate and distinct legal entities. For further information, please refer to Copyright 2012 DLA Piper. All rights reserved. This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.