Concerns over the application of the proposed foreign accumulation fund (FAF) rules have been mounting in the lead-up to the end of the financial year.
Although the rules are likely to result in better tax arrangements for the majority of foreign-based fund managers, the proposals could have a negative impact on certain fixed income and debt funds.
"Under the current draft of the FAF rules, an Australian investor in an international bond fund may be required to attribute income where debt interests comprise more than 80 per cent of the fund's total assets and the fund does not distribute substantially all of its income," Henry Davis York partner Greg Reinhardt said.
"This exposure may need to be managed by bed-and-breakfast arrangements."
Under the previous foreign investment fund (FIF) regime, many foreign fund managers were forced to crystallise gains on foreign investments, a practice called bed-and-breakfasting, which leads to inefficiencies in managing portfolios.
Part of the reason to repeal the FIF regime and replace it with a new integrity measure was to avoid inefficiencies for foreign fund managers and make it more attractive to establish a presence in Australia.
But a number of fund managers fear the new rules will not make much of a difference.
PIMCO head of operations Lincoln Wong said the proposed FAF rules did not provide enough details to base decisions on and so the fund manager was preparing to resume its bed-and-breakfast routine on 30 June.
"I'm not sure at the moment whether [FAF] will do what we are hoping it was going to do. We still need to test whether we will have a FAF at year end," Wong said.
"Previously, we handled FIF securities within our portfolio through the standard bed-and-breakfast regime. [But] we didn't tend to have that many; it is a very small percentage of our portfolio.
"For a lot of clients of ours that have gone into our European complex, they are preparing to be back where they were anyway under FIF. But ultimately, nobody is calling it; everyone is saying: 'it is a wait-and-see'."
But Tria Investment Partners managing partner Andrew Baker said it was unlikely many funds would get caught under the new rules.
"The new FAF rules remain delightfully murky. But I can't see it applying to diversified bond funds. There is little predictability of returns in practice," Baker said.
"Our view continues to be that the distributing units of UCITS pools, in particular, look okay."
Reinhardt remained hopeful the new FAF rules would make it easier for offshore fund managers to offer their products to Australian investors, either directly or via a feeder fund.
"Whilst further details are still to come, the government needs to act quickly to finalise and enact the new FAF rules to give clarity and certainty to the industry," he said.
"With the potential retrospective application of these rules, many fund managers are still managing their investments via bed-and-breakfasting arrangements and in particular the removal of this uncertainty would be welcome by the industry."
The draft does not indicate when the new rules will come into force, but it is expected this will not happen before the end of the financial year.
