Income Tax Act 2007 section 809FZS

Conditionally exempt carried interest

Section 809FZS provides a conditional exemption from income tax for carried interest that arises in the early years of a fund's life, where the fund intends to hold its investments for the long term but cannot yet demonstrate a sufficient average holding period.

• Carried interest arising to an individual from an investment scheme that qualifies as conditionally exempt is treated as if it were not income-based carried interest, meaning it is taxed under the capital gains rules rather than as income.
• Four conditions (A to D) must all be met: the carried interest must arise within the first four years of the scheme investing (or ten years if a realisation model is used), it would otherwise be treated as income-based, and it is reasonable to suppose that if it had arisen later in the fund's life it would not be income-based.
• The "relevant time" used to test whether the carried interest would escape income treatment is the earliest of: the expected wind-up of the scheme, four years after the scheme is expected to stop investing, four years (or ten years for a realisation model) after the carried interest arose, or four years after the end of the period by reference to which the carried interest was calculated.
• The individual must make a claim for the conditional exemption to apply; it does not operate automatically.