This article was written by Sylvester Urban and Sarah Huang.
The Government will proceed with its planned overhaul of the taxation of stapled structures announced in March 2018.
Consistent with the previously announced measures, the reforms limit access to beneficial rates of withholding tax on distributions from stapled entities, and also limit the tax concessions for foreign pension funds and foreign governments. The measures also tighten Australia’s thin capitalisation rules.
Management Investment Trusts (MITs) and Attribution MITs (AMITs) will see additional changes, with the 50% CGT discount for payments at a trust level set to be abolished.
The Government will proceed with previously announced measures regarding the taxation of stapled structures and similar arrangements.
The measures are:
- a withholding tax rate of 30% (instead of the current 15%) will be applied on distributions which are derived from trading income but have been converted to passive income through a MIT. This does not include rent received from third parties. Certain nationally significant infrastructure staples which are approved by the Government will be eligible for a 15-year exemption from this measure;
- the associate entity threshold for the thin capitalisation rules will be lowered from 50% cent to 10%. This aims to limit foreign investors using multiple layers of flow‑through entities to convert trading income into interest income (so-called “double gearing” arrangements). These changes will take effect from 1 July 2018;
- the foreign pension fund withholding tax exemption for interest and dividends will be limited to portfolio investments;
- the Government will introduce a legislative framework for the current administrative practice relating to tax exemptions for foreign governments. Importantly, the Government will limit this exemption to portfolio investments; and
- the 15% concessional MIT withholding tax rate for investments in agricultural land will be removed. This does not go as far as the previously announced measure, which provided that agricultural land would not qualify as eligible investment business income of a MIT.
The above changes, except for those regarding thin capitalisation, will take effect from 1 July 2019, and will involve a transitional period of at least 7 years.
See our previous alert here for a more detailed analysis of these changes.
Updating the list of information exchange countries for MITs
The Government will update the list of countries whose residents are eligible to access a reduced withholding tax rate of 15 per cent, instead of the default rate of 30 per cent, on certain distributions from Australian MITs. Listed countries are those which have established international agreements enabling them to share taxpayer information with Australia. The update will add the 56 jurisdictions that have entered into information sharing agreements since 2012. The updated list will be effective from 1 January 2019.
This measure supports the operation of the MIT withholding tax system by providing the reduced withholding tax rate only to residents of countries that enter into effective information sharing agreements with Australia. The information sharing agreements form a part of the Government’s broader commitment to safeguard against offshore tax avoidance and evasion.
Removal of the 50% CGT discount at the MIT and AMIT level
From 1 July 2019, MITs and AMITs will not be able to apply the 50% CGT discount to payments at the trust level.
This measure aims to promote the flow-through nature of MITs and AMITs such that income is taxed as though investors had invested directly.
This measure aims to prevent beneficiaries who are not otherwise entitled to the CGT discount from benefiting from the application of the discount at a trust level.
It still allows MITs and AMITs that derive a capital gain to distribute the income as a capital gain that the beneficiary is then able to discount.
Impact on the proposed CCIV regime
On 21 December 2017, the Federal Government released draft legislation for the tax treatment of Corporate Collective Investment Vehicles (CCIVs). See our previous alert here.
The tax treatment of CCIVs is broadly based on the model for AMITs and seeks to provide flow through tax treatment together with deemed capital gains tax treatment.
The removal of the capital gains discount at the trust level for MITs and AMITs is consistent with the treatment currently proposed for CCIVs. CCIVs are not entitled to discount capital gains, however a member who is entitled to discount capital gains may apply the discount to an amount that flows through the CCIV.
It remains to be seen how the other changes will be picked up in the next draft of the CCIV tax legislation.
For a full analysis of this year's Budget measures, please see Australian Federal Budget 2018-19.