A number of tax concessions are available for Australian investment vehicles that qualify as managed investment trusts (MITs) for tax purposes. These concessions are designed to encourage investment into Australia, particularly Australian real estate, by both resident and non-resident investors.
A trust must satisfy a number of requirements in order for it to qualify as a MIT and access these concessions (download Investing Down Under: A Guide for Global Real Estate Investors in English or Chinese (中文) for a list of requirements).
Not all trusts will qualify as MITs, so global investors that are seeking to invest in Australian real estate through a MIT should ensure that the relevant trust qualifies as a MIT. Most importantly, the activities of the MIT must be, in simple terms, investing in land for the purpose, or primarily for the purpose, of deriving rent or undertaking certain other prescribed investments.
Withholding tax concessions
The most important MIT tax concessions for global investors in Australian real estate are the reduced rates of withholding tax that apply to "fund payments" made by MITs to unitholders that are resident in an exchange of information (EOI) jurisdiction. In particular, the usual 30% withholding tax rate that applies to certain trust distributions to non-resident companies may be reduced to 15%.
These concessions provide that "fund payment" distributions – being distributions of any amounts aside from dividends, interest and royalties (such as rent or capital gains on Australian real estate) – are taxed at a rate of:
- 15% for foreign resident investors that are resident in an EOI jurisdiction
- 30% otherwise.
Many of Australia's main trading partners (such as US, UK, Singapore and Japan) are EOI jurisdictions. There are a number of important exclusions from the EOI list such as Luxembourg and Hong Kong.
Capital account election
MITs can also make a "capital account election", which allows them to obtain concessional capital gains tax (rather than ordinary income) treatment on gains made on the disposal of certain types of assets.
Obtaining capital gains tax treatment is valuable for:
- foreign resident investors who may obtain a foreign resident capital gains tax exemption upon distribution of the capital gain if the asset disposed of by the MIT is not "taxable Australian property" (i.e. not Australian real property)
- Australian investors who can offset such capital gains against their capital losses, and may claim the capital gains discount to reduce the amount of their taxable capital gain.
Attribution regime for eligible MITs
A new attribution regime for MITs has recently been enacted, effective from 1 July 2016. The new attribution regime is intended to provide greater certainty regarding the tax consequences of investing in certain MITs, and reduce the tax administration associated with operating MITs.
The regime also provides a different basis for the taxation of a MIT and its unitholders (being tax on an attribution rather than distributable basis). Other aspects of the new regime, such as the integrity rule which will assess the trustee of a MIT on non-arm's length income (subject to certain exclusions) will apply to MITs generally, not just those who elect into the attribution regime.
Structuring MIT investments and exits
As a result of these tax concessions, there can be significant advantages for global investors to structure their investments in Australian real estate through MITs and, in certain circumstances, to co-invest in such structures with other investors.
It is therefore important when making any investment, or realising any investment, that the transaction is appropriately structured.
For example, where a MIT with foreign resident investors invests in Australian real estate and one of the investors wishes to exit their investment, it may be preferable for the realisation to occur at the level of the MIT, rather than at the level of the foreign resident investor. This is because, if a MIT makes a capital gain on the disposal and distributes it to the foreign resident investor, the concessional MIT withholding tax rate of 15% is likely to apply to the capital gain, whereas if the foreign resident investor sold their units in the MIT, they would likely have to pay capital gains tax on the gain at a rate of at least 30% (if the foreign resident investor was a company).
It will, therefore, be important when implementing certain MIT co-investment structures that the MITs be structured in a way that allows one of the co-investors to exit and receive a distribution of the capital gains of the MIT upon their exit from the MIT.
In addition, on any exit, this may result in the trust ceasing to qualify as a MIT (for example, if the qualifying person test is no longer satisfied). This again will need to be managed as part of the exit arrangements.
This is an edited extract of Investing Down Under: A Guide for Global Real Estate Investors. For a complete overview of the initial legal, tax and structuring issues that foreign investors should consider before investing in Australian real estate, download the full publication in English or Chinese (中文).