Legislation passed in April 2019 may mean that a higher withholding tax rate of 30% (previously 15%) may apply to managed investment trust (“MIT”) fund payments made to foreign residents on or after 1 July 2019. Relief may be available in certain circumstances, provided a choice for transitional relief is made by 30 June 2019. It is therefore critical for MITs to act now and consider the implications of the new legislation and whether a choice to apply the transitional relief is required.
What are the changes trying to achieve?
The government identified that developments in the use of stapled structures has resulted in the emergence of a dual corporate tax system. Foreign institutional investors in land-rich industries were being taxed at withholding tax rates of anywhere between 0 and 15% on trading income that was converted into passive income (interest and rent) through stapled structures. In contrast, the trading income of other large businesses was subject to tax at the 30% corporate tax rate. The changes are designed to limit access to concessional rates by foreign investors by increasing the MIT withholding tax rate to 30% on distributions derived from trading income that has been converted into passive income using a MIT. In addition, distributions derived from certain types of investments by an MIT will also be subject to MIT withholding at a rate of 30%.
What distributions will the changes apply to?
The 30% withholding tax rate will apply to MIT fund payments to foreign residents that are attributable to “non-concessional MIT income” made after 30 June 2019 that relate to the 2019-20 income year or a later income year. Non-concessional MIT income refers to the following types of income:
(a) MIT cross staple arrangement income,
(b) MIT trading trust income,
(c) MIT agricultural income, and
(d) MIT residential housing income.
MIT cross staple arrangement income
A MIT will derive ‘MIT cross staple arrangement income’ where, broadly, the amount of income derived is attributable to a ‘cross staple arrangement’ between an ‘operating entity’ and an ‘asset entity’.
An asset entity is, broadly, a trust or partnership that only derives income from ‘eligible investment business’ such as investing in land primarily for the purpose of deriving rent, or investing or trading in various financial instruments.
Conversely, an operating entity is an entity that derives income from a trading business, and essentially covers all entities that are not asset entities.
A cross staple arrangement is, broadly, an arrangement involving at least one asset entity and one operating entity (‘the arrangement entities’), – where other entities hold interests in each of at least 80% in the arrangement entities.
MIT trading trust income
MIT trading trust income is defined broadly as a distribution from a ‘trading trust’ to a MIT where the MIT has an interest in the trading trust. A trading trust is a trust that carries on business other than an eligible investment business.
MIT agricultural income
Assessable income of a MIT that is attributable to land in Australia that is used, or could reasonably be used, for carrying on a primary production business and which is held primarily for the purposes of deriving rent, is characterised as MIT agricultural income.
MIT residential housing income
Any assessable income of a MIT that is attributable to a ‘residential dwelling asset’ (whether or not held by the MIT) is MIT residential housing income.
A residential dwelling asset is broadly a dwelling that is real property located in Australia and is a residential premises (but not commercial residential premises such as a hotel, motel or boarding house).
Is transitional relief available?
Transitional relief may be available where the relevant income otherwise captured by the amendments, in broad terms, relates to arrangements entered into prior to 14 September 2017 for MIT residential housing income, or 27 March 2018 in respect of MIT cross staple arrangement income, MIT trading trust income or MIT agricultural income. Such relief applies automatically in respect of MIT trading trust income, MIT agricultural income and MIT residential housing income.
However, to access transitional relief for MIT cross staple arrangements, in addition to the timing requirement outlined above, each of the entities involved in the arrangement must make a valid choice to access transitional relief via an approved form. Forms must be completed by 30 June 2019 and lodged with the ATO within 60 days of making the choice.
Please note, there is some technical uncertainty where the income derived by a MIT is covered by more than one category of non-concessional MIT income, particularly where one of those categories is MIT cross staple arrangement income. In such circumstances, it is currently unclear as to which non-concessional MIT income requirement needs to be followed to access transitional relief.
What is the transitional relief?
Where transitional relief is available, the existing 15% MIT withholding tax rate will apply to fund payments during specified transition periods.
What are the next steps?
Pitcher Partners has extensive experience advising managed funds and can promptly assist you in considering the applicability of these provisions to your fund. We have also consulted and are having ongoing conversations with the ATO as to the applicability of the stapled structure legislation to our client base.
For a discussion regarding the applicability of the new stapled structure rules to your fund, please contact your Pitcher Partners advisor.