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In an unexpected move, the Federal Government has announced in its 2012 Budget that the managed investment trust (“MIT”) withholding tax rate would be increased from 7.5% to 15% with effect from 1 July 2012. Currently, the 7.5% rate is available for fund payments made by a MIT to a foreign entity resident in an exchange of information country.

The decision to increase the MIT withholding rate is expected to generate savings of $260 million, however the extent to which this will affect the level of foreign investment into Australia is unclear.

The Budget announcement did not provide details as to how the rate increase will be transitioned, that is, whether the new rate would apply to distributions made after 1 July 2012, or those made in respect of income earned in the year starting 1 July 2012.  Further, there is no mention of grandfathering the withholding rate in relation to arrangements signed in reliance of the 7.5% rate.

When the MIT rules were first introduced in July 2011, they were intended to facilitate Australia as a financial hub and reduce any tax disadvantage to foreign investment into Australia.  However, with this annoucement, it is clear that the increased rate will negatively impact the intended benefits and concessions offered to foreign investors under the MIT rules.