In May 2018, Treasury released draft legislation to implement the integrity measures directed at stapled structures, previously announced by the Government in March 2018.
The draft legislation represents the first tranche of the Government’s integrity package, relating to the first four measures previously announced and directed at stapled structures. It is understood that draft legislation on the agricultural MIT changes will be released in due course.
The Measures: A Summary
Measure A: Increasing the MIT withholding rate
The MIT withholding rate for fund payments that are attributable to ‘non-concessional MIT income’ will be increased from 15% to the corporate tax rate. In summary (and subject to exceptions and carve outs) an amount is ‘non-concessional MIT income’ where it is attributable to a cross staple payment.
Measure B: Preventing Double Gearing
The thin capitalisation rules will be amended to limit upstream gearing within stapled structures.
Measure C: Foreign Pension Funds Exemptions
The exemption (from interest and dividend withholding tax) for foreign pension funds which are exempt from income tax in their country of residence will be limited to circumstances where the income is attributable to portfolio-like investments. That is, where the foreign pension fund holds an ownership interest of less than 10% and does not have influence over the entity’s key decision-making.
Measure D: Sovereign Immunity Tax Exemption
Sovereign investors will only be exempt from Australian taxation in respect of ownership interests of less than 10% and where they do not have influence over the entity’s key decision-making. The description of ‘influence’ is consistent with the foreign pension fund withholding tax exemption.
The Measures: The Impact
Measures A, C & D will apply from 1 July 2019, but arrangements in existence at the date of the announcement (27 March 2018) will have access to a seven year transitional period. Additional time will be provided for sovereign investors who are covered by an Australian Tax Office Ruling.
Whilst the draft legislation provides transitional periods in terms of existing structures, managers and investors are strongly encouraged to review their structures in light of the proposed changes. For new funds (or existing funds undergoing structural changes) consideration should be given to the use of MITs and stapled structures if at all, as these proposed new laws will limit the tax benefits of operating a stapled structure. Managers should also review their investor list and check whether any pension or sovereign funds will be affected.
The Exposure Draft is subject to a two week consultation period ending on 31 May 2018. Click here for the link to the Exposure Draft Legislation.