Foreign Pension Funds to Access MIT Withholding Tax Rates

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Proposed  legislation has been introduced into Parliament, intended to expand the existing category of foreign residents who are eligible to access the reduced withholding tax rates under the Managed Investment Trust (MIT) regime.

Under Australia’s existing MIT regime, foreign residents are eligible to be taxed at a reduced withholding tax rate of 15 per cent on certain payments they receive from investing in a MIT.  This reduced withholding rate is however only available to certain eligible foreign investors and specifically excludes trustees, where the underlying trust does not have beneficiaries who are presently entitled to the MIT payments.  This exclusion typically affects foreign pension funds structured as trusts, who are taxed at the highest marginal rate under the general provisions governing taxation of trusts.

The new legislation contains amendments that will effectively deem a foreign pension fund to not be a trustee to the extent that they receive an amount that is, or is reasonably attributable to, a fund payment.

However, only certain ‘qualifying’ foreign pension funds will be eligible, namely:

  • a pension fund established by an exempt foreign government agency;
  • a pension fund established under a foreign law for an exempt foreign government agency; or
  • a foreign superannuation fund that has at least 50 members.

Once enacted, the legislation will apply retrospectively, to fund payments made on or after 1 July 2008.  Consequently, affected foreign pension funds will need amend their historic assessments in order to recover the additional tax withheld on prior year fund payments.  The legislation will also grant affect funds an additional two years from the commencement of the changes to amend expired prior year assessments.

The changes will be welcomed by MITs and foreign investors, as it will allow foreign pension funds to access the benefits of the MIT regime, including reducing administration, simplified Australian tax exposure and more competitive taxation rates.

We will continue to monitor the progress of the legislation.

For all questions concerning MITs, please contact Justin Epstein on +612 8277 0000.