Integrity Package to target Stapled Structures and Foreign Investors

In March 2018, the Australian Government released a package of policy measures intended to address taxation bias towards foreign investors under certain stapled structures. The measures are a follow up to a Consultation Paper prepared by the Treasurer in 2017, which first addressed the Government’s concerns regarding stapled structures.

This bias comes about through the ability to flow passive income through a stapled structure to foreign investors, where the income is taxed at lower withholding tax rates (or in some cases, almost tax-free), rather than 30 per cent tax rate on Australian business income. As these (lower) withholding tax rates are not available to domestic investors, there is an unintended distortion of investment activity in the Australian market.

To address this bias, the Government’s integrity package introduces a number of proposed measures, including:

• Applying a final withholding tax set at the corporate tax rate to distributions derived from trading income that has been converted to passive income using a Managed Investment Trust (MIT) (with a 15 year exemption for new, Government-approved nationally significant infrastructure assets);
• Limiting the foreign pension fund withholding tax exemption for interest and dividends to portfolio investments only;
• Creating a legislative framework for the existing tax exemption for foreign governments (including sovereign wealth funds), and limiting the exemption to portfolio investments;
• Excluding agricultural land from being an ‘eligible investment business’ for a MIT; and
• Amending the thin capitalisation rules to prevent foreign investors from using multiple layers of flow-through entities (i.e. trusts and partnerships) to convert their trading income into favourably taxed interest income.

These changes (except the last point regarding thin capitalisation), will take effect from 1 July 2019. (The thin capitalisation changes will take effect from 1 July 2018). Further, a 7 year transition period will apply for arrangements in existence as at 27 March 2018. A longer transition period of 15 years is intended to be available in respect of the higher MIT rate for certain economic infrastructure staples that satisfy particular conditions.

Due to the objective of the reforms, there should be marginal impact for resident investors in MITs, with Scott Morrison stating “this package will neutralise the tax benefits of stapled structures without requiring investors to restructure their existing arrangements.”

At this stage, investors, industry and advisors await clarification on a number of matters raised by the package. However the Government has stated that it is committed to a consultation approach with regard to the reforms, so parties are advised to watch this space.

Click here to link to the Integrity Package.