On Thur 3.11.2016, the Government released a consultation paper on collective investment vehicle (CIV) non-resident withholding taxes as announced by the Minister for Financial Services on 4 May 2016 as part of the 2016/17 Federal Budget.

The proposals for change centre on a uniform 5% withholding tax rate for investors in Managed Investment Trusts (MIT’s) or Collective Investment Vehicles (CIV’s). It might be offered only to those investors covered by the Asia Region Fund Passport or alternatively all MIT or CIV investors but excluding Australian property income.

Some, who see it as imperative that foreign investors bear no tax (for international competitiveness sake), will be disappointed. The policy lense is that all investors are subject to tax at home and lower Australian tax will not hurt their after tax return, but rather just lose Australian tax to some other country. However, this is not always so. Significant global investible capital is in tax free pension funds. And there can be ‘fund of fund’ vehicles, which cannot afford to have their ‘ticket clipped’ by a regional government on the way through (as their investors may well be tax free). There seems to be a limited and slanted view of what ‘international competitiveness’ means.

[Treasury website – announcement & consultation paper] [LTN 213, 3/11/16]

Extracts from the Consultation Paper

The consultation paper is divided into 4 parts as follows.

  • Part 1 briefly describes the non-resident withholding tax regime, provides some commentary on the funds management sector, and highlights past policy initiatives.
  • Part 2 illustrates current arrangements in the application of non-resident withholding tax.
  • Part 3 sets out key policy considerations.

Current arrangements

Prior key initiatives of the Government include the conduit income exemption and the investment manager regime.

  • The conduit foreign income regime provides an exemption from withholding tax for non-residents investing in foreign assets via an Australian fund.
  • The Investment Manager Regime clarifies the tax treatment of gains made by foreign funds and non-resident investors who invest through Australian fund managers. It provides tax exemptions for widely held foreign funds investing in certain Australian portfolio investments and ensures that unintended tax liabilities are not triggered for foreign investments from use of an Australian funds manager.

Also the Government announced that the tax law would recognise two new new legal formats for Collective Investment Vehicles (CIV’s):

  • Corporate: to commence on 1 July 2017; and
  • Limited Liability Partnerships: to commence from 1 July 2018.

Additionally, whilst not a tax measure the ‘Asia Regional Funds Passport’ (ARFP) will commence in late 2017, being a a multilateral arrangement that aims to facilitate cross border trade in managed funds between member countries by either waiving or diminishing key regulatory impediments to trade.

Impact of foreign withholding tax on international competitiveness

Australia’s international competitiveness relates to the effective tax rate paid by the non-resident investor, which will depend on the amount of Australian tax paid, and which may be sensitive to whether additional tax is paid in the non-resident investor’s home country on the investment income (less any foreign tax credits).

It follows that Australian tax reductions may not necessarily increase an investor’s rate of return, if it is fully or partially offset by higher tax liabilities in the investor’s home country. It may lead to a partial or full transfer of revenue from the Australian government to the foreign government in question through a reduced foreign tax credit for Australian taxes paid in that other jurisdiction. This will also depend on the tax status of the recipient.

PROPOSALS FOR CONSIDERATION

Views are sought on the following broad proposals, having regard to the policy considerations set out in this paper. Views are also sought on alternative proposals for improving the competitiveness of Australia to attract inbound investment.

  • PROPOSAL A: NO POLICY CHANGE TO THE EXISTING TAX SETTINGS

This proposal involves no policy change to existing tax policy settings. This would allow already implemented policy initiatives and soon to be implemented policy initiatives to take effect to assist inbound investment. Under this proposal, no new withholding tax concessions would be granted for non-residents.

  • PROPOSAL B: SINGLE NON-RESIDENT WITHHOLDING TAX RATE OF 5 PER CENT FOR CIVS AND MITS UNDER THE ARFP

The Financial Services Council (FSC) proposed a single 5 per cent non-resident withholding tax rate for Australian CIVs and MITs in the ARFP.

This would replace existing non-resident withholding tax rates on interest, dividend and MIT fund payments and provide for an overall rate of 5 per cent on all ‘withholdable’ MIT income.

Income currently exempt from withholding tax, including conduit non-resident income and franked dividends, would continue to be exempt.

Non-resident investors (in CIVs and MITs) outside the ARFP and non-resident investors investing directly into Australian assets would continue to be subject to existing non-resident withholding tax rates.

  • 3. PROPOSAL C: UNIFORM NON-RESIDENT WITHHOLDING TAX RATE OF 5 PER CENT FOR ALL CIVS AND MITS EXCLUDING PROPERTY

Proposal C is similar to proposal B but applies the single non-resident withholding tax rate of 5 per cent to all Australian CIVs and MITs (not limited to ARFP funds).

Income from investments in property, including rental income and taxable Australian real property capital gains, would not be covered by this proposal.

Applying a single rate simplifies the withholding tax regime regardless of where the rate is set. That is, the rate could be a higher rate such as 10 percent or a rate determined to be revenue neutral.