This consultation paper seeks stakeholder views on potential policy options in relation to stapled structures, the taxation of real property investments and the re-characterisation of trading income.
Australia’s general framework for the taxation of non-resident investment seeks to balance a desire to ensure that non-residents pay an appropriate amount of tax on Australian sourced income while not unduly affecting the cost and level of foreign investment in Australia.
Over recent years, there has been growth of arrangements to re-characterise trading income into more favourably taxed passive income which can have the effect of reducing the Australian tax applicable to that income in the hands of non-resident investors. The use of these arrangements, most commonly in the form of transactions within stapled structures, has grown significantly and expanded into new sectors, beyond their traditional use in the property and infrastructure sectors. Further, these structures may provide a greater scope for trading income to be re-characterised than is possible in most other countries. This may distort investment decisions and lead to reduced economic efficiency.
This consultation paper is not limited to specific integrity or compliance issues highlighted* by the Australian Taxation Office (ATO). Rather the Government seeks to undertake a holistic examination of the taxation of investment income derived using these structures, including the dichotomy between trading and passive income. We seek to better understand how Australia’s taxation regime may have contributed to the use of stapled structures and other arrangements to re-characterise trading income, including a comparison to the relevant tax systems in other key countries. [*See Taxpayer Alert TA 2017/1 and the ATO’s draft guidance in the document entitled “Privatisation and Infrastructure — Australian Federal Tax Framework”, released on 31 January 2017.]
This consultation will be carried out with a view to examining policy options to modernise Australia’s taxation regime so as to remove the tax distortions that may be identified from the use of stapled structures. Administrative action alone would be inadequate to address these issues, and can lead to uncertainty for investors. Therefore, the Government is keen to discuss policy options with stakeholders, and develop a process for the transition of existing arrangements to any modified tax rules over an appropriate time period.
The Government is committed to ensuring that Australia is an internationally competitive location for foreign investment — this is particularly important in an increasingly integrated global market. This consultation will examine policy options for specific sectors, such as real estate investment trusts (REITs) and investment in critical infrastructure assets if the tax advantages for stapled entities are removed.
PAPER OUTLINE
- Part 1 (Background): briefly describes the history of stapled structures and the applicable non-resident withholding tax regimes, provides some commentary on the sector and highlights past policy initiatives.
- Part 2 (Integrity Risks): outlines the integrity issues that may arise from stapled structures and other arrangements to re-characterising trading income.
- Part 3 (International Comparisons): looks at international approaches taken to stapled structures, REITs and infrastructure.
- Part 4 (Policy considerations): sets out the key framework for considering the policy issues.
- Part 5 (Broad Policy Options): sets out some broad policy options to address these problems that could be considered.
- Part 6 (Impacts of Policy Options): sets out the potential impacts of the proposed policy direction on the Australian economy.
- Part 7 (Implementation and Transitional Issues): sets out how stapled arrangements already in existence could be treated.
[Treasury consultation – Stapled Structures; Consultation Paper; LTN 57, 27/3/17]