On 28 June 2018, the Treasury released a proposal paper, Stapled Structures – Integrity conditions for transitional rules and infrastructure concession. The paper outlines the proposed conditions stapled entities must comply with to access the infrastructure concession and/or transitional arrangements.

The conditions include:

  • the extension of existing integrity rules, that apply to Managed Investment Trusts (MITs – see: Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015), to ensure that all staples are required to set their rent at market prices; and
  • the introduction of statutory caps on the amount of cross-staple rent that is able to access the concessional rate of withholding tax (available under the MIT regime) for new and existing infrastructure projects during the transition or concession period.
  • To allow trusts that need to, periods of time to ‘transition’ out of the stapled structure or change the cross-subsidised arrangements.

The objectives of these integrity measures are to:

  • Safeguard against aggressive cross-staple pricing, during concessional periods; and
  • Minimise impact on commercial arrangements while mitigating tax integrity risks.

These new rules a complex in the way they interact with the pre-existing 2015 MIT rules and the ways they have sort to avoid commercial turmoil (including the way the ‘caps’ are calculated). For those interested in this, reference the Proposal Paper gives much more detail.

The proposal paper is available on the Treasury website and the Treasurer encourages all interested parties to make a submission by 12 July 2012, with draft legislation will be released shortly after that (for further consultation).

Background – commercial

‘Stapled’ structures are those where investment assets are held in a tax transparent unit trust and trading income is derived by a company, which pays deductible rent, interest or royalties to the trust (which it receives as passive income). The shares and units are ‘stapled’ together, in the sense that they must be traded together (which is achieved under the constituent documents).

Stapled structures have been in existence for over 30 years but have been used extensively since governments have been ‘privatising’ infrastructure. These were frequently the bid vehicle for a mixture of commercial and tax reasons (the tax reasons favouring foreign investors and Australian superannuation funds, who had no Australian tax to pay or lower rates).

The ‘stapling’ makes it easier to set the ‘cross-staple’ rent cost (or similar cost) as all investors own the securities for both the payer and the recipient. It also allows an investor in a particular business/infrastructure project, to invest in the entirety of the project (though, strictly, this could be achieved without the ‘stapling’). There might be other commercial reasons, for the stapling, such as getting finance, to make the winning bid (aided by the whole of cash flow being available and captured – without tax inside the structure).

Background – tax

The tax drivers, for a split structure, like this, are as follows.

  • Trusts have long been taxed on a ‘transparent’ basis, which is to say that there is no tax in the trust structure, and the tax is borne by the beneficiaries (unit holders), if the trust income is fully distributed. This is under Division 6 of of Part III of the ITAA36 (s97(1) in particular). This regime has been amplified and refined for so called ‘managed investment trusts’ under Division 276 of the ITAA97. Also, trusts beneficiaries are taxed like any other taxpayer (broadly) but shareholders are not (for, instance, by not being able to get the CGT discount). Sadly, politicians and tax collectors call the tax treatment of unit holders ‘concessional’ instead of comparing shareholders of companies unfavourably with the treatment of an individual owning the asset or business directly.
  • The trouble is that Division 6C (of Part III of the ITAA36) taxes so called ‘public trading trusts’ as if they were companies (s102S in particular). This would rob a trust structure of many of the commercial (and perhaps tax) advantages, that might have otherwise made a trust structure advantageous.
  • Division 6C does not apply, however, if the whole of its business is an “eligible investment business” which is defined (in s102M) to include a list of passive investments (see the definition of ‘public trading trust (s102R), which requires the trust to be a ‘trading trust’ (s102N), which requires the trust to carry on a ‘trading business’, which in turn is defined in s102M as being nothing other than an an ‘eligible investment business’ (as also defined in s102M).

The ATO’s and Treasurer’s rhetoric

The ATO’s has long objected that ‘stapled structures’ turned business income into passive income, and the Treasurer still mouthed as much, when he said that these measures would ensure that “trading income for foreign investors is taxed at the corporate tax rate, and limits access to broader concessions for passive income”. Of course that characterisation (turning trading income into passive income) is untrue, as can be seen in any trading entity that rents (rather than buys) its factory, warehouse or hotel (for instance).

The other way of testing this proposition, would be to just ‘unstable’ the trust units and the company shares, so that there was no excuse for thinking of the trust as anything over than carrying on an ‘eligible investment business’.

The ‘thinness’ of the ATO’s and Treasury rhetoric is evident in these measures only targeting any non-market value shift, from the trading side to the investment side (an on-shore ‘transfer pricing’ requirement – not yet applicable to wholly Australian transactions).

FJM 30.6.18

[Treasury website: Consultation Page, Proposal Paper; Treasurers website: Media Release; KPMG: Briefing Paper; LTN 123, 29/6/18; KPMG 29/6/18; Tax Month – June 2018]


Study questions (answers available)

  1. Has Treasury issued a discussion paper, for consultation, before it issues an exposure draft of the legislation for further consultation?
  2. Does the paper propose control of the ‘cross-staple’ rent or other passive income amount paid by an extension of the existing MIT ‘non-arm’s length income rule’ and statutory caps?
  3. Has it been an objective of this proposal, to minimise impact on commercial arrangements while mitigating tax integrity risks?
  4. Was a significant driver, for this, the huge amount of money already invested in privatised infrastructure and the continuing need of governments to privatise infrastructure without suffering a significant discount in sale proceeds?
  5. Are stapled structures purely tax driven?



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