On Friday 27 July 2018, Treasury released, for public consultation, the second stage of draft legislation, giving effect to the measures announced on 27 March 2018 that seek to address risks to the corporate tax base, posed by:
- stapled structures and similar arrangements, as the law currently stands, and
- limiting access to concessions currently available to foreign investors, for passive income.
The Treasurer said staples can present an unintended tax loophole available only to foreign investors. They are usually used to invest in property.
The revised draft, which will amend the ITAA 1997 and the TAA,:
- reflects feedback from public consultation on the first tranche of draft legislation, which was released on 17 May 2018; and it also
- includes draft legislation to prevent foreign investors from accessing concessional Managed Investment Trust (MIT) rates, on agricultural land.
- It seeks to neutralise the tax benefits of certain stapled structures and tightens concessions available to foreign investors (such as foreign sovereign wealth funds and pension funds).
The draft legislation also includes changes to the treatment of residential housing held in a MIT announced as part of the affordable housing measures. It would allow foreign investors access to the concessional MIT rate if they invest in affordable housing. MITs will also be able to be used to invest in residential housing provided they do so primarily for rental purposes. However, access to conventional tax rates will only be extended to the income from such investment derived from affordable housing.
The draft legislation includes the following measures:
- Converted trading income, to be subject to MIT withholding at the top corporate tax rate.
- Amending the thin capitalisation rules, to prevent foreign investors ‘double gearing’ their investments.
- Limiting the foreign pension fund withholding tax exemption, for interest and dividends to portfolio investments.
- Creating a legislative framework for a tax exemption for foreign governments, on their passive income from portfolio investments.
- Ensuring investments in agricultural land and residential property (other than affordable housing) are subject to MIT withholding tax rate at the corporate tax rate.
SUBMISSIONS were due by 10 August 2018.
FJM 15.8.18
[Treasury website: Consultation Page, Draft Bill, Draft EM; LTN 142, 7/7/18; Tax Month – July 2018]
Comprehension questions (answers available)
- Does this ‘second stage’ of the draft legislation include measures to subject ‘converted trading income’ to MIT withholding tax at the top corporate rate?
- Does it propose changes to the ‘thin capitalisation’ rules to stop an investor, in a MIT staple, gearing that investment, on top of the gearing already in the MIT/Stapled Security?
- Would foreign pension funds continue to have exemption from our interest and dividend withholding tax regime?
- Would foreign governments continue to have the same exemptions on their passive income from portfolio investments?
- Would MIT investments in agricultural land and residential property be subject to the MIT withholding tax at the top corporate tax rate?
- Would this include MIT investments in ‘affordable housing’ on rental income?
