18 October, 2018
This article outlines the key Australian income tax developments in the last month affecting your business, and focuses on the proposed reforms to stapled structures which were introduced to Parliament in September, following ongoing exposure draft consultation throughout 2018.
Top 4 developments in tax this month you need to know
| RELEVANT AREA | AT A GLANCE |
|---|---|
| Omnibus bill introduced into legislation | The Government has introduced a number of Bills into Parliament following exposure draft consultations. The Bills cover a number of issues including changes to non-concessional MIT income (which we discuss in more detail below), thin capitalisation, sovereign immunity exemptions, the withholding tax exemption for superannuation funds for foreign residents, the definition of "significant global entity" and technical amendments to the AMIT rules. |
| Multilateral instrument |
The OECD's multilateral instrument (MLI) is currently in effect for certain jurisdictions. Australia has passed legislation to give effect to the MLI but further steps are needed before the MLI becomes fully operational. Australia deposited its instrument of ratification and list of reservations/notifications with the OECD in Paris on 26 September 2018. The MLI will therefore enter into force for Australia's covered tax agreements on 1 January 2019. The MLI will apply to withholding taxes and arbitration procedures from that date and to other direct taxes for taxable periods commencing on or after 30 June 2019. Our April update provides an overview of the MLI. |
| Diverted profits tax |
The Commissioner of Taxation has finalised LCR 2018/6 (released in draft as LCR 2017/D7) and PCG 2018/5 (released in draft as PCG 2018/D2). LCR 2018/6 sets out the conditions required for diverted profits tax to apply, including how the sufficient economic substance test operates. PCG 2018/5 discusses how the ATO and taxpayers should deal with risk in relation to diverted profits tax, and sets out low and high risk scenarios for the sufficient economic substance test. |
| Legislation passed this month | The Treasury Laws Amendment (Tax Integrity and Other Measures) Bill 2018 was passed by the Senate on 20 September and awaits royal assent. The legislation will mean certain foreign trusts and partnerships will now be captured by the multinational anti-avoidance law. It also introduced changes to small business CGT concessions and extends venture capital investment tax concessions to fintech businesses. |
Proposed reforms to stapled structures introduced to Parliament in September and next steps
What you need to know
The Federal Government has introduced legislation to amend aspects of Australia's managed investment trust (MIT) regime into the Parliament.
Broadly, the changes follow from the Government's review of stapled structures and will increase the rate of MIT withholding required in respect of certain forms of income derived by a MIT.
If passed in their current form, the changes will apply from 1 July 2019, subject to the application of transitional rules to existing arrangements.
Background to the changes
In March 2018, Australia's Federal Government released a package of proposed measures to address stapled structures and similar arrangements. In the following months, the Government undertook consultation on the proposed measures, releasing multiple versions of the relevant exposure drafts. You can read Ashurst's note on the initial package of measures here.
Stapled structures and the MIT regime
Stapled structures generally involve two or more entities, the ownership interests in which are bound such that they cannot be dealt with separately. Generally a staple will have an operating side of the structure (eg a company or a public trading trust) and landholder entities on the other (eg a trust other than a public trading trust).
Australia's MIT regime allows investors resident in certain countries to receive distributions of certain types of income (eg rent) with a final 15% withholding tax. The effective tax rate for certain investors can be lowered through other mechanisms, such as the doctrine of sovereign immunity.
The Government's view is that stapled structures are currently used improperly by certain taxpayers, to convert active trading income into passive income distributed through a MIT and therefore taxed at a concessional rate.
The proposed changes aim to combat this by designating certain types of income as "non-concessional MIT income", which will be subject to a higher 30% withholding tax rate (ie the rate at which larger companies or public trading trusts are currently taxed).
How the changes work
Described at a very high level, the changes categorise income into four different types:
- cross-staple arrangement income, which covers certain distributions from an operating entity to an asset entity, flowing to a MIT (directly or indirectly), subject to satisfying a common ownership test (ie a test directed at assessing whether entities are "stapled");
- MIT trading trust income, which will capture certain distributions flowing directly or indirectly from a trading trust to a MIT;
- MIT agricultural income, designed to cover assessable income of a MIT attributable to Australian agricultural land which is or could be used for primary production but is held primarily for deriving rent; and
- MIT residential housing income, outlined in further detail below.
There are numerous exceptions to these categories and circumstances in which they might not apply or apply differently, a detailed consideration of which is beyond the scope of this note. The key exceptions in relation to cross-staple arrangement income include amounts which can be traced to third party rent for land paid to an operating entity, where the income from a cross staple arrangement satisfies a de minimis exception, where the relevant income is or is attributable to rent from a Treasury "approved economic infrastructure facility" or where the amount relates to a capital gain made because the operating entity acquires an asset from the asset entity.
There are also transitional rules which must be considered.
As noted above, MIT residential housing income is included as a category of "non-concessional MIT income". This broadly covers assessable income of a MIT attributable to residential housing (other than affordable housing or commercial residential premises).
The likely outcome is that relevant student accommodation investments will be subject to the 30% MIT rate. The definition of a "residential dwelling asset" now expressly includes premises used primarily to provide accommodation for students (other than in connection with a school which does not include tertiary education).
For further information, please contact:
Ian Kellock, Partner, Ashurst
ian.kellock@ashurst.com
