In the May 2016 Budget the government announced its intention to create 2 new types of flow-through collective investment vehicles in the hope that, being more familiar to foreign investors, these vehicles might increase the size of foreign funds under management in Australia. The announcement emerged from work begun by the Board of Taxation in 2011.
In the meantime, however, the Financial Services Council has been agitating for something else entirely. In its assessment of the impact of the Johnson report, for example, it lamented not just the failure to implement the Johnson report’s recommendations, it also emphasised how unattractive and mystifying Australia’s complex patchwork of withholding tax regimes was for foreign investors.
On 3 November, Treasury released a Consultation Paper outlining 2 options for changing our withholding tax regime and possibly tied into the proposed Asia Region Funds Passport (ARFP) which is due to start in late 2017. The Paper considers:
- a uniform 5% rate on distributions by collective investment vehicles that are part of the ARFP, or
- a uniform 5% rate on distributions by all collective investment vehicles (whether or not they are part of ARFP) except for income from investments in property (eg rental income and capital gains from real property assets).
Given that vehicles in the ARFP will, under the current design, be allowed to invest only in debt and equities, investors in funds that hold real estate directly would not benefit under either option. The Consultation Paper does not address how indirect income from property will be handled (eg vehicles that hold equity interests in Listed Property Trusts) although presumably this income will also be excluded from the 5% rate.
The disparities in the rates applied to interest, franked dividends, unfranked dividends, capital gains, MIT fund payments and so on would disappear. Conduit income would remain immune from Australian tax under either proposal.
The paper also offers for consideration the ‘do nothing option’ and invites suggestions for ‘alternative proposals.’
The Discussion Paper is open for comment until 2 December 2016.