A raft of proposed changes to Australia’s tax laws will have significant and potentially positive implications for investing in the agribusiness sector.
This article explains how a selection of the key proposed measures may impact the structuring of, and improve the returns on, your agribusiness investment.
Tax barrier to superannuation investing into agriculture removed
Agricultural ventures and investments are often structured as trusts, or as stapled structures involving either a corporate or trust entity which is taxed as a corporation, which is in turn stapled to a trust.
There have traditionally been a number of important advantages in using trust structures to invest in agribusiness. Trust structures are taxed on a ‘flow through’ basis and are eligible for discounted capital gains tax treatment. Trusts also offer the ability to provide tax deferred distributions to investors, and may in some instances qualify for additional tax concessions applicable to ‘managed investment trusts’.
However, the ability for superannuation funds to invest into agricultural ventures in a tax effective way has been limited. This is because of the so-called public trading trust rules. Under these rules, if superannuation funds end up holding 20% or more of certain trusts, those trusts lose their ‘flow through’ status and end up being assessed at corporate tax rates. This also limits the extent to which a superannuation fund can take advantage of discounted capital gains tax treatment on gains which have been realised.
This has presented a significant restriction on the ability of superannuation funds to invest in agribusiness through trust structures.
It is proposed that complying superannuation entities will no longer be subject to these rules. This should facilitate the use of trust structures by superannuation funds investing into agribusiness.
The new AMIT rules
The Federal Government is proposing to create a new form of trust structure, the Attribution Managed Investment Trust (AMIT). The proposed AMIT reform is intended to be compulsory for qualifying trusts from 1 July 2016, but any trust which qualifies can elect to have the new regime apply from 1 July 2015.
For trusts that qualify as an AMIT, there will be a number of significant benefits. Whilst retaining the classic ‘flow through’ characteristics of trusts, AMITs will be able to access a simpler, but wholly different, regime for the allocation of tax liabilities to members. The trustee of an AMIT will be able to attribute particular income and offsets to members on a fair and reasonable basis.
AMITs will also automatically qualify as ‘fixed trusts’ for tax purposes, which means that they will be able to access additional tax concessions, such as easier utilisation of tax losses.
This means that going forward, there are likely to be significant benefits in structuring agricultural investments through trusts that qualify as AMITs. This approach will allow investors who invest in such structures to obtain the benefit of these concessions.
However there are some important compliance issues that will need to be properly addressed by those managers seeking to take advantage of the structure:
There are a number of important gateway requirements that must be met for a trust to qualify as an AMIT. The most significant is that the trust constitution must provide members of the trust with ‘clearly defined’ interests in the income and capital of the trust. This requires the trust to be under an obligation to treat members who hold the same class of interests equally and members who hold different classes of interests fairly, and that the trust documents can only be changed in particular limited circumstances.
Investors in existing trust structures should consider whether the new AMIT regime and the associated tax concessions would be of benefit to them. Existing trust constitutions should be reviewed to ensure that the AMIT gateway requirements are satisfied and amendments made where necessary. Based on current industry practice, we expect that a significant number of changes will be required to be made to the constitutions of trusts that wish to take advantage of this regime. Trustees will need to consider whether the relevant amendments can be made by reliance on the trustee’s amendment power alone, or whether a unitholder meeting will be required.
Arm’s length dealing requirements
Whilst there are a range of important benefits available for AMITs, trust structures which qualify as AMITs will also need to abide by some strict requirements and new integrity measures.
The new regime introduces a specific arm’s length dealing rule that will apply to trusts under the regime. This means that trusts will need to ensure that income derived from non-arm’s length dealings must not exceed the amount of income that the trust would have received had the parties been dealing at arm’s length.
Any amount of non-arm’s length income will be taxed to the trustee at the penal rate of 47%.
Importantly, the arm’s length dealing rule is of general application and is not restricted to transactions between related entities in stapled arrangements.
It will be important for existing trust structures seeking to take advantage of the new regime to review their third party arrangements to ensure they can properly be regarded as being at arm's length for tax purposes. This is critical to ensuring that adverse tax consequences do not arise.
There are some significant exclusions from the arm’s length requirements for:
- distributions to the trust from a corporate entity;
- distributions to the trust from another trust that is not a party to the non-arm’s length arrangement; and
- returns on debt determined by reference to benchmark interest rates.
We expect that traditional transfer pricing principles will provide considerable guidance as to what this requires. A clear focus for trusts should be taking what is known about transfer pricing and applying it to what is effectively an onshore transfer pricing regime for trusts.