Treasury has released Exposure Draft of Treasury Laws Amendment (Stapled Structures and Other Measures) Bill 2018 (Exposure Draft) which proposes to amend the ITAA 1936, ITAA 1997 and TAA 1953 to improve the integrity of the income tax law by:

  • increasing the managed investment trust (MIT) withholding rate on income attributable to trading business
  • modifying the thin capitalisation rules to prevent double gearing structures
  • limiting the withholding tax exemption for superannuation funds for foreign residents to limit access to tax concessions for foreign investors and
  • codifying and limiting the scope of the sovereign immunity tax exemption.

Stapled Structure

Under the Exposure Draft, fund payments made by a MIT to a foreign investor are subject to MIT withholding tax at the top corporate tax rate to the extent that they are attributable to non-concessional MIT income. The MIT withholding tax provisions are modified so that, to the extent that a fund payment reflects amounts of income derived by a MIT that is non-concessional MIT income, the amounts are subject to withholding tax at the top corporate tax rate (currently 30%), rather than 15%.

Thin capitalisation

For income years commencing on or after 1 July 2018, the Exposure Draft proposes to amend the thin capitalisation associate entity test. For the purposes of determining associate entity debt, associate entity equity and the associate entity excess amount under the thin capitalisation provisions, a trust (other than a public trading trust) or partnership will be an associate entity of another entity if that other entity holds an associate interest of 10 per cent or more in that trust or partnership. In addition, in determining the arm’s length debt amount, an entity must consider the debt to equity ratios in entities that are relevant to the considerations of an independent lender or borrower.

Under the current law, for the purposes of determining associate entity debt, associate entity equity and the associate entity excess amount under the thin capitalisation provisions, a trust or partnership is an associate entity of another entity if that other entity holds an associate interest of 50 per cent or more in that trust or partnership.

Superannuation funds for foreign residents withholding tax exemption

Under the Exposure Draft, a superannuation fund for foreign residents will be liable to pay withholding tax on payments of interest, dividends or non-share dividends from an entity if the foreign superannuation fund has a portfolio-like interest in the entity making the payment.

Under the current law, a superannuation fund for foreign residents is not liable to pay withholding tax on payments of interest, dividends or non-share dividends from an entity.

Sovereign Immunity

The Exposure Draft proposes that a sovereign entity will not be liable to tax on amounts paid by another entity if the sovereign entity has, broadly, a portfolio-like interest in the entity making the payment and the payment is not derived from a commercial activity.