Over recent years, various tax regimes have been introduced to encourage foreign investment in Australia and they have been used to invest in the agricultural sector. These include:
- the Managed Investment Trust (“MIT”) regime; and
- the Investment Manager Regime (“IMR”) (including the recent release of draft legislation in relation to the third (final) element).
These new regimes, together with other existing tax concessions available to taxpayers engaged in a primary production business, should assist to provide a more favourable tax environment for foreign investment in Australian agricultural assets.
This article provides a brief overview of the MIT regime and IMR and notes some other existing tax concessions which are likely to be relevant to any investment in Australian agribusiness.
Managed Investment Trust (MIT) regime
We have seen an increasing number of foreign investors use trust structures for their investments in Australian agricultural assets. Many of these structures involve the establishment of an Australian MIT often in combination with a stapled share in an operating company.
One of the key benefits of using a MIT is the reduced rate of withholding tax (generally 15%, although in certain limited cases for “clean building” MITs, the rate can be reduced to 10%) that is applied to certain distributions that are made to qualifying foreign residents. Examples include distributions of rental income from an investment in Australian agricultural land and distributions of capital gains which may be realised when underlying assets are sold.
Another key benefit is the ability for the MIT to make a capital account election in relation to certain investments such as shares, units, real property or rights or options to acquire one of those assets. This is intended to remove uncertainty surrounding the tax treatment of such investments and preserve the capital gains tax exemption for foreign investors in relation to gains realised on those investments which are not taxable Australian property.
Broadly, the key requirements which must be satisfied in order for a trust to be a MIT and be eligible for the reduced withholding tax rate include the following:
- the trustee of the MIT must be an Australian resident, or management and control of the trust must be in Australia;
- the MIT must not be a “trading trust” (i.e. it must not control an active business);
- a substantial portion of investment management activities carried out in relation to the trust in respect of “Australian assets” must be in Australia;
- the trust must be a “managed investment scheme” (“MIS”);
- the trust must have a wholesale membership or be a registered MIS;
- the trust must satisfy certain widely held requirements (generally 25 members, although deeming rules are available);
- the trust must not be “closely held” (e.g. a foreign individual must not hold 10% or more); and
- the trust must satisfy certain licensing requirements.
For a trust to be a MIT and have the ability to make the capital account election, it must meet similar requirements to those listed above, with some exceptions. For example, in certain circumstances (e.g. where the only member of a trust is another MIT), a trust may be deemed to have satisfied some of the above requirements.
For the purpose of making agricultural investments, a dual structure is often used – with the MIT holding the agricultural land holdings and a corporate entity conducting the business. In such a case, the corporate entity pays tax at the company tax rate (30%) on profits. This structure can also protect the land holding from claims relating to the conduct of the business.
Investment Manager Regime (IMR)
The recent release of draft legislation in relation to the third (final) element of the IMR should also be welcome news for foreign investors making investments in Australian agricultural assets.
Generally, where a foreign fund meets the definition of an “IMR foreign fund”, Australian sourced capital gains and revenue gains made by the foreign fund in respect of passive portfolio investments (with the exception of certain real property interests) will be exempt from Australian tax. However, the changes do not affect income from dividends, interest and royalties that is subject to withholding tax.
To be an “IMR foreign fund”, a foreign fund must:
- not be an Australian resident at any time during the income year;
- not conduct or control a trading business in Australia at any time during the income year (i.e. a trading business outside Australia is acceptable);
- be resident in an information exchange country at all times during the income year;
- pass a “widely held” and “closely held” test; and
- give an annual information statement to the Commissioner each year and make available certain information to beneficiaries and members.
Special rules also ensure that the IMR exemption only flows to foreign resident beneficiaries and partners where the IMR foreign fund is a trust or partnership.
The benefit of utilising an IMR arrangement would be to allow management of the foreign fund’s Australian assets, without jeopardising the tax status of the foreign fund.
Other tax concessions
As noted above, there are already existing tax concessions that may be available to a taxpayer engaged in a primary production business. Some of these include:
- annual deductions over 10 years for the cost of communication lines;
- three year write-off for expenditure on water facilities;
- outright deductions for landcare operations;
- spreading of insurance recoveries for livestock; and
- spreading or deferring the tax profit due to the forced disposal or compulsory destruction of livestock.
These deductions can be significant, particularly for large agricultural operations.