Further progress on draft law on tax treatment of stapled structures 

Treasury has been busy with the release of the exposure draft law that seeks to give effect to the Government’s proposal from 27 March 2018 which addressed risks to the corporate tax base posed by stapled structures and similar arrangements, and limits access to concessions currently available to foreign investors for passive income. 

Specifically, the second stage of draft legislation was released to reflect feedback received on the first stage of draft legislation. In addition, this draft incorporated amendments to prevent foreign investors from accessing concessional Managed Investment Trust (MIT) tax rates on agricultural land as well as including changes to the treatment of residential housing held in an MIT. The complete package of law covers the following measures: 

  • ensure that converted trading income is subject to MIT withholding at the top corporate tax rate 
  • amend the thin capitalisation rules to prevent foreign investors ‘double gearing’ their investments 
  • limit the foreign pension fund withholding tax exemption for interest and dividends to portfolio investments 
  • create a legislative framework for a tax exemption for foreign governments on their passive income from portfolio investments, and 
  • ensure that investments in agricultural land and residential property (other than affordable housing) are subject to MIT withholding tax rate at the corporate tax rate. 

Comments were due on 10 August 2018. See also the Government’s media release. 

In addition, Treasury has released draft legislation on additional integrity rules that will apply to stapled entities that access the infrastructure concession and/or transitional arrangements. The conditions include: 

  • the extension of existing integrity rules that apply to MITs to ensure that all staples eligible for the transition rules or the infrastructure concession are required to comply with the existing non arm’s length income rule, and 
  • the introduction of statutory caps on the amount of cross-staple rent that is able to access the concessional 15 per cent rate of withholding tax 

(available under the MIT regime) for economic infrastructure projects during the transition or concession period. 

Comments were due on 14 August 2018. See also the Government’s media release. 

Guidance on deemed dividend rules for private companies 

The Australian Taxation Office (ATO) has issued the following in relation to the application of the deemed dividend rules (Division 7A), which apply to private companies: 

  • Tax Determination TD 2018/14, which indicates that the benchmark interest rate for Division 7A purposes for the income year that commenced on 1 July 2018 is 5.20 per cent per annum. This benchmark interest rate is relevant to determine if a private company loan made in the 2017-18 income year is taken to be a dividend, and to calculate the amount of the minimum yearly repayment for the 2018-19 income year on an amalgamated loan taken to have been made prior to 1 July 2018. 
  •  Update to Practical Compliance Guideline PCG 2017/13 which deals with the repayment of unpaid present entitlements (UPEs) owing from a trust to a private company beneficiary. The update extends the application of the preexisting guidance to seven-year sub-trust arrangements so that it applies to those maturing in the 2019 income year. The ATO has confirmed that if the principal of the loan is not repaid on or before the date of maturity, a seven-year Division7A complying loan agreement may be put in place between the trust and the private company beneficiary. 

ATO guidance on company tax rate change 

The ATO has updated Practical Compliance Guideline PCG 2018/D5 which sets out the ATO’s compliance and administrative approaches for small business corporate tax entities that have faced practical difficulties in determining their corporate tax rate and corporate tax rate for imputation purposes in the 2015-16 to 2017-18 income years. The Commissioner acknowledges that uncertaintymay have arisen as a result of changes to the tax laws, and the subsequent release of Draft Taxation Ruling TR 2017/D7 which deals with the ‘carrying on a business’ requirement which applied to the 2015-16 and 20160-17 income years. In light of this uncertainty, the Commissioner will apply the following two approaches to assist affected corporate tax entities: 

  • For the 2015-16 and 2016-17 income years, a facilitative compliance approach will apply to the ‘carrying on a business’ test for corporate tax rate purposes.
  • For the 2016-17 and 2017-18 income years, a practical administrative approach will apply that allows corporate tax entities to choose a simplified method to inform members of the correct franking credit to which they are entitled.  This means that the Commissioner will not generally allocate compliance resources specifically to conduct reviews of whether corporate tax entities have applied the correct rate of tax or franked at the correct rate in the 2015-16 and 2016-17 income years. 

Comments were due on 24 August 2018. 

In addition, the ATO issued a draft Law Companion Ruling, LCR 2018/D7, which provides guidance and examples to assist taxpayers to apply the new tests relevant to eligibility for a reduced company tax rate for the 2017-18 and later income years, including: 

  • determining which amounts are ‘base rate entity passive income’ 
  • the meaning of rent, interest and when a share of trust or partnership income is referable to an amount of base rate entity passive income, and 
  • how to calculate the corporate tax rate for imputation purposes. 

Comments are due on 5 October 2018.

For further information concerning the company taxrate changes, refer to the TaxTalk Alert of August 2018.