On 28 June 2018, Treasury released a proposal paper seeking feedback on proposed integrity rules which must be satisfied to access the 7 and 15 year transitional relief from the proposed tax changes to the MIT withholding regime announced in the 17 May 2018 “Stapled Structures” Exposure Draft. These amendments are discussed in more detail in our previous publications on the implications in the real estate and infrastructure sectors.
Broadly, to continue to access the concessional 15% Managed Investment Trust (MIT)withholding tax rate during the 7 or 15 year transitional period (or the 15 year concessional period for new infrastructure) certain integrity rules must be satisfied.
Treasury is seeking feedback on the proposed integrity rules in a two week consultation period ending 12 July 2018.
The integrity conditions which must be satisfied differ depending on whether a 7 or 15 year transitional period applies. Broadly, the 15 year period applies for infrastructure staples, and the 7 year period for other staples, including real estate staples.
A Staples eligible for 7 year transition
The proposal paper suggests that compliance with the existing non-arm’s length income rule (which taxes the trustee on non-arm’s length income) applying to MITs is sufficient for staples eligible to access the 7 year transitional period, and does not propose additional integrity requirements. This is because these staples are expected to have directly comparable Australian transactions by which the arm’s length amount can be measured.
However, the paper suggests minor technical amendments will be made to the existing rule to ensure it applies to all MITs receiving cross-staple rent or subsequent distributions, including managed investment trusts that buy into existing staples.
B Staples eligible for 15 year transition
Conversely, the proposal paper suggests that the non-arm’s length income rule is not of itself sufficient for staples eligible to access the 15 year transitional or concessional period. This is because these staples are considered not to have directly comparable Australian transactions with third party operators.
Statutory rental caps are proposed to be imposed depending on whether a cross staple lease agreement was in place by 27 March 2018 and whether a methodology for calculating cross staple rent under that lease can be evidenced. Where the rental cap is exceeded, the excess amount will not be able to access the concessional MIT withholding rate of 15% and will be subject to withholding tax at the prevailing corporate tax rate.
The rental caps can be summarised as follows:
- where a lease agreement was in place by 27 March 2018 and a methodology for calculating rent under that lease (for example a percentage of the regulated asset base for regulated infrastructure) can be evidenced – the rental cap is based on that methodology;
- where a lease agreement was in place and no methodology can be evidenced – the rental cap is fixed at the pre-27 March 2018 rent uplifted annually for CPI; and
- where no lease agreement was in place – the rental cap is determined as the amount necessary to ensure that no more than 80% of the combined taxable income (or tax loss) of the stapled entities for the year (ignoring carried forward losses) arises on the asset side.
In addition, a deduction ordering rule will be implemented so that where both concessional and non-concessional rental income is derived, deductions must first be applied against concessional rental.
If both the non-arm’s length income and rental cap apply to an amount of rent, the non-arm’s length income rule (which applies trustee tax, rather than higher MIT withholding rates) is said to prevail.