BACKGROUND, OVERVIEW AND CURRENT STATUS OF MIT CONCESSION AND RELATED REFORMS
The MIT withholding tax concession was originally announced by the Australian Government (Government) in its 2008–09 Federal Budget of 13 May 2008. It subsequently introduced legislation on 4 June 2008 which provided a significant reduction in withholding tax (from 30% progressively to 7.5% over three years) on certain distributions (predominantly rental income and certain capital gains) from Australian MITs to specified foreign investors. The 7.5% rate applied to distributions made from 1 July 2010 to 30 June 2012. In the 2012–13 Federal Budget of 8 May 2012, the Government announced that the MIT withholding rate would double from 7.5% to 15% for fund payments made in relation to income years commencing from 1 July 2012.
MIT WITHHOLDING TAX CONCESSION
The MIT withholding tax concession is available where the following requirements have been satisfied pursuant to Sub-division 12–H of Schedule 1 to the Tax Administration Act 1953 (Cth):
- The trust must be a MIT
- The distribution must be a "fund payment"
- The recipient of the distribution must be an entity with an address outside Australia
- The address of the recipient must be an "information exchange country".
These requirements are discussed in further detail below.
The definition of a MIT was expanded in 2010 to include certain unregistered wholesale funds and Government-owned funds. A trust can only obtain the MIT withholding tax concession where it satisfies all the following requirements. For ease of reference, we have summarised these requirements in Appendix A.
Australian resident trust
The trust must have either an Australian resident trustee or the central management and control of the trust must be in Australia.
Not a trading trust In the case of a unit trust, the trust must not be a trading trust. For any other trust, the trust must not carry on a trading business or control/be able to control the affairs or operations of another person carrying on a trading business. That is, the trust must undertake passive investments (for example, holding land for rental income) rather than active business investments or operations.
Australian investment management activities
A substantial proportion of the investment management activities of Australian assets (including taxable Australian property) must be carried out in Australia. Managed Investment Scheme (MIS)
The trust must be a MIS as defined in the Corporations Act 2001 (Cth) (Corporations Act). Generally, a MIS is where members pool money to produce financial benefits and the members do not have day-to-day control of the scheme.
This requirement varies depending on whether the fund is a registered retail fund, registered wholesale fund or unregistered wholesale fund and these are discussed below. Trusts that are in a start-up or wind-down phase will be deemed to have met the widely held requirements in certain circumstances.
Registered retail fund
A registered retail fund will be widely held where one of the following is satisfied:
- Units in the fund are listed on an approved Australian stock exchange
- Fund has at least 50 members – tracing through eligible entities (refer to Appendix B for a list of eligible entities) is allowed in calculating the number of members. In particular, the interest in the MIT held by an eligible entity is multiplied by 50 and rounded up to give the number of members in respect of the interest held by the eligible entity
- Fund satisfies the "25/60% rule" – that is, eligible entities (refer to Appendix B for a list of eligible entities) has an interest of more than 25% in the fund at the time the first fund payment is made and at no time does an entity (other than eligible entities) have an interest of more than 60%.
Registered wholesale fund
- A registered wholesale fund will be widely held where one of the following is satisfied:
- Fund has at least 25 members – tracing through eligible entities (refer to Appendix B for a list of eligible entities) is allowed in calculating the number of members. Please refer to the discussion above on registered retail funds
- Fund satisfies the "25/60% rule" – refer to the discussion above on registered retail funds.
Unregistered wholesale fund
An unregistered wholesale fund will be widely held where it has at least 25 members. Tracing through eligible entities (refer to Appendix B for a list of eligible entities) is allowed in calculating the number of members. Please refer to the discussion above on registered retail funds.
Not closely held
A foreign resident individual cannot have an interest in the MIT of 10% or more and the trust cannot be closely held. This closely held requirement varies depending on whether the fund is a retail or wholesale fund. In the case of a retail fund, 20 or fewer persons cannot have a total interest in the fund of 75% or more. In the case of a wholesale fund, 10 or fewer persons cannot have a total interest in the fund of 75% or more.
A wholesale fund must be operated or managed by a financial services licensee or by an authorised representative of such licensee. Similar licensing requirements are imposed on retail funds by the Corporations Act. GREEN BUILDING MIT – 10%
CONCESSIONAL WITHHOLDING TAX RATE
The Government amended the law from 1 July 2012, such that MITs that only (solely) hold newly constructed energy efficient commercial buildings would be eligible for a 10% withholding tax rate instead of 15%. This 10% rate was made available in relation to office buildings that obtain a 5-star Green Star rating or a predicted 5.5-star National Australian Built Energy Ratings Scheme (NABERS) rating, and retail centres and nonresidential accommodation that meet equivalent standards.
This regime applies only where construction of the building commenced from 1 July 2012. The Department of Climate Change and Energy Efficiency administers the eligibility requirements and monitors investment outcomes.
The MIT withholding tax concession applies only to fund payments, that is distributions primarily of rental income and capital gains from taxable Australian property by Australian MITs. The nature of the underlying income of Australian trusts is preserved on distribution from these trusts, including to non-residents.
These MIT withholding tax rules will not apply to dividend, interest, royalty income and capital gains from non-taxable Australian property. Therefore, only distributions of Australian sourced net income of these trusts to non-residents will benefit from the new rules. A payment is not a fund payment in relation to an income year unless it is paid during the income year or within three months of the end of that income year.
The reduced MIT withholding tax rate is only available where the investor has an address outside of Australia or where the MIT is authorised to make the payment to a place outside Australia.
INFORMATION EXCHANGE COUNTRY
In addition, the MIT withholding tax concession is only available for investors resident in a country with which Australia has an effective Exchange of Information (EOI) arrangement on tax matters with Australia. These countries are listed in Appendix C. Otherwise, fund payments for foreign investors are subject to the 30% withholding tax rate.
CAPITAL ACCOUNT ELECTION
In addition to the MIT withholding tax concession, the Government introduced a capital account election for MITs. This election allows a MIT to hold eligible assets (such as, shares in a company, units in a unit trust and land, including an interest in land) on capital account resulting in income from those assets that would otherwise be on revenue account, being subject on disposal to the capital gains tax regime. Therefore, investors may be concessionally taxed on these gains due to the capital gains discount that is available to individuals and trusts (up to a discount of 50%) and complying superannuation funds (up to a discount of 331/3%) where the asset has been held for more than 12 months.
The Australian Government has released draft legislation for reforms to the MIT regime, which are proposed to commence effectively from 1 July 2016. The proposed reforms will consolidate the MIT rules into a single co-ordinated regime, and will cover issues such as income unders and overs, the list of eligible entities (including foreign life insurance companies), attribution rules, fixed trusts, tax deferred distributions and arm's length rules for related party transactions.
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- There are similar requirements to the withholding tax concession in respect of the capital account election except for this requirement (ie substantial proportion of investment management activities in Australia is not required for the capital account election).
- This requirement is pursuant to the Corporations Act 2001.
List of Eligible Entities
- Life insurance company registered under section 21 of the Life Insurance Act 1995 (Cth).
- Complying superannuation funds, a complying approved deposit fund or a foreign superannuation fund, being a fund that has at least 50 members.
- Pooled superannuation trust that has at least one member that is a complying superannuation fund that has at least 50 members.
- An entity recognised under a foreign law as being used for collective investment by means of pooling the contributions of at least 50 members as consideration to acquire rights to benefits produced by the entity, if the members of the entity do not have day-to-day control over the operation of the entity.
- Certain Government-owned entities.
- Certain foreign entities established for the principal purpose of funding pensions (including disability and similar benefits).
- Certain foreign government-owned investment entities.