The Australian Government has targeted the use of Managed Investment Trusts (MITs) by foreign investors in a reversal of original policy objectives to the introduction of MITs, while couching the proposed package in terms of levelling the playing field.
Unhelpfully, and reflective of the muddle that is the Government’s approach to tax, despite the package being titled “Stapled Structures – Details of Integrity Package”, the package is neither limited to stapled structures nor detailed. There is a significant level of important detail missing, including how the package will practically apply and how domestic investors will be protected. The measures will apply from 1 July 2019.
Who does the package affect?
The Government’s package released on 27 March 2018 has broad ranging application, despite being couched in relatively narrow terms. It will affect investors including:
- Foreign investors in MITs. MITs are widely used in real estate, venture capital and private equity investments to attract foreign investors with a definite Australian tax outcome that was more generous than the Australian corporate tax rate (and the highest marginal tax rate for non-corporate investors) – an explicitly stated policy objective of the original MIT rules.
- Foreign pension funds and sovereign wealth funds. These are significant sources of funds, with Canadian pension funds being some of the largest sectorial investors in Australian infrastructure, from roads to airports to energy assets (including renewable energy).
- Investors (domestic or otherwise) in a cascade of trusts. A cascade of non-wholly owned trusts could arise in a number of non-tax driven circumstances, but there is no consideration of the purpose, just the outcome.
- Investors (domestic or otherwise) in MITs that invest in agricultural assets.
The lack of detail and consistency in the description of the changes makes it difficult to assess exactly who the measures will apply to. Investors with any interest in a trust and foreign pension funds and sovereign wealth funds must keep a keen eye out for more details, some of which may well come in the upcoming Federal Budget.
What seems to be clear, though, is that traditional real estate trusts with stapled structures and no (or immaterial) cross charges are unaffected.