On 24 March 2017, the Australian Government released its Stapled Structure Consultation Paper (Consultation Paper) seeking submissions on potential policy options to address issues that may arise in relation to stapled structures, the taxation of real property investments and other arrangements to re-characterise trading income.
Find out more in our previous article, The end of the road for stapled securities in Australian infrastructure?
The deadline for making submissions on the issues raised in the Consultation Paper closed on 20 April 2017.
There had been speculation that the Government may look to address some of the issues raised in the Consultation Paper in the Federal Budget which will be delivered on 9 May 2017. However, on 2 May 2017, the Government announced that it will not be responding to the issue in the Budget, recognising that more time is needed to “formulate relevant options that minimise unintended consequences”. The timetable for the review has also been extended to the end of July.
Summary of key observations about the issues raised in the Consultation Paper
King & Wood Mallesons was one of the many interested parties who lodged a submission on the issues raised in the Consultation Paper. The following is a summary of some of the key observations made in our submission:
Investors are drawn to stapled structures for a number of commercial reasons, many of which are unrelated to tax
- Stapled structures are an entrenched form of structuring Australian and foreign investment in privatised assets, infrastructure, Australian real property and other associated businesses.
- The use of stapled structures has helped facilitate significant investment across a range of industries and sectors.
Any reforms must be clearly and specifically targeted and provide certainty of outcome
- If specific structures or arrangements are identified as problematic, they should be targeted directly by any reforms.
- Wholesale changes to the tax system or framework (including a broader prohibition on stapled structures) should not be necessary to deal with particular identified exceptional cases.
Some reforms are warranted to address current uncertainties
- Some reforms to the tax laws that apply to stapled structures are not only warranted, but needed, to address the current uncertainties in this area, particularly in light of recent actions by the ATO and changes to the foreign investment rules.
- In particular, reliance on traditional legal concepts such as “rent” and “royalties” in the definition of “eligible investment business” is outdated and needs reform.
- Consideration should be given to updating and clarifying what activities are eligible, to eliminate some of the uncertainty that currently exists in relation to how the provisions apply to particular investments and asset classes
- This could include amending the definition of rent, so that includes all income from Australian real property, even where the relevant tangible asset may not at law constitute a fixture or the relevant interest granted in order to generate income may not strictly constitute a lease and simply be a contractual licence. Income from these types of assets and activities is still passive investment income, even though it may not neatly fall within the relevant legal category of “rent”.
- When considering international approaches to the tax treatment of infrastructure and similar types of investments, the analysis is not as simple as whether nor not they use stapled structures or have provisions which specifically deal with stapled structures or similar arrangements.
- Any comparison needs to be done within an appropriate timeframe on a holistic basis by reference to the broader tax laws of the relevant jurisdiction including effective tax rates, specific tax concessions, access to flow through vehicles, ease of returning capital and the specific circumstances of that jurisdiction including access to capital and investment opportunities.
- Australia’s position in the global market and need to attract foreign investors to fund assets and infrastructure in Australia should also be taken into account.
Timing of reforms
- Any changes to the tax treatment of stapled structures, or changes that impact the tax treatment of real property and infrastructure arrangements more broadly, require careful consideration of the short and long term consequences, as well as a modelling of outcomes, to ensure that any reforms achieve their objectives and do not simply result in additional complexity, uncertainty and cost.
- Any reforms need to addressed in a formal and transparent manner, through legislative change, and not by administrative means such as the publication of guidelines or by subjecting other regulatory decisions (such as foreign investment approvals) to tax conditions.
Existing arrangements must be grandfathered
- Any application of new rules to existing structures is likely to result in significant costs for projects and investors, which will impact on the value and liquidity of investments.
- Any application to existing structures would also add to concerns that have been voiced recently as to the sovereign risk associated with investing in Australia and the significant uncertainties that have arisen because of changes in law and administrative approaches.
- Investors, domestic and foreign, will be closely watching the Government’s approach and assessing the regulatory certainty in this area.