Treasury has released the much anticipated Exposure Draft to implement its announcement of 27 March 2018 of a package of tax measures to address the perceived sustainability and tax integrity risks posed by "stapled structures" (Exposure Draft).
Although the Exposure Draft contains proposed amendments to give effect to the announcement (other than in respect of agricultural MITs), it does not contain the conditions stapled entities must comply with to access the infrastructure concession and/or transitional arrangements. Draft legislation containing these conditions and agricultural MIT changes will be released in due course.
The Exposure Draft is subject to a two week consultation period ending on 31 May 2018.
This Riposte focusses on the Exposure Draft from an infrastructure perspective. The references below correspond with the referencing contained in the Treasury paper accompanying the announcement on 27 March 2018.
A Preventing active business income from accessing the 15% MIT rate
The Exposure Draft reflects the proposal to increase the rate of MIT withholding for fund payments of 15% to the highest corporate tax rate (currently 30%) for fund payments to the extent they are attributable to ‘non-concessional MIT income’. An amount is ‘non-concessional MIT income’ where broadly it is attributable to a cross staple payment (subject to certain carve-outs), or where the MIT receives a distribution from a trading trust (e.g. if the MIT has a non-controlling interest in the trading trust). The higher withholding tax rate will not apply to 3rd party rent and cross-staple interest, and is subject to a de minimis threshold.
B Preventing double gearing structures through the thin capitalisation rules
For income years commencing on or after 1 July 2018, the Exposure Draft reflects the proposal to amend the thin capitalisation associate entity test (for the purpose of determining associate entity equity and associate entity debt) so that for these purposes any interest of 10% or more in a flow-through entity (e.g. partnerships and trusts) will give rise to an associate entity relationship. The effect of this is to significantly limit upstream gearing to prevent "double" gearing, i.e. gearing at multiple levels with debt capacity determined by reference to the same underlying assets. The arm’s length debt amount will also be amended to require consideration of the debt to equity ratios in entities in which the test entity has a direct or indirect interest.
C Limiting foreign pension fund withholding tax exemptions
Foreign pension funds which are exempt from income tax in their home country of residence are currently exempt from Australian interest and dividend withholding tax, whether or not the income is associated with a non-portfolio interest in the paying entity.
The Exposure Draft reflects the proposal that this exemption be limited to income associated with portfolio-like investments, broadly where the foreign pension fund holds an ownership interest of less than 10% and does not have influence over the entity’s key decision-making, whether conferred to the foreign pension fund by a membership interest, debt interest or non-share equity interest. The Exposure Draft specifically refers to a right of the foreign pension fund to participate in making financial, operating and policy decisions as constituting influence.
D Limiting the sovereign immunity tax exemption
Australia generally provides an exemption on income derived by sovereign investors where the sovereign investor is not acting in a commercial capacity. The exemption is currently not codified.
The Exposure Draft reflects the proposal that a legislative framework be created for the sovereign immunity exemption which will limit the exemption to situations where sovereign investors have an ownership interest of less than 10% and do not have influence over the entity’s key decision-making. The description of influence is consistent with the foreign pension fund withholding tax exemption.
Importantly, the Exposure Draft appears to provide the exemption in respect of fund payments from MITs to the extent they are not attributable to ‘non-concessional MIT income’.
E Preventing Agricultural MITs
As noted above, draft legislation on the agricultural MIT changes will be released in due course.
Timing & Transitional Rules (Measures A, C & D)
Measures A, C & D will commence on 1 July 2019, but arrangements in existence at the date of the announcement (27 March 2018) will have access to a seven year transitional period. In the case of sovereign investors that had a ruling from the ATO in respect of arrangements in existence as at, where the ruling applied on, 27 March 2018, the amendments apply from the later of the expiry date of the ruling or 1 July 2026. This means that if the transitional period applies, the earliest these changes (other than Measure B) will apply is 1 July 2026.
The Exposure Draft provides economic infrastructure assets in relation to which a cross staple arrangement was entered or reasonably committed to before the date of the announcement with 15 year transitional period with respect to Measure A. During the transitional period, cross-staple rent in respect of transitional assets will not be ‘non-concessional MIT income’ and will therefore not be subject to the increased withholding rate of 30% (provided the conditions to be announced are adhered to). A choice must be made in writing by 30 June 2020 to access the transitional rule.
Treasury will consult separately on the conditions stapled entities must comply with to access the transitional arrangements available under Measure A.
Importantly for all stapled structures, the Exposure Draft appears to protect the deduction of the operating entity on cross staple rent payments from the general anti-avoidance rule during the transitional period.
Additional Concession for certain infrastructure projects under Measure A
Separate from the transitional rules, the Exposure Draft reflects the proposal to introduce a 15 year concession for new investment in economic infrastructure assets approved by the Treasurer on application from a State. This exemption will allow approved infrastructure assets held in a stapled structure to access the 15% MIT withholding rate for cross-staple rent during the 15 year exemption period. At the end of the 15 year period the MIT withholding rate would convert to the highest corporate tax rate. To access the 15 year exemption:
- the asset must be an ‘economic infrastructure asset’ which is either yet to be constructed or is an existing asset that will be substantially improved;
- where the estimated capital expenditure on the asset is $500m or more;
- the asset will significantly enhance the long-term productive capacity of the economy; and
- the asset is in the national interest (where the Treasurer may consider whether in the opinion of Infrastructure Australia, the asset is nationally significant infrastructure within the meaning of the Infrastructure Australia Act 2008).