Aus & NZ: Australia to hike foreign investor tax take

27 March 2018 - 12:00 am UTC

Prices paid for Australian infrastructure may trend lower under a clampdown on how the country taxes foreign investors.

After a year of consultation, the federal government will apply measures to rein in foreign investors’ use of stapled trust structures and managed investment trusts to minimise tax. These structures are commonly used in the property and infrastructure sectors, but property will largely be exempt from the changes.

“Hundreds of millions in revenue is potentially being forgone because of staples and broader tax concessions,” the government said in a statement issued today. “Left as is this could grow to be in the order of billions of dollars.”

At the same time, the government is trying to cut the corporate tax rate to 25% from 30%, following similar moves in several countries including the UK and the US. 

The changes include applying the full corporate ‘withholding tax’ rate to “distributions derived from trading income that has been converted to passive income using a managed investment trust”.

While the changes will begin coming in from July this year, “new, government-approved, nationally significant infrastructure assets” will be exempted from complying for 15 years.

The government has begun a separate consultation on what conditions will need to be satisfied before granting the exemption. It said there may need to be “stronger integrity rules” to protect against “aggressive cross staple pricing”.

Sovereign rules
It will also place limits on so called “sovereign immunity” that the Australian Taxation Office has allowed.

The-government said foreign state owned companies and sovereign wealth funds have been able to reduce their tax to near zero in Australia when combining this immunity with stapled tax structures, even though their shareholding in an asset may be greater than 10%.

The government said it will specifically limit this immunity to where offshore sovereign investors have an ownership interest of less than 10 per cent and have no influence over the entity’s key decision-making.

“Most countries do not provide reciprocity through such broad tax concessions for sovereign investors,” a government paper on the changes said.

“This means that foreign sovereign investors generally receive a much greater benefit when they invest in Australia than we receive when our sovereign wealth funds invest in other countries.”

The government will also ensure a foreign pension fund “withholding tax exemption for interest and dividends” will be limited to portfolio investments only.

The changes will also see amendments to the so-called “thin capitalisation” rules to “prevent foreign investors from using multiple layers of flow-through entities [such as trusts and partnerships] to convert their trading income into favourably taxed interest income”.

Investor reaction
Investors contacted by Inframation were still digesting the full implications of the changes.

One foreign investor who did not wish to be named predicted they would reduce investment in infrastructure by foreign investors and inevitably cut the prices infrastructure owners receive.

“This will affect the marginal investor in the sector – which is the foreign investor. There will be a hit to values,” he said. “At the margins this will affect the level of competition and the big prices that have been paid [recently for infrastructure].”

Minter Ellison tax partner, Adrian Varrasso, said last week he discussed a proposed investment by a “sovereign” client with the tax office that would have been above 10%. That now likely will need to be reduced to comply with the new regime.

He said the changes will be less severe than some feared when the government first proposed changes in March 2017, but added they will be more wide ranging as they go beyond just stapled structures. 

“It will I think have an impact on foreign investment, as to how much who knows,” he said. [The government] are trying to level the playing field for local investors, [but] it is likely to reduce the value of assets because a foreign investor will not pay as much and the local investor will know this.”

Local investors shared mixed views during the consultation process. Some see it as positive because they will become more competitive with offshore buyers. Others have predicted the changes will lower market liquidity and mean they will get less for their existing assets when they try to sell them.

The government said stapled structures had been used by the property sector in Australia since the 1980s. Under this regime, foreign and local investors had been taxed at broadly the same marginal corporate tax rates.

In 2008 the Managed Investment Trust rules were introduced. Aimed at attracting foreign capital to the funds management industry in Australia, particularly for the commercial and retail property funds, it allowed a 15% tax rate.

But the government said the MIT rules combined with stapled trusts had encouraged tax structures in sectors outside property that characterise what is really trading income, which should be taxed at the full 30% corporate rate, as passive or rental income.

“In effect, stapled structures have resulted in the unintended emergence of a dual corporate tax system that taxes foreign institutional investors in land-rich industries at rates anywhere between 0% and 15%,” the government paper said. “Meanwhile, other large businesses remain subject to the 30% corporate tax rate.”

When the federal treasury first released its plans for stapled trust structures in March 2017 it was planning to implement them in time for the 2017 federal budget in May that year.

Following heavy lobbying from investors that had used the structures for 20 years and based their investment returns on them, the government agreed to consult much more widely.