The Treasury has released an exposure draft of the Treasury Laws Amendment (Stapled Structures and Other Measures) Bill 2018. The Bill contains a number of measures that the Treasury says are designed to “address risks to the corporate tax base posed by stapled structures and similar arrangements and limit access to concessions currently available to foreign investors for passive income”. The introduction of these measures was originally flagged by Treasurer Scott Morrison in a media release issued on 27 March 2018. In the media release, he said:
“The Turnbull Government is continuing to deliver on its commitment to protect the integrity of Australia’s corporate tax system by tightening the rules on stapled structures.
The package announced today levels the playing field for Australian investors by closing down an unintended concession that was only available to foreign investors…
The use of staples and similar structures has grown significantly in recent years and expanded into new sectors, beyond their traditional use in commercial and retail property.
Hundreds of millions in revenue is potentially being forgone because of staples and broader tax concessions. Left as is this could grow to be in the order of billions of dollars.”
The Exposure Draft Bill is divided into four Schedules.
Schedule 1 deals with “Non-concessional MIT [Managed Investment Trust] Income” and amends the Income Tax Assessment Act 1997 (“the ITAA 1997”) and the Taxation Administration Act 1953 (“the TAA 1953”). According to the Draft Explanatory Memorandum:
“Schedule 1 to this Exposure Draft Bill amends the ITAA 1997 and the TAA 1953 to improve the integrity of the income tax law for arrangements involving stapled structures and to limit access to tax concessions for foreign investors by increasing the MIT withholding rate on income attributable to trading business to a rate equal to the top corporate tax rate.
To achieve this, the MIT withholding tax provisions are modified so that, to the extent that a fund payment reflects amounts of income derived by a MIT that is non-concessional MIT income, the amounts are subject to withholding tax at the top corporate tax rate (currently 30 per cent), rather than 15 per cent.
With some exceptions, an amount of a fund payment will be non-concessional MIT income if it is attributable to:
Schedule 2 amends the ITAA 1997 to modify the thin capitalisation rules in Division 820 to prevent double gearing structures. As summarised by the Draft Explanatory Memorandum:
“For the purposes of determining associate entity debt, associate entity equity and the associate entity excess amount under the thin capitalisation provisions, a trust (other than a public trading trust) or partnership will be an associate entity of another entity if that other entity holds an associate interest of 10 per cent or more in that trust or partnership.
In addition, in determining the arm’s length debt amount, an entity must consider the debt to equity ratios in entities that are relevant to the considerations of an independent lender or borrower.”
Schedule 3, “Superannuation funds for foreign residents withholding tax exemption” amends the ITAA 1997 and the Income Tax Assessment Act 1936 (“the ITAA 1936”). These changes will mean a superannuation fund for foreign residents will now be liable to pay withholding tax on payments of interests, dividends or non-share dividends from an entity if the foreign superannuation fund has a portfolio-like interest in the entity making the payment. The withholding tax exemption will be limited to portfolio investments only.
Schedule 4, “Sovereign immunity”, amends the ITAA 1997 and the ITAA 1936 to create a new legislative framework for the existing tax exemption for foreign governments. As outlined in the Draft Explanatory Memorandum:
“A sovereign entity will not be liable to tax on amounts paid by another entity if the sovereign entity has a portfolio-like interest in the entity making the payment and the payment is not derived from a commercial activity.”
Public consultation on the Exposure Draft closes on 30 May 2018.
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