All managed investment trusts and foreign investors.
What do you need to do?Review the new rules and assess how they may impact you.
Partner
T +61 2 9296 2193
Melbourne
Andrew Clements
Author
Richard Snowden
New Tax Rules - Distributions of managed investment trust income to foreign investors - 27 June 2008
A new final withholding tax regime has been enacted (Tax Laws Amendment (Election Commitments No.1) Act 2008) which applies to distributions of Australian source net income from Australian managed investment trusts to foreign investors.
Amounts excluded from the regime include dividends, interest, royalties and capital gains (that would otherwise be tax free). The new withholding tax regime replaces the existing 30 per cent non-final withholding regime which previously applied to distributions from Australian trusts to non-residents.
Under the new regime, certain eligible foreign investors will be subject to a reduced rate of withholding tax , with the withholding tax rate applying to distributions falling to a 7.5 per cent final withholding tax once the new measures are fully implemented (after 2 years).
The new withholding tax regime is applicable to distributions made from 1 July 2008.
Whether a trust qualifies under the new regime will depend on whether the trust is a “managed investment trust” (“MIT”) within the terms of the legislation. A MIT is generally a resident managed investment scheme under the Corporations Act 2001 that is widely held. The latter requirement will be met if the MIT’s units are listed, there are at least 50 members, or a specified entity (eg a foreign superannuation fund) is a member. The rate of withholding applying to a particular distribution will then depend on the residency of the foreign investor recipient. Where the foreign investor is resident in a country with which Australia has an exchange of information agreement (“EOI”) on tax matters, the tax treatment will effectively be as follows:
- distributions from the first income year following Royal Assent (23 June 2008) - being 1 July 2008 will be subject to a non final withholding at 22.5 per cent,
- distributions from 1 July 2009 will be subject to a 15 per cent final withholding tax, and
- distributions from 1 July 2010 will be subject to a 7.5 per cent final withholding tax, which will also apply to distributions made in all subsequent income years.
Where the investor is not in a EOI jurisdiction the rate is effectively 30%.
Thus an Australian MIT with say 50 members which distributes to an investor in Bermuda (being a country with which Australia has an EOI) would - after 1 July 2008 deduct tax at 22.5%.
Regulations have been issued which specify the foreign countries and foreign territories that are an EOI jurisdiction for the purposes of the new withholding tax regime. Broadly, the regulations list the comparable taxing jurisdictions with which Australia has entered into a bi-lateral tax treaty or agreement (such as the United States, United Kingdom, Canada etc). However, other jurisdictions of interest include the Netherlands Antilles and Bermuda.
A significant result of the new rules is that capital gains in respect of Australian real property which were previously taxed at 30% will from 1 July 2008 be taxed at the new concessional rates and from 1 July 2010 be taxed at 7.5%.
The Assistant Treasurer has noted the changes as a significant step in making Australia a regional financial centre.