Tax Insight: The staple 'punch' – Major changes to the taxation of staple structures

On 27 March 2018, the Treasurer released an Integrity Package which proposes a number of significant changes to the tax treatment of stapled structures and foreign investors. Whilst stapled entities are in the spotlight, the tax reform proposed is not limited to stapled structures and also targets the concessional tax treatment afforded to certain foreign investors.

The detail of this Integrity Package has been long awaited by industry, following the ATO Taxpayer Alert and Treasury Consultation Paper released early last year.

Key elements of the proposed changes

The Integrity Package outlines that “globally, the pool of funds invested by sovereign wealth funds and pension funds has grown rapidly” and that “these types of investors have access to a range of additional tax concessions“. The perceived concern outlined by the Australian Government is that certain stapled arrangements “have no clear commercial justification and appear to be solely a tax driven strategy to reduce effective tax rates for foreign investors“.

In this context, the Integrity Package details the following proposed changes:

1. Removing concessional rate of MIT withholding. The concessional Managed Investment Trust (MIT) withholding rate of 15% will be replaced with the company tax rate (in most cases, 30%) where MIT distributions are sourced from certain cross-staple payments. Exceptions have been proposed (third party rental income, safe-harbour income threshold and new Government-approved significant infrastructure assets).
2. Reducing the thin capitalisation associate threshold. The current ownership interest threshold of 50% will be reduced to 10% when applying the associate rules for thin capitalisation purposes. This is intended to prevent the use of multiple flow-through vehicles to have high levels of debt gearing in structures.
3. Restricting foreign pension fund tax exemptions. The withholding tax exemption currently provided on payments of interest and unfranked dividends will be restricted to payments received on portfolio-like investments only (ie interests of less than 10% and no influence over key decision-making).
4. Restricting the sovereign immunity tax exemption. A legislative framework will be created for the existing tax exemption for foreign governments (including sovereign wealth funds), but limiting the exemption to portfolio investments (ie investments of less than 10% and no influence over key decision-making).
5. Excluding MITs from holding agricultural land. Agricultural land will excluded from being an ‘eligible investment business’, which has the effect of preventing any trust that holds agricultural land qualifying as a MIT.

Implementation and transitional periods

With the exception of the thin capitalisation changes that are proposed to take effect from 1 July 2018, the remaining changes are proposed to take effect from 1 July 2019.

Arrangements in place as at 27 March 2018 will be provided a 7 year transitional period and certain existing infrastructure assets will be provided a 15 year transitional period in relation to the higher rate of MIT withholding.

To discuss how these changes may impact you, please contact a member of our National Taxation Group.

This article was written by Nima Sedaghat, Partner, and Alina Sedmak, Associate.