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The Government is committed to protecting the integrity of Australia’s corporate tax system by tightening the rules on stapled structures. Stapled structures and the broader concessions available to foreign investors for passive income have been identified as a tax integrity concern, allowing some foreign investors to pay very little if any tax on Australian business income. The Government has released details of a package of measures to address the sustainability and tax integrity risks posed by stapled structures and limit the concessions currently available to foreign investors for passive income. The key elements of the package are:
- applying a final withholding tax set at the corporate tax rate to distributions derived from trading income that has been converted to passive income using a Managed Investment Trust (with a 15 year exemption for new, Government-approved nationally significant infrastructure assets);
- amending the thin capitalisation rules to prevent foreign investors from using multiple layers of flow-through entities (i.e. trusts and partnerships) to convert their trading income into favourably taxed interest income;
- limiting the foreign pension fund withholding tax exemption for interest and dividends to portfolio investments only;
- creating a legislative framework for the existing tax exemption for foreign governments (including sovereign wealth funds), and limiting the exemption to portfolio investments; and
- excluding agricultural land from being an ‘eligible investment business’ for a Managed Investment Trust.
These changes (except the thin capitalisation changes), will take effect from 1 July 2019. The thin capitalisation changes will take effect from 1 July 2018. To balance concerns over the impact on existing arrangements, transitional arrangements of seven years (ordinary business staples) and 15 years (for infrastructure assets) have been included for the majority of the package.