27 March 2018

Levelling the playing field for Australian investors: Taxation of Stapled Structures

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.

Over recent years, a growing number of taxpayers have sought to re-characterise trading income into more favourably taxed passive income. When combined with existing concessions used by foreign pension funds and sovereign wealth funds, some foreign investors can pay tax rates of 15 per cent or less (in some cases, almost tax-free), rather than 30 per cent on Australian business income.

These tax benefits are not available to domestic investors, and are only available for investments in land rich businesses. As such, they may distort investment decisions and encourage higher foreign ownership of land rich investments relative to Australian investors who do not receive these concessions.

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 Government has developed a package of measures to address the sustainability and tax integrity risks posed by stapled structures and limit the broader concessions for foreign investors. 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 passive income from portfolio investments; and
  • excluding agricultural land from being an ‘eligible investment business’ for a Managed Investment Trust.

The package will have no direct impact on finance staples or stapled structures in the commercial and retail property sectors to the extent that they generate rent from third parties.  However, some foreign investors into these structures may be affected by the changes to broader concessions.

These measures have been developed following extensive consultation. This package will neutralise the tax benefits of stapled structures without requiring investors to restructure their existing arrangements.

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, as these changes address a clear loophole in the current law which is being exploited.

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. The transitional arrangements will minimise the impact of the package on existing investments.

The 15 year exemption for new, Government-approved infrastructure assets will ensure continued support for the development of nationally significant infrastructure assets that enhance the productive capacity of the economy and drive long term economic growth.                             

Treasury will consult separately on the conditions stapled entities must comply with to access the proposed infrastructure concession and / or transitional arrangements (for example, stronger integrity rules may be needed to protect against aggressive cross staple pricing). 

Further details on the package is available on the Treasury website.