Increase in managed investment final withholding tax

Budget Review 2012–13 Index

Les Nielson

Current policy

A withholding tax of 7.5 per cent applies to distributions from managed investment trusts made to residents of countries with whom Australia has a tax information exchange agreement. In all other cases the withholding tax rate is 30 per cent.

Withholding tax recent history

During the 2007 election campaign the Australian Labor Party undertook to cut the rate of withholding tax from 30 to 15 per cent on managed investment trust distributions to foreign residents.

As part of the 2008–09 Budget the Labor government announced that the final rate would be reduced from 30 to 7.5 per cent in three stages:

  • 22.5 per cent for certain distributions in relation to the first income year starting on or after the first 1 July after the day on which Royal Assent is received for the relevant Acts
  • 15 per cent for certain distributions in relation to the second income year starting on or after the first 1 July after the day on which Royal Assent is received for these Acts, and
  • 7.5 per cent for certain distributions in relation to the third and later income years starting on or after the first 1 July after the day on which Royal Assent is received for these Acts.

Royal Assent was granted to the main enacting Bill, which became the Income Tax (Managed Investment Trust Withholding Tax) Act 2008 on 23 June 2008. Other relevant bills were granted Royal Assent on the same day. Thus the 7.5 per cent rate has only applied to distributions made since the 2010–11 financial year.

The budget measure

The Government has announced that it will increase the withholding tax rate applying to distributions from managed investments to residents of a country with whom Australia has a tax information exchange agreement, from 7.5 to 15 per cent. This measure is projected to raise an additional $260m over the forward estimates period.[1] The 30 per cent tax rate will continue to apply to distributions made to residents of another country with whom Australia does not have such an agreement.

Reaction

This particular initiative came as a surprise to the Australian investment industry. Reported reactions have been: this initiative will jeopardise investment in crucial infrastructure, it will undermine efforts to develop the Australian asset management industry and it undermines Australia’s reputation for having a stable, favourable investment environment for international capital.[2]

Withholding tax regimes are very common within the Organisation for Economic Cooperation and Development (OECD). Some recent tax rates for withholding tax regimes with a similar function to the Australian regime are:

  • United Kingdom – 15 per cent[3]
  • United States of America – 15 per cent[4]
  • Singapore – 15 per cent, where no tax treaty applies[5]
  • France – 18 to 30 per cent[6]
  • Germany – 25 to 15 per cent[7], and
  • Canada – 25 to 0 per cent.[8]

An increase in the withholding tax rate to 15 per cent would place Australia on a similar level with like countries within the OECD.


[1].       Australian Government, Budget Measures: Budget Paper No 2: 2012-13 Commonwealth of Australia, Canberra, 2012, p. 31.

[2].       J Keho and J Wiggins, ‘Industry slams rise in withholding levy’, Australian Financial Review, 10 May 2012, p. 13, viewed 10 May 2012, F Chong, ‘Tax flip sends ‘an appalling message’, the Australian, 10 May 2012, p. 35, viewed 10 May 2012.

[4].       US Internal Revenue Service, Publication 901, Application of Tax Treaties, Table 1, viewed 10 May 2012.

[5].       Inland Revenue Authority of Singapore, Withholding tax rates, 17 April 2012, viewed 10 May 2012.

[6].       Deloitte, International Tax, Withholding Tax Rates 2012, viewed 10 May 2012.

[7].       Ibid.

[8].       Ibid.

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