Bills Digest no. 40 2012–13
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WARNING: This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
Bernard Pulle
Economics Section
1 November 2012
Contents
Purpose
Background
Committee consideration
Financial impact
Key provisions
Date introduced: 10 October 2012
House: House of Representatives
Portfolio: Treasury
Commencement: This Act commences on the day it receives the Royal Assent. The commencement and application of the various measures in Schedule 1 are outlined in the section of this Bills Digest dealing with the key provisions.
Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill's home page, or through http://www.aph.gov.au/Parliamentary_Business/Bills_Legislation. When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website at http://www.comlaw.gov.au/.
The purpose of the Tax Laws Amendment (Clean Building Managed Investment Trust) Bill 2012 (the Bill) is to cut the final withholding tax rate from 15 per cent to 10 per cent on fund payments from Clean Building Managed Investment Trusts (Clean Building MITs) to foreign residents in countries with which Australia has effective exchange of information arrangements.[1]
In 2008, Schedule 1 of the Tax Laws Amendment (Election Commitments No. 1) Act 2008, the companion Income Tax (Managed Investment Trust Withholding Tax) Act 2008 and the Income Tax (Managed Investment Trust Transitional) Act 2008 put in place a new final withholding tax regime for Australian managed investment trusts (MITs) on certain distributions called fund payments made to foreign investors resident in certain countries listed in regulations (referred to as ‘information exchange countries’). These Acts received the Royal Assent on 23 June 2008 and the new rules applied from 1 July 2008. The background to the introduction of this withholding tax regime can be found in the Bills Digest covering the relevant Bills.[2]
The rate of withholding tax was initially set at 22.5 per cent in the first year, 15 per cent in the second year and 7.5 per cent for all later years if the place of payment or address of the recipient or, in certain cases, the residency of the recipient, was in an ‘information exchange country’. In all other cases, withholding tax was required at the rate of 30 per cent.
In 2012, Schedule 5 of the Tax Laws Amendment (2010 Measures No. 3) Act 2010 amended the definition of ‘managed investment trust’ (MIT) in the Taxation Administration Act 1953 (TAA 1953) and the Income Tax Assessment Act 1997 (ITAA 1997) for withholding tax purposes. The Bills Digest on the relevant Bill gives a comprehensive explanation of the current definition of an MIT. [3]
In 2012, the Income Tax (Managed Investment Trust Withholding Tax) Amendment Act 2012 increased the withholding tax rate to 15 per cent for payments by an MIT to residents of an ‘information exchange country’ made on or after 1 July 2012.
On 27 June 2012, in a joint media release, the Assistant Treasurer and the Parliamentary Secretary for Climate Change and Energy Efficiency announced that the Australian Government would introduce legislation to apply a 10 per cent withholding tax rate to fund payments from MITs that only hold newly constructed energy efficient commercial buildings. The joint media release also indicated that the concession would be available in relation to office buildings that had obtained a 5‑star Green Star rating or a predicted 5.5 star National Australian Built Environment Rating System (NABERS) rating, and retail centres and non-residential accommodation that meet equivalent standards. The new regime would apply where construction of the building commenced after 1 July 2012.[4] The concessionary 10 per cent rate is intended to support investment in the construction of new energy efficient commercial buildings.
It can be seen from this joint media release that this announcement was made after the passage of the Income Tax (Managed Investment Trust Withholding Tax) Amendment Bill 2012 which as noted above, once enacted, increased the managed investment trust (MIT) withholding tax rate from 7.5 per cent to 15 per cent.
On 16 August 2012, the Government released exposure draft legislation and Explanatory Memorandum for ‘Clean Building Managed Investment Trusts’ for consultation. The purpose of the draft legislation being to provide that from 1 July 2012 the concessionary rate of 10 per cent withholding tax rate will apply to MITs that only hold newly constructed energy efficient commercial buildings.[5] The consultation process was undertaken by the Treasury.[6]
On 10 October 2012, the House of Representatives Selection Committee referred the Bill to the Parliamentary Joint Committee on Corporations and Financial Services for inquiry and report.[7] The reasons for referral/principal issues for consideration, were stated to be to ‘Deal with Greens for Clean Building carve out; operation of carve out; justification for differential rate; and cost to budget’.[8]
On 29 October 2012, the Parliamentary Joint Committee on Corporations and Financial Services (the Committee) tabled its report titled: Inquiry into the Tax Laws Amendment (Clean Building Managed Investment Trust) Bill 2012.[9] The Committee received six submissions.[10] The Committee recommended that the Bill be passed (Recommendation 3).
However, the Committee highlighted two matters of concern to stakeholders relating to the definition of ‘clean building’ in proposed section 12-430 to be inserted into Schedule 1 of the Taxation Administration Act 1953 (TAA 1953) by item 20 of the Bill.
The primary concern of stakeholders relates to the exclusion of retrofitted buildings from the definition of ‘clean building’ as defined in proposed paragraph 12-430(1)(a) of the TAA 1953—the proposed new definition is restricted to new buildings whose construction commenced on or after 1 July 2012.[11] The Explanatory Memorandum reinforces the reasons for this stakeholder concern because it emphasises in paragraph 1.30 that existing buildings that are retrofitted or extended are not within the scope of this measure.[12]
The second matter of concern to stakeholders is how the point of commencement of construction of a ‘clean building’ will be determined under the proposed definition of ‘clean building’. In this regard the report of the Committee notes that proposed subsection 12-430(2) states that ‘the construction of the building is taken to have commenced at the time the works on the lowest level (including any basement level) of the building commence’.[13]
The Committee report also notes that the Property Council of Australia recommended that the Bill should specifically state that the commencement of construction does not include ‘any works preparing the site and works undertaken below the lowest level of the proposed building’. The Committee agrees with the Property Council that the Bill should make explicit reference to ‘preparing the site for construction’. Accordingly, recommendation 2 is that proposed subsection 12-430(2) be amended by adding the following sentence:
The commencement of construction does not include any works preparing the site or works undertaken below the lowest level of the proposed building.[14]
As noted under the heading ‘Key provisions’ a supplementary government amendment to this effect has been made to item 20 of Schedule 1 of the Bill.
On 11 October 2012, the Senate Selection of Bills Committee deferred consideration of the Bill to its next meeting.[15]
The Committee has no comment on this bill.[16]
The Statement of Compatibility with Human Rights can be found at pages 15 and 16 of the Explanatory Memorandum to the Bill. As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011, the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[17]
The Joint Parliamentary Committee on Human Rights has no comment on this Bill which it considers is unlikely to raise any human rights concerns.[18]
The Explanatory Memorandum states that this measure is estimated to have a small and unquantifiable cost to revenue over the forward estimates period.[19]
A managed investment trust (MIT) may be required under Subdivision 12-H of the Taxation Administration Act 1953 (TAA 1953) to withhold an amount from a payment of its Australian sourced net income, other than dividends, interest and royalties, if the payment is made to an entity whose address or place of payment is outside Australia.
The current definition of ‘managed investment trust’ (MIT) for tax purposes is in section 12-400 in Subdivision 12-H of the TAA 1953. As noted above, this definition was extensively amended by Schedule 5 of the Tax Laws Amendment (2010 Measures No. 3) Act 2010.
Under that section, the conditions to be satisfied for a trust to be a MIT in relation to an income year include:
- that the trustee of the trust was an Australian resident or the central management and control of the trust was in Australia
- a substantial proportion of the investment management activities carried out in relation to the trust must be in respect of assets that are situated in Australia at any time in the income year, or assets that are taxable Australian property or are assets that are shares, units or interests listed on an approved stock exchange in Australia at any time in the income year and
- it cannot be a unit trust or other trust carrying on trading business.
Item 20 of Schedule 1 of the Bill inserts proposed section 12-425 at the end of Subdivision 12-H of Schedule 1 of the TAA 1953 to provide a meaning of ‘clean building managed investment trust’.
Under proposed subsection 12-425(1) of the TAA 1953, a trust must satisfy the following conditions to be a ‘clean building managed investment trust’:
(a) be a MIT in relation to the income year (proposed paragraph 12-425(1)(a))
(b) hold one or more clean buildings, as defined in proposed section 12-430 (proposed paragraph 12-425(1)(b)) and
(c) not derive assessable income from any taxable Australian property, other than from the clean buildings or assets that are reasonably incidental to those buildings (proposed paragraph 12-425(1)(c)).
Meaning of clean building
Item 20 of Schedule 1 of the Bill also inserts proposed section 12-430 into Subdivision 12-H of the TAA 1953 to provide a meaning of ‘clean building’. A government amendment to the Bill replaced proposed subsection 12-430(2).[20] The commentary that follows is relevant to the Bill as amended.
Under this definition, a building is a ‘clean building’ if the construction of the building commenced on or after 1 July 2012 and satisfied the following conditions:
(a) the building is a commercial building that is an office building, a hotel for use wholly or mainly to provide short-term accommodation for travellers, or a shopping centre or a combination of any of the foregoing buildings (proposed paragraph 12-430(3)(a)).
(b) the building has, and continues to maintain at all times during the income year at least a:
(i) 5 Star Green Star rating as certified by the Green Building Council of Australia or
(ii) 5.5 star energy rating as accredited by the National Australian Built Environment Rating System (NABERS) (proposed paragraph 12-430(4)(a)).
(c) The building satisfies the requirements prescribed by regulations for the purposes of proposed paragraph 12-430(3)(b) or proposed paragraph 12-430(4)(b).
In determining if the construction of a building commenced on or after 1 July 2012, proposed subsection 12-430(2) provides that the time of the commencement of the construction of the building is only determined by the time the works on the lowest level (including any basement level) of the building commenced. The Government amendment made to this proposed subsection clarifies that any works preparing a site for construction or undertaken below the lowest level of the building do not represent the commencement of construction for the purposes of this provision.[21]
If a building had previously satisfied the ratings requirements in proposed paragraph 12-430(4)(a) or requirements specified in regulations under proposed paragraph 12-430(4)(b), and thereafter failed to satisfy the requirements for a period (referred to as the non-compliance period) and satisfies the requirements again within 180 days of the commencement of the non-compliance period, the building is treated as having satisfied the requirements during the non-compliance period.
Foreign residents are liable to pay income tax on certain amounts of Australian sourced net income, other than dividends, interest and royalties, of a MIT that are either paid to them or to which they become entitled under Subdivision 840-M of the Income Tax Assessment Act 1997 (ITAA 1997).
The Income Tax (Managed Investment Trust Withholding Tax) Act 2008 (ITMITA 2008) imposes the MIT withholding tax on fund payments paid to an entity resident in an ‘information exchange country’ at rates specified in subparagraphs (i), (ii) and (iii) of paragraph 4(1)(a) of the ITMITA 2008.
Item 5 of Schedule1 of the Bill inserts proposed subparagraph (iv) at the end of paragraph 4(1)(a) of the ITMITA 2008. Proposed subparagraph 4(1)(a)(iv) imposes a withholding tax at the rate of 10 per cent for fund payments from a clean building MIT in relation to income years starting on or after 1 July 2012.
Clause 2 of the Bill provides that this Act commences on the day it receives the Royal Assent.
The effect of clause 3 of the Bill is that the amendments made to the ITAA 1997, the ITMITA 2008 and the TAA 1953 take effect as set out in the applicable items of Schedule 1 of the Bill.
Thus, for example, the rate of tax of 10 per cent imposed on fund payments from a clean building MIT applies to income years starting on or after 1 July 2012, and this is provided by an amendment to the ITIMITA 2008 by item 5 of Schedule 1.
Another example is the insertion of the definitions of clean building MIT and clean building in proposed sections 12-425 and 12-430 respectively, into Subdivision 12-H of Schedule 1 of the TAA 1953 by item 20 of Schedule 1 of the Bill. The definition of clean building in proposed section 12-430 provides that to qualify as a clean building the construction of the building must have commenced on or after 1 July 2012 (proposed paragraph 12-430(1)(a)). In consequence, the meaning of clean building MIT in proposed section 14-425 can only apply to an income year commencing on or after 1 July 2012, because the definition of clean building MIT includes a condition in proposed paragraph 12-425(1)(b) that it holds one or more clean buildings.
Appendix A
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Countries that have a tax information exchange agreement (TIEA) with Australia
Tax information exchange agreements (TIEAs) are an important tool in Australia's efforts to combat offshore tax evasion. The agreements:
- provide for the effective exchange of information between Australia and its TIEA partners
- promote fairness and
- enhance Australia's ability to administer and enforce its domestic tax laws.
The agreements are an important part of Australia's ongoing commitment to the Organisation for Economic Cooperation and Development's (OECD) efforts to improve the transparency of ownership and accounting information and establish an effective exchange of information on civil and criminal tax matters.
Under the TIEAs, treaty partners must have legal and administrative frameworks in place to support their commitment to exchange information. For example, the ability to exchange information cannot be hindered by restrictions such as bank secrecy laws or a limitation to only be able to acquire and hence exchange information that is necessary for their domestic tax administration.
The countries that currently have a TIEA with Australia are:
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*
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These countries have signed an Agreement for the Allocation of Taxing Rights with Respect to Certain Income of Individuals with Australia.
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What to read/do next
The Government is continually reviewing international tax arrangements. For information about how potential international legislative changes may affect you, refer to New legislation.
For more information, refer to:
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Source: Australian Taxation Office (ATO), ‘Countries that have a tax information exchange agreement (TIEA) with Australia’, Australian Taxation Office website, last modified 30 March 2012, viewed 31 October 2012, http://www.ato.gov.au/businesses/PrintFriendly.aspx?ms=businesses&doc=/content/00161158.htm
Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2500.
[1]. An ‘information exchange country’ is one that is listed in Regulation 44E of the Taxation Administration Regulations 1976. Currently Australia has tax information exchange arrangements with the countries listed in Appendix A.
[2]. B Pulle, B Harris and P Darby, Tax Laws Amendment (Election Commitments No. 1) Bill 2008, Income Tax (Managed Investment Trust Withholding Tax) Bill 2008 [and] Income Tax (Managed Investment Trust Transitional) Bill 2008,
Bills Digest, nos. 145-147, 2007–08, Parliamentary Library, Canberra, 2008, viewed 29 October 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fbillsdgs%2F447R6%22
[3]. This Digest is an historical Digest, published after the Bill was read a third time in the Senate. The Bill, as passed by both Houses, contained 20 government amendments (all relating to managed investment trusts). M Donaldson, Tax Laws Amendment (2010 Measures No. 3) Bill 2010, Bill Digest, no. 4, 2010–11, Parliamentary Library, Canberra, 2010, viewed 26 October 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fbillsdgs%2FGLOX6%22
[11]. Parliamentary Joint Committee on Corporations and Financial Services, op. cit., paragraph 3.3, p. 15.
[13]. Ibid., paragraph 3.11, p. 17.
[19]. Explanatory Memorandum, op. cit., p. 3.
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