BILLS DIGEST NO. 157, 2011–12, 19 June 2012

Income Tax (Managed Investment Trust Withholding Tax) Amendment Bill 2012

Christos Kyrgios
Law and Bills Digest Section

Date introduced:  24 May 2012

House:  House of Representatives

Portfolio:  Treasury

Commencement:  Royal Assent

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/.

Purpose

The purpose of the Income Tax (Managed Investment Trust Withholding Tax) Amendment Bill 2012 (the Bill) is to increase the final withholding tax rate that is charged on managed investment trusts (MITs) from 7.5 per cent to 15 per cent in income years commencing on or after 1 July 2012. 

This is one in a suite of Bills that also includes:

•       Tax Laws Amendment (2012 Measures No. 2) Bill 2012[1] and

•       Pay As You Go Withholding Non-compliance Tax Bill 2012.[2]

Background

Foreign direct investment (FDI) provides a significant amount of revenue to Australia and the sector’s growth has been strong over the past couple of years.  FDI into Australia increased by
11.1 per cent in 2009 and was followed by an expansion of 7.5 per cent to a total of $474 billion in 2010.[3]  Although the global financial crisis did have a significant negative effect on levels of FDI into Australia, given the strength and resilience of the Australian economy, these levels have returned to positive growth due to investor confidence.[4]

The current tax rate of 7.5 per cent applies to all distributions that are paid from Managed Investment Trusts (MITs) to residents of countries that have an active tax information exchange agreement with Australia[5]; otherwise the withholding tax rate is 30 per cent.

Rate applied in comparable countries

The following list outlines the tax rates for withholding tax regimes similar to the Australian regime from other countries within the Organisation for Economic Cooperation and Development (OECD).  As can be seen, the proposed amendments will bring Australia in line with comparable countries.

Country

Rate

United Kingdom

15 per cent[6]

United States of America

15 per cent[7]

Singapore

15 per cent[8]

France

18–30 per cent[9]

Germany

15–25 per cent[10]

Canada

0–25 per cent[11]

Basis of policy commitment

As part of the Australian Labor Party’s (Labor) 2007 election campaign, it promised to reduce the withholding tax rate on MITs payments to foreign residents from the then rate of 30 per cent to
15 per cent.

Further, forming part of the 2008–09 Budget, the Labor Government declared that the effective rate would be reduced more significantly than originally proposed, to 7.5 per cent, but that it would be done in the following three steps[12]:

•       22.5 per cent for certain distributions in relation to the first income year after the enabling legislation receives Royal Assent

•       15 per cent final withholding tax for fund payments in the second income year and

•       7.5 per cent final withholding tax for fund payments of third and later income years.

The Income Tax (Managed Investment Trust Withholding Tax) Act 2008 (MITW Act) received the Royal Assent on 23 June 2008. The rate of 7.5 per cent has applied to distributions made from the 2010–11 financial year.

This Bill operates to increase that rate to 15 per cent. This measure was announced as part of the 2012–13 Budget and is intended to ensure that Australia receives a ‘fair return’ on profits that have been generated in Australia.[13]  Although there has been some criticism of the rise, the Government view is that the 15 per cent tax level is ‘consistent with its original 2007 election commitment’[14] and that, when compared to other developed economies, the rate remains competitive.[15]

Committee consideration

All three of the Bills in the suite of Bills were referred to the House of Representatives Standing Committee on Economics (the Economics Committee) for inquiry and report.[16]

Ernst & Young submitted to the Economics Committee that this measure ‘makes foreign investors in Australia nervous and some major investors will rethink their Australian investment plans’.[17]  In particular, Ernst & Young stated:

Australia is competing, currently, for global capital investment with other countries.  We have seen global asset manage interest in investing into the USA and UK given their lower currency exchange rates and greater turnaround prospects from the global financial crisis and thus potential for higher capital growth.  Overseas investors have been prepared to accept slightly lower yields from Australian asset investments given the stability and transparency of our legal, tax and regulatory system.  [This measure] ... affects the perception of Australia by global investors.[18]

The Economics Committee published its final report on 18 June 2012.[19]  The majority recommended that the House of Representatives pass the Bills.[20] 

However, the Liberal Party members of the Committee lodged a dissenting report.  Of particular concern in relation to this Bill and the companion provisions in Schedule 4 to the Tax Laws Amendment (2012 Measures No. 2) Bill 2012 was the increase to:

... the managed investment trust (MIT) final withholding tax from 7.5 per cent to 15 per cent. Both the investments made, especially in infrastructure, and the reputation of Australia as a safe and stable place to will now be placed at risk because of the vacillation of the Government.

Taxpayers who made sound effort to comply with the prevailing law as it was when they entered into financial agreements are particularly affected. In submissions made to the Committee, there were instances of entities that, with these changes in place, may not have entered into the financial agreements outlined.[21]

Position of major interest groups

The amendments in the Bill have come without prior warning by the Government and were not foreseen by stakeholders in the Australian investment industry.

Key industry players including AMP Capital, Infrastructure Partnerships Australia and The Trust Company have voiced the opinion that ‘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.[22]

In addition, it has been reported that:

Singapore’s Mapletree Logistics Trust is understood to have withdrawn from negotiations to buy Stockland’s $822 million industrial portfolio in response to the government’s move to double the tax imposed on overseas investors.[23]

And:

The federal government’s decision to double withholding tax for foreign investors in managed investment trusts, in tandem with the high Australian dollar, could curtail burgeoning Chinese investment in Australia real estate.[24]

Financial implications

The Explanatory Memorandum to the suite of Bill states that these amendments are expected to generate approximately $260 million, in revenue, over the forward estimates.[25]

Key provisions

Item 1 of Schedule 1 to the Bill amends subparagraph 4(1)(a)(ii) of the Income Tax (Managed Investment Trust Withholding Tax) Act 2008 so that the rate of income tax imposed by the MITW Act if the entity is a resident of an information exchange country is 15 per cent for fund payments starting on or after 1 July 2012.

Consequential to this amendment, schedule 4 to the Tax Laws Amendment (2012 Measures No. 2) Bill 2012 amends the Taxation Administration Act 1953 by increasing the MIT withholding tax rate from 7.5 per cent to 15 per cent with effect from 1 July 2012.

Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2795.

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ISSN 1328-8091

[1].               C Kyrgios, Tax Laws Amendment (2012 Measures No. 2) Bill 2012, Bills Digest, no. 155, 2011–2012, Parliamentary Library, Canberra, 2012.

[2].               C Kyrgios, Pay As You Go Withholding Non-compliance Tax Bill 2012, Bills Digest, no. 156, 2011–12, Parliamentary Library, Canberra, 2012.

[3].               Australian Trade Commission, Australia continues to be an attractive destination for FDI, Investor updates, 6 May 2011, viewed 31 May 2012, http://www.austrade.gov.au/Invest/Investor-Updates/110506-Australia-continues-to-be-an-attractive-destination-for-FDI

[4].               K Sanyal, Foreign investment in Australia: recent developments, Background note, 1 April 2011, Parliamentary Library, Canberra, viewed 31 May 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22library%2Fprspub%2F665635%22

[5].               The Australian Taxation Office publishes a list of those countries that have a tax information exchange agreement with Australia at: http://www.ato.gov.au/businesses/content.aspx?doc=/content/00161158.htm

[6].               UK Customs and Revenue, Countries with double taxation agreements with the UK – rates of withholding tax for the year ended 5 April 2012, viewed 10 May 2012, http://www.hmrc.gov.uk/cnr/withholding-tax.pdf

[7].               US Internal Revenue Service, Publication 901, Application of Tax Treaties, Table 1, viewed 10 May 2012, http://www.irs.gov/publications/p901/ar02.html

[8].               Inland Revenue Authority of Singapore, Withholding tax rates, 17 April 2012, viewed 10 May 2012, http://www.iras.gov.sg/irasHome/page04.aspx?id=600

[9].               Deloitte, Withholding tax rates 2012: international tax, viewed 10 May 2012, http://www.deloitte.com/assets/Dcom-Global/Local%20Assets/Documents/Tax/Taxation%20and%20Investment%20Guides/matrices/dttl_WHT_rates_2012.pdf

[10].               Ibid.

[11].               Ibid.

[12].               W Swan (Treasurer) and C Bowen (Assistant Treasurer), Establishing Australia as a Regional Financial Hub, joint media release, 13 May 2008, viewed 17 June 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressrel%2FWKGQ6%22

[13].               D Bradbury, ‘Second reading speech: Income Tax (Managed Investment Trust Withholding Tax) Amendment Bill 2012’, House of Representatives, Hansard, 24 May 2012, p. 18, viewed 31 May 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=BillId_Phrase%3A%22r4826%22%20Dataset%3Ahansardr,hansards%20Title%3A%22second%20reading%22;rec=1

[14].               Ibid.

[15].               J Kehoe and J Wiggins, ‘Industry slams rise in withholding levy’, Australian Financial Review, 10 May 2012, p. 13, viewed 10 May 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressclp%2F1623013%22  and F Chong, ‘Tax flip sends “an appalling message”’, The Australian, 10 May 2012, p. 35, viewed 31 May 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressclp%2F1624493%22

[16].               Details of the terms of reference, submissions to the inquiry and the final report (when published) are available at: http://www.aph.gov.au/Parliamentary_Business/Committees/House_of_Representatives_Committees?url=economics/7billsreferred/index.htm

[17].               Ernst & Young, Submission to the House Standing Committee on Economics, Inquiry into the Tax Laws Amendment (2012 Measures No. 2) Bill 2012, Income Tax (Managed Investment Trust Withholding Tax) Amendment Bill 2012 and Pay As You Go Withholding Non-compliance Tax Bill 2012, 1 June 2012, viewed 16 June 2012, http://www.aph.gov.au/Parliamentary_Business/Committees/House_of_Representatives_Committees?url=economics/index.htm

[18].               Ibid., p. 1.

[19].               Standing Committee on Economics, Advisory report on the Tax Laws Amendment (2012 Measures No. 2) Bill 2012, Pay As You Go Withholding Non-compliance Tax Bill 2012, Income  Tax (Managed Investment Trust Withholding Tax) Amendment Bill 2012 and Passenger Movement Charge Amendment Bill 2012, House of Representatives, Canberra, 18 June 2012, viewed 18 June 2012, http://www.aph.gov.au/Parliamentary_Business/Committees/House_of_Representatives_Committees?url=economics/7billsreferred/index.htm

[20].               Ibid., recommendation 1.

[21].               Ibid., p. 62.

[22].               J Kehoe and J Wiggins, ‘Industry slams rise in withholding levy’, op. cit. and F Chong, ‘Tax flip sends “an appalling message”’, op. cit.

[23].               C Cummins, ‘Doubling of withholding tax scares off foreign buyers’, Sydney Morning Herald, 16 May 2012, p. 6, viewed 17 June 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressclp%2F1638006%22

[24].               L Allen, ‘Doubling of tax threatens flow of Chinese cash’, Australian, 14 June 2012, p. 32, viewed 17 June 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressclp%2F1711014%22

[25].               Explanatory Memorandum, Tax Laws Amendment (2012 Measures No. 2) Bill 2012; Pay As You Go Withholding
Non-compliance Tax Bill 2012; Income Tax (Managed Investment Trust Withholding Tax) Amendment Bill 2012, p. 7.