Scott Farrell examines how the new Attribution Managed Investment Trust (AMIT) regime affects the pricing of transactions between stapled entities.
The new Attribution Managed Investment Trust (MIT) regime has effectively resulted in a domestic transfer pricing regime with respect to income derived by MITs. An MIT (either a Withholding or Attribution MIT) that derives income in excess of an arm’s length amount is subject to tax on the excess at the rate of 30 percent. From 1 July 2018, this will apply to both new arrangements entered and pre-existing arrangements.
The pricing of transactions between stapled entities can be difficult, especially in an infrastructure context. These transactions typically split land ownership from the ownership of business assets associated with the infrastructure asset. The Australian Taxation Office's (ATO) approach to pricing of cross staple lease transactions is evolving. As well as these new provisions, the ATO is also reviewing the historic pricing of rent for cross staple leases.
In recent infrastructure privatisations, the ATO has identified that the land and business assets represent a single integrated business and applied a profit split methodology to the pricing of the lease rentals. The ATO’s initial position has been to apply a 70:30 profit split.
The appropriate methodology for pricing lease rentals varies depending upon the specific infrastructure asset as well as the ability to identify third party pricing benchmarks. Such privatisations typically involve a competitive tender process and so the pricing methodology for the cross staple lease is an important issue. The appropriateness of a 70:30 profit split for infrastructure privatisations is an open question.
These new rules impacting income derived by MITs not only affect privatisation transactions but also have the potential to have material impacts on existing infrastructure assets. This may result in material changes to the pricing of cross staple lease rental. Such a change could increase the go forward effective tax rate for the investment and so result in adverse valuation impacts.
For this reason, MIT investors may need to carefully monitor any review of the pricing of transactions entered by MITs (in light of these new rules and renewed ATO focus on the historical pricing of cross staple transactions).