Reduction in withholding taxes for CIVs | KPMG | AU

Reduction in withholding taxes for CIVs – final jigsaw piece?

Reduction in withholding taxes for CIVs

Natalie Raju and Sean Hanrahan highlight proposed changes on withholding tax which could impact Collective Investment Vehicles (CIVs).

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Last piece missing in the puzzle

The current rate and complexity of withholding tax applied to distributions made by Australian funds has a significant impact on the ability of Australian funds to compete internationally. On Friday 4 November, the Government released a much anticipated consultation paper seeking industry views on the following policy options for withholding tax reform:

  • no policy change (i.e. maintain status quo / no new withholding tax concessions for non-residents)
  • applying a single 5 percent non-resident withholding tax rate to all withholdable payments from for Australian collective investment vehicles (CIVs) that qualify for the Asia Region Funds Passport
  • applying a single 5 percent non-resident withholding tax rate to all withholdable payments (excluding rental income and taxable Australian real property gains) across all Australian CIVs.

Importantly, the Government has recognised that simplicity in policy design is a key factor to successful funds distribution, and hence the suggestion of a single rate across all income types.

Whilst a reduction in withholding tax to 5 percent would be a welcome measure, it would still place Australian funds at a headline disadvantage in comparison to foreign funds that do not impose non-resident withholding taxes, such as Singapore and Irish/Luxembourg Undertakings for the Collective Investment of Transferable Securities (UCITS) which are distributed throughout Asia. Although, the counter argument is that these jurisdictions predominantly operate as conduits, whereas Australia already has an equivalent conduit regime which equally exempts foreign income from tax when distributed to foreign investors.

Following recent policy initiatives (the investment manager regime, new managed investment trust regime, Asia Region Funds Passport and the planned CIV regime), the implementation of a competitive withholding tax regime could be viewed as the final piece in the tax policy jigsaw to remove the remaining structural barriers and further encourage the export of Australian managed funds. However, with the Asia Region Funds Passport just around the corner, for many local fund managers these measures can’t come soon enough.

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