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New Australian Rules Affect Foreign Investors

New Australian Rules Affect Foreign Investors

Australia's limits on stapled structures and other concessions may affect foreign investors.

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Australia's new measures tackle possible tax integrity risks posed by stapled structures, as well as various other tax concessions available to foreign investors. For instance, the new rules address businesses that may have used these structures to effectively convert active business income into passive rental income (which is typically taxed at a lower rate), or foreign investors who use significant debt financing to effectively convert business income taxable in Australia into interest income paid offshore. Australia has introduced a package of new measures to address these concerns. Finally, Australia is also amending its thin capitalization rules, which could reduce the amount of debt foreign entities may invest in these structures.

Changes affecting stapled structures & foreign investment concessions
According to a recently released package of policy measures, Australia says it will:

  • Disqualify payments sourced from cross-staple payments from the 15% concessional "Managed Investment Trust" (MIT) withholding tax rate (instead withholding tax will apply at the company tax rate of 30%), unless the payment is a pass-through of rent received from third parties 
  • Exclude agricultural land from being an 'eligible investment business' for an MIT
  • Limit the foreign pension fund withholding tax exemption for interest and dividends, so that it only applies to portfolio investments (i.e., investments where the foreign pension fund holds less than 10% of the ownership interests and does not have influence over the entity's key decision making)
  • Create a legislative framework for the existing tax exemption for foreign governments (including sovereign wealth funds), and limit the exemption to portfolio investments (i.e., investments where the sovereign investor holds less than 10% of the ownership interests and does not have influence over the entity's key decision making).

Australia's announcement follows an extensive consultation process last year.

These changes will be effective as of July 1, 2019. Already-existing arrangements will be subject to a seven-year transition period as at March 27, 2018, with a fifteen-year extension for certain infrastructure projects that are "nationally significant".

Thin-cap rule amendments
Australia also says it will amend the thin capitalization rules, applicable for income years starting on or after July 1, 2018. Australia will lower the associate entity ownership test to 10% or more (from 50% or more) for purposes of grouping associate entity debt and associate entity equity. This measure is intended to prevent foreign investors from using debt in multiple layers of flow-through entities (i.e., trusts and partnerships) to convert their trading income into favourably taxed interest income.

 

For more information, contact your KPMG adviser.

 

Information is current to April 10, 2018. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500

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