Australia: Developments affecting offshore investors’ inbound investments
There have been a number of important Australian tax developments recently that affect offshore businesses/investors and their inbound investments into Australia.
Exposure draft legislation affecting inbound investments
On May 17 2018, exposure draft legislation was released, setting out the details of the proposed integrity measures previously announced on March 27 2018. The proposed measures are:
Managed investment trusts (MITs) and stapled structures – Effective from July 1 2019, a 30% withholding tax (rather than 15%) would apply to distributions by a MIT to its qualifying foreign investors, where the distribution is sourced from active business income derived from:
A stapled structure comprising an asset entity (usually the MIT) and its stapled operating entity, with common ownership of 80% or more; or
A subsidiary trust or partnership carrying on or controlling an active trading business.
Exceptions and transitional rules are available, under which the concessionary 15% withholding tax rate could still apply to the MIT distributions. These include:
A 5% de minimis exception for MITs in a stapled structure;
A third-party rental income exception for MITs in a stapled structure;
A seven-year transitional period for certain arrangements committed to or existing before March 27 2018 (the announcement rate of these measures); and
A 15-year period for certain existing and new economic 'public interest' infrastructure assets costing A$500 million ($380 million) or more.
Details are yet to be released for the announced measure that would prevent MITs from investing in agricultural assets.
Thin capitalisation and 'double gearing' – Effective from July 1 2018, amendments to the safe harbour debt test and the arm's-length debt tests in the thin capitalisation rules. These changes are intended to prevent foreign investors from 'double gearing' their inbound investments via flow-through trusts or partnerships;
Foreign pension funds – Effective from July 1 2019, a limitation on the foreign pension fund withholding tax exception for interest and dividends to portfolio investments, i.e. where the fund has ownership interests of less than 10% and does not have influence over the target entity's key decision-making; and
Foreign sovereign investors – Effective from July 1 2019, legislation on the existing tax exemption for foreign sovereign investors (presently only an Australian Taxation Office (ATO) administrative concession), but limiting the exception to passive income from portfolio investments.
Anti-hybrid rules – legislation introduced into parliament
On May 24 2018, legislation for implementing the OECD's hybrid mismatch rules (BEPS Action 2) was introduced into the Australian federal parliament.
The legislation is broadly consistent with the exposure draft legislation previously released for public consultation, with expanded details (including on the integrity measures) and clarifications on the application dates of the rules – being from January 1 2019 or January 1 2020 for the 'imported mismatch rule'.
MAAL – draft tax determination
The ATO has released draft taxation determination TD 2018/D1.
The draft determination sets out the ATO's broad interpretation of one of the Multinational Anti-Avoidance Law (MAAL) conditions, namely what activities in Australia (performed by an Australian associate or dependent of a foreign entity) are regarded as 'directly in connection with' the foreign entity's supply of goods/services to Australian customers.
The draft determination also considers whether examples of the following activities can be caught by that condition:
Contributing to bringing about the contract for the supply;
Attracting new customers or maintaining existing customer relationships;
Relating to the ability to supply the goods/services, or the manner in which they are supplied;
Supporting the continuing execution of a sale under an existing sale arrangement; and
Procuring demand for sales.
Foreign resident capital gains tax (CGT) 'anti-churning' – draft ruling
The ATO has released draft law companion ruling LCR 2018/D3.
The draft ruling sets out the ATO's views on the 'anti-churning' measure and related examples.
Broadly, the anti-churning measure is an integrity measure that disallows an 'uplift' in asset tax cost bases when an entity joins an Australian income tax consolidated group, where a foreign resident:
Ceases to hold interests in that joining entity or its parent entity within 12 months before the joining time;
Does so without any triggering capital gains tax; and
Does so without a change in majority economic ownership of the joining entity.
Multinationals and foreign investors should consider the impact of these important measures on their inbound investments into Australia.