Concessionally taxed managed investment trust income of foreign investors
The Australian Taxation Office (ATO) recently released Law Companion Ruling LCR 2020/2 on the withholding tax concession for foreign residents, with respect to fund payments made by eligible managed investment trusts (MITs). Generally, the rate of MIT withholding tax is limited to 15% unless the fund payment is attributable to non-concessional MIT income (NCMI).
Subject to certain transitional rules, NCMI includes MIT cross staple arrangement income, trading trust income, agricultural income or residential housing income. Where applicable, a transitional rule applies until July 1 2026, or with respect to an eligible ‘economic infrastructure facility’, till July 1 2034.
The ATO guidance provided in this ruling is of critical interest to foreign investors that hold interests in eligible MITs that principally invest in Australian infrastructure, real estate and related assets. The differing withholding tax rates applicable (i.e. 15% or 30%) have and continue to be of great interest to foreign investors.
Certain key exceptions are available including the third party rent exception, and the approved economic infrastructure facility exception.
Much interest has been focused on the ATO’s views on what is a ‘facility’, particularly where an existing facility e.g. toll road is expanded and/or altered to enhance and naturally develop the relevant asset.
The relevant amending legislation was passed into law in 2019 (Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019) and is generally applicable to fund payments made on or after July 1 2019.
Advance pricing arrangements
The ATO issued an updated version of its Practice Statement Law Administration PSLA 2015/4 on December 3 2020, which covers the ATO’s practices and procedures in dealing with advanced pricing arrangements (APAs), i.e. cross border transfer pricing and related arrangements.
The updated APA guidance to ATO staff principally refines the APA decision-making processes with improved governance and greater flexibility in approach.
Generally, the approach to analysis and evaluation of the APA application of taxpayers is more prescriptive, as is the role of the APA team leader and the competent authority in negotiating the terms of the relevant APA.
Collateral issues including the general anti-avoidance provision, part IV A, the multinational anti-avoidance law (MAAL), diverted profits tax (DPT) and anti-hybrid mis-match Rules may be considered and dealt with as a part of the APA process.
The ATO has a long and comprehensive history in successfully negotiating APAs and many multinationals have pursued Australian APAs as a favourable option in properly managing and mitigating transfer pricing and related tax risks.
Continuing ATO reviews
The ATO Top 1,000 Tax Performance Program has recently been refocused and escalated following the redeployment of many ATO staff, who have been seconded to the Economic Stimulus Branch and related Australian government initiatives, throughout 2020. We expect these reviews covering both income tax and goods and services tax (GST) to be very active and comprehensive through 2021.
Recent government reform measures allowing temporary full depreciating asset expensing, limited tax loss carry back, and related initiatives are expected to be the subject of comprehensive taxpayer reviews by the ATO. Furthermore, the ATO is expected to pursue the perceived misuse of legal professional privilege during these reviews and tax audits.
Freezing orders to prevent removal of Australian assets
On November 27 2020 in Deputy Commissioner of Taxation v Wang (2020) FCA 1711, Abraham J. allowed freezing orders sought by the ATO to prevent two taxpayers (husband and wife) from removing assets from Australia, or otherwise diminishing the value of their Australian assets as there was a real risk of dissipation of these assets.
Following a tax audit of each taxpayer/respondent, amended assessments in the amount of AUD 63.5 million (US$47.2 million) were issued covering the years ending on June 30 from 2008 to 2019. Abraham J. was satisfied that the balance of convenience favoured the making of the freezing orders sought and noted that the taxpayers’ position was protected by the ATO’s undertakings as to damages.
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