Most other measures included in the budget papers reflect previous government announcements. The remaining changes will mainly impact on non-resident funds and funds with foreign investors.
Measures previously announced
The budget papers confirmed the following previous announcements:
- The deferral of the management investment trust regime until 1 July 2012.
- Deferring the start of the tax breaks for green buildings program until 1 July 2012.
- Changes to the GST rules governing the use of development leases to ensure such projects are 'new residential premises' and subject to GST.
New measures announced
Investment manager regime
The Government has extended the investment manager regime ("IMR") by bringing the program forward into the current income year (i.e. the 2011 income year).
The IMR is directed towards non-resident funds which utilise an Australian based funds manager. It seeks to exempt non-resident investors from Australian tax on certain portfolio investments to encourage non-resident investors to use Australia as a regional funds management base.
The IMR proposal has four key elements for non-resident investors:
- No Australian tax on income earned on offshore assets (conduit income);
- Neutral tax treatment for direct investments and investments made through an independent intermediary (i.e. funds shouldn't be worse off by using an intermediary);
- Neutral tax treatment for direct investments that have only a small proportion of Australian assets and similar investments via a dependent intermediary acting at arm's length (i.e. a permanent establishment);
- Changes to the central management and control test so that a foreign entity covered by the IMR is not considered an Australian tax resident solely because central management and control is in Australia.
The IMR is a positive development for non-resident funds as it reduces the tax burden on non-resident funds. Consequently the extension of the start date is a welcome move.
Withholding tax requirements on management investment trust distributions
The list of countries which are eligible for the reduced, 7.5% rate of withholding tax on managed investment trust distributions will be expanded. This measure will impact on property funds with investors who are resident in these countries. Once it is introduced these funds will only be required to withhold 7.5% of the fund payment amount distributed to these investors.
The following countries will be added to the current list:
- Bahamas;
- Belize;
- Cayman Islands;
- Monaco;
- San Marino;
- Singapore;
- St Christopher and Nevis; and
- St Vincent and the Grenadines.
Loss utilisation for infrastructure projects
As part of a suite of measures to encourage infrastructure investment the Government has announced it will relax the loss rules for infrastructure projects.
Infrastructure projects normally involve large amounts of (generally deductible) expenditure in their early years, with long lead times before any assessable income is derived. This means that projects will generate net losses in their early stages, before moving to a taxable position in later years. In order to utilise the losses generated in the early stages projects structured through companies will need to satisfy the continuity of ownership test or the same business test. Trusts also face restrictions on utilising prior losses generated on revenue account. Also, due to the long lead time for projects, the real value of the losses previously generated will decline by the time they are utilised.
The budget proposes two measures aimed at mitigating these issues. The Government will exempt the losses of designated infrastructure projects from the continuity of ownership test and the same business test, making it easier for taxpayers to utilise the losses. It will also uplift the value of those losses in line with the Government bond rate. A special decision maker will be empowered to confer designated project status on projects which are considered to be of national significance.
The value of this reform to taxpayers will really depend on the range of eligible infrastructure projects. If designated project status is restricted to only a few projects, the measure will be of little practical benefit to the majority of taxpayers in the property industry. It is also unclear whether the measures apply only to projects structured through companies, or also to projects structured through trusts.
Reporting payments to construction contractors
From 1 July 2012 businesses will need to report annually to the Australian Tax Office all payments they make to contractors in the building and construction industry. Businesses will need to report the total amount of the payments together with the contractor's ABN.
It is important to note that this measure is simply designed to improve the Australian Taxation Office's data matching program; there will be no new withholding obligation on businesses. However the requirement could potentially increase the compliance burden of property players who are involved in development projects. As yet the Government has not provided much detail on the manner in which the payments will be reported, or whether there will be penalties for failing to report amounts.
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