Australian Government announces several key initiatives to promote Australia as a leading Financial Services Centre, including funds management, encouraging and attracting foreign investors. These initiatives continue the Government's strong commitment to establishing Australia as a regional finance/funds management hub as demonstrated by recent withholding tax concessions, elective CGT treatment and Double Tax Treaty concessions/recognition.
The Australian Government handed down the 2010- 11 Federal Budget on 11 May 2010 with a real focus on developing Australia as a leading regional financial centre and to ensure that Australian managed funds remain competitive in global financial markets.
The key highlights from the 2010-11 Federal Budget and an announcement by the Assistant Treasurer on 7 May 2010 are summarised as follows and discussed in further detail below:
- Introduction of a new dedicated tax system for Managed Investment Trusts (MITs).
- Consultation on the introduction of an Investment Manager Regime (IMR).
- Consultation process to streamline and update the Offshore Banking Unit (OBU) provisions.
- Interest Withholding Tax (IWT) to be reduced
- interest incurred by local subsidiaries and branches on borrowings from their overseas parents;
- Australian-owned financial institutions borrowing from related parties overseas; and
- any financial institution borrowing offshore retail deposits which they on-lend in Australia.
- Further countries qualify for the concessionary withholding tax rate (currently 15% and 7.5% from 1 July 2010) on certain distributions from MITs.
New tax system for MITS
The Australian Government announced the introduction of a new dedicated tax system for MITs on 7 May 2010 as part of its 2010-11 Federal Budget based on the recommendations made by the Board of Taxation Report on MITs (August 2009).
The key features of the new MIT system which are to commence on 1 July 2011 are:
Elective Attribution Model
This elective attribution system of taxation for qualifying MITs will replace the current system of present entitlement to income. Pursuant to the current system, beneficiaries may be taxable on amounts that they are not entitled to receive and trustees may be taxed on capital gains that they have already distributed to beneficiaries.
This new attribution model will provide that beneficiaries will be taxed only on the taxable income that the trustee allocates to them on a fair and reasonable basis, consistent with the investor's entitlements and rights under the trust's constituent documents.
Further, qualifying MITs will be deemed to be fixed trusts for various taxation law purposes.
- 'Unders and overs' distribution reform.
There will be a carry-over facility to allow MITs to deal with 'over or under' distributions within a 5% cap. Pursuant to these new rules, trusts will not be required to re-issue statements for revised distributions where the adjustments fall within a 5% range (that is, the revised amount does not amount to more or less than 5% of the amount detailed in the issued statement).
- Removal of double taxation.
Double taxation can arise where the taxable income of a MIT differs from the amount distributed to beneficiaries due to timing or other reasons.
This double taxation will be removed by allowing upward cost base adjustments to the capital gains tax cost base of a beneficiary's interest in the MIT in certain circumstances.
- Abolishing the corporate unit trust provisions in Division 6B
of the Income Tax Assessment Act 1936.
The corporate unit trust provisions which are redundant since the introduction of the capital gains tax and thus will be abolished and replaced with an arm's length rule in the public trading trust provisions in Division 6C of the Income Tax Assessment Act 1936.
- Other requirements regarding a 'widely held' test and the boundaries of the passive investment requirement are yet to be fully articulated.
- Character retention of tax deferred income, capital gains (in legislative process), treaty recognition/benefits and broader 'flow through' treatment are expected to be more specifically dealt with in legislative amendments.
The Australian Government announced on 11 May 2010 its in principle support on the introduction of an IMR. An important element of the IMR is to ensure that non-residents investing in foreign assets will not face further Australian tax on their investments when using Australian fund managers.
As a first stage, the Australian Government has commenced a consultation process with the release of a Consultation Paper (Developing an Investment Manager Regime - Improving conduit income arrangements for managed funds). Submissions on this Consultation Paper are due by 22 June 2010.
This consultation is a result of the Australian Financial Centre Forum report (Johnson Report) which recommended the introduction of an IMR based on the following principles:
- The IMR would have wide application, to both retail and wholesale funds and other areas of financial services beyond funds management, but would be confined to entities operating within the financial sector.
- For non-resident investors using an independent resident
investment adviser, fund manager, broker, exchange or agent:
- investments in all foreign assets would be exempt from any tax liabilities in Australia; and
- investments in Australian assets would for tax purposes be treated the same as if the investments were made directly by the non-resident without the use of any Australian intermediary.
- For non-resident investors using a dependent intermediary
acting at arm's length:
- investments in all foreign assets would be exempt from any tax liabilities in Australia; and
- investments in Australian assets would be treated as they are currently, subject to an agreed de minimis exemption to cater for global investment strategies that may include a nominal portion of Australian assets. Any Australian assets under this de minimis exemption would for tax purposes be treated the same as if the investments were made directly by the non-resident without the use of any Australian intermediary.
- The location of central management and control of Australia for entities that are part of the regime will not of itself give rise to Australian tax residency of those entities.
The Australian Government also announced on 11 May 2010 it will commence a consultation process, which will begin with the release of a discussion paper covering options for:
- streamlining the OBU application process;
- addressing the issue of whether there is a 'choice' as to whether all OBU eligible activities have to be treated as OBU transactions; and
- ensuring timely and efficient updated and review (and potential broadening) of 'eligible OBU activities'.
In this regard, the Australian Government has given its in principle support in respect of the following recommendations made by the Australian Financial Centre Forum report:
- The Government, in its response to the Forum's Report, include a statement of support for, and commitment to, the OBU regime. Such a statement could also refer to arrangements to ensure the ongoing competiveness of OBUs.
- The tax uncertainty about 'choice' be removed, if
necessary by legislation.
Division 9A of the Income Tax Assessment Act 1936, which details the list of eligible OBU activities, be updated and regularly reviewed. The Forum's preferred option is for much of the detail in this Division to be replaced with Regulations. The Regulations would contain an updated list of eligible OBU activities, developed with advice from the Treasury and the Australian Taxation Office, and following consultation with industry. These Regulations would be updated periodically on advice from the proposed Financial Centre Task Force, which would also make periodic recommendations on any other changes to the OBU regime necessary to ensure that it remained internationally competitive.
- A streamlined process for vetting new OBU applications be put
- with a requirement that an application be approved or denied within six months of its receipt, subject to all the appropriate application material being lodged;
- with revised administrative changes for the 'other company' category. The Forum proposes that the guidelines 4(q), 4 (r) and 4(s) in the Income Tax Assessment (Determination of Offshore Banking Activities) Guidelines 1999 be satisfied by an external auditor (or equivalent) verification; and
- that these new arrangements be reviewed by Treasury 18 months after their adoption to ensure they are working effectively.
The Australian Government will phase down the IWT paid on a number of offshore borrowings. The current and proposed IWT rates and exemptions as announced are summarised below:
|Type of Borrowing||Current IWT rates||Proposed from 2013-14||Proposed from 2014-15|
|Local subsidiaries borrow from overseas parents||10%||7.5%||5%*|
|Financial institution borrows from a foreign financial institution (where not exempt under a tax treaty)||10%||7.5%||5%*|
|Foreign bank branch borrows from overseas head office||5%||2.5%||Exempt|
|Financial institution borrows from offshore retail deposits (proceeds used and traced to Australian operations)||10%||7.5%||5%*|
|Financial institution borrows through a publicly offered debenture issue, non-equity share or syndicated loan||Exempt||Exempt||Exempt|
|Offshore banking unit (borrows and on-lends offshore)||Exempt||Exempt||Exempt|
|Financial institution borrows from non-resident retail deposits held in Australia||10%||10%||10%|
However, as an integrity measure, the IWT phase down will not apply to interest paid on non-resident retail deposits held in Australia.
Further countries qualify for concessionary withholding rate on distributions from MITS
Currently, there is a concessionary withholding rate (15% which will decrease to 7.5% from 1 July 2010) in respect of certain distributions (such as distributions of Australian source net income of the trust but excluding interest, dividends, royalties and a capital gain or loss from an asset that is not taxable Australian property) from MITs to beneficiaries resident in a country with which Australia has a Tax Exchange Information Agreement (TEIA). These countries are currently listed in regulation 44E of the Taxation Administration Act 1953.
The Australian Government has announced that regulation 44E will be updated to include:
- Antigua and Barbuda;
- The British Virgin Islands;
- The Isle of Man; and
Many of our other TEIA countries have not been gazetted as such at this stage and thus there appears to be a considerable time delay from entering into the relevant agreement and the time it becomes operative for purposes of the withholding tax concession.
Other aspects of Government's promotion of Australia as a Financial Services Centre
The Government has warmly embraced other aspects of the Johnson Report including the possible provision of a broader range of 'flow through' vehicles and support of Islamic financial products and we expect to see further action on these and related matters in the coming months.
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