The 2012 Federal Budget will have an adverse impact on
non-residents investing in Australia. Regardless of your view about
the merits of these changes, the announcements are laden with spin
as they portray the changes as beneficial when they are clearly
detrimental to non-residents, with the property industry the main
Managed Investment Trusts
The withholding rate applicable to certain payments made by
'managed investment trusts' will be doubled from 7.5%
to 15% from 1 July 2012 under the MIT withholding regime. The MIT
withholding regime most commonly applies to payments by qualifying
Australian property funds of rental income - as the tax treatment
of dividends, interest and royalties (but see below about capital
gains) are carved out of this regime and dealt with under the
non-resident withholding tax regime.
The official announcement proudly proclaimed the Government had
"halved the withholding rate", then in an act of pure
obfuscation noted it was halved from the 30% rate that applied
under the Howard Government but made no reference to the current
rate of 7.5%.
The current rate of 7.5% was introduced in 2008. The purpose of
the reduction in the withholding rate was to make Australia a more
attractive location for foreign investment, and the explanatory
memorandum lamented the lack of foreign funds under management in
Australia. This was in large part attributed to the high rate of
withholding tax compared to other countries in the Asia-Pacific
The rate of 7.5% was phased in over three years, and came into
effect from 1 July 2009; however, it was, and remains, available
only to non-resident investors from countries that have entered
into a Tax Information Exchange Agreement with Australia. The
withholding rate is, and will continue to be, 30% for residents in
all other jurisdictions.
But the impact is greater than just the numeric increase: it
sends a confused message to foreign investors about the credibility
of the rules of investment in Australia and the ease with which
they can change.
Property Funds will need to update their systems to ensure the
higher withholding applies to payments from 1 July 2012 even though
the legislation introducing these changes is unlikely to be passed
Disposal of interests in land by non-residents no longer
attract the CGT discount
The 50% capital gains tax (CGT) discount has been abolished with
effect from 7.30 pm 8 May 2012 for capital gains made by eligible
non-residents on the sale of 'taxable Australian real
property' (TARP), which includes certain indirect interests
in real property. Again, this measure targets Australian property
The immediate removal of this concession is softened for those
non-residents who choose to value their TARP assets on Budget
night. If the TARP asset is valued, the portion of the capital gain
accruing before Budget night is still eligible for the 50% CGT
discount when the asset is eventually sold. The gain that accrues
after Budget night is not.
It should be noted that while this measure will commence from
Budget night, the devil, as always, is in the detail which has not
been released. The final form of the legislation will be
intriguing, especially if non-residents are incentivised to become
Australian residents before they dispose of their TARP assets.
Furthermore, accessing the valuation concession will pose real
challenges where the non-resident fund or individual holds an
interest in an Australian property fund, which in turn owns the
TARP assets that are sold after Budget night.
The Government also announced a change to the personal income
tax rates and thresholds that apply to non-resident individuals.
This measure will apply from 1 July 2012. The announcement says
this is motivated by better alignment with rates and thresholds
that apply to Australian residents. This is surprising as it
suggests this change in rates and thresholds will advantage
non-residents as the Budget also triples the tax-free threshold for
residents, but contrary to intuition the Budget papers say this
measure is designed to generate additional revenue for the
Government! Non-residents can therefore expect to be adversely
affected by this measure.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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