MIT withholding tax rate
One of the biggest surprises in this year's Budget was the decision to increase the rate of the managed investment trust withholding tax to 15%. The rate will be increased from 7.5% to 15% with effect from 1 July 2012. Currently, the 7.5% rate is available for fund payments made by a MIT to an entity resident in an exchange of information ("EOI") country.
There was no consultation with industry as to the likely impact of the rate change on levels of investment and the announced savings of $260m seem remarkably small given the significance of the change.
The announcement does not provide details about the transition to the new rate – that is, whether the new rate applies to all distributions made after 1 July 2012, or just those made in respect of income earned in the year starting 1 July 2012.
There is no apparent grandfathering for long-term deals signed in reliance on the 7.5% rate.
MIT withholding and exchange of information countries
The Government announced it has updated the list of EOI countries included in the Taxation Administration Regulations to include Anguilla, Aruba, Belgium, Malaysia, and the Turks and Caicos Islands. Residents of EOI countries are eligible for the lower MIT withholding rate, currently 7.5% but which will be increased to 15% as discussed above.
The Budget announcement states the measure will apply with effect from 1 January 2012. Amendments to the list of EOI countries are typically made by regulation and generally have effect for fund payments in respect of net income of the relevant MIT derived on or after the 1 July next following the date on which the relevant EOI country was formally added to the list. Accordingly, it may be that the additions to the EOI list announced in this measure will only affect fund payments made in relation to the 2013 income year (ie, the income year commencing on the 1 July after the 1 January 2012 commencement date).
Australia-Bahrain EOI agreement
The Government signed an EOI agreement with Bahrain on 15 November 2011 which will enter into force once the relevant domestic requirements have been complied with. The Budget announcement in relation to additions to the list of EOI countries included in the Taxation Administration Regulations did not refer to Bahrain and therefore it may be some time before Bahrain is eligible for the MIT withholding tax rate available for residents of EOI countries.
Investment manager regime
The Government has re-announced its intention to implement the final element of the investment manager regime ("IMR"), being an exemption for certain Australian-sourced income/gains of certain foreign managed funds. These final reforms were previously announced in a Press Release on 16 December 2011.
One of the key recommendations of the final report of the Australian Financial Centre Forum (the Johnson Report) was for a dedicated IMR to ensure that nonresidents using Australian fund managers would not face further tax in Australia on income and gains made from holding local and foreign assets.
The problem has a number of dimensions. First, by using a resident manager a non-resident can find that it has a permanent establishment ("PE") in Australia. This means that all of the assets that are effectively connected with that PE would be potentially liable to Australian tax. For example, assets that would not be taxable Australian property if held directly (eg, shares in a non-land-rich Australian company) would become taxable Australian property because they are effectively connected to an Australian PE. Second, if the Australian resident fund manager administers a portfolio of foreign assets, this may give rise to Australian source income in a non-treaty situation and potentially be liable to Australian tax.
In late 2010, an additional problem appeared with the application of FIN 48 in the US, which requires US-based funds to report uncertain tax positions.
The Government has already released exposure draft legislation covering the first two elements of the IMR: the "FIN 48" measures and the PE/conduit income measures. Initial drafts were released on 16 August 2011, which were followed by revised drafts on 7 March 2012.
Final element of the IMR
On 16 December 2011, the Government released a Press Release announcing it would implement the final element of the IMR, which it has effectively now reannounced as part of the Budget. The final element of the IMR is:
- Australian sourced income, gains or losses from certain portfolio interests or financial arrangements of a foreign managed fund will be excluded from the fund's taxable income (and that of its non-resident investors). The exemption will not apply to the extent that withholding tax (ie, on interest, dividends, royalties and MIT fund payments) is currently payable on the income. Nor will it apply to income or gains from an interest in taxable Australian property, other than a portfolio interest in a publicly traded company;
- the exemption will be restricted to foreign managed funds domiciled in countries with which Australia has exchange of information agreements; and
- the conduit income IMR rules will be extended so that they apply not only to portfolio interests (ie, less than 10%) but also to certain non-portfolio interests (ie, more than 10%) in non-Australian assets.
The measures will have effect from 1 July 2011.
Removal of the 50% CGT discount for non-residents
The 50% CGT discount reduces a capital gain for individuals (including partners in partnerships) and trusts where they held the relevant CGT asset for 12 months or more before a CGT event occurred.
The CGT discount is currently available to both Australian residents and nonresidents (noting that non-residents are only subject to CGT in Australia in respect of "taxable Australian property" they hold).
The Government is now proposing to remove the 50% CGT discount for nonresidents in respect of CGT events occurring after 8 May 2012. The non-resident will be liable to CGT on the (undiscounted) capital gains accruing after 8 May 2012. The CGT discount will still be available for capital gains that accrued prior to this time, but non-residents will need to obtain a market valuation of assets as at 8 May 2012 in order to determine the portion of the gain that is eligible for discount.
Personal income rates for non-residents
The personal income tax rates and thresholds applying to non-residents' Australian taxable income will be changed so that they better align with the rates and thresholds that will apply to residents.
Currently, the tax rates for non-residents for the 2011-12 income year are:
|Taxable income||Tax on this income|
|0 - $37,000||29c for each $1|
|$37,001 - $80,000||$10,730 plus 30c for each $1 over $37,000|
|$80,001 - $180,000||$23,630 plus 37c for each $1 over $80,000|
|$180,001 and over||$60,630 plus 45c for each $1 over $180,000|
From 1 July 2012, the first two marginal tax rate thresholds will be merged into a single threshold. The tax rate for the new 0 - $80,000 threshold will be increased to 32.5% (which will align with the second marginal tax rate for residents). From 1 July 2015, the marginal rate for this threshold will rise from 32.5% to 33%.
- Australia's Budget 2012-13: Business tax changes
- Australia's Budget 2012-13: Retirement income
- Australia's Budget 2012-13: Personal income tax changes
- Australia's Budget 2012-13: Goods & Services Tax (GST)
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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