Australia: Withholding Tax Cut For Clean Building Managed Investment Trusts: Clarity Provided On Breadth And Detail Of Tax Concession

Last Updated: 27 October 2012
Article by Jock McCormack and Anshu Maharaj


Following announcements earlier this year (27 June 2012), the Federal Government has introduced a Bill into Parliament to reduce the final withholding tax rate for certain managed investment trusts (MITs) from 15% to 10% effective from 1 July 2012. The 10% rate will apply to certain fund payments where the MIT owns newly constructed energy efficient/environmentally sustainable commercial buildings.

This change makes the development of energy efficient/environmentally sustainable commercial buildings more attractive to foreign-based property investors, and Australian-based co-investors and investment managers.


Clean building MIT

Fund payments starting on or after 1 July 2012 are eligible for the 10% withholding tax concession where the following requirements are satisfied:

  • The trust must be a MIT in relation to the income year
  • The MIT holds one or more clean buildings (including the land on which the buildings are situated)
  • The MIT must not derive assessable income from any taxable Australian property other than from the clean buildings or assets that are reasonably incidental to those buildings subject to a 5% safe harbour
  • The fund payment must be to a foreign resident in an Exchange of Information (EOI) country. We attach the EOI countries at Appendix A.

The key requirements of a "clean building MIT" and a "clean building" are set out respectively in proposed sections 12 - 425 and 12 - 430 of Subdivision 12-H, Schedule 1 of the Taxation Administration Act 1953 (Cth).

We note that fund payments are specifically defined to exclude dividends, interest, royalties, foreign sourced income, and capital gains and losses from assets that are not taxable Australian property.

The second and third requirements are discussed in further detail below.

Clean building

A building is a clean building if:

  • The construction of the building commenced on or after 1 July 2012
  • The building is a commercial building that is an office building, hotel or shopping centre, or a building consisting of a combination of these
  • The building meets and continues to maintain at all times during the income year at least a 5 Star Green Star rating as certified by the Green Building Council of Australia or a 5.5 star energy rating as accredited by the National Australian Built Environment Rating System (NABERS).

Construction on or after 1 July 2012

A building is taken to have commenced construction when the works on the lowest level (including the basement level) of the building begins.

Although the statutory language or text has primacy, legitimate aids to interpretation of statutes including explanatory memoranda may provide useful guidance as to the legislative intention for investors.

The accompanying explanatory memorandum (EM) to the Bill notes (at paragraph 1.27) that any works preparing the site for construction and works undertaken below the lowest level of the proposed building do not represent the commencement of construction for the purposes of these changes. This includes any excavation, environmental remediation or site stabilisation works.

The EM suggests (at paragraph 1.28) that buildings such as those built on top of previous foundations or on top of shared car parking facilities will not be considered to have commenced construction until works on the lowest level of the building commence. Further, existing buildings that are retrofitted or extended are not within the scope of these changes (refer to paragraph 1.30 of the EM). Also, a building that is substantially or significantly extended or retrofitted will not change its character from an existing building and is not a clean building (refer to paragraph 1.30 of the EM).

Office building, hotel or shopping centre

It is intended that "office building, hotel and shopping centre" will take their ordinary meanings (refer to paragraph 1.32 of the EM).

The EM states (at paragraph 1.33) that an office building is a commercial building used to provide office space and associated facilities. Therefore, incidental uses of an office building (such as a child care centre, limited retail and food outlets) will not exclude the building from being an office building (refer to paragraph 1.33 of the EM). Whether a building is considered to be an office building is a question of fact (refer to paragraph 1.33 of the EM).

A building must wholly or mainly provide shortterm accommodation for travellers to be eligible as a hotel (refer to paragraph 1.35 of the EM).

Further, a building must be predominantly used for retail purposes (including facilities such as cafes and restaurants) to be eligible as a shopping centre (refer to paragraph 1.36 of the EM).

However, any building that provides any amount of non-commercial residential accommodation is excluded from these changes (refer to paragraph 1.37 of the EM).

Energy efficiency rating

Prior to, and at the time the building starts producing assessable income, the building must have the requisite energy efficiency rating discussed above.

An office building will need to achieve a 5.5 star energy NABERS rating for the base building only to be eligible as a clean building (refer to paragraph 1.43 of the EM). However, shopping centres and hotels will be required to achieve the 5.5 star energy NABERS rating, as base building ratings do not currently exist for such buildings (refer to paragraph 1.43 of the EM).

Where a building previously satisfied the energy efficiency requirements to be eligible as a clean building, and subsequently fails to maintain that requirement, the MIT will have 180 days from the date of the failure to re-establish the building's eligibility. If the building is reassessed and meets the energy efficiency requirement within the 180 day period, the MIT will be considered to have satisfied this requirement for the entire period. However, if the MIT fails to rectify any deficiencies and the building falls short of the energy efficiency requirement to be a clean building, the MIT will not be eligible for this withholding concession for the entire income year.

No other income subject to 5% safe harbour

The MIT must derive assessable income from clean buildings or assets that are reasonably incidental to those buildings. However, the assessable income derived from assets that are reasonably incidental to clean buildings must be 5% or less of the assessable income of the MIT that is derived from clean buildings.

Whether an asset is "reasonably incidental" to a clean building is a question of fact and degree. The EM states (at paragraphs 1.18 and 1.19) that for an asset to be "reasonably incidental to" a clean building, there must be a clear and generally accepted connection that the asset naturally appertains to the clean building: such as car parking facilities, telecommunications infrastructure attached to the building (mobile phone towers on top of a building) and advertising infrastructure (such as billboards).

Further, the MIT is not precluded from holding:

  • Taxable Australian property that is not producing assessable income (for example, land from which no income is being derived for the purpose of developing and constructing clean buildings) (refer to paragraph 1.20 of the EM); or
  • Assets that are not taxable Australian property (such as, cash or shares) (refer to paragraph 1.22 of the EM). Any income derived from these assets does not form part of the MIT's fund payment and therefore is not subject to the MIT withholding tax.


The Bill has been referred to the Parliamentary Joint Committee on Corporations and Financial Services, which is expected to recommend passage of the Bill through Parliament in the coming months.


There are currently 60 countries with which Australia has an effective EOI arrangement on taxation matters.

Argentina Sri Lanka
Bermuda Sweden
Canada Taipei
China Thailand
Czech Republic United Kingdom
Denmark United States of America
Fiji Vietnam
Finland Antigua and Barbuda
France British Virgin Islands
Germany Isle of Man
Hungary Jersey
India Gibraltar
Indonesia Guernsey
Ireland Belize
Italy Cayman Islands
Japan The Commonwealth of the Bahamas
Kiribati Principality of Monaco
Malta The Republic of San Marino
Mexico The Republic of Singapore
Netherlands Saint Kitts and Nevis
Netherlands Antilles Saint Vincent and the Grenadines
New Zealand Anguilla
Norway Aruba
Papua New Guinea Belgium
Poland Malaysia
Romania Turks and Caicos Islands
Russia Cook Islands
Slovakia Macau
South Africa Mauritius
Spain Republic of Korea

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This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.

DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to

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