In keeping with its goal of encouraging more foreign
investment into Australia, the Federal Government will change
existing laws to ensure foreign pension and sovereign wealth funds
can access the Managed Investment Trust (MIT) withholding tax
In summary, the regime allows a MIT to make payments to
non-residents at concessional withholding tax rates, offering an
attractive Australian investment option for foreign funds where
they and their members are ultimately based overseas.
POPULARITY OF MITS IN AUSTRALIA
The use of MITs in Australia is growing rapidly. In the
superannuation industry alone, the value of savings under
management has exploded from $183 billion in 1993 to $1.5 trillion
As at 1 January 2010, 17.6% of all inflows to Australian MITs
came from foreign pension and sovereign wealth funds. By 31
December 2011, this figure had grown to 26%.
THE WITHHOLDING TAX REGIME
In the 2007/08 Federal Budget, the Government introduced a
concessional withholding tax rate with a view to developing
Australia as a regional financial services hub. It initially set
the withholding tax rate at 30%. In the 2008/09 Budget, the
Treasurer announced the rate would be reduced to 7.5%. The goal in
reducing the rate was to promote foreign investment into MITs in
As part of the 2012/2013 Federal Budget, the Government revised
the withholding tax rate for MITs and increased it to 15% for
payments from 1 July 2012.
Where a foreign trust (such as a foreign pension or sovereign
wealth fund) can satisfy the relevant requirements under the tax
laws for MITs, it can qualify for the concessional tax
However, since its inception in 2008, the major hurdle for these
offshore funds looking to invest in Australian has been the law
itself. The law has prevented offshore funds from obtaining the
concessional rate because of a technicality and gap in the drafting
of the law.
The gap arises because of the way the MIT tax laws are expressed
to exclude beneficiaries acting in their capacity as trustees of
another trust (as most foreign pension and sovereign wealth funds
are taken to be when they invest as institutional investors in an
Australian MIT). This was confirmed by an ATO Interpretative
Decision in August 2012.
THE ATO INTERPRETATIVE DECISION
The ATO set out the situation for a typical foreign pension
fund. The fund is usually formed for the purpose of providing a
benefit to non-residents (the members of the fund being overseas)
and these foreign funds usually pool their assets together to form
an investment trust. When the foreign fund invests in a MIT, it
does so as a trustee of the foreign fund and it is characterised as
a beneficiary of the MIT.
In such cases, the ATO confirmed that the tax laws act to
exclude those funds that are beneficiaries acting in their capacity
as a trustee of another trust. As a result, the ATO decision
resolved that all foreign pension funds and sovereign wealth funds
were required to pay the full withholding tax rate of 45%.
A REALIGNMENT TO THE ORIGINAL INTENT OF THE REGIME
The ATO's decision was met with intense criticism and was
considered to be at odds with Government policy that sought to
encourage foreign investment in Australia and the flow of capital
across the globe.
As a result, on 13 February 2013 the Assistant Treasurer
announced that the Government will amend the income tax laws to
ensure foreign pension funds can access the withholding tax regime
for MITs. 2
The amendments are intended to apply retrospectively, back to
when the regime began on 1 July 2008.
Although the particulars of the amending legislation are yet to
be determined, the Government is confident the amendment will
overcome the concerns raised by industry and help stimulate what
the original regime intended – the flow of capital from
foreign pension and sovereign wealth funds into investment trusts
The property sector has already welcomed the Government's
response to the ATO decision with the Property Council of Australia
issuing a press release to coincide with Government's
announcement on 13 February 2013.
Assuming the legislation is amended, it will remedy this anomaly
for foreign trusts, meaning the concessional tax rate (currently
15%) will generally be available to foreign pension funds and
sovereign wealth funds looking to invest in Australian MITs.
1 Australian Bureau of Statistics: ABS
2 Treasury. (13 February 2013) "Ensuring
Foreign Pension Funds can access the Managed Investment Trust
Withholding Tax Regime". Media Release No. 012.
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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