Investment into Australia can be achieved through a variety of
different structures, each of which will have a different
consequence for tax purposes. Under Australian law, an investor
could make an investment directly or through an investment vehicle
such as a company, a trust, a joint venture, a managed investment
scheme or other collective investment vehicle or a partnership. The
appropriateness of any one of these methods is dependent on the
desired commercial requirements of a transaction and the taxation
implications that result from each structure.
Investment vehicle of choice – the MIT
Recently the investment vehicle of choice, both for foreign and
domestic investors has tended to be a managed investment trust
(MIT). Tax reforms introduced have increased the popularity of the
MIT, particularly for non-residents investing in property. Foreign
investors making such investments receive a concessional
withholding tax rate of 15% (or 10% for eligible clean building
MITs), rather than a withholding rate of 30%, for distributions of
rental income and realised capital gains paid from an MIT to an
investor that is domiciled in a country with which Australia has an
exchange of information agreement.
Another advantage of making an investment through a MIT is that
they may elect to hold certain assets, including shares, units and
land, on capital account, ensuring that distributions arising from
its disposal are taxed under Australia's capital gains tax
(CGT) regime. Under this regime, individuals and trusts are
entitled to a 50% reduction, and superannuation funds are entitled
to 33.33% reduction, on a taxable gain on the disposal of assets
that have been held for more than 12 months.
Attraction of MITs for foreign investors
For non-resident investors, having the investment treated as a
capital gain rather than a revenue gain, means that there are only
limited instances in which Australia will tax the amount of the
gain. Non-residents are only liable to CGT on disposals of real
property (directly or indirectly) and of business assets of a
permanent establishment located in Australia. Australia's
taxation of gains on revenue account is not so restricted and the
application of any applicable double tax agreement is usually the
determinant for whether a non-resident has a liability to
Australian tax on these gains.
How does a managed fund qualify as a MIT?
To qualify as an MIT a fund must meet several requirements,
the trustee of the fund must be an Australian resident, or
alternatively the central management and control of the fund must
be in Australia
the fund must be a passive investment vehicle, it cannot be a
a substantial proportion of the investment management
activities for the funds' Australian assets must be carried on
in Australia (this requirement only applies to the withholding tax
the fund must be a managed investment scheme. Under
Australia's Corporations Law a managed investment scheme is an
arrangement where people pool funds for a common purpose to make a
profit. The investment vehicle is usually a unit trust with an
external company manager
the fund must be widely held—in the case of a wholesale
fund this means that the fund must have at least 25 members.
Tracing through the funds members is allowed to calculate the
number of members, and
a foreign individual investor must not own more than 10% of the
fund—in the case of a wholesale fund, 10 or fewer investors
(other than eligible widely held investors) cannot own more than
75% or more of the fund.
The new Investment Manager Regime (IMR) and advantages for
Australia recently introduced reforms as part of its new
Investment Manager Regime (IMR) to address the previous uncertainty
about the tax treatment of offshore transactions undertaken through
Australia. This brings Australia into closer alignment with other
jurisdictions with an IMR, including Hong Kong, Singapore, the
United Kingdom and the United States.
Under the new IMR regime, a non-resident investor may now use an
Australian independent resident investment advisory fund manager,
broker or exchange agent, and all investments in foreign assets
will be exempt from tax in Australia, and investment in Australian
assets will be treated as if they had been made directly by the
non-resident, disregarding the Australian intermediary for tax
This tax treatment also extends to include foreign residents
that invest through one or more interposed trusts or partnerships.
This measure now ensures that foreign funds, which have a permanent
establishment in Australia solely for the reason of using an
Australian intermediary, will not be taxed on profits made on
foreign assets in Australia.
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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