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 loser.
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 region.
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 by Parliament.
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 funds.
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.
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