In a speech by Wayne Swan (the then Opposition Treasurer) on 3 April 2007 and in Kevin Rudd's Address in Reply to the Budget in May 2007, Labor committed itself to halve the current 30%1 withholding tax on distributions from Australian managed investment trusts to foreign investors to 15%.
By halving the withholding tax rate, it is Labor's intention to "secure Australia's place as a financial hub in the Asia-Pacific". Accordingly, by making the withholding tax a final tax, Labor proposed to abolish the requirement for foreign investors in these managed trusts to lodge a tax return where their income is subject to such withholding. This will remove a burdensome compliance requirement for foreign investors and greatly enhance Australia's global competitiveness.
However, as it currently stands, instead of the proposed 15% flat final withholding tax rate, it is still a 30% non-final withholding tax imposed on distributions. As a result, foreign investors receiving such distributions will need to lodge an Australian income tax return in order for them to claim a foreign tax credit for the amount of tax withheld.
All is not lost as a review of the new treaty between Australia and Japan reveals that half of Labor's promise is kept. The upside is, as promised by Labor, the withholding tax on distributions from Australian managed investment trusts to Japanese investors is limited to 15%.
However, the downside is, this only applies if the Japanese investors hold less than 10% of the capital in the managed investment trust in the 12 month period prior to the date the distributions are made.
Accordingly, where the interest in the managed investment trust is greater than 10% the withholding tax is not limited to 15% but will remain at 30%.
There are also other issues. The minor technical problem was that the 15% withholding tax is to be calculated based upon the gross distributions. This conflicts with the new fund payment withholding tax rules, which calculates the withholding based upon the fund payment amount. Therefore this mismatch needs to be rectified.
If Australia is to prosper, we must remove this uncompetitive tax burden on Australia's managed investment trusts. For now, we recommend that for future treaties, consideration could be given to negotiating a reciprocal withholding tax limit of 15% on distributions to foreign investors regardless of their interest in the Australian managed investment trust.
Footnotes
1. Prior to the Federal Election, Tax Laws Amendment (2007 Measures No. 3) Act 2007 received Royal Assent on 21 June 2007 which now requires Australian managed investment trusts and its intermediaries to collect a non-final withholding tax at a single rate (the company tax rate) on certain distributions to foreign residents
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