On 10 October 2012 the Government introduced Tax Laws Amendment (Clean Building Managed Investment Trust) Bill 2012 into Parliament. The Bill proposes to reduce the Managed Investment Trust ("MIT") final withholding tax rate to 10%, from 1 July 2012, on fund payments from Clean Building MITs made to non-residents, from countries that have an effective Exchange Of Information ("EOI") agreement with Australia.

The key elements

A Clean Building MIT, must:

  • only invest in new office buildings, hotels or shopping centres (or a combination of these) that commenced construction on or after 1 July 2012;
  • not derive assessable income from any other Australian property other than certain assets that are reasonably incidental (i.e. less than 5%) to a clean building (e.g. car parks, telecommunication infrastructure and advertising infrastructure (e.g. billboards); and
  • meet and maintain at least a 5 Start Green Star rating as certified by the Green Building Council of Australia or a 5.5 star energy rating accredited by the National Australian Built Environment Rating System (NABERS).

The amendments also ensure that the fund payments made by Clean Building MITs continue to maintain its character, where those funds pass through certain entities that are not required to withhold or through interposed MITs which subsequently makes a payment to a non-resident of an EOI country.

Our thoughts

Whilst the introduction of the concessional withholding tax rate for clean buildings was as a result of a political strategy to double the MIT withholding tax rate from 7.5% to 15% from 1 July 2012, the question remains whether the Government has done enough to provide incentives to invest in energy efficient commercial buildings. No doubt this green initiative is a start but where the bigger picture is concerned, it may likely not be enough to convince MITs to invest in Clean Buildings.

For example, existing AREITs will not be able to access the 10% withholding tax rate as they own "non-Clean Buildings". A flow through mechanism to retain the 10% withholding tax rate on Clean Buildings would be desirable.

Given that the income in a Clean Building MIT must not be tainted with income from other assets that are not reasonably incidental, current MITs will have to establish a stapled MIT to hold any Clean Buildings. Also, it may not be wise to group numerous Clean Buildings into one Clean Building MIT as it takes only one property to fall outside the Clean Building definition for the whole MIT to be ineligible for the concessional tax rate. It is easy to see how this may become problematic if one building is unable to maintain its Green Star or NABERS rating.

The concessional withholding rate only applies to newly constructed energy efficient commercial buildings so expenditure on major improvements to make buildings more energy efficient will also fail to benefit from the rate reduction.

There are some opportunities for special purpose MITs to be established to develop Clean Buildings and they would be at a competitive advantage over existing AREITs when attracting non-resident investors.

For MITs that are considering constructing or developing new energy efficient office buildings, shopping centres or hotels, it is important to ensure that you utilise the most appropriate structure to utilise the 10% withholding tax rate.

It is doubtful how beneficial the proposed legislation will be to MITs given its practical application. It will be interesting to see if changes are made to the legislation prior to it being passed.

Should you require further information on the above topic please contact the authors or your Moore Stephens Relationship Partner.

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