Government eyes tighter tax policy for foreign investors

The government has opened consultation on its Treasury Laws Amendment (Stapled Structures and Other Measures) Bill 2018 exposure draft legislation, aimed at limiting the tax concessions currently available to foreign investors.

The consultation follows a government announcement for a package measure of stapled structures (the arrangement where two or more entities that are commonly owned [at least one of which is a trust] are bound together, such that they cannot be bought or sold separately).

The government has noted the proposed amendments in the announced package would ensure that:

• Trading income that is converted to passive income will be taxed at the corporate tax rate.
• Foreign investors will no longer be able to use multiple layers of flow-through entities (i.e. trusts and partnerships) to “double gear” their investments to generate more favourably taxed interest income.
• Foreign pension fund withholding tax exemption for interest and dividends is limited to portfolio investments only.
• A legislative framework is created for the existing tax exemption for foreign governments (including sovereign wealth funds) and limit the exemption to passive income from portfolio investments.
• Investment in agricultural land will not be able to access the 15 per cent concessional MIT (Manage Investment Trust) withholding tax rate. New government-approved nationally significant infrastructure assets may be eligible to access the 15 per cent concessional withholding tax rate for managed investment trusts for 15 years to ensure continued support for the development of nationally significant infrastructure assets that enhance the productive capacity of the economy and drive long-term economic growth.

Treasurer Scott Morrison has said that, in order to minimise the impact of such changes on existing investments, the proposed amendments include transitional arrangements of seven years (for ordinary business staples) and 15 years (for economic infrastructure assets).

“The Turnbull government is continuing to protect the integrity of Australia’s corporate tax system — ensuring foreign investors don’t have a competitive advantage over Australian investors,” the Treasurer said.

“The stapled structures package is an important integrity measure, and the Turnbull government is committed to introducing legislation as soon as possible,” Mr Morrison added.

However, the Treasurer said that the draft legislation would be released in stages to “maximise time for consultation”.

The exposure draft legislation and explanatory materials are available on the Treasury website.

The federal government’s announcement follows on from a recently proposed amendment to foreign investor tax policy by the West Australian government in its state budget.

The state government’s proposed changes would raise the foreign buyers surcharge for property investors from 4 per cent to 7 per cent before 2019 in a bid to bring in an additional $50 million to state coffers.

Following the announcement, WA Treasurer Ben Wyatt said: “Last year, I also announced the introduction from 1 January 2019 of a 4 per cent surcharge on purchases of residential property by foreign individuals and entities.

“In this budget, we have decided to bring Western Australia into line with other states and raise the foreign buyers surcharge to 7 per cent. 

“This increase will raise an estimated additional $50 million, bringing the total estimated revenue from the foreign buyers surcharge to $123 million over the forward estimates period — at no cost to Western Australians.” 

Mr Wyatt added: “It is fair for foreign owners of residential property, who benefit from our services and infrastructure, to make a contribution to budget repair.”

[Related: Fears raised over new WA property tax]