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2008
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
TAX LAWS AMENDMENT (ELECTION COMMITMENTS No. 1) BILL 2008
INCOME TAX (MANAGED INVESTMENT TRUST WITHHOLDING TAX)
BILL 2008
INCOME TAX (MANAGED INVESTMENT TRUST TRANSITIONAL) BILL 2008
EXPLANATORY MEMORANDUM
(Circulated by the authority of the
Treasurer, the Hon Wayne Swan MP)
Table of contents
Glossary .................................................................................................. 1
General outline and financial impact ....................................................... 3
Chapter 1 Distributions of managed investment trust
income to foreign residents........................................... 5
Chapter 2 Income tax treatment of the Prime Minister's
Literary Award............................................................. 77
Index ..................................................................................................... 79
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
Abbreviation Definition
ATO Australian Taxation Office
CGT capital gains tax
Commissioner Commissioner of Taxation
Corporations Act Corporations Act 2001
IT (TP) Act 1997 Income Tax (Transitional Provisions)
Act 1997
ITAA 1936 Income Tax Assessment Act 1936
ITAA 1997 Income Tax Assessment Act 1997
TAA 1953 Taxation Administration Act 1953
1
General outline and financial impact
Distributions of managed investment trust income to foreign
residents
Schedule 1 to this Bill replaces the existing 30 per cent non-final
withholding regime applying to certain distributions (called `fund
payments') from Australian managed investment trusts with a new
withholding regime. An entity may have an obligation to withhold an
amount from a payment of these distributions to an overseas person.
The rate of withholding tax under the new regime will depend on the
residency of the foreign investor.
Most foreign investors will be subject to a reduced rate of withholding tax
under the new regime, with the withholding tax rate applying to fund
payments falling to a 7.5 per cent final withholding tax once this measure
is fully implemented. This is expected to enhance the competitiveness of
the Australian managed funds industry in attracting future foreign
investment.
The reduced withholding tax rate will be restricted to residents of
jurisdictions with which Australia has effective exchange of information
for tax matters. A 30 per cent rate of withholding will apply to foreign
investors resident in other jurisdictions. This will enhance the integrity of
the new arrangements, and provide a strong signal of Australia's
non-tolerance of international tax evasion and avoidance.
Date of effect: This measure applies to fund payments of income years
starting on or after the first 1 July following Royal Assent.
Proposal announced: This measure was announced in the Treasurer's
Press Release No. 043 of 13 May 2008.
Financial impact: This measure will have the following revenue
implications.
2008-09 2009-10 2010-11 2011-12
$60m $125m $210m $235m
Compliance cost impact: This measure is expected to impose medium
compliance costs on managed investment trusts and interposed entities for
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Tax Laws Amendment (Election Commitments No. 1) Bill 2008
Income Tax (Managed Investment Trust Withholding Tax) Bill 2008
Income Tax (Managed Investment Trust Transitional) Bill 2008
the first and second transitional years, as they will need to modify their
systems to adjust to the new withholding regime. Ongoing compliance
costs are expected to be minimal.
Summary of regulation impact statement
Regulation impact on business
Impact: This measure will affect managed investment trusts; interposed
entities (custodians and non-custodians) used by foreign investors to
invest indirectly in managed investment trusts; foreign investors; and the
Australian Government.
Main points:
· The reduced withholding rates that apply to most foreign
investors will enhance the ability of managed investment
trusts (particularly property trusts) to attract foreign
investment.
· Managed investment trusts and interposed entities would be
required to modify existing systems so they can withhold as
required under the new withholding regime.
Income tax treatment of the Prime Minister's Literary Award
Schedule 2 to this Bill amends the Income Tax Assessment Act 1997 to
exempt from income tax the Prime Minister's Literary Award, to the
extent that the award would otherwise be assessable income.
Date of effect: This amendment applies to assessments for the 2007-08
income year and later income years.
Proposal announced: This measure was announced in the Minister for
the Environment, Heritage and the Arts' Press Release No. PG/25 of
22 February 2008.
Financial impact: Nil.
Compliance cost impact: Negligible.
4
Chapter 1
Distributions of managed investment trust
income to foreign residents
Outline of chapter
1.1 Schedule 1 to this Bill inserts Division 840 and
Subdivision 840-M into the Income Tax Assessment Act 1997
(ITAA 1997).
1.2 This Schedule:
· replaces the current Subdivision 12-H of Schedule 1 to the
Taxation Administration Act 1953 (TAA 1953) dealing with
the obligations to withhold amounts;
· inserts, into a new Division 840 in both the ITAA 1997 and
the Income Tax (Transitional Provisions) Act 1997 (IT (TP)
Act 1997), Subdivision 840-M dealing with managed
investment trust withholding tax as a final withholding tax;
and
· repeals and amends various other provisions of the
ITAA 1997, the TAA 1953, the Income Tax Assessment
Act 1936 (ITAA 1936) and the Income Tax Act 1986.
1.3 The formal imposition of income tax, and the establishment of
the applicable rate of tax, is provided for by means of the Income Tax
(Managed Investment Trust Withholding Tax) Bill 2008 and the Income
Tax (Managed Investment Trust Transitional) Bill 2008.
1.4 All legislative references are to Schedule 1 to the TAA 1953
unless otherwise stated.
Context of amendments
1.5 The Australian funds managed industry has assets under
management of approximately $1.4 trillion. This makes it one of the
largest markets for managed funds in the world. The industry is expected
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Income Tax (Managed Investment Trust Withholding Tax) Bill 2008
Income Tax (Managed Investment Trust Transitional) Bill 2008
to continue its growth, with funds under management forecast to exceed
$2.5 trillion by 2015.
1.6 At present, less than 3 per cent of the fees derived by the
Australian funds management industry are attributable to foreign
investment. Industry has contended this is due, in part, to the high
withholding tax that currently applies to certain distributions from the
industry to foreign investors, namely, the 30 per cent non-final
withholding rate that predominantly applies to distributions of Australian
source rental income and capital gains from Australian property trusts.
1.7 Industry argues the headline rate of withholding discourages
foreign investment in the Australian funds management industry as it is
higher, on average, than the withholding tax rates imposed by other
countries, particularly those in the Asia-Pacific region.
1.8 The Government, in furthering its objective to secure Australia's
position as a financial services hub in the Asia-Pacific region, will replace
the existing non-final withholding regime with a new final withholding tax
regime with reduced withholding tax rates, to be implemented over a
three-year period. Once fully implemented, foreign investors of
jurisdictions with which Australia has effective exchange of information
on tax matters will be subject to a 7.5 per cent final withholding tax, which
will be one of the lowest internationally. This will enhance the
competitiveness of the industry and ensure it is well-placed to attract and
retain foreign investment.
1.9 Subjecting residents of jurisdictions with which Australia does
not have effective exchange of information to a 30 per cent final
withholding tax will enhance the integrity of the new arrangements and
send a strong signal of Australia's non-tolerance of international tax
evasion and avoidance.
Summary of new law
1.10 This Schedule implements a new withholding tax regime in
respect of certain distributions from managed investment trusts to foreign
residents.
1.11 The new withholding tax regime, in respect of these
distributions replaces the existing 30 per cent non-final withholding
regime, with effect for fund payments made in relation to the first income
year starting on or after the first 1 July following Royal Assent. A `fund
payment' is, broadly, a component of a payment made by a managed
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Distributions of managed investment trust income to foreign residents
investment trust that represents a distribution of Australian source net
income (other than dividends, interest and royalties) of the trust.
1.12 An entity may have an obligation to withhold an amount from a
fund payment, or an amount reasonably attributable to a fund payment,
where it on-pays to a recipient (or, in certain cases, the recipient becomes
entitled to the amount) and the place of payment or address of the
recipient is outside Australia (or, in certain cases, the recipient is a foreign
resident).
1.13 Where an entity is in receipt of an amount that is, or reasonably
attributable to, a fund payment and is not required to withhold, it may be
required to give a notice or make available on a website certain details of
the on-payment that another entity can use in discharging its obligations.
1.14 The rate of withholding is determined with regard to the place of
payment or address of the recipient (or, in some cases, the residency of the
recipient). If the place, address or country of residence is in a jurisdiction
with which Australia has effective exchange of information on tax
matters, withholding will be required at the following rate:
· 22.5 per cent for fund payments in relation to the first income
year following Royal Assent;
· 15 per cent for fund payments in relation to the second
income year; and
· 7.5 per cent for fund payments in relation to later income
years.
1.15 In any other case, withholding will be required at the rate of
30 per cent.
1.16 A foreign resident investor will have a liability to managed
investment trust withholding tax in respect of amounts represented by or
reasonably attributable to fund payments where these amounts are paid to
the foreign resident or (in certain cases) the foreign resident is presently
entitled to the amounts.
1.17 For a foreign investor liable to managed investment trust
withholding tax, the rate of tax depends on their residency status. Where
the foreign investor is resident in a jurisdiction with which Australia has
effective exchange of information, the taxation treatment will be as
follows:
· for fund payments in relation to the first income year of
application -- the foreign investor will be subject to tax at a
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Income Tax (Managed Investment Trust Withholding Tax) Bill 2008
Income Tax (Managed Investment Trust Transitional) Bill 2008
new rate of 22.5 per cent on fund payments, net of related
deductions (as an interim measure);
· for fund payments in relation to the second income year --
the foreign investor will be subject to a 15 per cent final
withholding tax; and
· for fund payments in relation to later income years -- the
foreign investor will be subject to a 7.5 per cent final
withholding tax.
1.18 In any other case, a 30 per cent final withholding tax will apply.
Comparison of key features of new law and current law
New law Current law
The trustee of a managed The trustee of a managed investment
investment trust must withhold an trust is liable to withhold an amount
amount from fund payments paid to from fund payments paid to a foreign
an entity whose address or the place resident or to an entity whom the
of payment is outside Australia. trustee has reasonable grounds to
believe is a foreign resident.
A custodian must withhold an An Australian intermediary (a
amount on payments representing or custodian) must withhold an amount
reasonably attributable to a fund from payments representing or
payment paid to an entity whose reasonably attributable to a fund
address or the place of payment is payment made to a foreign resident or
outside Australia. to an entity whom the trustee has
The custodian must, in respect of reasonable grounds to believe is a
amounts received by it and later foreign resident.
on-paid, have received a notice or To be an intermediary the entity must,
accessed relevant information in among other things, be in receipt of a
relation to the amounts. notice setting out relevant details of a
payment received from another entity.
An entity that is neither a trustee of A trustee of a trust is liable to pay tax
a managed investment trust nor a on a foreign resident beneficiary's
custodian must withhold an amount share of the net income of the trust.
from a payment it receives if a
foreign resident is, or becomes
entitled, to all or part of the
payment.
The entity must, in respect of
amounts received by it, have
received a notice or accessed
relevant information in relation to
the amounts.
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Distributions of managed investment trust income to foreign residents
New law Current law
There is no obligation to withhold No equivalent.
an amount if there is no underlying
managed investment trust
withholding tax liability.
Where withholding is required, the Where withholding is required, the rate
rate of withholding is 30 per cent, of withholding is at the corporate tax
but is reduced where the recipient is rate.
in a foreign jurisdiction that has
effective exchange of information
on taxation matters with Australia.
Where withholding is not required Where withholding is not required, the
because the recipient is not an entity entity making the payment may
whose address, place of payment or provide a notice with certain
(in some cases) residence is outside information in relation to the payment.
Australia, the entity making the Notices are not mandatory, but without
payment is required to provide the a notice the entity is not considered to
recipient with a notice or publish be an intermediary and the ordinary
certain information in relation to the rules of trust taxation (rather than the
payment. Failure to give a notice or managed fund withholding rules) will
make this information available apply.
gives rise to an administrative
penalty.
Managed investment trust Managed investment trust withholding
withholding tax is a final tax. An tax is a non-final tax.
amount on which managed To the extent that the net income of a
investment trust withholding tax is trust is represented by or reasonably
payable is not assessable and is not attributable to an amount from which
exempt income. withholding was required, Division 6
of the ITAA 1936 does not bring to tax
the net income, and the ultimate
beneficiary is entitled to a credit for a
relevant portion of the amount
withheld.
The rate of managed investment The rate of tax payable depends on
trust withholding tax payable is whether the foreign resident is an
30 per cent, but is reduced where individual, company or trust. Tax is
the entity liable to the tax is resident imposed at the relevant marginal rate.
of a foreign jurisdiction that has
effective exchange of information
on taxation matters with Australia.
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Income Tax (Managed Investment Trust Transitional) Bill 2008
Detailed explanation of new law
Obligations under the new withholding regime
1.19 All obligations to withhold under the new withholding regime
rely on there being an initial distribution of certain amounts (of, broadly
speaking, Australian source net income other than dividends, interest and
royalties) from a managed investment trust. The obligation to withhold
may arise at the time the managed investment trust makes the payment. If
the managed investment trust does not have an obligation to withhold at
that time, it may have an obligation to give a notice to the recipient or
make certain information available on a website in respect of the payment.
1.20 The giving of a notice or publication of information on a website
in relation to a payment may trigger an obligation on the recipient of the
payment to withhold an amount when on-paying to a third entity.
Alternatively, it may trigger an obligation to provide a notice to the third
entity or publish information on a website in relation to the on-payment.
The obligation to give a notice or make information available on a website
will continue through a chain of entities until the obligation to withhold is
triggered. [Schedule 1, item 1, section 12-375]
Obligation of a managed investment trust to withhold in respect of
certain payments
1.21 Two requirements must be satisfied before there is an obligation
on a trust which is a managed investment trust, in relation to a particular
year, to withhold an amount from a payment it makes in relation to that
year. These are:
· the payment must be, in whole or part, a fund payment; and
· the recipient of the payment must have a relevant connection
outside Australia.
[Schedule 1, item 1, subsection 12-385(1)]
What is a managed investment trust?
1.22 While the existing Subdivision 12-H is being repealed, the new
Subdivision 12-H inserted by these rules contains a definition of `managed
investment trust' that is broadly consistent with the definition in the
current law.
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Distributions of managed investment trust income to foreign residents
Testing at the time of the first fund payment
1.23 Consistent with the existing definition, the relevant time for
determining whether a trust is a managed investment trust for a year of
income is the time of the making of the first `fund payment'. [Schedule 1,
item 1, paragraph 12-400(1)(a)]
1.24 Where the relevant conditions (set out below) are satisfied at the
time of making the first fund payment in relation to an income year, the
trust will be a managed investment trust for the entire year of income,
notwithstanding that the conditions may not be satisfied at a later time in
the income year. This provides certainty to investors and other interposed
entities receiving distributions from the trust during the income year as to
whether the payments will be subject to withholding during the income
year.
1.25 A trust is a managed investment trust in relation to an income
year where all the following conditions are satisfied at the time the first
fund payment in relation to the income year is made:
· the trust has a relevant connection with Australia (at the time
of the first fund payment or at an earlier time in the income
year);
· the trust must satisfy certain requirements of the
Corporations Act 2001 (Corporations Act) pertaining to the
management of investments; and
· the trust is either listed or widely held.
[Schedule 1, item 1, subsections 12-400(1) and (2)]
Connection with Australia
1.26 The connection with Australia can be established in one of two
ways. First, a trustee of the trust can be an Australian resident [Schedule 1,
item 1, item 1(a) in the table in paragraph 12-400(1)(b)]. Where there are multiple
trustees, the connection with Australia is satisfied if any one of those
trustees is an Australian resident. This represents a change to the
requirements applying under the existing rules.
1.27 Second, and alternatively, the trust's central management and
control can be located in Australia. [Schedule 1, item 1, item 1(b) in the table in
paragraph 12-400(1)(b)]
1.28 In either instance, the connection must exist at some time during
the income year up to and including the time of making the first fund
payment.
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Income Tax (Managed Investment Trust Withholding Tax) Bill 2008
Income Tax (Managed Investment Trust Transitional) Bill 2008
1.29 These tests broadly align with the residency test for trusts set out
in Division 6 of Part III of the ITAA 1936.
Corporations Act 2001 requirements to manage investments
1.30 A trust must be associated with the management of investments
as regulated by the Corporations Act to be a managed investment trust.
This means, at the time of making the first fund payment, the trust must be
a `managed investment scheme' operated by a `financial services licensee'
whose licence covers operating such a managed investment scheme. The
terms `managed investment scheme' and `financial services licensee' are
defined in the Corporations Act. [Schedule 1, item 1, item 2 in the table in
paragraph 12-400(1)(b)]
1.31 This requirement ensures the trust is a genuine collective
investment vehicle. It limits the ability of foreign residents to establish
trust structures as a means by which to access the withholding tax rates.
Listed or widely held requirement
1.32 The trust must be listed or widely held at the time of making the
first fund payment for the income year. This requirement is satisfied if:
· the units of the trust are listed on an approved stock exchange
in Australia;
· the trust has at least 50 members (other than objects of a
trust); or
· the trust has less than 50 members but one of the members is
an entity of a type specified in the rules.
[Schedule 1, item 1, item 3 in the table in paragraph 12-400(1)(b)]
1.33 A trust would not be held to have at least 50 members where the
purported members of the trust are discretionary objects. Without this
rule, a person could establish a trust that purports to be widely held (by
having more than 50 discretionary beneficiaries) but which is not widely
held as a matter of substance. This would defeat the policy objectives of
the new rules.
1.34 A trust will be considered widely held if, although it has less
than 50 members, one of the members of the trust is an entity of a
specified kind. The entities specified in the new rules are:
· a life insurance company;
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Distributions of managed investment trust income to foreign residents
· a complying superannuation fund, complying approved
deposit fund, or a foreign superannuation fund, as long as the
fund has at least 50 members;
· an Australian resident trust that is a managed investment
scheme operated by a financial services licensee whose
licence covers operating such a scheme and that is listed on
an approved stock exchange or has at least 50 members
(other than objects of the trust); and
· an entity that is recognised, under a foreign law relating to
corporate regulation, as having a similar status to a managed
investment scheme and that has at least 50 members.
[Schedule 1, item 1, subsection 12-400(2)]
1.35 The types of entities listed above typically hold investments
collectively.
1.36 The rules provide for tracing through one or more interposed
trusts where an entity that owns directly or holds indirectly the interests of
the trust is of a type specified in the list above. However, it must be the
case that each interposed trust is an Australian resident trust that is a
managed investment scheme operated by a financial services licensee with
a licence that covers operating a managed investment scheme.
1.37 The tracing rule recognises that a managed investment scheme
established by a wholesale trust would otherwise fail to satisfy the test of
being widely held, even if interests in the wholesale trust were held by
entities with more than 50 members.
Example 1.1
Zoidberg Trust is a managed investment scheme that is operated by a
financial services licensee whose licence covers operating such a
scheme. Zoidberg Trust has a trustee that is an Australian resident. It
is not listed on an approved stock exchange in Australia and has one
member.
Interests in Zoidberg Trust are held by Fry Trust, a trust whose central
management and control is in Australia. Fry Trust is also a managed
investment scheme operated by a financial services licensee whose
licence covers operating such a scheme. Fry Trust has three members.
One of the three members of Fry Trust is Leela Superannuation Fund,
a complying superannuation fund that has at least 1,000 members.
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Income Tax (Managed Investment Trust Transitional) Bill 2008
Zoidberg Trust will satisfy the requirement of being widely held.
Although it only has one member, that member, Fry Trust, is a trust
whose central management and control is in Australia, and is a
managed investment scheme, interests in which are directly owned by
an entity of the kind specified in the rules, being a complying
superannuation fund (Leela Superannuation Fund).
1.38 Under the tracing rule, interests in the trust purporting to be a
managed investment trust must be owned directly or held indirectly by an
entity of a kind specified in the rules. The tracing rule cannot be satisfied
by tracing through to two or more entities that, in aggregate, have 50 or
more members.
Example 1.2
Assume the same facts as in Example 1.1 except that Fry Trust has the
following members:
· Leela Superannuation Fund, a complying superannuation fund with
40 members; and
· Farnsworth Trust, an entity with a similar status to a managed
investment scheme regulated under UK law with 35 members.
In this case, interests in Fry Trust would not be owned by one entity of
a kind specified in the rules that has 50 or more members (or is listed
on an approved stock exchange in Australia).
Consequently, Zoidberg Trust will fail to satisfy the widely held
requirement. This is so despite the fact that Leela Superannuation
Fund and Farnsworth Trust together have more than 50 members.
An exception if a foreign resident individual has a substantial interest in
the trust
1.39 A trust is taken not to be widely held if any one foreign resident
individual directly or indirectly:
· holds, or has the right to acquire, interests representing
10 per cent of more of the value of the interests in the trust;
· has the control of, or ability to control, 10 per cent or more of
the rights attaching to `membership interests' (as defined in
section 960-135 of the ITAA 1997) in the trust; or
· has the right to receive 10 per cent or more of any
distribution of income that the trustee may make.
[Schedule 1, item 1, subsection 12-400(3)]
14
Distributions of managed investment trust income to foreign residents
1.40 Where one of the conditions set out above is satisfied, the trust
will not qualify as a managed investment trust. This result is consistent
with the policy intent of the new rules, which is to encourage collective
investment in widely held trusts.
Special rules for trusts that are created or cease to exist during an
income year
1.41 The requirement that a managed investment trust be listed or
widely held may be difficult to satisfy in the income year in which the trust
is starting up or winding up. For this reason, there are special rules that
require a trust to satisfy only the requirements of:
· being an Australian resident trust; and
· a managed investment scheme operated by a financial
services licensee whose licence covers operating such a
scheme,
in the start-up or wind-up year.
[Schedule 1, item 1, subsections 12-400(4) and (5)]
1.42 The rules do not allow a trust to qualify as a managed
investment trust for two successive income years by utilising the start-up
phase in the first year and wind-up phase in the following year. This is
because each exception to the widely held requirement is specifically
targeted and not intended to be used in conjunction. To allow otherwise
would be inconsistent with the broad aim of the new rules, which is to
encourage long-term investment by foreign residents.
What payments does a managed investment trust have to withhold from?
1.43 The new withholding regime applies to amounts that represent
or are reasonably attributable to fund payments made by a managed
investment trust to certain recipients. While the existing
Subdivision 12-H is being repealed, the new Subdivision 12-H inserted by
this Schedule contains a definition of `fund payment' broadly consistent
with the definition of the term in the current law. The main difference is
the new definition treats capital losses from taxable Australian property as
`excluded amounts', consistent with the treatment of capital gains.
[Schedule 1, item 1, paragraph 12-405(1)(d)]
1.44 The rules do not apply to fund payments in relation to an income
year by a trust that is not a managed investment trust in relation to that
income year. Further discussion can be found in paragraphs 1.63 and
1.64.
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Income Tax (Managed Investment Trust Transitional) Bill 2008
What is a fund payment?
1.45 The fund payment component of a payment made by the trustee
of a managed investment trust is that portion of the payment that
represents, in effect, a distribution of the net income of the trust
(disregarding certain amounts, known as excluded amounts, and related
deductions) such that the total of the fund payments made by the trust in
relation to an income year equals, as nearly as practicable, the net income
of the trust (suitably adjusted) for the year. [Schedule 1, item 1,
subsection 12-405(1)]
1.46 In order to assist a trustee in working out how much of a
payment made by the trustee is a fund payment, consistent with the current
rules in Subdivision 12-H which is being repealed, the new rules set out a
three-step process in the form of a method statement.
1.47 This process requires estimation, at the time of payment, of the
adjusted net income of the trust and other fund payments in relation to the
income year expected to be made by the trust.
Step 1 -- Amounts excluded from the calculation
1.48 Step 1 of the method statement involves reducing the amount of
the actual payment made, by the portion of the payment attributable to
`excluded amounts' being:
· dividend, interest or royalty income, subject to (or exempted
from) withholding tax under Division 11A of Part III of the
ITAA 1936;
· any capital gains or capital losses from CGT events that
happen in relation to CGT assets that are not taxable
Australian property; or
· amounts not from an Australian source.
[Schedule 1, item 1, step 1 in the method statement in subsection 12-405(2)]
1.49 Excluded amounts represent items of income that would
generally not be assessable to a foreign resident or that are subject to
separate withholding tax arrangements (or made exempt from such
arrangements).
1.50 It is intended the rules that set out excluded amounts be applied
cumulatively. For example, if a capital gain from a CGT event happens in
relation to a CGT asset that is taxable Australian property, it cannot be
16
Distributions of managed investment trust income to foreign residents
disregarded if it constitutes an amount that is not from an Australian
source.
1.51 The new definition of `fund payment' extends the definition of
`excluded amounts' to include a capital loss from a CGT event that
happens in relation to a CGT asset that is not taxable Australian property
[Schedule 1, item 1, paragraph 12-405(1)(d)]. This contrasts with the position
under the current Subdivision 12-H, which did not identify a capital loss
from a CGT event happening in relation to a CGT asset that is not taxable
Australian property, to be an excluded amount. As excluded amounts
represent items of income that would, generally, not be assessable to a
foreign resident, it is appropriate to exclude both capital gains and capital
losses from CGT events that happen in relation to such CGT assets.
Step 2 -- Estimating the adjusted net income of the trust
1.52 Under step 2 of the method statement, the trustee must work out,
based on their knowledge at the time of payment, the amount that it is
reasonable to expect will be the net income of the trust for the year in
relation to which the payment is made, disregarding expected excluded
amounts and related deductions. [Schedule 1, item 1, paragraph (a) of step 2 in the
method statement in subsection 12-405(2) and subsection 12-405(3)]
1.53 The process of determining a reasonable estimate of the net
income of the trust is necessitated by the fact a trust's net income is an
amount that can only be ascertained at the end of the trust's income year.
1.54 Excluded amounts are disregarded under step 2 of the method
statement for the same reasons they are disregarded under step 1 of the
method statement.
1.55 Under step 2 of the method statement, the trustee must ignore
the CGT discount in estimating the net income of the trust. The trustee
does this by doubling any amount that it is reasonable to expect will be
included within the net income of the trust as a discount capital gain.
[Schedule 1, item 1, paragraph (b) of step 2 in the method statement in
subsection 12-405(2)]
Step 3 -- Ascertaining how much of a payment is a fund payment
1.56 The third and final step in ascertaining how much of a payment is
a fund payment involves a determination as to how much of the payment
may reasonably be considered a distribution of net income (suitably
adjusted) having regard to:
· the object of the three-step process;
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Income Tax (Managed Investment Trust Withholding Tax) Bill 2008
Income Tax (Managed Investment Trust Transitional) Bill 2008
· the actual payment reduced by excluded amounts;
· the amounts of any earlier fund payments made in relation to
the income year; and
· expected amounts of any later fund payments to be made
based on the trustee's knowledge at the time payment is
made.
[Schedule 1, item 1, step 3 in the method statement in subsection 12-405(2)]
1.57 Whether it is reasonable to conclude a specific portion of the
payment is a fund payment is to be determined on an objective basis. The
test is whether a reasonable person would consider that portion could be
expected to form a part of the net income (suitably adjusted) of the trust at
the end of the income year.
Example 1.3
The Hoffman Managed Fund, a managed investment trust, makes two
distributions per annum. At the time of its second distribution, a
reasonable estimation of its net income (net of excluded amounts and
deductions relating to those amounts) based upon the knowledge of the
trustee of the Fund at that time is as follows:
Income/Expense July to Dec Jan to June Total
(Already (Current
paid) payment)
Dividends from Australian $200 $800 $1,000
company (A)
Australian source rental $250 $350 $600
income (B)
Expenses related to Australian ($0) ($300) ($300)
source rental income (C)
Capital gains from CGT $0 $650 $650
events happening to CGT
assets that are taxable
Australian property (not
eligible for discount) (D)
Capital losses from CGT $0 ($500) ($500)
events happening to CGT
assets that are not taxable
Australian property (E)
Other distributable amounts $100 $350 $450
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Distributions of managed investment trust income to foreign residents
Income/Expense July to Dec Jan to June Total
(Already (Current
paid) payment)
(eg, tax preferred amounts) (F)
Total $550 $1,350 $1,900
(G = A + B C + D + E + F)
Total (net of excluded $350 $1,050 $1,400
amounts) (H = G A E)
Estimated net income (I) $450 $1,000 $1,450
Estimated adjusted net $250 $700 $950
income (net of excluded
amounts) (J = I A E)
At the time of the Fund's second distribution, it decides to pay an
amount of $1,350. The trustee of the Hoffman Managed Fund is
required to determine, based on its knowledge at the time of the second
distribution, how much of the payment of $1,350 is a fund payment.
This is done as follows:
Step 1: The amount of the payment net of `excluded amounts' (being
the $800 of dividend income and the capital loss of $500, which relates
to a CGT event happening to a CGT asset that is not taxable Australian
property) is $1,050.
Step 2: Based on the trustee's knowledge at the time of the payment, it
is reasonable to expect that the net income of the trust for the year, net
of excluded amounts and deductions relating to those amounts, will be
$950.
Step 3: The trustee must determine how much of the step 2 amount is
a fund payment having regard to:
· the object of section 12-405 (which is, that the total of the fund
payments that the trustee makes in relation to an income year
equals, as nearly as practicable, the net income of the trust for the
income year, disregarding excluded amounts). The expected
adjusted net income of the trust, at the time the second and final
distribution is made, is $950;
· the step 1 amount, which is $1,050; and
· the amount of any earlier fund payments made during the income
year. This was $350.
As the expected adjusted net income of the trust, at the time the second
and final distribution is made, is $950, and the trustee had previously
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made a fund payment of $350, the trustee could designate that, of the
second distribution being made, $600 is the fund payment.
Time limits on when the fund payment must be made
1.58 A payment will not be a fund payment in relation to an income
year unless it is paid:
· during the income year;
· within three months after the end of the income year; or
· within a longer period as allowed by the Commissioner of
Taxation (Commissioner), but not exceeding six months from
the end of the income year.
[Schedule 1, item 1, subsections 12-405(4) and (5)]
1.59 The requirement that all fund payments be made within a
specified period of time following the end of the year of income ensures
there is timely collection of withholding amounts (as an obligation on the
managed investment trust to withhold is triggered by payment to certain
recipients).
1.60 Managed investment trusts are allowed a period of three months
from the end of the income year within which to make fund payments
relating to that year without requiring an exercise of the Commissioner's
discretion, in recognition of the fact they will typically require that period
of time in order to ascertain their net income for the year.
1.61 If the Commissioner is of the opinion a trustee of a managed
investment trust was unable to make a fund payment within the
three-month period because of circumstances beyond the influence or
control of the trustee, the Commissioner may extend the period within
which the fund payment must be paid, although the period can be extended
by no more than six months following the end of the year of income.
[Schedule 1, item 1, subsection 12-405(5)]
1.62 An example of a circumstance where an extension of the time
period may be warranted is where an unrelated trust, in which the trustee
of the managed investment trust had made an investment, has not
provided sufficient information about the constituent parts of a
distribution made to the managed investment trust, despite all reasonable
efforts by the trustee of the managed investment trust to obtain that
information. Without this information, the managed investment trust is
unable to accurately calculate its net income.
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Distributions of managed investment trust income to foreign residents
Fund payment must be in relation to an income year
1.63 To come within the operation of the managed investment trust
withholding regime implemented by this Schedule, the fund payment
made by a managed investment trust must relate to an income year in
which the trust was a managed investment trust [Schedule 1, item 1,
subsection 12-385(1)]. A trust that is a public trading trust or corporate unit
trust cannot be a managed investment trust [Schedule 1, items 9 and 11,
subsections 102L(15) and 102T(16) of the ITAA 1936].
1.64 It is possible a trust that is a managed investment trust for the
current year, but was not for the prior year, may make a payment, in the
current year, of part of its prior year Australian source net income (net of
excluded amounts and related deductions). Although such a payment will
constitute a fund payment, because it relates to an income year in which
the trust was not a managed investment trust, withholding will not be
required under these rules. However, other provisions of the income tax
law may apply to bring to tax the relevant share of net income
(eg, section 98 of the ITAA 1936).
Example 1.4
Lee Trust is a managed investment trust for the 2009-10 income year,
but was not a managed investment trust for the 2008-09 income year.
For the 2008-09 income year, Lee Trust derived a net capital gain from
taxable Australian property (that was not eligible for the CGT
discount) of $20,000. The trustee of Lee Trust estimates the trust will
derive Australian source rental income (net of related expenses) of
$10,000 for the 2009-10 income year.
Katrina is a foreign resident beneficiary of the Lee Trust. She is not a
beneficiary in the capacity of trustee of another trust.
Lee Trust makes a payment to Katrina's UK bank account of $300 on
15 August 2009. Of this amount, $200 is identified as relating to the
2008-09 income year and $100 to the 2009-10 income year. Both
amounts represent a part of the net income of the trust, net of excluded
amounts and related deductions. Therefore, $200 of the payment is a
fund payment relating to the 2008-09 income year and $100 of the
payment is a fund payment relating to the 2009-10 income year.
The trustee of Lee Trust will only be required to withhold from the
fund payment of $100 as this is a fund payment that relates to an
income year in which the trust was a managed investment trust.
Lee Trust will not be required to withhold from the fund payment of
$200.
However, if Katrina was a foreign resident for the 2008-09 income
year, presently entitled to a share of the income of the Lee Trust for the
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2008-09 income year represented by or reasonably attributable to the
fund payment, the trustee of Lee Trust would be liable to tax on that
share of the net income of the trust for the 2008-09 income year under
section 98 of the ITAA 1936.
Displacement of agency rule
1.65 Consistent with current Subdivision 12-H, the new withholding
regime implemented by this Schedule contains rules with specific
application to agents. For the purpose of the new Subdivision 12-H, where
an interposed entity is acting as an agent of a foreign resident, a payment
from a managed investment trust to the interposed entity will be taken not
to be a payment to an agent of the foreign resident and, by implication, not
a payment to the foreign resident as principal. Any advance by the
interposed entity to the foreign resident will also be treated as if it were a
payment made by the interposed entity to the foreign resident. [Schedule 1,
item 1, section 12-420]
1.66 From the perspective of the managed investment trust, the
design of the rules is such that the withholding obligation of the trust is
unaffected by whether the interposed entity is, or is not, an agent of the
foreign resident. As such, the managed investment trust does not need to
know the capacity in which the interposed entity is acting in order to
correctly determine its own obligations under Subdivision 12-H.
What entity must receive the payment?
1.67 The new rules implemented by this Schedule provide that
withholding is required by a managed investment trust if an amount
representing a fund payment is made to an entity with a relevant
connection outside Australia. A recipient will have a relevant connection
outside Australia if either:
· according to any record in the payer's (the managed
investment trust's) possession, or kept or maintained on their
behalf, the recipient has an address outside Australia; or
· the payer is authorised to make payment at a place outside
Australia.
[Schedule 1, item 1, subsection 12-410(1)]
1.68 The new rules recognise that a managed investment trust often
does not have sufficient information to determine whether the recipient is a
foreign resident for Australian tax purposes and, accordingly, focuses
attention on whether the recipient has provided an address to the payer that
is an overseas address or has authorised the payer to make payment at a
place outside Australia. The new rules are consistent with certain
22
Distributions of managed investment trust income to foreign residents
provisions of Subdivision 12-F (which sets out the withholding obligations
in respect of dividends, interest and royalties), which require withholding
in respect of payments to `overseas persons', based on the address of the
recipient and the place where payment is made.
1.69 It is possible that a recipient may provide the managed
investment trust with more than one address. If one of those addresses is
outside Australia, the recipient will have a relevant connection outside
Australia.
1.70 A recipient will not be considered to have a relevant connection
outside Australia if the recipient is carrying on business at or through an
Australian permanent establishment and the amount received from the
managed investment trust is attributable to that permanent establishment.
[Schedule 1, item 1, subsection 12-410(2)]
1.71 In such cases, the recipient (not the managed investment trust)
may have an obligation to withhold. Imposing the obligation to withhold
in such cases on the recipient and not the managed investment trust
minimises the chances withholding will occur where it should not
(eg, because the ultimate recipient of the payment is an Australian resident
and, therefore, there is no underlying liability to managed investment trust
withholding tax).
1.72 If all the requirements for withholding by the managed
investment trust are met except for the fact the recipient has a relevant
connection outside Australia, the managed investment trust must issue a
notice to the recipient or publish on a website certain details in respect of
the payment [Schedule 1, item 1, subsections 12-395(1) and (2)]. This obligation
is discussed in paragraphs 1.80 to 1.92.
Amount of withholding required
1.73 Where the managed investment trust has an address for the
recipient in its records (or on records maintained on its behalf), or has
been authorised to make payment to, a jurisdiction that is listed in the
regulations as an `information exchange country', withholding will be
required on the amount of the fund payment at the following rate:
· 22.5 per cent for fund payments in relation to the first income
year starting on or after the first 1 July after the day on which
Royal Assent is received for these amendments;
· 15 per cent for fund payments in relation to the second
income year starting on or after the first 1 July after the day
on which Royal Assent is received for these amendments;
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· 7.5 per cent for fund payments in relation to the third and
later income years starting on or after the first 1 July after the
day on which Royal Assent is received for these
amendments.
[Schedule 1, item 1, paragraph 12-385(3)(a) and subsection 12-385(4)]
1.74 The rate of withholding, in any other case, is 30 per cent.
[Schedule 1, item 1, paragraph 12-385(3)(b)]
1.75 The distinction made between an `information exchange
country' and any other country is consistent with the requirement to
determine whether a foreign resident is a resident of an `information
exchange country' or not for the purposes of determining what rate of tax
is applicable to the liability to managed investment trust withholding tax.
When is withholding not required?
1.76 An obligation to withhold from a payment, a portion of which is
a fund payment, will not arise to the extent there is no underlying liability
for managed investment trust withholding tax on the payment or on an
amount reasonably attributable to the payment. [Schedule 1, item 1,
subsection 12-385(5)]
1.77 This result is similar to that achieved by section 12-300 in the
context of Subdivision 12-F (concerning dividends, interest and royalties).
Example 1.5
The Burns Trust, a managed investment trust, is making a payment to
Wayne Smithers, a US citizen. Wayne has resided in Australia for a
number of years but has always requested payment be made to his
US bank account. He is an Australian resident for tax purposes.
The Burns Trust makes a payment of $800, of which $300 represents a
dividend and $500 represents a fund payment. As Wayne is not a
foreign resident, he does not have a withholding tax liability in respect
of either the dividend or the fund payment. Therefore, the Burns Trust
is not required to withhold from either payment.
Wayne Smithers will have a liability to income tax under section 97 of
the ITAA 1936, being a resident presently entitled to the net income of
the Burns Trust.
1.78 A managed investment trust may be unaware that no managed
investment trust withholding tax is payable and may, consequently,
withhold from the payment when withholding is not required at law. This
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Distributions of managed investment trust income to foreign residents
will arise because the trust is unaware of the exact circumstances of the
person to whom payment is being made.
1.79 In such circumstances, an amount has been withheld in error.
Accordingly, the person that has borne the withholding amount without an
underlying withholding tax liability could seek a refund from the managed
investment trust of the amount erroneously withheld under section 18-65.
Where the conditions for refund under section 18-65 are not met, the
recipient may apply to the Commissioner for a refund under
section 18-70.
Obligations of a managed investment trust to give a notice or make
information available on a website
1.80 Where a managed investment trust is not required to withhold
from a payment, the managed investment trust may have an obligation to
give a notice or publish information on a website in respect of the
payment.
1.81 The obligation to give a notice or make information available on
a website will arise where the following conditions are satisfied:
· the managed investment trust makes a payment;
· had the payment been made to an entity with a relevant
connection outside Australia, withholding would have been
required; and
· withholding is not required because payment was not made
to such an entity.
[Schedule 1, item 1, subsection 12-395(1)]
1.82 A managed investment trust is only required to give a notice or
make information available on a website where all conditions for
withholding are satisfied except for the condition that the recipient have a
connection outside Australia.
What is the purpose of the obligation to give a notice or make
information available on a website?
1.83 The purpose of the obligation to issue a notice or make
information available on a website is to provide the payee with sufficient
information about the payment so as to allow it to accurately discharge its
withholding obligation, or obligation to issue a notice or make
information available on a website (whichever is applicable).
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Information that is to be provided in a notice or made available on a
website
1.84 The information provided in a notice or made available on a
website must specify:
· the part or parts of the payment from which withholding is
required; and
· the income year of the managed investment trust to which
each of the part(s) relate.
[Schedule 1, item 1, subsection 12-395(3)]
1.85 There may be situations where a managed investment trust
makes a single payment that comprises two fund payments that relate to
different income years. In such cases, the notice or information made
available on the website must separately identify the two fund payments
and the income years to which they relate.
Requirements that apply where information is made available on a
website
1.86 There is no separate obligation on the managed investment trust
to advise the recipient that information has been placed on a website. It is
expected that entities with an obligation to withhold under these rules
would generally be cognisant that this obligation may arise in respect of a
payment received from a managed investment trust (or received through a
chain of entities where the original payment was sourced from a managed
investment trust) and would, therefore, seek out the information required
in order to discharge their withholding obligations.
1.87 Where the managed investment trust makes information
available on a website, it must make that information readily accessible,
such that an entity with an obligation to withhold under these rules (or,
itself, to issue a notice or make information available on a website) is able
to obtain the information it requires to discharge its obligations.
[Schedule 1, item 1, paragraph 12-395(2)(b)]
1.88 Information will not be considered to be `readily accessible' if it
is placed on a part of the website that is `locked' (where access is not
extended to all entities that may have a withholding or
notification/publication obligation under these rules).
1.89 It is not necessary that the information be made available on a
website of the managed investment trust. The requirement to make
information available on a website can also be satisfied if the information
26
Distributions of managed investment trust income to foreign residents
is made available on the website of another entity, such as, the website of
the Australian Securities Exchange.
1.90 The managed investment trust must ensure the information is
made accessible for a period of at least five years from the date on which
the information is made available [Schedule 1, item 1, paragraph 12-395(2)(b)].
The five-year period is consistent with existing record-keeping
requirements in the law.
At what time must a notice be provided or information be made
available on a website?
1.91 The notice must be provided to the recipient or the information
be made available on a website at or before the time payment is made.
[Schedule 1, item 1, subsection 12-395(3)]
1.92 It is essential the relevant information be provided (either by
notice or publication on a website) at this time because the recipient of the
payment may be required to withhold from the payment on receipt (eg, if
the recipient is a non-custodian and a foreign resident is immediately
entitled to all or part of the payment received by the non-custodian).
Example 1.6
McLoughlin Trust, a managed investment trust for the 2008-09 and
2009-10 income years, makes a payment on 31 August 2009 of $3,000.
Of this payment, $2,000 represents a fund payment relating to the
2008-09 income year and $1,000 represents a fund payment relating to
the 2009-10 income year.
McLoughlin Trust makes a payment to Bardy Trust. McLoughlin
Trust's records indicate that Bardy Trust has an Australian address and
payment is made to an Australian bank account.
Had the trustee of McLoughlin Trust made the payment to an entity
with an overseas address, the trustee would have been obliged to
withhold an amount from the payment. Therefore, McLoughlin Trust
is required to provide Bardy Trust with a notice or make information
available on a website in relation to the payment at or before the time
of payment.
The notice that is provided or the information that is made available on
the website must specify the parts of the payment from which an
amount would have been required to be withheld ($2,000 and $1,000);
and the income years to which each part relates (ie, that $2,000 relates
to the 2008-09 income year and $1,000 to the 2009-10 income year).
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Obligations of custodians and other entities
1.93 A foreign resident may invest in a managed investment trust
through an interposed entity. Currently, the majority of foreign residents
invest in managed investment trusts through custodians.
Withholding obligations of custodians
What is a custodian?
1.94 An entity is a custodian within the meaning of the new rules
implemented by this Schedule if it carries on a business that predominantly
consists of providing custodial or depository services. Custodial or
depository services take their meaning from the Corporations Act.
[Schedule 1, item 1, subsection 12-390(9)]
1.95 The business need only predominantly consist of providing
custodial or depository services. Where the business consists of other
activities, provided their extent is not such that the provision of custodial
or depository services could not be considered to be the dominant activity
of the business, the business conducted by the entity may still be
considered to be predominantly consisting of providing custodial or
depository services.
When is a custodian required to withhold?
1.96 A custodian is required to withhold from a payment it makes
where the following conditions are satisfied:
· the payment made by the custodian is reasonably attributable
to a payment received by the custodian that was covered by a
notice or information that was made available on a website;
and
· the recipient of the payment made by the custodian has a
relevant connection outside Australia.
[Schedule 1, item 1, subsection 12-390(1)]
The payment made by the custodian must be reasonably attributable to a
`covered payment'
1.97 The first requirement for withholding by a custodian is that the
payment made by the custodian must be reasonably attributable to a
payment received by the custodian that was covered by a notice or
information made available on a website.
28
Distributions of managed investment trust income to foreign residents
1.98 The payment will be covered by information made available on
a website where the entity that made the payment (the `source payment')
to the custodian gave a notice or made available information relating to
the source payment on a website. [Schedule 1, item 1, subsection 12-395(2)]
1.99 If the payment made by the custodian is attributable to some
other income derived by the custodian (eg, it arises in the context of
another business conducted by the custodian), the payment is not
reasonably attributable to the source payment. The payment made by the
custodian must have a nexus with a payment received by the custodian
that was covered by a notice or by information that was made available on
a website. [Schedule 1, item 1, paragraph 12-390(1)(a)]
1.100 The notice that accompanies the payment or the information
made available on the website will indicate the portion of the payment that
potentially gives rise to a withholding obligation. The custodian will use
this information to determine what portion of the payment it makes is
subject to withholding.
1.101 The notice or information provided on the website will also
specify the income year of the managed investment trust to which the
portion of the payment potentially giving rise to withholding relates. The
custodian will need this information in order to determine the appropriate
rate of withholding.
Payment is made to a recipient with a relevant connection outside
Australia
1.102 The second condition for withholding by a custodian is that:
· the recipient has an address outside Australia, according to
any record in the payer's (the custodian's) possession, or kept
or maintained on their behalf; or
· the custodian is authorised to make payment at a place
outside Australia.
[Schedule 1, item 1, paragraph 12-390(1)(b)]
1.103 Paragraphs 1.67 to 1.72 provide further discussion of the above
conditions.
The amount on which withholding is required
1.104 The rules for determining the amount a custodian must withhold
are similar to the rules that apply where a managed investment trust makes
a payment to a recipient with a relevant connection outside Australia.
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However, whereas the managed investment trust withholds an amount
from that portion of the payment it makes that is a fund payment, the
custodian will withhold from that portion of the payment it makes that is
reasonably attributable to a fund payment that is covered by a notice or by
information made available from a website. This is referred to as the
`covered part'. [Schedule 1, item 1, subsection 12-390(2)]
1.105 The withholding rates that apply under the new withholding
regime are the same as those that apply to payments made by a managed
investment trust [Schedule 1, item 1, subsection 12-390(3)]. The rates are
specified in paragraphs 1.73 to 1.75.
When is withholding not required by a custodian?
1.106 There are two exceptions to the obligations of a custodian to
withhold.
Payments made to and from companies
1.107 The first exception to the obligation of a custodian to withhold
applies if the custodian is a company [Schedule 1, item 1,
paragraph 12-390(10)(a)]. Withholding is not required in respect of a payment
made by a corporate custodian unless the custodian is acting in the
capacity of a trustee or as an agent for a principal. For this purpose, both a
public trading trust and a corporate unit trust is a company [Schedule 1,
items 8 and 10, subsections 102L(10) and 102T(11) of the ITAA 1936].
1.108 In order to determine whether a company is acting as an agent of
the foreign resident in this context, the special rules in Subdivision 12-H
that operate to deem an entity that is an agent of a principal not to be
acting as an agent for certain purposes, have no application [Schedule 1,
item 1, paragraph 12-390(10)(a)]. As a consequence, a corporate custodian that
is an agent of an entity with a relevant connection outside Australia may be
required to withhold an amount, under the new rules implemented by this
Schedule, from an advance it makes to the entity.
1.109 The exception does not apply to a corporate custodian that is
acting in the capacity of trustee. Subsection 960-100(4) of the ITAA 1997
provides that where a provision refers to a particular kind of entity it
refers to the entity in that capacity not to the entity in any other capacity.
This means a corporate custodian acting in the capacity of trustee may be
required to withhold an amount from a payment it makes to a recipient
with a relevant connection outside Australia.
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Distributions of managed investment trust income to foreign residents
Example 1.7
Jones Trust, a managed investment trust, makes three fund payments,
one payment each to:
· White Custodians Ltd -- an Australian resident corporate
custodian, with one foreign resident shareholder, Ben.
· Grey Custodians Ltd -- an Australian resident corporate custodian
acting in the capacity of a trustee, with one foreign resident
beneficiary, Jean, who has provided to the company an address
outside Australia.
· Blue Custodians Ltd -- an Australian resident corporate custodian
that is an agent of a foreign resident, Robert.
All three custodians on-pay the payments received from Jones Trust.
· White Custodians Ltd will not be required to withhold under these
rules from the payment it makes to Ben as it did not make the
payment as an agent or in the capacity of trustee. White Custodians
Ltd may be required to withhold from the payment under the
dividend withholding rules (in Subdivision 12-F).
· Grey Custodians Ltd will be required to withhold from the payment
it makes to Jean under these rules as it is acting in the capacity of
trustee.
· Blue Custodians Ltd will be required to withhold from the payment
it makes to Robert under these rules as it is an agent of Robert.
Where no underlying managed investment trust withholding is payable
1.110 The second exception to the obligation of a custodian to
withhold arises to the extent there is no underlying liability to managed
investment trust withholding tax in respect of the amount covered by a
requirement to give a notice (or make details available on a website), or an
amount reasonably attributable to that amount. [Schedule 1, item 1,
paragraph 12-390(10)(b)]
1.111 This is similar to the exception that applies in respect of a
payment from a managed investment trust, which is discussed in
paragraphs 1.76 to 1.79.
Withholding obligations of other interposed entities (`non-custodians')
1.112 The existing non-final withholding rules for managed investment
trust distributions impose withholding obligations only on managed
investment trusts and custodians. Interposed entities that are not
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custodians (`non-custodians') were excluded from these rules. Therefore,
investments in a managed investment trust through a non-custodian have
until now been dealt with by the ordinary provisions of the Income Tax
Acts (in particular, Division 6 of Part III of the ITAA 1936, concerning the
taxation of trusts).
1.113 The new managed investment trust withholding tax rules in
Subdivision 12-H apply to payments received directly (from the managed
investment trust) or indirectly (through an interposed entity, being either a
custodian or a non-custodian). The extension of the rules to
non-custodians is on the basis that this is a final withholding tax and the
policy of the new regime is to attract foreign investment into the
Australian managed funds industry, whether this be through direct or
indirect investment, through flow-through vehicles.
When is a non-custodian required to withhold?
1.114 Non-custodians will be required to withhold an amount where
both of the following conditions are satisfied:
· the non-custodian receives a payment, all or part of which is
covered by a notice or information made available on a
website; and
· a foreign resident is, or becomes entitled to, an amount
attributable to the payment received by the non-custodian.
[Schedule 1, item 1, subsection 12-390(4)]
The payment received by a non-custodian must be covered by a notice or
information made available on a website
1.115 The first requirement for withholding by a non-custodian is that
all or part of the payment received by the non-custodian must be covered
by a notice or information made available on a website [Schedule 1, item 1,
paragraph 12-390(4)(a)]. This is similar to the requirement for payments
from a custodian which is discussed in paragraphs 1.97 to 1.101.
A foreign resident is or becomes entitled to receive an amount
1.116 The second requirement for withholding by a non-custodian is
that a foreign resident is or becomes entitled to receive an amount that is
reasonably attributable to the payment received by the non-custodian.
[Schedule 1, item 1, paragraph 12-390(4)(b)]
1.117 This requirement varies from the requirements for withholding
by managed investment trusts or custodians. A non-custodian is required
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Distributions of managed investment trust income to foreign residents
to withhold at the time a foreign resident is, or becomes, entitled to receive
an amount rather than at the time a payment is made by the non-custodian
to the foreign resident. Requiring withholding at the time the entitlement
crystallises ensures the obligation to withhold an amount cannot be
avoided or deferred merely by deferring payment to the foreign resident.
1.118 Additionally, the withholding rules for non-custodians focus on
the residency status of the party becoming entitled to receive an amount.
Withholding is required where a foreign resident has an entitlement to all
or part of the amount received by the non-custodian that was covered by a
notice or publication on a website. The non-custodian cannot rely on the
proxies for residency (address and place of payment) that apply in the case
of payments by managed investment trusts and custodians.
1.119 This recognises that the relationship between a non-custodian
and the person entitled to an amount from the non-custodian is likely to be
closer than the relationship between a recipient of a payment and a
managed investment trust or custodian. This closer relationship means the
non-custodian is likely to be in a better position to obtain information as to
the actual residency status of the person entitled to receive an amount.
1.120 Requiring a non-custodian to withhold at the time a foreign
resident becomes entitled to receive an amount aligns with similar rules in
Subdivision 12-F, which require withholding at the time a foreign resident
becomes entitled to receive an amount.
The time when withholding is required
1.121 When withholding is required will depend on when the foreign
resident becomes entitled to receive the amount from the non-custodian. If
the foreign resident is entitled to receive the amount (or is entitled to have
the non-custodian credit to them or otherwise deal with the amount on
their behalf or as they direct) at the time when the non-custodian receives
the payment covered by a notice or the publication of information on a
website, withholding is required immediately after the time of receipt.
[Schedule 1, item 1, paragraph 12-390(8)(a)]
1.122 If the foreign resident becomes entitled after the time when the
non-custodian receives the payment, withholding is required immediately
after the foreign resident becomes entitled. [Schedule 1, item 1,
paragraph 12-390(8)(b)]
The amount on which withholding is required
1.123 Withholding is required on the amount that the foreign resident
is entitled to receive from the non-custodian (or have the non-custodian
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credit or otherwise deal with on the foreign resident's behalf or as the
foreign resident directs) that is reasonably attributable to the part of the
payment received by the non-custodian that was covered by a notice or the
publication of information on a website. [Schedule 1, item 1,
subsections 12-390(4) and (5)]
Example 1.8
Seville Trust, a managed investment trust in relation to an income year,
makes a payment of $2,000, all of which represents a fund payment for
that income year, to Alvin (a non-custodian), who is an agent of
Simon, a foreign resident.
Alvin's fees as agent are 5 per cent of the payments received. Alvin
must pay all amounts, net of his fee, to Simon within two days of the
date payment is received by Alvin.
Seville Trust is not required to withhold from the payment and,
therefore, issues a notice to Alvin.
The relationship between Alvin and Simon is two-fold:
· in his capacity as agent, Alvin is required to pay to Simon the
amounts received; and
· because Alvin is operating as Simon's agent, Simon is required to
pay him a fee calculated by reference to the amounts received by
Alvin.
On this analysis, Simon is entitled to receive an amount of $2,000,
which is attributable to a payment received by Alvin, all of which is
reasonably attributable to a fund payment. Withholding will be
required, by Alvin, on this amount.
Alvin will pay, to Simon, the amount remaining after deduction of the
withholding amount and the administration fee.
What is the rate of withholding?
1.124 The rate at which a non-custodian must withhold depends upon
whether the foreign resident is resident of an `information exchange
country'.
1.125 Australian taxation law defines what is meant by `Australian
resident' and `foreign resident' (subsection 995-1(1) of the ITAA 1997).
It does not prescribe when an entity will be considered a resident of a
particular foreign country.
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Distributions of managed investment trust income to foreign residents
1.126 For this reason, these rules provide that an entity will be
considered a resident of an information exchange country where the entity
is a resident of that country for the purposes of the taxation laws of that
country. [Schedule 1, item 1, paragraph 12-390(7)(a)]
1.127 There will be circumstances where an entity will be unable to
apply the above test. For example, the test cannot be applied in the case
of those information exchange countries that do not have taxation laws (as
is the case with some territories with which Australia has Tax Information
Exchange Agreements). Alternatively, there may be a case where a
country does have taxation laws, however, those laws do not apply to the
entity in question and, accordingly, the test cannot be applied.
1.128 In cases where there are no taxation laws applicable to the
entity, the foreign resident will be considered a resident of an `information
exchange country' if:
· the foreign resident is an individual, and ordinarily resident
in that country; or
· in any other case, the entity was incorporated or formed in
that country and is carrying on business in that country.
[Schedule 1, item 1, paragraph 12-390(7)(b)]
1.129 A person will be considered to be ordinarily resident in a
country if that is the place where they normally reside.
1.130 An entity that is not an individual will be considered a resident
of an information exchange country if the entity was both formed (or
incorporated) in that country and is carrying on business in that country.
By having the carrying on business test in conjunction with the place of
incorporation or formation test, only entities actually undertaking genuine
business activities in that country can meet the test.
Payments that are not liable to withholding
1.131 There are two exceptions to the obligation to withhold for
non-custodians. Withholding is not required:
· in respect of a payment received by a corporate
non-custodian unless the company is acting in the capacity as
an agent or trustee of the foreign resident; or
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· in respect of a payment received by the non-custodian to the
extent there is no underlying managed investment
withholding tax liability.
[Schedule 1, item 1, subsection 12-390(10)]
1.132 A discussion of the exceptions to the withholding obligations is
in paragraphs 1.107 to 1.109 and 1.76 to 1.79.
Obligations of a non-custodian to give a notice or make information
available on a website
1.133 A non-custodian will be required to give a notice or make
information available on a website where all the following conditions are
satisfied:
· the non-custodian receives a payment;
· an entity (not being a foreign resident) is or becomes entitled
to receive from the non-custodian (or to have the
non-custodian credit, or otherwise deal with the payment, on
their behalf or as they direct) an amount attributable to the
amount received; and
· had a foreign resident entity been so entitled to receive the
amount, an amount would have been required to have been
withheld by the non-custodian.
[Schedule 1, item 1, subsections 12-395(4) and (5)]
1.134 The notice must be provided to the foreign resident or the
information must be made available on a website by the non-custodian at
or before the time the amount is paid, credited or otherwise dealt with.
[Schedule 1, item 1, subsection 12-395(6)]
1.135 The details that must be specified in the notice or made available
on the website are discussed in paragraphs 1.83 to 1.90.
Implications of failure to withhold
An entity commits an offence and is liable to an administrative penalty
1.136 Where an entity fails to withhold an amount, as required, the
entity will commit an offence of strict liability under section 16-25.
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Distributions of managed investment trust income to foreign residents
1.137 Further, the entity (other than an exempt Australian Government
agency) is liable to pay to the Commissioner a penalty equal to the
amount that was required to be withheld under section 16-30.
1.138 Subdivision 298-A of Part 4-25 is also relevant as it sets out a
number of provisions that apply to administrative penalties, including the
accrual of general interest charge on an unpaid penalty and the
Commissioner's discretion to remit all or part of a penalty.
Subdivision 298-A applies to the penalties that may arise for failure to
withhold an amount. [Schedule 1, item 56, paragraph 298-5(c)]
An entity liable to the withholding tax is entitled to a credit where
another entity has paid the penalty
1.139 Where an entity has paid a penalty for failure to withhold, the
entity liable to the managed investment trust withholding tax is entitled to
a credit equal to the amount of the penalty, or general interest charge, as
appropriate [Schedule 1, item 46, paragraph 18-35(1)(a)]. This is consistent with
the existing crediting rules that apply to dividends, interest and royalties.
1.140 Although the entity liable to the tax will not have borne the
incidence of the tax (as that, effectively, has been borne by the entity
liable to the penalty), as the Commissioner has received an amount equal
to the amount that would have been withheld had the failure to withhold
not occurred, it is appropriate the foreign resident's liability to tax be
discharged to the extent of the penalty.
An entity liable to an administrative penalty is entitled to recover the
penalty
1.141 An entity liable to an administrative penalty for failing to
withhold an amount is entitled to recover an amount equal to the amount
of the penalty from the person liable to pay the managed investment trust
withholding tax on that payment [Schedule 1, items 36 and 37, section 16-195 and
paragraph 16-195(1)(c)]. This is consistent with the existing provisions that
apply to dividends, interest and royalties (as well as other payments such
as the departing Australia superannuation payment and mining payments).
1.142 These provisions recognise that the entity liable to the
withholding tax has received a windfall gain as the payment received by it
was never reduced by withholding. As the foreign resident's liability is
subsequently extinguished, by virtue of the credit that arises where the
administrative penalty representing the withholding amount that would
have been collected is paid (refer to paragraphs 1.239 to 1.242), the entity
liable to the withholding tax is no longer liable to pay that tax to the
Commissioner.
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1.143 To allow a foreign resident to benefit from an offence
committed by another entity would be inappropriate and inconsistent with
the approach adopted in relation to other withholding amounts. For this
reason, the entity that is liable to the administrative penalty is entitled to
recover the amount of the penalty from the foreign resident liable to the
withholding tax.
Implications of failure to give a notice or make information available on a
website
What is a failure to give a notice or make information available on a
website?
1.144 An entity will have failed to give a notice or make information
available on a website in the following circumstances:
· the entity is required to give a notice or make information
available on a website and does not do so;
· the entity purports to provide a notice or make information
available on a website but this is not done at or before the
required time;
· the purported notice or information made available on the
website does not, or does not correctly, specify the details as
required.
An entity liable to an administrative penalty
1.145 As the requirement to give a notice or make information
available on a website is a critical component of the withholding regime
implemented by this Schedule, it is appropriate that failure to give a notice
or make information available on a website as required will give rise to an
administrative penalty.
1.146 The administrative penalty is equal to the amount that would
have been withheld from the payment or from amounts reasonably
attributable to the payment had the notice or publication requirements
been satisfied in respect of each payment and each amount reasonably
attributable to the payment. In determining the penalty amount,
paragraph 12-390(1)(b) is disregarded because knowledge of the ultimate
withholding tax liability may be difficult to obtain. [Schedule 1, item 1,
section 12-415]
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Distributions of managed investment trust income to foreign residents
Example 1.9
Jones Trust, a managed investment trust, makes two payments of
$5,000 each to D Custodian and B Trust. Both entities do not have a
relevant connection outside Australia. As a result, Jones Trust is
required to issue notices or make information available on a website in
respect of each payment but does not do so.
D Custodian makes two payments of $2,500; one to Sasha (to a UK
bank account) and one to Harry (to an Australian bank account).
D Custodian is not required to withhold from the payment to Sasha
because D Custodian is not in receipt of a notice from the Jones Trust,
nor has information relating to the payment been made available on a
website.
B Trust (a non-custodian) has one beneficiary, Martin, a resident of
Singapore (a country with which Australia does not have effective
exchange of information). Martin is entitled to receive the payment of
$5,000 (made by Jones Trust) at the time it is received by B Trust.
B Trust is not required to withhold from the amount to which Martin is
entitled because B Trust did not receive a notice from Jones Trust, nor
was information relating to the payment provided on a website.
Jones Trust is liable to an administrative penalty in respect of each
payment of $5,000 that it made. The administrative penalty is equal to
the amount that would have been withheld had the payment by
Jones Trust and all amounts reasonably attributable to that payment
been covered by a notice or publication on a website.
Jones Trust is, therefore, liable to pay the Commissioner a penalty of
$1,875. This is calculated as $375 in relation to the payment that is
made by D Custodian to Sasha (calculated as 15% × $2,500) and
$1,500 in relation to Martin's entitlement to an amount received by
B Trust (calculated as 30% × $5,000).
Sasha and Martin are entitled to a credit for the penalty paid by
Jones Trust (as against their respective liabilities to managed
investment trust withholding tax). Jones Trust is able to recover from
both Sasha and Martin (who are liable to pay managed investment trust
withholding tax) the amount of each penalty (but limited to the related
tax liability of Sasha and Martin) -- in this case, $375 and $1,500
respectively.
1.147 Further discussion of the provisions that generally apply to
administrative penalties is in paragraphs 1.138 and 1.234 to 1.242.
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Income Tax (Managed Investment Trust Transitional) Bill 2008
An entity liable to an administrative penalty is entitled to recover an
amount
1.148 By analogy with the rules regarding failure to withhold, the new
rules implemented by this Schedule provide that where an entity is liable
to pay an administrative penalty for failing to provide a notice or make
information available on a website, the entity may be liable to recover an
amount equal to the administrative penalty from the entity with an
underlying liability to managed investment trust withholding tax.
[Schedule 1, item 38 , subsections 16-195(2) and (3)]
1.149 Allowing for this recovery recognises the person with the
underlying withholding tax liability has received a windfall gain as,
despite the fact that no amount was withheld from the payment received
by the person, the person's liability can be offset by the credit that arises
where the administrative penalty is paid [Schedule 1, item 47,
subsection 18-35(1A)]. For this reason, it is appropriate the entity that is
liable to the administrative penalty be entitled to recover the amount of the
penalty from the person liable to the tax.
1.150 The amount that may be recovered by the entity that has paid the
administrative penalty is capped to the managed investment trust
withholding liability of the foreign resident. [Schedule 1, item 38,
subsections 16-195(2) and (3)]
Example 1.10
Halliwell Trust, a managed investment trust, makes a fund payment of
$1,000 to Prudence Custodians, an Australian resident. Halliwell Trust
does not provide a notice or make information available at or before
the time of payment and, therefore, Prudence Custodians does not
withhold from the fund payment that it on-pays to the Singapore bank
account of Piper Trust, a trust that is resident in Singapore (a country
that is not an exchange of information country).
Phoebe is a New Zealand resident and a beneficiary of Piper Trust.
She receives a payment of $1,000 all of which is attributable to the
fund payment of Halliwell Trust. It is assumed that her managed
investment trust liability is $150 (15 per cent of $1,000).
Halliwell Trust is liable to an administrative penalty for failure to
provide a notice or make information available under section 12-395.
The penalty is equal to the amount that would have been withheld from
the payment had the notice or publication requirements been satisfied.
This means the administrative penalty is equal to $300 (withholding
would have been required at the rate of 30 per cent on the $1,000
payment).
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Distributions of managed investment trust income to foreign residents
Halliwell Trust is entitled to recover the administrative penalty from
the person that has the underlying managed investment trust
withholding tax liability, being Phoebe, to the extent of the liability,
which is $150.
Who is liable to managed investment trust withholding tax?
1.151 Subdivision 840-M of the new Division 840 of the ITAA 1997,
inserted by this Schedule to the Bill, provides the rules for determining if
there is a liability to managed investment trust withholding tax.
1.152 Broadly, the liability for managed investment trust withholding
tax is imposed on foreign residents in respect of amounts received (or, in
some cases, amounts they are entitled to receive) that are represented by
or reasonably attributable to fund payments of a managed investment
trust.
1.153 The conditions that give rise to a liability for managed
investment trust withholding tax differ depending on whether the foreign
resident is paid an amount directly from a managed investment trust or a
custodian or is entitled to receive an amount from a non-custodian.
1.154 Once a liability to pay managed investment trust withholding tax
is established, this liability is formally imposed, and the applicable rate of
tax is provided for in:
· the Income Tax (Managed Investment Trust Transitional)
Bill 2008 for the first income year of operation of the
amendments made by this Schedule to this Bill for residents
of a country with effective exchange of information on tax
matters [Schedule 1, item 23, section 840-805 of the IT (TP) Act 1997].
and;
· the Income Tax (Managed Investment Trust Withholding
Tax) Bill 2008 for the first income year of operation of the
amendments for residents of other countries and for later
income years for all taxpayers [Schedule 1, item 2,
subsection 840-805(1) of the ITAA 1997].
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Income Tax (Managed Investment Trust Transitional) Bill 2008
Direct investment in a managed investment trust
1.155 A liability to managed investment trust withholding tax is
imposed on a person who receives an amount from a trust that is a
managed investment trust in relation to an income year where:
· all or part of the amount received is a fund payment in
relation to that year; and
· at the time of payment the recipient is foreign resident
beneficiary of the managed investment trust and not a
beneficiary in the capacity of trustee of another trust.
[Schedule 1, item 2, subsection 840-805(2) of the ITAA 1997]
An entity is paid a fund payment from a managed investment trust
1.156 A liability for the managed investment trust withholding tax is
imposed on a beneficiary of a managed investment trust upon payment of
an amount from the trust, rather than at the time the beneficiary becomes
presently entitled to a share of the trust income of the managed investment
trust.
1.157 Payment is used as the relevant benchmark for imposition of the
withholding tax liability as such a rule aligns the time at which the
underlying liability to withholding tax crystallises with the time when
withholding from the payment is required. Withholding is never required
from a payment made by a managed investment trust sooner than the time
it is paid from the managed investment trust. [Schedule 1, item 1,
subsection 12-385(1)]
Constructive payments
1.158 Even where the managed investment trust does not pay an
amount, the foreign resident beneficiary will have a withholding tax
liability where an amount that is a fund payment is applied or dealt with
on the beneficiary's behalf or as the beneficiary directs. [Schedule 1, item 2,
paragraph 840-805(2)(a) of the ITAA 1997]
1.159 This rule again ensures alignment between the time at which the
liability to withholding tax crystallises and the time when withholding
from a payment is required.
1.160 A payer may be obliged to withhold an amount if it has made a
constructive payment to the payee. Section 11-5 provides that a
constructive payment takes place where an entity applies or deals with an
amount in any way on the other's behalf or as the other directs.
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Distributions of managed investment trust income to foreign residents
Agency rules
1.161 Under normal agency principles, a payment by an entity (the
first entity) to an intermediary acting in the capacity of agent for another
entity (the principal) would usually be taken to be a payment from the first
entity to the principal.
1.162 These amendments displace this rule in one case -- where the
intermediary is a custodian. In this case, the agency rule is displaced in
respect of a payment made to, and from, a custodian such that a payment
made by the first entity is taken to be a payment to the custodian in its
own right with the payment (or advance) made by the custodian to its
principal taken to be a separate payment. [Schedule 1, item 2, section 840-820
of the ITAA 1997]
1.163 The displacement of the agency rule does not affect the nature of
the relationship between custodian and recipient, which is that of
agent-principal.
Example 1.11
Blue Trust is a managed investment trust. It makes two payments.
The first payment is to Green Co. Custodians, an agent of Ben, and the
second payment is to Jean, who is an agent of Patrick. Green Co.
Custodians and Jean are Australian residents and amounts are paid to
addresses in Australia. Both immediately on-pay the amounts to Ben
and Patrick, respectively. Both Ben and Patrick are foreign residents.
The agency rule will be displaced in the case of the first payment as
Green Co. Custodian is a custodian for the purposes of these
amendments. This means the law will recognise two separate
payments, being the payment from Blue Trust to Green Co.
Custodians and the payment from Green Co. Custodians to Ben. Ben
will have a withholding tax liability as he has received payment from
Green Co. Custodians that is attributable to a fund payment.
The agency rule will not be displaced in the case of the payment to
Jean, as Jean is not a custodian for the purposes of the amendments.
The law does not recognise a payment from an agent (Jean) to its
principal (Patrick). The payment from Blue Trust to Jean will be
treated as a payment from Blue Trust to Patrick. Patrick will,
therefore, have a withholding tax liability based on being in receipt of
a fund payment from a managed investment trust.
What amount is liable to managed investment trust withholding tax?
1.164 The withholding tax liability arising out of a payment of an
amount from a managed investment trust to a beneficiary of the trust is
imposed on that part of the amount that is represented by a fund payment
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[Schedule 1, item 2, paragraph 840-805(2)(b) of the ITAA 1997].
An explanation of
what constitutes a fund payment is set out in paragraphs 1.45 to 1.57.
1.165 If no part of the amount represents a fund payment (eg, it is a
distribution of net income attributable to a dividend or interest received by
the managed investment trust), it will not give rise to a withholding tax
liability under these rules.
1.166 Further, the amount must represent a fund payment in relation to
an income year of a managed investment trust for that year [Schedule 1,
item 2, paragraphs 840-805(2)(a) and (b) of the ITAA 1997]. The conditions a trust
must satisfy in order to qualify as a managed investment trust are set out
in paragraphs 1.22 to 1.42.
1.167 If a managed investment trust pays an amount that is a fund
payment in relation to a prior income year and the trust was not a
managed investment trust for that prior year, no liability to managed
investment trust withholding tax will arise in respect of that amount.
Example 1.12
Red Trust, a managed investment trust for the 2009-10 income year,
makes a payment that is a fund payment for the 2008-09 income year
on 31 August 2009. Red Trust was not a managed investment trust in
the 2008-09 income year.
The payment made by Red Trust will not give rise to a managed
investment trust withholding tax liability. Rather, the general
provisions relating to the taxation of trusts, such as Division 6 of
Part III of the ITAA 1936, may apply.
Foreign resident beneficiary is recipient of amount
1.168 The recipient of the fund payment part must be a beneficiary of
the managed investment trust for a liability to withholding tax to arise.
This ensures if a payment is received by a recipient for any reason other
than because they are a beneficiary of the managed investment trust
(eg, because the managed investment trust has mistakenly paid an amount
to the recipient or has lent an amount to a recipient under a loan
agreement), a withholding tax liability will not arise.
1.169 In addition, the recipient will not have a withholding tax liability
if it receives the amount from the managed investment trust in a capacity
as trustee of another trust [Schedule 1, item 2, paragraph 840-805(2)(c)]. The
purpose of this requirement is to ensure that where there are a number of
interposed trusts between the managed investment trust and the ultimate
recipient of the amount, the liability to managed investment trust
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Distributions of managed investment trust income to foreign residents
withholding tax falls on the ultimate beneficiary rather than any
interposed trustee.
1.170 Finally, the recipient must be a foreign resident at the time the
recipient is paid the amount from the managed investment trust (or when
that amount is applied with or dealt with on the recipient's behalf or as
directed by the recipient) for a withholding tax liability to crystallise
[Schedule 1, item 2, paragraph 840-805(2)(d)]. If the recipient is a foreign
resident at any other time (such as at the time of present entitlement) but
not at the time of payment from the managed investment trust, a liability
to managed investment trust withholding tax will not arise. Rather, the
general provisions relating to the taxation of trusts such as Division 6 of
Part III of the ITAA 1936 may apply.
Example 1.13
Brady Trust, a managed investment trust, makes two fund payments of
$2,000 one to each of its two beneficiaries, Marcia and Jan. Both
payments are made on 1 December 2009. Marcia moves to Australia
and becomes an Australian resident on 21 November 2009.
Marcia is not a foreign resident at the time the amount representing the
fund payment is paid to her. Therefore, she is not liable to managed
investment trust withholding tax. However, if Marcia was presently
entitled to a share of the income of Brady Trust, she will be assessed
on that share of the net income of the trust under Division 6 of Part III
of the ITAA 1936.
Jan is a foreign resident at the time the fund payment is paid to her
from Brady Trust. Therefore, Jan will have a liability to managed
investment trust withholding tax.
1.171 A beneficiary that is a foreign resident may not be liable to
managed investment trust withholding tax where it otherwise might be, if
the beneficiary is paid an amount in the course of carrying on a business
through a permanent establishment in Australia [Schedule 1, item 2,
subsection 840-805(6) of the ITAA 1997]. This exception to the rule is discussed
in paragraphs 1.204 to 1.207.
Investing through an interposed entity that is a custodian
1.172 A liability to managed investment trust withholding tax is
imposed on a recipient that is paid an amount from a custodian where:
· all or part of the amount paid by the custodian is reasonably
attributable to a fund payment in relation to a year of income
of a managed investment trust for that year of income (`the
fund payment part');
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· the recipient is foreign resident at the time of payment, is a
beneficiary of a trust in respect of the received amount and is
not a beneficiary in the capacity of trustee of another trust;
and
· the custodian is either not a company or, if it is a company, is
acting in the capacity as agent of the foreign resident.
[Schedule 1, item 2, subsection 840-805(3) of the ITAA 1997]
1.173 Each of these conditions is considered below.
An entity is paid an amount reasonably attributable to a fund payment
1.174 Managed investment trust withholding tax is imposed on
amounts that are reasonably attributable to fund payments of a managed
investment trust. The trust must have been a managed investment trust for
the year of income to which the fund payment relates. [Schedule 1, item 2,
paragraph 840-805(3)(b) of the ITAA 1997]
1.175 If the trust did not satisfy the relevant test to be a managed
investment trust for the year of income to which the relevant fund
payment relates, a liability to managed investment trust withholding tax
can never arise in respect of that amount. There may be other provisions
of the income tax law that apply in respect of that amount (such as
Division 6 of Part III of the ITAA 1936).
1.176 There must be a nexus between the amount received from the
managed investment trust by the custodian (which would be the fund
payment or, if through another intermediary, an amount attributable to the
fund payment) and the on-payment made by the custodian. In most cases,
this nexus would be clear as custodians are generally required to on-pay
payments received on behalf of a customer within 24 hours of receipt, in
some cases, net of administration fees. If a nexus cannot be shown
between the payment received by the custodian and the on-payment made
by the custodian, the amount on-paid will not attract managed investment
trust withholding tax.
1.177 Paragraphs 1.45 to 1.57 provide explanation of what constitutes
a fund payment.
1.178 The rules on constructive payments and agency rules that apply
in the case of a payment directly from a managed investment trust are also
relevant for payments from a custodian. These rules are discussed in
paragraphs 1.158 to 1.163.
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Distributions of managed investment trust income to foreign residents
1.179 The effect of the displacement of the agency rules is that,
irrespective of whether the custodian is acting in the capacity of trustee or
agent of a foreign resident, the withholding tax liability will arise at the
time payment is made by the custodian. This avoids some of the
complexities otherwise associated with determining whether the
custodian-recipient relationship is one of agent-principal or
trustee-beneficiary.
1.180 Payment is used as the relevant benchmark for imposition of the
withholding tax liability for the same reasons as it is used in the case of a
direct payment from a managed investment trust (see paragraph 1.157).
A foreign resident beneficiary is the recipient of an amount from a
custodian
1.181 The requirement that the recipient is a foreign resident at the
time of payment, is a beneficiary of a trust in respect of the received
amount and is not a beneficiary in the capacity of trustee of another trust,
are similar conditions to those required for a direct fund payment from a
managed investment trust to attract a withholding obligation [Schedule 1,
item 2, paragraphs 840-805(3)(c) and (d) of the ITAA 1997]. Those requirements
are discussed in paragraphs 1.168 to 1.170.
1.182 A beneficiary that is a foreign resident may not be liable to
managed investment trust withholding tax where it otherwise might be, if
the beneficiary is paid an amount in the course of carrying on a business
through a permanent establishment in Australia [Schedule 1, item 2,
subsection 840-805(6) of the ITAA 1997]. This exception to the rule is discussed
in paragraphs 1.204 to 1.207.
The custodian is not a company
1.183 There is a special rule regarding liability to withholding tax that
may arise in respect of payments from a custodian. The withholding tax
rules will not apply to payments from custodians that are companies,
except where the custodian is a company acting as the recipient's agent.
[Schedule 1, item 2, paragraph 840-805(3)(e) of the ITAA 1997]
1.184 If the custodian is a company, the payment from the custodian
may be a dividend, in which case the payment may be subject to dividend
withholding tax, and not managed investment trust withholding tax.
1.185 However, if the company is acting as a foreign resident's agent
the payment from the company is not received by the foreign resident in
the capacity of a shareholder of the company (and therefore, dividend
withholding tax would not be appropriate).
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1.186 It is appropriate that a managed investment trust withholding tax
liability may arise in respect of a payment from a company acting as agent
of the foreign resident. In this case, the payment from the company will
be recognised because of the displacement of the agency rule in relation to
payments [Schedule 1, item 2, section 840-820 of the ITAA 1997]. The
displacement of the agency rules is discussed in paragraphs 1.161 to
1.163.
Other indirect investments through non-custodians
1.187 In relation to investments through non-custodians, a liability to
managed investment trust withholding tax will arise where the following
requirements are met:
· the beneficiary of a trust that is a non-custodian (ie, is not a
managed investment trust nor a custodian) is presently
entitled to a share of the income or capital of the trust and all
or part of that share is reasonably attributable to a fund
payment in relation to an income year of a managed
investment trust for that year [Schedule 1, item 2,
paragraphs 840-805(4)(a) and (b) of the ITAA 1997]; and
· the beneficiary is not a trustee of another trust in respect of
the share of the income or capital of the trust and is a foreign
resident at the time of present entitlement [Schedule 1, item 2,
paragraphs 840-805(4)(c) and (d) of the ITAA 1997].
An entity is presently entitled to an amount reasonably attributable to a
fund payment
1.188 In relation to this first requirement, it is necessary that:
· the beneficiary is presently entitled to a share of the income
or capital of the trust; and
· that share is reasonably attributable to a fund payment in
relation to an income year of a managed investment trust for
that year.
Liability based on present entitlement
1.189 Where the investment is undertaken through a trust that is not a
managed investment trust or a custodian, liability to managed investment
trust withholding tax is imposed on the basis of present entitlement. This
aligns with the approach currently adopted to the imposition of dividend,
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Distributions of managed investment trust income to foreign residents
interest and royalty withholding tax under Division 11A of the
ITAA 1936.
Treatment of capital of the trust
1.190 Subsection 95A(2) of the ITAA 1936 applies to deem a
beneficiary to be presently entitled in circumstances where the beneficiary
has a vested and indefeasible interest in any of the income of a trust but is
not actually presently entitled to that income.
1.191 These amendments extend the operation of section 95A, for the
purposes of section 840-805, to apply to capital of a trust in the same way
as it applies to income. [Schedule 1, item 2, subsection 840-805(5) of the
ITAA 1997]
1.192 The extension of subsection 95A(2) in this manner will deem a
beneficiary with a vested and indefeasible interest in a share of the capital
of a trust to be presently entitled to that share of capital. The concept of
present entitlement to capital has previously been recognised in the tax
law in the context of Division 6D of Part III of the ITAA 1936.
Example 1.14
An Australian resident trust, Purple Trust, receives a `fund payment'
from a managed investment trust that is made up of a $100 capital gain
(not eligible for the CGT discount) from taxable Australian property
and $100 rent. Purple Trust does not derive any other income during
the income year.
The trust has two beneficiaries with one, Greg, being an income
beneficiary and the other, Ben, a capital beneficiary. Both
beneficiaries are foreign residents. Greg is presently entitled to the
$100 income will have a withholding tax liability on $100.
Ben, who has a vested and indefeasible interest in the capital of the
trust, is deemed to be presently entitled to the $100 capital gain. This
is because Ben is presently entitled to a share of the capital of the trust
and that share is reasonably attributable to the $100 capital gain
component of the `fund payment'. Ben will also have a withholding
tax liability on $100.
An amount reasonably attributable to a fund payment
1.193 A withholding tax liability is only ever imposed on a share of
income or capital of a trust to which a beneficiary is presently entitled that
is reasonably attributable to a fund payment. As a fund payment
represents, in effect, a distribution of net income (less certain excluded
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Income Tax (Managed Investment Trust Transitional) Bill 2008
amounts and related deductions), a beneficiary can only ever be taxed on
amounts that form part of the net income of the trust.
1.194 It is necessary that the fund payment be a fund payment of a
trust that is a managed investment trust for the year of income to which
the fund payment relates. This nexus is necessary because a fund
payment is, broadly, calculated with reference to the net income of a trust
(less excluded amounts and related deductions) and, therefore, potentially
a distribution from any trust could qualify as a fund payment. [Schedule 1,
item 2, paragraph 840-805(4)(b) of the ITAA 1997]
A foreign resident beneficiary is presently entitled to the amount
1.195 A beneficiary of a trust (other than a managed investment trust
or custodian) that is not a trustee of another trust is liable to managed
investment trust withholding tax if the beneficiary is a foreign resident
becoming presently entitled to a share of the income or capital of the trust
that is attributable to a fund payment. [Schedule 1, item 2,
paragraphs 840-805(4)(c) and (d) of the ITAA 1997]
1.196 If the beneficiary is not a foreign resident at the time of
becoming presently entitled but is a foreign resident at a later time (such
as at the time of payment or year end), a liability to managed investment
trust withholding tax will not arise. However, other provisions of the
income tax law may apply.
Example 1.15
Moe is a beneficiary of an Australian resident trust. The trust is neither
a managed investment trust nor a custodian. The trust's net income
includes an amount that is reasonably attributable to a fund payment of
a managed investment trust (the Simpson Trust). The fund payment
relates to the income year in which the Simpson Trust is a managed
investment trust.
Moe is an Australian resident beneficiary at the time he is presently
entitled to a share of the income of the Australian resident trust. He
then migrates to the US and is a US resident at the time an amount,
representing his interest in the trust income, is paid to him. He remains
a US resident for the remainder of the income year.
As Moe is not a foreign resident at the time of present entitlement, he
will not be subject to managed investment trust withholding tax on his
share of the net income of the trust that is reasonably attributable to a
fund payment. Rather, the provisions of Division 6 of Part III of the
ITAA 1936 will apply (see section 98 of that Act).
1.197 A beneficiary that is a foreign resident may not be liable to
managed investment trust withholding tax where it otherwise might be if
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Distributions of managed investment trust income to foreign residents
the beneficiary becomes presently entitled to an amount in the course of
carrying on a business through a permanent establishment in Australia
[Schedule 1, item 2, subsection 840-805(6) of the ITAA 1997]. This exception to the
rule is discussed in paragraphs 1.204 to 1.207.
How does the rule apply to interposed partnerships?
1.198 Although these rules for liability for managed investment trust
withholding tax are couched in terms of a person being a beneficiary in a
trust, they could apply where a partnership in Australia receives a
payment from a non-custodian trust which is reasonably attributable to an
earlier fund payment from a managed investment trust. In this case, it is
intended that the liability to managed investment trust withholding tax is
imposed on the partner.
1.199 Therefore, just as there may be an obligation for a partnership to
withhold an amount from a payment it receives (if it is receiving it for a
foreign resident partner that is or becomes entitled to the amount), there
will be a similar crystallisation of a liability to managed investment trust
withhold tax on the partner.
Example 1.16
MI Trust
$100 fund payment
NC Trust
$100 distribution of trust income
Smart Brothers
Partnership
$40 partnership distribution
Maxwell
Smart Brothers is a partnership that is presently entitled to receive a
$100 distribution from NC Trust (a non-custodian) which is reasonably
attributable to a fund payment from MI Trust (a managed investment
trust). Smart Brothers is paid the amount in Australia and both
MI Trust and NC Trust provide information in relation to the payment
as required under section 12-395.
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Maxwell is a partner of Smart Brothers and is a foreign resident at the
time he becomes entitled to receive $40 (as its partnership
distribution). Smart Brothers has an obligation (under
subsection 12-395(4)) to withhold an amount in respect of the $40 to
which Maxwell becomes entitled.
Maxwell would be considered to be a beneficiary of the NC Trust and
is presently entitled to a share of the income of the trust that is
reasonably attributable to a fund payment. Maxwell is liable to pay
managed investment trust withholding tax. (Subsection 840-805(4) of
the ITAA 1997.)
Note that if in this example Smart Brothers held a direct investment in
MI Trust (and NC Trust did not exist) Maxwell's liability to
withholding tax would instead arise under subsection 840-805(2),
being an amount that is applied or dealt with by a managed investment
trust as directed (under paragraph (a) of that subsection).
What happens where the non-custodian intermediary is an agent?
1.200 A foreign resident may invest in a managed investment trust
through an agent that is not a custodian (ie, a `non-custodian agent').
Agency rules are not displaced
1.201 The changes that displace the agency rule only apply in the case
of payments to and from a custodian (refer to the discussion in
paragraphs 1.161 to 1.163). Therefore, a payment from a managed
investment trust to a non-custodian agent will be taken to be a direct
payment from a managed investment trust to the foreign resident
principal.
1.202 The liability rules in subsection 840-805(2) of the ITAA 1997
for liability applying to direct investment in a managed investment trust
are applicable. Those rules are discussed in paragraphs 1.151 to 1.171.
1.203 The relevant event giving rise to a liability for managed
investment trust withholding tax is the payment from the managed
investment trust to the non-custodian agent. Where the managed
investment trust applies or deals with an amount on the behalf of the
non-custodian agent or as the non-custodian agent directs, it will be take
to make a payment to the principal.
An exception if business is carried on through an Australian permanent
establishment
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Distributions of managed investment trust income to foreign residents
1.204 There is a general exception to a liability for managed
investment trust withholding tax where an entity is paid a fund payment
part (including constructive payment) or becomes entitled to it in the
course of a business carried on by the entity at or through an Australian
permanent establishment. [Schedule 1, item 2, subsection 840-805(6) of
the ITAA 1997]
1.205 This exception is relevant in respect of all situations where there
may be a liability to managed investment trust withholding tax --
involving the payment of an amount from either a managed investment
trust or a custodian, or an entitlement to an amount from a non-custodian.
1.206 This rule is consistent with the existing rules applying to interest
and dividend payments paid to an entity in carrying on business in
Australia at or through a permanent establishment in Australia (in
paragraph 128B(3)(h) and subsection 128(3E) of the ITAA 1936,
respectively).
1.207 If a foreign resident is carrying on a business in Australia
through a permanent establishment but is paid a fund payment part that is
not received in the course of a business carried on at or through an
Australian permanent establishment, it will not be covered by this
exception.
Amounts on which managed investment trust withholding tax is imposed
are non-assessable and non-exempt income
1.208 Income on which managed investment trust withholding tax is
payable is made not assessable and not exempt income of an entity
[Schedule 1, item 2, section 840-815 of the ITAA 1997]. This is consistent with the
purpose of the new managed investment trust withholding tax regime to
impose a final rate of withholding tax on distributions subject to managed
investment trust withholding tax.
1.209 It is also consistent with the approach adopted in Division 11A
of Part III of the ITAA 1936, which (except in some limited cases) makes
dividends, interest and royalties that are subject to the withholding tax not
assessable and not exempt income of a person (under section 128D of the
ITAA 1936).
1.210 Making the income non-assessable and non-exempt income of
an entity ensures that:
· the amounts upon which the tax is imposed are not assessable
under any other provision of the income tax law in the hands
of any entity; and
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· deductions (in respect of expenses relating to the derivation
of that income) cannot be claimed as no relevant amount is
included in assessable income (refer to subsection 8-1(2) of
the ITAA 1997).
1.211 Noting that although these amounts are non-assessable and
non-exempt income, there is a special rule (that applies in certain cases) in
relation to the calculation of the liability to managed investment trust
withholding tax for the first income year of operation of these
amendments. These transitional rules reduce the amount on which the
income tax liability is calculated by the relevant losses or outgoings
[Schedule 1, item 23, subsections 840-805(1), (3) and (4) of the IT (TP) Act 1997].
1.212 Being not assessable and not exempt, the income will not affect
the calculation of an entity's tax loss for a year of income under
section 36-10 of the ITAA 1997. Also, if an entity makes a tax loss under
section 36-10 of the ITAA 1997, the managed investment trust
withholding tax will be payable regardless.
Example 1.17
Wilma Flintstone is a foreign resident who has investments in an
Australian rental property and a managed investment trust.
Her assessable income from the Australian rental property is $10,000
for the 2009-10 year of income. She has allowable deductions relating
to that income of $12,000. In the same income year she also receives a
distribution of $3,000 from the managed investment trust, which
consists entirely of a `fund payment'.
Wilma will be liable to managed investment trust withholding tax on
the distribution of $3,000 received from the managed investment trust.
This distribution does not affect the calculation of her tax loss.
Consequently, Wilma will have a tax loss of $2,000 for the year of
income.
1.213 The effect of the changes is that the amount subject to managed
investment trust withholding tax is not assessable and not exempt, not
only in the hands of the entity liable to the managed investment trust
withholding tax, but also in the hands of any other entity (including the
trustee of a trust) that would otherwise have been subject to tax in respect
of that income.
Example 1.18
On 1 August 2012, the Purple Managed Investment Trust makes a
payment of $100 to the Orange Custodian (an Australian resident trust)
all of which is identified as a fund payment in relation to the 2011-12
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Distributions of managed investment trust income to foreign residents
income year. The Orange Trust on-pays $100 to Mr Green at an
address in Great Britain and withholds $7.50, which it remits to the
Commissioner of Taxation in Australia.
Mr Green has a liability to withholding tax equal to $7.50 against
which he can claim as a credit the amount withheld by Orange
Custodian. The $100 amount he receives is not assessable and is not
exempt income of each entity by reason of section 840-815 of the
ITAA 1997.
While the $100 received by Orange Custodian (a trust) forms part of
the net income of the trust, section 840-815 has the result that neither
the trustee is assessed under section 98 of the ITAA 1936 on the
amount, nor is Mr Green assessed under section 98A of the ITAA 1936
on the amount.
What is the rate of managed investment trust withholding tax?
1.214 Upon establishing a liability to pay managed investment trust
withholding tax, this liability is formally imposed, and the applicable rate
of tax is provided for in:
· the Income Tax (Managed Investment Trust Transitional)
Bill 2008 for the first income year of operation of these
amendments for certain taxpayers [Schedule 1, item 23,
section 840-805 of the IT (TP) Act 1997]; and
· the Income Tax (Managed Investment Trust Withholding
Tax) Bill 2008 for both the first income year of operation of
these amendments for certain taxpayers and for later income
years [Schedule 1, item 2, subsection 840-805(1) of the ITAA 1997].
1.215 For the transitional year of operation of these amendments and
subsequent years, the rate of withholding tax is dependent on the
residency of the foreign investor.
1.216 Where the foreign investor is resident in a jurisdiction with
which Australia has effective exchange of information for taxation
matters, the rates of withholding tax will be as follows:
· 22.5 per cent; for fund payments made in relation to the
income year commencing the first 1 July following the date
of Royal Assent (the rate is imposed by the Income Tax
(Managed Trust Transitional) Bill 2008);
· 15 per cent; for fund payments made in relation to the
income year commencing the second 1 July following the
date of Royal Assent; and
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· 7.5 per cent; for fund payments made in relation to income
years commencing the third 1 July following the date of
Royal Assent.
1.217 The list of jurisdictions with which Australia has effective
exchange of information will be set out in regulations to the TAA 1953.
1.218 Australian taxation law defines what is meant by `Australian
resident' and `foreign resident' (subsection 995 1(1) of the ITAA 1997).
It does not prescribe when an entity will be considered a resident of a
particular foreign country.
1.219 For this reason, these rules provide that an entity will be
considered a resident of an information exchange country where the entity
is a resident of that country for the purposes of the taxation laws of that
country.
1.220 There will be circumstances where an entity will be unable to
apply the above test. For example, the test cannot be applied in the case
of those information exchange countries that do not have taxation laws (as
is the case with some territories with which Australia has Tax Information
Exchange Agreements). Alternatively, there may be a case where a
country does have taxation laws, however, those laws do not determine
the residency of the entity in question and, accordingly, the test cannot be
applied.
1.221 In cases where the country's taxation laws do not determine the
residency of the entity, the foreign resident will be considered a resident
of an `information exchange country' if:
· the foreign resident is an individual, and ordinarily resident
in that country; or
· in any other case, the entity was incorporated or formed in
that country and is carrying on business in that country.
1.222 A person will be considered to be `ordinarily resident' in a
country if that is the place where they normally reside.
1.223 If this second test of residency is relevant and the entity is not an
individual, it will be considered a resident of an information exchange
country if the entity was both formed (or incorporated) in that country and
is carrying on business in that country. By having the carrying on
business test in conjunction with the place of incorporation or formation
test, only entities actually undertaking genuine business activities in that
country can meet the second test.
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Distributions of managed investment trust income to foreign residents
1.224 In any other case, the withholding tax liability will be imposed
at 30 per cent. The rate is imposed by the Income Tax (Managed
Investment Trust Withholding Tax) Bill 2008.
When is managed investment trust withholding tax due and payable?
1.225 Managed investment trust withholding tax is due and payable at
the end of 21 days after the end of the month in which the managed
investment trust withholding tax liability was imposed [Schedule 1, items 2
and 23, section 840-810 of the ITAA 1997 and section 840-810 of the IT (TP) Act 1997].
This is consistent with the time at which the withholding taxes applying to
dividends, interest and royalties, as imposed in Division 11A, are due and
payable.
1.226 In the case of payments from a managed investment trust or
custodian, this will be 21 days from the end of the month in which the
payment from the managed investment trust or custodian to a foreign
resident was made. [Schedule 1, items 2 and 23, paragraph-840-810(1)(a) of the
ITAA 1997 and of the IT (TP) Act 1997]
1.227 In cases where the liability to managed investment trust
withholding tax arose as a consequence of a beneficiary being presently
entitled to an amount of trust income or capital, the liability will be due
and payable at the end of 21 days at the end of the month in which present
entitlement arose. For example, at the time a non-custodian intermediary
receives a fund payment from a managed investment trust. [Schedule 1,
items 23 and 2, paragraph 840-810(1)(b) of the IT (TP) Act 1997 and of the ITAA 1997]
1.228 The managed investment trust withholding tax liability will
generally be satisfied by another entity withholding as required under
Schedule 12-H of Schedule 1 to the TAA 1953. Such amount will be
available as a credit to the foreign resident to reduce their managed
investment trust withholding tax liability. This is discussed further in
paragraphs 1.234 to 1.238.
1.229 Where withholding does not take place, or is not sufficient to
discharge the foreign resident's withholding tax liability in its entirety,
there will be an amount of withholding tax liability that will remain due
and payable.
What happens if the withholding tax remains unpaid?
1.230 Once due and payable, the managed investment trust
withholding tax becomes a debt due to the Commonwealth. The
Commissioner may give a notice of the amount of withholding tax due
and the date on which that tax became due and payable [Schedule 1, items 23
and 2, subsection 840-810(2) of the IT (TP) Act 1997 and subsection 840-810(3) of the
ITAA 1997]. This is consistent with the approach adopted in relation to
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other final withholding taxes in Division 11A of Part III of the
ITAA 1936.
1.231 If it remains unpaid, a liability for the general interest charge
arises from the date upon which the liability was due to be paid. The
general interest charge is calculated on the unpaid withholding tax and
any accumulated general interest charge from the date the withholding tax
was due to be paid until the last day on which the withholding tax on
general interest charge thereon remains unpaid. [Schedule 1, items 23 and 2,
subsection 840-810(2) of the IT (TP) Act 1997 and of the ITAA 1997]
1.232 The general interest charge is worked out under Division 1 of
Part 11A of the TAA 1953.
1.233 The ascertainment of an amount of managed investment trust
withholding tax is not an assessment. [Schedule 1, item 2, subsection 840-810(4)
of the ITAA 1997]
How is managed investment trust withholding tax discharged?
Credit for amounts withheld
1.234 An entity that has a liability to managed investment trust
withholding tax is entitled to a credit against their liability where:
· their ordinary or statutory income includes an amount that is
represented by or reasonably attributable to a fund payment;
and
· the entity has borne all or part of an amount withheld from
the payment.
[Schedule 1, item 44, section 18-32]
1.235 This crediting provision is based on existing crediting provisions
that apply in the case of dividends, interest and royalties. It is capable of
applying to both Australian and foreign residents.
1.236 The first requirement for a credit is that the entity's ordinary or
statutory income includes an amount that is represented by or reasonably
attributable to a fund payment. Although the imposition of managed
investment trust withholding tax will result in the amount being
non-assessable non-exempt it can still be described as ordinary or
statutory income within the meaning of the ITAA 1997.
1.237 The entity must have borne all or part of an amount withheld in
respect of the amount represented by or reasonably attributable to a fund
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Distributions of managed investment trust income to foreign residents
payment. An entity will have `borne' the tax where a withholding amount
has been deducted from the payment, such that the entity has borne the
economic incidence of that tax.
Example 1.19
Trigg Trust is a managed investment trust. It makes two fund
payments to two unit holders: Harry, an Australian resident, and Sam,
a resident of Hong Kong. Neither Harry nor Sam is under a legal
disability and both are presently entitled to the trust income and capital
of Trigg Trust in equal proportions at the time of payment.
Harry was living in the UK when he acquired units in Trigg Trust and
has not yet advised Trigg Trust of his Australian address. Trigg's
records indicate a UK address for Harry.
The income of the Trigg Trust is $2,000, which equals the net income
of the trust.
From the gross fund payment of $1,000 Trigg Trust makes to Harry,
$75 is withheld (7.5 per cent of $1,000). As such, Harry receives
$925.
Harry, being an Australian resident, does not have a managed
investment trust withholding tax liability. As he is not under legal
disability and is presently entitled to a half share of trust income of
Trigg Trust, Harry is liable to tax on that share of the net income of the
trust at year end, pursuant to Division 6 (see section 97 of the
ITAA 1997). Harry must, therefore, include $1,000 ($925 + $75) in
his assessable income. As Harry's ordinary or statutory income is
represented by a fund payment and he has borne all of the tax withheld
by Trigg Trust ($75) on that fund payment, he is entitled to claim a
credit for $75 against his income tax liability.
Trigg Trust's records indicate that Sam has directed payment to be
made in Hong Kong. Trigg Trust, therefore, withholds $300 from the
fund payment of $1,000 that it makes to Sam. The net payment
received by Sam is $700.
As Hong Kong, is not an `information exchange country', Sam is liable
to managed investment trust withholding tax at the rate of 30 per cent
on the $1,000 fund payment from Trigg Trust. This means Sam has a
managed investment trust withholding tax liability of $300 (30 per cent
of $1,000). His ordinary income includes an amount of $1,000
represented by a fund payment and he has borne all of the tax withheld
by Trigg Trust ($300) from that fund payment. Therefore, he is
entitled to a credit of $300. The credit fully discharges Sam's liability
to managed investment trust withholding tax leaving no amount due
and payable.
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1.238 If the credit to which an entity is entitled is not sufficient to fully
discharge the entity's managed investment trust withholding tax liability,
the entity will have a debt to the Commonwealth remaining due and
payable and subject to the general interest charge. Further discussion can
be found in paragraphs 1.230 to 1.232.
Credits for administrative penalties
1.239 If an entity pays an administrative penalty under these rules for
failure to withhold an amount as required, or failure to give a notice or
make information available, the foreign resident liable to the managed
investment trust withholding tax in respect of the amount upon which the
penalty was imposed (or an amount attributable to that amount) will be
entitled to a credit for the amount of the penalty paid by the entity
including any general interest charge [Schedule 1, items 45 to 51, section 18-35].
This is consistent with the approach adopted in respect of dividends,
interest and royalties.
1.240 The amount of the credit cannot exceed the managed investment
trust withholding tax liability.
1.241 If all or part of the amount of penalty or general interest charge
paid by the entity liable to the administrative penalty is subsequently
remitted by the Commissioner, the amount of the credit available to the
foreign resident liable to the managed investment trust withholding tax is
reduced and the Commissioner must pay the amount of penalty or general
interest charge remitted to the entity liable to pay the penalty. [Schedule 1,
items 48 to 51, paragraphs 18-35(2)(a) and (c) and (3)(a) and (c)]
1.242 The entity liable to pay the administrative penalty is entitled to
recover the amount of the penalty, capped at the withholding tax liability,
from the foreign resident liable to that tax. For further discussion, see
paragraphs 1.141 to 1.143 and 1.148 to 1.150.
Application and transitional provisions
1.243 The amendments contained within this Schedule apply to fund
payments in relation to income years starting on or after the 1 July
following the day on which this Bill receives Royal Assent [Schedule 1,
item 58]. Transitional provisions apply to residents of information
exchange countries for the first income year of operation of these
amendments [Schedule 1, item 23, Division 840 of the IT (TP) Act 1997].
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Distributions of managed investment trust income to foreign residents
1.244 The Income Tax (Managed Investment Trust Transitional) Bill
2008 and Income Tax (Managed Investment Trust Withholding Tax) Bill
2008 commence from the day on which they receive Royal Assent.
Consequential amendments
Interaction with Division 6
Amounts subject to managed investment trust withholding tax or
withholding under the new rules are not liable to tax under Division 6
1.245 Under the current non-final withholding rules, an amount subject
to withholding is excluded from taxation in the hands of the trustee under
Division 6 of Part III of the ITAA 1936. This is achieved through a
general rule that provides that sections 98, 99 and 99A of the ITAA 1936
do not apply to the net income of a trust estate of a year of income to the
extent it represents:
· income to which a beneficiary was presently entitled; and
· was represented by or reasonably attributable to an amount
from which an entity was required to withhold an amount
under the non-final withholding regime.
1.246 In the absence of this provision, section 98 would have applied
to tax a trustee of a trust on the share of the net income of the trust as
represented the share of the income of a trust to which a foreign resident
beneficiary was presently entitled.
1.247 For the non-final withholding rules (which are being repealed by
this Schedule) it was necessary to also exclude the operation of
sections 99 and 99A, to avoid taxation to the trustee arising as a
consequence of subsection 99(3) of the ITAA 1936.
1.248 Under the new final managed investment trust withholding tax
rules being inserted by this Schedule, it is not necessary to retain the
general rule to exclude the operation of sections 98, 99 and 99A. This is
because the new final withholding tax regime makes amounts subject to
managed investment trust withholding tax non-assessable and non-exempt
income with the result that Division 6 of the ITAA 1936 will not operate
to tax these amounts in the hands of any entity. Further discussion of this
can be found in paragraphs 1.208 and 1.213.
1.249 The non-final withholding tax rules also contained a specific
rule that excluded the operation of subsection 98(4) of the ITAA 1936 in
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certain cases. This rule provided that subsection 98(4) did not apply to so
much of the net income of a trust as represented income to which a
beneficiary was presently entitled and that gave rise to an amount from
which an entity was required to withhold an amount under the non-final
withholding regime.
1.250 The new rules retain the specific rule. Without this rule,
circumstances may arise in which an amount that flows to a managed
investment trust and forms part of a fund payment subsequently made by
the trust, could have been subject to taxation under subsection 98(4) of the
ITAA 1936 prior to reaching the managed investment trust. [Schedule 1,
item 6, section 99G of the ITAA 1936]
Payments made too late to be fund payments
1.251 Consistent with the existing non-final withholding arrangements,
in order to qualify as a fund payment and, therefore, be eligible for
withholding, it is necessary for the payment to be made (including
constructively made) by the managed investment trust within three
months of the end of the income year or within such later period as
allowed by the Commissioner. Further discussion on the requirement to
pay out the net income of the trust (net of excluded amounts and related
deductions) is in paragraphs 1.58 to 1.62.
1.252 Consistent with the change made to the definition of `fund
payment', these rules provide that a capital loss from a CGT event that
happens in relation to a CGT asset that is not taxable Australian property
is an excluded amount. [Schedule 1, item 7, paragraph 99H(3)(e) of the
ITAA 1936]
1.253 If a foreign resident beneficiary is presently entitled to a share of
the income of the trust and that share of the net income is not paid within
this period, the trustee will be assessed as if no-one was presently entitled
to the share of income. The trustee of the managed investment trust will
then be assessed on the share under section 99 or 99A of the ITAA 1936.
The purpose of this approach is to deter trustees from accumulating
income within the managed investment trust.
What happens if a beneficiary is an Australian resident for part of a
year?
1.254 Division 6 of the ITAA 1936 may still apply to tax certain
amounts where, for part of the year, the beneficiary was an Australian
resident. In these cases there is no liability to managed investment trust
withholding tax in respect of those fund payments paid to an investor
while an Australian resident.
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Distributions of managed investment trust income to foreign residents
Example 1.20
Abbey is an investor in the MI Trust (a managed investment trust).
MI Trust makes a fund payment of $50 on 1 September 2009, at which
time Abbey is an Australian resident. MI Trust is not required to
withhold from this amount.
On 1 April 2010 MI Trust makes a final fund payment of $200. At the
time of payment Abbey is a resident of the UK. MI Trust withholds an
amount of $30 (15 per cent of $200) from the payment. At year end,
Abbey would be considered to be presently entitled to $250 of the net
income of the trust for the purposes of Division 6 of the ITAA 1936.
The $200 is a non-assessable amount because managed investment
trust withholding tax is payable. However, the $50 paid to Abbey
while she was an Australian resident is an amount that the trustee
would be assessed on under subsection 98(2A) of the ITAA 1936.
General
1.255 Many consequential amendments result from inserting new
Subdivision 840-M into new Division 840 of the ITAA 1997 and the
IT (TP) Act 1997. [Schedule 1, items 2, 3, 12, 14, 15, 22, 24, 55 and
57, section 840-1 of the ITAA 1997, section 840-800 of the ITAA 1997, subsection 5(2A)
of the Income Tax Act 1986, section 11-55, subparagraph 118-12(2)(a)(vii),
paragraph 118-12(2)(a) and subsection 995-1(1) of the ITAA 1997, subsection 8AAB(5),
items 39A and 39B in the table in subsection 250-10(2), item 6 in the table in
subsection 340-10(2)]
1.256 Other consequential amendments have resulted from repealing
the existing Subdivision 12-H and reinserting a new Subdivision 12-H
[Schedule 1, items 4 to 6, 13, 17, 19, 25 to 37, 39 to 43, 52 to 54 and 56, section 99G of
the ITAA 1936, subsection 995-1(1) of the ITAA 1997, note to subsection 10-5(1),
item 26 in the table in subsection 10-5(1), subparagraph 12-315(1)(c)(vii),
subsection 15-10(3), note to subsection 15-15(1), subsection 15-35(1), note 2 to
section 16-5, note to subsection 16-153(4), note to subsection 16-157(1), heading to
Subdivision 16-D, section 16-195, paragraph 16-195(b), section 18-1,
subsection 18-10(1), heading to section 18-30, paragraphs 20-35(2)(a) and (b),
subsection 45-120(3), paragraph 298-5(c)]
1.257 Definitions have also been inserted into the Dictionary for
`custodian' `information exchange country', and `managed investment
withholding tax'. [Schedule 1, items 16, 18, 20 and 21, subsection 995-1(1) of the
ITAA 1997]
Other obligations
Remittance of amounts withheld
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Income Tax (Managed Investment Trust Transitional) Bill 2008
1.258 An entity is required to remit amounts withheld under these
rules to the Commissioner in accordance with the existing remittance rules
set out in Subdivision 16-B.
1.259 The time when amounts must be paid to the Commissioner will
vary depending on whether the withholder is a large, medium or small
withholder.
1.260 Section 16-80, which applies to these rules, provides that if an
entity fails to pay an amount withheld by the time required, it will be
liable to pay the general interest charge. The general interest charge will
apply on the unpaid amount for the period starting on the day by which
the amount was due to be paid and ending on the last day when the unpaid
amount (including accumulated general interest charge) is unpaid.
Requirement to issue a payment summary
1.261 Where an entity is required to withhold an amount under these
rules, the entity is also required, at year end, to issue an annual payment
summary to the recipient of the payment from which withholding was
required.
1.262 The rules provide that a payment summary:
· must cover each of the payments from which withholding
was required;
· may be in electronic form; and
· must be given not later than 14 days after the end of the
income year of the managed investment trust to which the
relevant withholding payments relate, or within a longer
period allowed by the Commissioner.
1.263 Withholders are allowed additional time within which to issue a
payment summary (the standard time is 14 days after the end of the
financial year, pursuant to subsection 16-155(1)) in recognition of the fact
managed investment trusts have a period of three months, and up to
six months, after the end of the income year during which a payment of
net income (less excluded amounts and related deductions) may qualify as
a fund payment. For further discussion of the time period within which
fund payments must be made, see paragraphs 1.58 to 1.62.
1.264 As with the current non-final withholding rules, the new final
withholding rules require the payment summary to set out:
· the names of the payer and recipient;
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Distributions of managed investment trust income to foreign residents
· the tax file number and the Australian Business Number of
the recipient, if provided to the payer by the recipient;
· the total of the payments from which withholding took place
and the total of the amounts withheld; and
· the income year of the managed investment trust to which
those withholding payments relate.
REGULATION IMPACT STATEMENT
Background
1.265 Australia is considered to be one of the major markets for funds
management, with the industry managing assets worth more than
$1.4 trillion. The industry is expected to continue its strong growth, with
assets under management anticipated to exceed $2.5 trillion by 2015.
This growth has been largely driven by the superannuation sector.
1.266 A feature of the industry is its increasing globalisation, with
20 per cent of assets held by Australian managed funds now being
overseas assets. This trend is likely to continue where the supply of
appropriate domestic investment assets is unable to meet demand.
Foreign investment represents approximately 5 per cent of funds under
management.
1.267 The property trust sector forms a key part of the industry, and
comprises around 40 per cent of Australian unit trusts. Australian listed
property trusts (where the units are listed on the Australian Securities
Exchange) currently represent 12 per cent of the world's listed real estate
assets, despite Australia geographically comprising only 2 per cent of
global real estate. Assets in property trusts are growing strongly, with
over 40 per cent of these assets comprising overseas property. This sector
is more internationalised than the industry generally. Foreign investment
in Australian property trusts amounts to approximately 28 per cent of total
investment in those trusts. Much of this is managed by Australian
custodians.
1.268 Foreign resident investors are only liable to Australian tax on
Australian source income. Foreign source income of foreign residents
(eg, income from overseas properties held by Australian trusts), is exempt
from Australian tax.
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Income Tax (Managed Investment Trust Transitional) Bill 2008
1.269 Australian source dividend, interest and royalty income is
subject to final withholding tax at the rates of 30 per cent, 10 per cent and
30 per cent respectively (although these rates may be lower under
Australia's tax treaties). Non-final withholding at the rate of 30 per cent
applies to distributions of other Australian source income (predominantly
income related to property; ie, rental income and capital gains) to a
foreign resident.
Problem
1.270 Industry has expressed concern at the low level of foreign
investment in the industry generally (although foreign investment in the
property trust sector is higher than that in the industry generally).
Arguably, the industry is well placed to attract a higher level of foreign
investment given the existence of a well developed regulatory regime,
strong reputation for funds management and a relatively stable, well
performing economic environment.
1.271 While industry itself has noted an inward looking focus, largely
due to its domestic success, there is merit in pursuing policy options that
could further increase the level of foreign investment in Australian
managed investment trusts.
1.272 Industry has identified tax (a high withholding tax rate on
distributions from property) and non-tax (regulator responsiveness and
limited advocacy/promotional efforts) factors that it believes impede the
ability of Australian managed investment trusts to compete for foreign
investment.
1.273 In particular, industry contends the existing non-final
withholding rate (currently 30 per cent) that primarily applies to
distributions of Australian rental income and capital gains from real
property is high relative to that applied in its competitor countries and that
this headline tax rate is influential in foreign investment location
decisions, irrespective of the actual amount of tax foreign residents
ultimately pay in their home countries.
Objectives of Government action
1.274 This proposal aims to increase Australia's funds management
export earnings by increasing Australia's attractiveness as an investment
destination. This is to be achieved by removing a key impediment to the
industry's long-term ability to compete globally, that is, the relatively high
level of withholding tax.
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Distributions of managed investment trust income to foreign residents
1.275 The proposal is a part of the Government's election commitment
to secure Australia's place as a financial hub in the Asia-Pacific region.
The Government's election commitment contemplated replacing the
current non-final withholding tax rate of 30 per cent with a final
withholding tax of 15 per cent.
Options that may achieve objectives(s)
1.276 The stated objective may be achieved in a number of ways:
· Option 1: Reduction of the headline withholding tax rate
through Australia's tax treaties.
· Option 2: Reduction of the headline withholding tax rate in
domestic legislation for all foreign residents.
· Option 3: Reduction of the headline withholding tax rate in
domestic legislation for residents of foreign jurisdictions with
which Australia has effective exchange of information for tax
matters.
· Option 4: No change to the withholding tax rate, other
non-taxation initiatives to be pursued.
Impact analysis
Impact group identification
1.277 The main groups to be impacted by this proposal are:
· Australian managed investment trusts (predominantly
Australian property trusts holding Australian real property);
· intermediaries (custodians and non-custodians) operating in
the industry (Australian service providers that assist with the
administration of investment portfolios or agents for foreign
resident investors);
· foreign investors (individuals, companies, superannuation
funds and other trusts);
· Australian investors; and
· the Australian Government.
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1.278 Industry has consistently argued the interim 30 per cent
withholding tax rate is the key factor discouraging foreign investment, on
the basis it is significantly higher than rates imposed on similar
investments by other countries. As a non-final tax, foreign investors are
required to lodge an Australian tax return to receive a credit for the tax
withheld and/or to claim a tax deduction for any expenses relating to the
income. This results in compliance costs for the investor and acts as a
disincentive to investment in Australia.
1.279 Industry has proposed the new withholding tax rate be set at
15 per cent, which is, broadly, the average rate applied by other
comparable countries. Although setting the withholding tax rate at a
higher rate (such as 20 per cent) would mitigate some of the revenue costs
associated with this proposal, it may still be uncompetitive and could,
therefore, fail to encourage foreign investment. The proposal has,
therefore, been examined on the basis of a transition to a final withholding
tax rate of 7.5 per cent, which is more comparable within the Asia-Pacific
region.
1.280 As a final tax, eligible foreign investors would be relieved of the
compliance burden of filing Australian tax returns in respect of this
income. However, for some foreign investors this benefit would be offset
by the denial of Australian deductions for expenses associated with their
investment, which could result in a higher overall tax liability than under
the current system.
Option 1: Implementing the new final withholding tax through new or
revised bilateral tax treaties
Background
1.281 This approach would be consistent with the June 2007
recommendation of the Senate Standing Committee on Economics, which
advocated reducing the withholding tax payable on distributions from
Australian managed investment trusts to foreign residents through
Australia's tax treaties where reciprocal benefits were offered to
Australian investors.
Benefits
1.282 On the basis that foreign resident investors' decisions are
motivated by the headline withholding tax rate (as is industry's
contention), Option 1 would enable Australia to target residents of those
countries most likely to be the source of additional foreign investment,
which would maximise the benefits of a reduced withholding rate.
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Distributions of managed investment trust income to foreign residents
1.283 Implementation of a reduced withholding tax on a
treaty-by-treaty basis would allow Australia to confine the benefits of the
reduced withholding tax rate to residents of countries that are prepared to
offer reciprocal benefits to Australian investors. This could mitigate the
cost to revenue associated with reducing the withholding tax rate. It could
also facilitate other policy initiatives that seek to combat the use of tax
havens and other harmful tax practices.
1.284 The Australian Government would potentially gain revenue
from enhanced activity of Australian based fund managers and custodians.
The Australian Taxation Office (ATO) would potentially incur lower
administration costs as foreign residents would not be filing Australian tax
returns (although to date there is little evidence this occurred).
1.285 Sustained foreign investment may maintain unit values for
Australian resident investors (although, given the Australian market is
nearly fully securitised, any additional foreign demand, together with
continuing domestic demand, could create broader inflationary pressure
on underlying property values).
Costs
1.286 Option 1 would take several years to implement, due to the
protracted nature of the tax treaty negotiation process. The reduced
withholding tax rate would only take effect upon the conclusion of each
new or revised tax treaty, with investors from different countries
becoming eligible for the reduced rate at different times. This could
stagger the benefits that industry anticipates would flow from a reduction
in the withholding tax rate.
1.287 Compliance costs for Australian managed funds and custodians
would be adversely affected because this approach would require them to
ascertain whether each foreign investor was eligible for the final
withholding tax rate. Australian managed funds and custodians would
also be required to update their withholding systems following the
conclusion of each tax treaty, which would entail additional ongoing
compliance costs, although it should be noted this would occur anyway in
respect of payments of dividends, interest and royalties.
1.288 Foreign investors would become eligible for the reduced
withholding tax rates at different times, which may induce certain
investors to undertake undesirable practices such as `treaty shopping' to
access the concessional rate. Additional administrative measures may be
required to address this.
1.289 The revenue costs associated with Option 1 have not been
quantified as the impact of tax treaties are only determined when they are
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Income Tax (Managed Investment Trust Transitional) Bill 2008
signed, not when negotiations are commenced. It is expected that, over
time, the costs associated with Option 1 would approach the costs
associated with implementing Option 2 or 3 (where the rate negotiated
under the treaties is 7.5 per cent and subject to treaty policy on effective
exchange of information).
Option 2: Unilaterally implementing the new 7.5 per cent final
withholding tax through domestic law
1.290 Option 2 would see the final withholding tax being implemented
unilaterally through domestic law, rather than through the negotiation of
Australia's tax treaties. This is industry's preferred option. A number of
the costs and benefits identified in relation to Option 1 apply in this case.
Benefits
1.291 This option would result in all foreign investors being subject to
a 7.5 per cent final withholding tax on their fund payments from managed
investment trusts. This will be one of the lowest withholding tax rates
globally. It will significantly enhance the competitiveness of the
Australian funds management industry, and increase their ability to attract
foreign investment into the future.
1.292 Implementing the final withholding tax unilaterally through
domestic law would be more timely than Option 1 as it would allow the
new withholding tax rate to take effect for all foreign investors without the
need to wait for individual tax treaties to be negotiated.
1.293 Foreign investors, irrespective of their country of residence,
would be eligible for the final withholding tax at the same time.
1.294 This approach would entail lower compliance costs for
Australian managed investment trusts and custodians as, unlike Option 1,
they would not be required to ascertain whether the particular foreign
investor was entitled to the reduced withholding tax rate. This approach
also avoids the ongoing system changes that would be associated with
Option 1.
1.295 In addition, this approach would lessen the administrative costs
for the ATO as ongoing system changes would not be necessitated by this
approach.
Costs
1.296 Australia's ability to seek reciprocal benefits for Australian
investors in future tax treaty negotiations would be impaired by this
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Distributions of managed investment trust income to foreign residents
option. As the option would benefit residents of all countries equally
there would be no incentive for other countries to concede reciprocal
rights to Australian residents in treaty negotiations.
1.297 Given the Australian market is nearly fully securitised, any
additional foreign investment into the industry, together with continuing
domestic demand, could create inflationary pressure on underlying
property values.
1.298 Where the reduced withholding tax is made available to all
foreign investors, the cost to revenue would be higher than that identified
in relation to Option 3 (see paragraph 1.305). Foreign investors excluded
from the reduced rates under Option 3 comprise around 20 per cent of
current investors.
Option 3: Implementation of a new final withholding tax regime in the
domestic law, with reduced rates limited to residents of foreign
jurisdictions with which Australia has effective exchange of information
for tax matters.
1.299 Once fully implemented, this option would result in foreign
investors resident in exchange of information jurisdictions being subject
to a 7.5 per cent final withholding tax on their fund payments from
managed investment trusts. As noted above, this will be one of the lowest
withholding tax rates globally.
1.300 Where a foreign investor is not a resident of a country with
which Australia has effective exchange of information, a 30 per cent final
withholding tax will apply to fund payments. This rate is the same as the
current interim withholding rate, however, as a final withholding tax,
deductions will not be able to be claimed.
Benefits
1.301 This option has many of the benefits identified in relation to
Option 2, noting that most foreign investors will be liable to the reduced
rates.
1.302 Restricting the reduced withholding tax rate to residents of
countries with which Australia has effective exchange of information will
enhance the integrity of the new arrangements by providing greater scope
to verify the residence of foreign investors and ensure Australian residents
are not establishing structures in a foreign country to benefit from the
withholding tax rate. Countries that do not have effective exchange of
information often deliberately engage in such practices and, thereby,
encourage offshore tax evasion.
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1.303 It also provides a clear statement of Australia's non-tolerance of
international tax evasion and avoidance. Extending the reduced
withholding tax rate to jurisdictions that have signed Tax Information
Exchange Agreements with Australia will send a strong signal of support
to those jurisdictions. This measure is expected to create incentives for
other countries to enter into (enhanced) exchange of information
arrangements with Australia.
Costs
1.304 This measure is estimated to involve medium costs on managed
investment trusts, custodians and non-custodians. The costs are
predominantly related to one-off implementation costs, with minimal
on-going costs. Costs are expected to be incurred in relation to:
· modifying existing systems to implement the new
withholding regime; and
· determining the rate of withholding based on the place of
payment, address or residency of the foreign investor.
1.305 The above costs are mitigated somewhat by the fact most
entities will already have withholding obligations under the existing
dividend, interest and royalty regimes, which are very similar to the
withholding regime introduced by this measure. The existing dividend,
interest and royalty regimes also currently determine the rate of
withholding required based on the address, place of payment or residency
of the foreign investor.
1.306 There will be a medium administrative impact on the ATO,
largely attributable to systems changes to implement the new withholding
regime, as well as additional marketing communications and interpretative
advice (to ensure that taxpayers have sufficient information regarding the
operation of the new withholding regime).
1.307 This measure is expected to have the following revenue
implications:
2008-09 2009-10 2010-11 2011-12
$60m $125m $210m $235m
1.308 The cost to revenue is mitigated by the intended phase-down
of the withholding tax rate over a three-year implementation period.
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Distributions of managed investment trust income to foreign residents
Option 4: No change to the withholding tax rate, other non-taxation
initiatives to be pursued
1.309 Industry has indicated that greater regulator responsiveness
(where regulators would be required to take account of the implications of
their actions for the industry's international competitiveness); increased
industry promotion efforts (with increased joint efforts by industry and
Government in promoting Australia's funds management experience in
the region); and, more focused international trade engagement (where
financial services are accorded a greater priority in the negotiation of trade
agreements) would enhance the export ability of the funds management
industry.
Benefits
1.310 The above initiatives are already being pursued, to various
degrees. For example, the Government already promotes the Australian
funds management industry through Invest Australia, (although,
traditionally, Invest Australia has been primarily focused on encouraging
foreign firms to establish operations in Australia rather than assisting
Australian firms to export financial services). The recommendations of
the Government's Task Force on Reducing the Regulatory Burden on
Business (Banks Report) are currently being implemented, and have been
received positively by industry.
1.311 As a result, the Government is well placed to enhance and tailor
existing efforts so they are better targeted to improving the export of funds
management services.
1.312 Industry is also familiar with a number of the bodies that would
advance these initiatives, and could be engaged as part of this process.
Costs
1.313 Industry has indicated that although there are a number of
non-tax impediments that impact on the export ability of Australia's funds
management industry, it is the withholding tax rate that is the most
significant disincentive to foreign investment.
1.314 Although addressing the non-taxation impediments would be
welcomed by industry, such initiatives, where unaccompanied by a
reduction in the withholding tax rate, would not be expected to have as
significant an impact on the overall export levels in the industry.
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Income Tax (Managed Investment Trust Transitional) Bill 2008
Consultation
1.315 Industry has been strongly supportive of the introduction of a
final withholding tax rate of 15 per cent, and has proposed this on a
number of occasions. Implementation of a final withholding tax was also
explored in hearings before the Senate Standing Committee on Economics
when it considered the impacts arising from implementation of the
non-final withholding tax system.
1.316 Consultation on the draft legislation commenced following
announcement of the measure in the 2008-09 Budget. As the Government
intends the measure to take effect from the 2008-09 income year, it was
only possible to undertake consultation for a limited period.
1.317 Submissions were received from industry stakeholders (the
Investment and Financial Services Association, the Property Council of
Australia and the Australian Custodial Services Association), as well as
accounting groups (the Institute of Chartered Accountants and Tax
Institute of Australia).
1.318 The consultation group were generally strongly supportive of the
measure. Suggestions made by representatives on the legislative design of
the measure were adopted where consistent with the policy objectives and
integrity of the measure.
Conclusion and recommended option
1.319 The option to implement a new final withholding tax, with the
reduced rate of withholding of 7.5 per cent available only to residents of
effective exchange of information jurisdictions (Option 3) should be
pursued.
1.320 This measure will provide a significant boost to the
competitiveness of the Australian managed funds industry, especially in
the Asia-Pacific region, and is expected to enhance its ability to attract
future foreign investment. Relative to Option 2, restricting the reduced
withholding tax rate to residents of exchange of information jurisdictions
will also enhance the integrity of the tax system and reflects Australia's
non-tolerance of international tax evasion and avoidance.
1.321 The approach would be the most effective in achieving the
Government's objective in a timely manner. The reduction in the
withholding rates has the strong support of industry.
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Distributions of managed investment trust income to foreign residents
1.322 Implementation of the final withholding tax rate through tax
treaties (Option 1) should not be pursued because of the indefinite nature
of its implementation, and the fact it would necessitate ongoing
administration and compliance costs with the negotiation of each treaty.
1.323 Although there are a range of non-taxation initiatives that may
be worthy of consideration (Option 4), it is suggested the potential
benefits flowing from such initiatives, absent a reduction in the
withholding tax rate, would be more limited. Industry has indicated
priority should be given to reducing the tax impediments to increased
foreign investment.
Implementation and review
1.324 Option 3 will be implemented in a phased manner. For residents
of effective exchange of information jurisdictions, in relation to fund
payments arising in the first income year after Royal Assent, a non-final
rate of withholding of 22.5 per cent will apply; for the second year, a
15 per cent final withholding tax rate; and, for the third and later years, a
7.5 per cent final rate.
1.325 As a transitional measure, for the first income year, the fund
payments will be reduced by certain expenses (such as interest expenses)
relating to those fund payments, with the net amount subject to
withholding tax of 22.5 per cent. These arrangements are designed to
assist such investors in the transition to the final withholding tax regime,
by allowing them to utilise deductions incurred in that income year.
1.326 Foreign investors not resident in a jurisdiction with which
Australia has effective exchange of information will face a 30 per cent
final withholding tax from the first income year following Royal Assent.
1.327 The existing non-final withholding tax regime will be repealed.
1.328 Treasury and the ATO would monitor the new withholding tax
regime, as part of the whole taxation system, on an ongoing basis.
1.329 The list of jurisdictions with which Australia has effective
exchange of information arrangements, to be prescribed by regulation,
will be a matter for ongoing review.
1.330 This measure implements the Government's decision announced
in the Treasurer's Press Release No. 043 of 13 May 2008.
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Chapter 2
Income tax treatment of the Prime
Minister's Literary Award
Outline of chapter
2.1 Schedule 2 to this Bill amends the Income Tax Assessment
Act 1997 to exempt from income tax the Prime Minister's Literary Award,
to the extent that the award would otherwise be assessable income.
Context of amendments
2.2 On 22 February 2008 the Minister for Environment, Heritage
and the Arts called for entries for the inaugural Prime Minister's Literary
Awards and announced that these awards would be tax exempt.
2.3 This amendment ensures that no income tax is payable on the
Prime Minister's Literary Award.
Summary of new law
2.4 From 1 July 2007, the Prime Minister's Literary Award will be
exempt from income tax to the extent that the award would otherwise be
assessable income.
Detailed explanation of new law
2.5 Whether an award is assessable income depends on
consideration of the circumstances and the nature of the award and the
recipient's assessable income. Given this, this amendment ensures that
the Prime Minister's Literary Award is exempt only where the amounts
would otherwise be assessable income. [Schedule 2, item 2, section 51-60]
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Tax Laws Amendment (Election Commitments No. 1) Bill 2008
Application and transitional provisions
2.6 This amendment applies to assessments for the 2007-08 income
year and later income years. [Schedule 2, item 3]
78
Index
Schedule 1: Distributions of managed investment trust
income to foreign residents
Bill reference Paragraph number
Item 1, item 1(a) in the table in paragraph 12-400(1)(b) 1.26
Item 1, item 1(b) in the table in paragraph 12-400(1)(b) 1.27
Item 1, item 2 in the table in paragraph 12-400(1)(b) 1.30
Item 1, item 3 in the table in paragraph 12-400(1)(b) 1.32
Item 1, section 12-375 1.20
Item 1, subsection 12-385(1) 1.21, 1.63, 1.157
Item 1, paragraph 12-385(3)(a) and subsection 12-385(4) 7.5
Item 1, paragraph 12-385(3)(b) 1.74
Item 1, subsection 12-385(5) 1.76
Item 1, subsection 12-390(1) 1.96
Item 1, paragraph 12-390(1)(a) 1.99
Item 1, paragraph 12-390(1)(b) 1.102
Item 1, subsection 12-390(2) 1.104
Item 1, subsection 12-390(3) 1.105
Item 1, subsection 12-390(4) 1.114
Item 1, subsections 12-390(4) and (5) 1.123
Item 1, paragraph 12-390(4)(a) 1.115
Item 1, paragraph 12-390(4)(b) 1.116
Item 1, paragraph 12-390(7)(a) 1.126
Item 1, paragraph 12-390(7)(b) 1.128
Item 1, paragraph 12-390(8)(a) 1.121
Item 1, paragraph 12-390(8)(b) 1.122
Item 1, subsection 12-390(9) 1.94
Item 1, subsection 12-390(10) 1.131
Item 1, paragraph 12-390(10)(a) 1.107, 1.108
Item 1, paragraph 12-390(10)(b) 1.110
Item 1, subsection 12-395(1) 1.81
Item 1, subsections 12-395(1) and (2) 1.72
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Tax Laws Amendment (Election Commitments No. 1) Bill 2008
Income Tax (Managed Investment Trust Withholding Tax) Bill 2008
Income Tax (Managed Investment Trust Transitional) Bill 2008
Bill reference Paragraph number
Item 1, subsection 12-395(2) 1.98
Item 1, paragraph 12-395(2)(b) 1.87, 1.90
Item 1, subsection 12-395(3) 1.84, 1.91
Item 1, subsections 12-395(4) and (5) 1.133
Item 1, subsection 12-395(6) 1.134
Item 1, subsections 12-400(1) and (2) 1.25, 1.34
Item 1, paragraph 12-400(1)(a) 1.23
Item 1, subsection 12-400(3) 1.39
Item 1, subsections 12-400(4) and (5) 1.41
Item 1, subsection 12-405(1) 1.45
Item 1, paragraph 12-405(1)(d) 1.43, 1.51
Item 1, paragraph (b) of step 2 in the method statement in 1.55
subsection 12-405(2)
Item 1, step 1 in the method statement in subsection 12-405(2) 1.48
Item 1, step 3 in the method statement in subsection 12-405(2) 1.56
Item 1, paragraph (a) of step 2 in the method statement in 1.52
subsection 12-405(2) and subsection 12-405(3)
Item 1, subsections 12-405(4) and (5) 1.58, 1.61
Item 1, subsection 12-410(1) 1.67
Item 1, subsection 12-410(2) 1.70
Item 1, section 12-415 1.146
Item 1, section 12-420 1.65
Items 2, 3, 12, 14, 15, 22, 24, 55 and 57, section 840-1 of the 1.255
ITAA 1997, section 840-800 of the ITAA 1997, subsection 5(2A) of
the Income Tax Act 1986, section 11-55,
subparagraph 118-12(2)(a)(vii), paragraph 118-12(2)(a) and
subsection 995-1(1) of the ITAA 1997, subsection 8AAB(5),
items 39A and 39B in the table in subsection 250-10(2), item 6 in the
table in subsection 340-10(2)
Item 2, subsection 840-805(1) of the ITAA 1997 1.154, 1.214
Item 2, subsection 840-805(2) of the ITAA 1997 1.155
Item 2, paragraph 840-805(2)(a) of the ITAA 1997 1.158
Item 2, paragraphs 840-805(2)(a) and (b) of the ITAA 1997 1.166
Item 2, paragraph 840-805(2)(b) of the ITAA 1997 1.164
Item 2, paragraph 840-805(2)(c) 1.169
Item 2, paragraph 840-805(2)(d) 1.170
Item 2, subsection 840-805(3) of the ITAA 1997 1.172
Item 2, paragraph 840-805(3)(b) of the ITAA 1997 1.174
80
Index
Bill reference Paragraph number
Item 2, paragraphs 840-805(3)(c) and (d) of the ITAA 1997 1.181
Item 2, paragraph 840-805(3)(e) of the ITAA 1997 1.183
Item 2, paragraphs 840-805(4)(a) and (b) of the ITAA 1997 1.187
Item 2, paragraph 840-805(4)(b) of the ITAA 1997 1.194
Item 2, paragraphs 840-805(4)(c) and (d) of the ITAA 1997 1.187, 1.195
Item 2, subsection 840-805(5) of the ITAA 1997 1.191
Item 2, subsection 840-805(6) of the ITAA 1997 1.171, 1.182, 1.197,
1.204.
Items 2 and 23, section 840-810 of the ITAA 1997 and 1.225
section 840-810 of the IT (TP) Act 1997
Items 2 and 23, paragraph-840-810(1)(a) of the ITAA 1997 and of 1.226
the IT (TP) Act 1997
Item 2, subsection 840-810(4) of the ITAA 1997 1.233
Item 2, section 840-815 of the ITAA 1997 1.208
Item 2, section 840-820 of the ITAA 1997 1.162, 1.186
Items 4 to 6, 13, 17, 19, 25 to 37, 39 to 43, 52 to 54 and 56, 1.256
section 99G of the ITAA 1936, subsection 995-1(1) of the
ITAA 1997, note to subsection 10-5(1), item 26 in the table in
subsection 10-5(1), subparagraph 12-315(1)(c)(vii),
subsection 15-10(3), note to subsection 15-15(1),
subsection 15-35(1), note 2 to section 16-5, note to
subsection 16-153(4), note to subsection 16-157(1), heading to
Subdivision 16-D, section 16-195, paragraph 16-195(b),
section 18-1, subsection 18-10(1), heading to section 18-30,
paragraphs 20-35(2)(a) and (b), subsection 45-120(3),
paragraph 298-5(c)
Item 6, section 99G of the ITAA 1936 1.250
Item 7, paragraph 99H(3)(e) of the ITAA 1936 1.252
Items 8 and 10, subsections 102L(10) and 102T(11) of the 1.107
ITAA 1936
Items 9 and 11, subsections 102L(15) and 102T(16) of the 1.63
ITAA 1936
Items 16, 18, 20 and 21, subsection 995-1(1) of the ITAA 1997 1.257
Item 23, Division 840 of the IT (TP) Act 1997 1.243
Item 23, section 840-805 of the IT (TP) Act 1997 1.154, 1.214
Item 23, subsections 840-805(1), (3) and (4) of the IT (TP) Act 1997 1.211
Items 23 and 2, paragraph 840-810(1)(b) of the IT (TP) Act 1997 1.227
and of the ITAA 1997
Items 23 and 2, subsection 840-810(2) of the IT (TP) Act 1997 and 1.231
of the ITAA 1997
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Tax Laws Amendment (Election Commitments No. 1) Bill 2008
Income Tax (Managed Investment Trust Withholding Tax) Bill 2008
Income Tax (Managed Investment Trust Transitional) Bill 2008
Bill reference Paragraph number
Items 23 and 2, subsection 840-810(2) of the IT (TP) Act 1997 and 1.230
subsection 840-810(3) of the ITAA 1997
Items 36 and 37, section 16-195 and paragraph 16-195(1)(c) 1.141
Item 38 , subsections 16-195(2) and (3) 1.148, 1.150
Item 44, section 18-32 1.234
Items 45 to 51, section 18-35 1.239
Item 46, paragraph 18-35(1)(a) 1.139
Item 47, subsection 18-35(1A) 1.149
Items 48 to 51, paragraphs 18-35(2)(a) and (c) and (3)(a) and (c) 1.241
Item 56, paragraph 298-5(c) 1.138
Item 58 1.243
Schedule 2: Prime Minister's Literary Awards
Bill reference Paragraph number
Item 2, section 51-60 2.5
Item 3 2.6
82
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