With a significant rise in the use of stapled structures across Australia, the spotlight was recently shone on the tax treatment of the structures.
At the 2019 National Infrastructure Conference in Melbourne next week, Tim Rowe (Australian Taxation Office) and Adrian Varrasso, ATI (MinterEllison) present the session 'Cross Staple Arrangements – The Cross Roads'.
In their session, they will consider the details of the package and the ATO’s proposed guidance.
Looking at what constitutes economic infrastructure, they will discuss how the rules will affect existing structures, in particular the operation of the transitional rules, discuss the key integrity measures introduced under the stapled structure reform and how they will affect existing structures, and look at possible areas of contention with the proposed stapled structure reform.
We preview the paper written by Adrian to be presented at the Conference in this post.
The Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Bill 2018 (Stapled Structure Bill) was introduced following a number of announcements made by the Australian Taxation Office and Treasury regarding concerns about the 'widespread' misuse of stapled structures and, particularly, the unfair benefit being offered to foreign investors utilising these structures.
The Stapled Structure Bill seeks to make amendments that will have impacts far beyond just stapled structures.
The Bill received Royal Assent on 5 April 2019, and will have the effect of:
(a) limiting access to tax concessions for foreign investors by:
(i) increasing the managed investment trust withholding tax rate on fund payments attributable to non-concessional MIT income to 30%;
(ii) limiting withholding tax exemptions for foreign superannuation funds;
(iii) codifying and limiting the scope of the sovereign immunity tax exemptions; and
(b) modifying thin capitalisation rules to reduce double gearing structures.
Adrian's paper gives an outline of the history of stapled structures and the use of stapled structures for infrastructure investments. It then details the impact of the Stapled Structure Bill and briefly analyses the policy reasoning behind the Stapled Structure Bill's proposed measures.
Focusing on the impact of the proposed measures on the infrastructure sector, his paper will concentrate on the changes to the MIT withholding tax regime.
The Stapled Structure Bill was introduced to "ensure foreign investors pay their fair share of tax".
The Bill outlines four measures designed to address tax integrity issues the Government feels are being created by the combination of the use of a stapled structure and existing tax concessions for foreign investors. The current system is seen by the ATO to create an unfair bias for foreign investors by allowing effective tax rates of between 0% and 15% on active income.
Adrian's paper looks at each measure in detail:
Measure A – MIT withholding rate to be increased
Measure B – preventing double gearing structures
Measure C – foreign pension fund exemption
Measure D – sovereign immunity tax exemption.
Finally, his paper will discuss the contentious issues within the Stapled Structure Bill and the wider application of the Stapled Structure Bill amongst the Australian tax landscape.
Adrian notes that, at the time of writing this paper, there is no guidance from the ATO on many of the issues with the Stapled Structure Bill. Guidance is expected to be issued, possibly in the form of a law companion ruling, by the time the legislation is in force. Therefore this paper will highlight the potential issues with the Stapled Structure Bill which will be of importance to transactions and investments involving MITs in the infrastructure industry and which could do with further clarification by the ATO.
The paper concludes by reiterating that the Stapled Structure Bill, now legislated, will have far-reaching consequences.
The paper considered the consequences for MIT cross staple arrangements, with a particular focus on the infrastructure industry. The Stapled Structure Bill will have far broader consequences that will have further impact on MITs which, when combined with the MIT withholding changes discussed in this paper, may have a significant impact on infrastructure.
Some have said that the measures could have been worse. In the author's opinion, these measures will most likely bring an end to stapled structures being used in future infrastructure projects (aside from the lucky few approved economic infrastructure projects). Adrian says "Time will tell".
Adrian Varrasso, ATI, is a Partner in the Tax group at MinterEllison.