The cost of capital for new investment in Australian infrastructure and much of the property sector will increase following changes announced yesterday to the taxation of Managed Investment Trusts (MITs) that are “stapled”, i.e. the MITs lease property assets to brother/sister operating companies.
The key changes will increase the MIT withholding rate to 30% on distributions of income and gains to foreign investors, up from 15%, and foreign pension funds will lose their 10% interest withholding exemption where they own 10% or more of the fund (this exemption enabled pension funds to enjoy an overall effective tax rate of well under 10%).
The good news is that foreign investors in commercial and retail property MITs will continue to enjoy the 15% concessional rate, as these funds will meet the new qualification that the MIT’s income is a pass-through of rent received from unrelated tenants. However, foreign pension funds investing through loan structures will lose their interest withholding exemption, though for existing loans this will not kick in until 2026.
Other types of property MITs will not be eligible for continued concessional treatment, such as hotel funds where the operating company does not derive rent. Agricultural land has been disqualified altogether.
The largest impact of the crackdown will be on new infrastructure deals, whereas existing infrastructure arrangements will continue to benefit from the 15% rate until 2034 in order to mitigate the retrospectivity and sovereign risk impacts of the crackdown . Disturbingly, the Government intends to cherry-pick new projects of “national significance” that can benefit from a replacement MIT regime which will be subject to a 15% tax rate for a limited period of 15 years.
The Government also announced an extension to the thin capitalisation rules to deny interest deductions to minority investors in trusts. This is a broad-reaching crackdown which extends beyond MITs or staples. Whereas previously the investor’s “safe harbour” gearing ratio of 60% was not reduced by the trust’s debt unless the investor held 50% or more of the trust, the disallowance will now apply in the case of investments as low as 10%.
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