The Australian government has announced details of an integrity package relating to Australian stapled investment structures that may increase the rate of Australian withholding tax from 15% to 30% for some foreign investors on distributions from their investment in those structures. Corrs Chambers Westgarth, Taxand Australia, explains the background to the integrity package and its possible impact on investors.
Stapled investment structures are a common form of investment vehicle in the Australian market, particularly where the assets of the vehicle are property intensive. They typically involve an investor acquiring a share in a company and an interest in a unit trust that are each “stapled” so that they cannot be separately traded. This structure potentially allows, where eligible, flow through tax treatment for passive investments which are typically held by the trust and income in respect of active business assets (typically held by a company or a trust that is taxed like a company) taxed at the company level. More recently, eligible trusts may be taxed under the Managed Investment Trust (MIT) regime, which in most stapled structures generally results in foreign resident investors being subject to a final withholding tax rate of 15% on the “passive income” and the 30% corporate tax rate for the “active income”.
The Australian government has formed the view that there has been significant growth in the number of stapled structures that seek to re-characterise active trading income into more favourably taxed passive income which is taxed at the lower 15% rate. In addition, the use of the stapled structure was viewed as being introduced into more diverse business sectors than was traditionally the case with resulting increase in the re-characterisation of income.
From a tax perspective, there is limited time for investors to address any adverse impact on their thin capitalisation position and any restructuring of investments in property-rich stapled structure may involve a potential stamp duty cost. The measures also put into some doubt the continued effectiveness of any private binding tax ruling obtained by an investor in a stapled structure on the basis that such rulings cease to be binding where there is a substantial change in law. This may leave investors who have obtained a favourable ruling on a structure prior to the integrity measures in a potentially unprotected position against future tax risk. Investors should continue to monitor these changes as they are further developed.