Investors in Managed Investment Trusts (MITs) will be rethinking their strategies after the final withholding tax on MITs doubled from 7.5% to 15% on 1 July 2012.
Investors in Managed Investment Trusts (MITs) will be rethinking their strategies after the Commonwealth Government’s Budget announcement to double the final withholding tax on MITs from 7.5% to 15% from 1 July 2012.
The Commonwealth Government’s 360 degree about turn to increase the tax to 15% on 1 July 2012 rather than adhere to the 7.5% rate has left the managed investment industry scratching its head. Investors will have modelled their investment profiles on the continued application of the 7.5% withholding tax rate. However, this sudden and unexpected increase in withholding tax will significantly undermine their forecast returns.
It will also produce serious challenges for the local funds management industry as it will no longer be on a level playing field with other comparable jurisdictions in the Asian Region.
In 2009 the Government introduced new MIT rules which offered a flat rate final withholding tax for non-resident investors who invested into the Australian market through a MIT. Internationally, the 7.5% withholding tax rate was seen as competitive and many foreign investment funds have started to use this structure to invest in Australia and have based their investment return forecasts and decisions on that tax rate.
This created opportunities for Australian fund managers because, in order to qualify for the reduced withholding tax rate, the MIT needed to engage the services of an Australian responsible entity and investment manager.
As well as penalising Australian fund managers, the Government’s Budget announcement to reduce the withholding tax will have a significant impact on foreign investment.
The reversal of what was seen as an effective and internationally competitive tax measure will undermine the confidence of foreign investors and foreign fund managers looking to operate from, and invest in, Australia.
While the Government continues to promote the idea of Australia as a financial services hub for the Asian region, announcements such as this will cause investors to question its commitment to that concept who may think twice about investing in Australia.