Following a period of intense regulatory change in the financial services industry, we are now seeing increased activity in relation to product development. This is particularly evident in the property funds space where we are seeing new start-ups as well as offshore managers entering the market.
The number of new single-asset property syndicates has increased sharply and there is also positive activity in the A-REITS space.
The tax concessions available to managed investment trusts (MITs) are particularly appealing for foreign investors and are also driving investor demand. After some uncertainty and concern from foreign investors when the withholding tax rate was unexpectedly and suddenly doubled from 7.5% to 15%1 in 2012, confidence in investing in the Australian property market is returning.
Managed Investment Trusts
MITs are a crucial structure for offshore investors looking to invest in Australian property. This is due to the tax concessions they offer, in particular:
(a) Capital account election. An eligible MIT can make an irrevocable election to treat the disposal of certain eligible assets of the MIT as capital in nature and apply the capital gains tax provisions as the primary code for calculating the gains or losses of the MIT. Eligible assets include shares, units and real property, or investments in those assets. This is significant as capital gains can be eligible for concessionary tax treatment (including exemptions for non-real property held by non-residents).
(b) Reduced withholding tax rate. An eligible MIT is subject to a lower withholding tax rate of 15% (down from 30%) for most distributions2 made to foreign investors located in a country with which Australia has an exchange of information agreement3. A lower rate of 10% applies to funds that invest in newly constructed “clean” properties4 only.
The key requirements for a trust to qualify as a MIT are set out in the table below.
- The increase in rate was announced in the Budget 2012 and applied from 1 July 2012.
- Interest, dividends and royalties are subject to a separate withholding tax regime.
- The list of countries with whom Australia has an exchange of information agreement is set out in Table 2.
- Property is deemed to be “clean” if construction of the building commenced on or after 1 July 2012, the building is a commercial building that is an office building, hotel or shopping centre (or a combination) and the the building meets and continues to maintain at all times during the income year at least a 5 Star Green Star rating as certified by the Green Building Council of Australia or a 5.5 star energy rating as accredited by the National Australian Built Environment Rating System.
- Includes foreign government pension funds, sovereign wealth funds and/or other Government agencies and certain foreign investment funds.
- A trust is a trading trust if during an income year, the trust carried on a trading business or otherwise it controlled, or was able to control, directly or indirectly, the affairs or operations of another person in respect of the carrying on by that other person of a trading business. For example if a trust operates a short term parking facility, this would be treated as a ‘trading trust’ as this is an active business operation.
In determining whether a fund meets the ‘widely held’ test, the rules provide a look-through and deemed participation for certain deemed widely held entities. For example, in determining whether a trust is widely held, if a superannuation fund holds units in that trust, that superannuation fund will be deemed to contribute a number of members dependent on its unitholding in the trust (e.g. if the superannuation fund holds 50% of the units in a trust, for the purposes of calculating whether a fund is widely held, that fund will be deemed to have 25 members in the trust).
Recently released draft legislation will ensure that foreign pension funds can access the concessional withholding tax rates available to MIT investors.
Unfortunately, foreign life insurance companies and endowment funds are not currently included on the list of “widely held entities” although there is the ability to add such entities by way of regulations in the future.
As these entities are significant institutional investors with large amounts of capital, we hope the rules will be extended to cover them.
List of countries with whom Australia has an exchange of information agreement
(Source: regulation 44E of the Taxation Administration Regulations 1976 (Cth))