Investment into Australia can be achieved through a variety of different structures, each of which will have a different consequence for tax purposes. Under Australian law, an investor could make an investment directly or through an investment vehicle such as a company, a trust, a joint venture, a managed investment scheme or other collective investment vehicle or a partnership. The appropriateness of any one of these methods is dependent on the desired commercial requirements of a transaction and the taxation implications that result from each structure.
Investment vehicle of choice – the MIT
Recently the investment vehicle of choice, both for foreign and domestic investors has tended to be a managed investment trust (MIT). Tax reforms introduced have increased the popularity of the MIT, particularly for non-residents investing in property. Foreign investors making such investments receive a concessional withholding tax rate of 15% (or 10% for eligible clean building MITs), rather than a withholding rate of 30%, for distributions of rental income and realised capital gains paid from an MIT to an investor that is domiciled in a country with which Australia has an exchange of information agreement.
Another advantage of making an investment through a MIT is that they may elect to hold certain assets, including shares, units and land, on capital account, ensuring that distributions arising from its disposal are taxed under Australia's capital gains tax (CGT) regime. Under this regime, individuals and trusts are entitled to a 50% reduction, and superannuation funds are entitled to 33.33% reduction, on a taxable gain on the disposal of assets that have been held for more than 12 months.
Attraction of MITs for foreign investors
For non-resident investors, having the investment treated as a capital gain rather than a revenue gain, means that there are only limited instances in which Australia will tax the amount of the gain. Non-residents are only liable to CGT on disposals of real property (directly or indirectly) and of business assets of a permanent establishment located in Australia. Australia's taxation of gains on revenue account is not so restricted and the application of any applicable double tax agreement is usually the determinant for whether a non-resident has a liability to Australian tax on these gains.
How does a managed fund qualify as a MIT?
To qualify as an MIT a fund must meet several requirements, including:
- the trustee of the fund must be an Australian resident, or alternatively the central management and control of the fund must be in Australia
- the fund must be a passive investment vehicle, it cannot be a trading trust
- a substantial proportion of the investment management activities for the funds' Australian assets must be carried on in Australia (this requirement only applies to the withholding tax concession)
- the fund must be a managed investment scheme. Under Australia's Corporations Law a managed investment scheme is an arrangement where people pool funds for a common purpose to make a profit. The investment vehicle is usually a unit trust with an external company manager
- the fund must be widely held—in the case of a wholesale fund this means that the fund must have at least 25 members. Tracing through the funds members is allowed to calculate the number of members, and
- a foreign individual investor must not own more than 10% of the fund—in the case of a wholesale fund, 10 or fewer investors (other than eligible widely held investors) cannot own more than 75% or more of the fund.
The new Investment Manager Regime (IMR) and advantages for foreign investors
Australia recently introduced reforms as part of its new Investment Manager Regime (IMR) to address the previous uncertainty about the tax treatment of offshore transactions undertaken through Australia. This brings Australia into closer alignment with other jurisdictions with an IMR, including Hong Kong, Singapore, the United Kingdom and the United States.
Under the new IMR regime, a non-resident investor may now use an Australian independent resident investment advisory fund manager, broker or exchange agent, and all investments in foreign assets will be exempt from tax in Australia, and investment in Australian assets will be treated as if they had been made directly by the non-resident, disregarding the Australian intermediary for tax purposes.
This tax treatment also extends to include foreign residents that invest through one or more interposed trusts or partnerships. This measure now ensures that foreign funds, which have a permanent establishment in Australia solely for the reason of using an Australian intermediary, will not be taxed on profits made on foreign assets in Australia.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.