21st May 2008

Dear Investor,

Distributions from managed investment trusts to non-resident investors

The withholding tax rate on distributions from Australian-managed investment trusts (MIT) to non-resident investors will be reduced from the current non-final rate of 30% to a final rate of 7.5% over three years as a result of the recent Budget changes.

The new withholding tax regime will apply to fund payments made by Australian MITs to foreign residents. Fund payments will generally be calculated as the net income of the MIT, disregarding dividends, interest, royalties, foreign-sourced income and capital gains or losses from CGT assets that are not taxable Australian property. It will cover fund payments made directly by MITs as well as distributions through intermediaries (including custodians).

As an integrity measure, the reduced withholding provisions will only apply to foreign investors who are resident in a country with which Australia has effective exchange of information (EOI) arrangements that cover tax matters. The EOI jurisdictions will be specified in regulations and may include countries with which Australia has double tax agreements and certain other countries with which Australia has concluded tax information exchange arrangements (TIEAs), although we will need to wait for the regulations to confirm this.

The rate reduction will be phased in over three years:

  • a 22.5% non-final withholding tax for fund payments for the first income year after the enabling legislation receives Royal Assent (2008/09 income year)
  • a 15% final withholding tax for fund payments in the second income year (2009/10 income year)
  • a 7.5% final withholding tax for fund payments of the third and later years (2010/11 and following income years).

As a transitional measure for the first year, investors resident in EOI jurisdictions will be eligible to claim deductions for expenses relating to fund payments. Investors resident in non-EOI jurisdictions will be subject to a 30% final withholding tax, effective for fund payments for the first income year in which the enabling legislation receives Royal Assent. As the withholding will become a final tax (with the exception of the first year), foreign investors will not be required to lodge an Australian tax return for distributions received from the MIT from the 2009 year onwards.

Foreign investors in non-MIT funds will continue to be subject to the existing provisions of Division 6 of the 1936 Income Tax Assessment Act. The new provisions are likely to be modelled on the existing withholding tax provisions for MITs, and it will be interesting to see whether an issue will arise in relation to fund payments which is currently an issue with Australian-sourced discount capital gains - whether the withholding tax applies to the actual gain or the discount gain.

The reduction in withholding tax on taxable distributions from listed property trusts and other managed investment schemes from 30% to 7.5% over the next three years is very welcome. It shows the Federal Government has followed through on one of its promises to the property industry last year. The cut will make the level of tax on income from investment into Australian property through a listed or wholesale trust by a non-resident investor very competitive compared with other major economies such as US and UK. It will also lift the burden of filing Australian tax returns from many non-resident investors.

The change will be a mixed blessing for more sophisticated investors. By making the withholding a final tax (15% in 2009-2010 and 7.5% from 2010-2011 onwards) with no ability to claim a refund, some investors who utilise leveraged holding entities to make their property investments may find their effective tax rate has in fact increased even though the headline rate has reduced. The Treasurer has softened the blow by allowing such investors time to restructure to prevent this change from affecting their net return.

Australia as a regional financial hub

The Labor Government's continuing commitment to establishing Australia as a regional financial hub is welcome.

While the proposed 7.5% tax rate for foreign residents investing in Australian property trusts will be good for the commercial and rural property sectors, the Government should consider other measures to enhance Australia's position as a regional financial hub. These measures could include tax incentives for fund managers and their employees, clarity on the taxation of sovereign wealth investment, measures to facilitate the Initial Public Offering of foreign companies in Australia, and special economic zones for true international fund management activities or offshore banking type concessions for such activities. The ultimate measure of success will be if fund managers move to Australia from established centres like Singapore and Hong Kong as a result of these measures.

Best regards,
Chris Andrews


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Chris Andrews
Head of Funds Management

t  +61 3 8610 2811
e  candrews@latrobefinancial.com.au

Chris Andrews is the Head of Funds Management for the La Trobe Group and has responsibility for the La Trobe Australian Mortgage Fund.
Read full profile here.

La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 115 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.

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