The current taxation rules increase the complexity of investment structures into Australian infrastructure and property. This increased complexity, together with recent changes in policy by the previous Federal Government (around the thin capitalisation rules and MIT withholding rate), has created an environment of uncertainty for potential foreign investors.
In particular, the Government should immediately:
- Enact the announced changes preventing Australian superannuation funds from holding 20 percent or more of certain trusts.
The original rationale for this rule is no longer applicable and effectively discriminates against Australian superannuation funds compared with non-Australian pension funds and sovereign investors (who are not similarly restricted)
- MITs should still be considered to be undertaking passive activities if a wholly owned subsidiary company is established to undertake active business activities (i.e. allow Taxable Real Estate Investment Trust (REIT) subsidiaries to be established).
The announcement that MITs must satisfy an arm’s length test in their dealings with associated entities addresses integrity concerns with allowing MITs to establish a Taxable REIT subsidiary. This should prevent profits being stripped from the subsidiary company to the MIT, through non-arm’s length arrangements. Similar tests have been introduced by other jurisdictions, for example, the United States.
These changes would simplify the structuring of joint venture investments into Australian infrastructure and property and make it easier for foreign investors to understand the commercial and taxation issues arising from such investments. This would promote the objective of encouraging foreign investment and allow partnering with local superannuation funds.