Clarifying the rules for MITs
The Government will amend the tax laws to clarify the rules for managed investment trusts (MIT) to ensure that the concessional final MIT withholding tax rates for fund payments made by MITs (being 15% ordinarily or 10% for clean building MITs) will continue to be available where the MIT is ultimately owned by a single foreign specified widely-held investor.
This measure was earlier announced by Treasury on 13 March 2025 in response to the ATO's Taxpayer Alert TA 2025/1 released on 7 March 2025. This measure will apply to fund payments from 13 March 2025.
In TA 2025/1, the ATO expressed its concern about 'captive MITs', being a MIT structure that is ultimately directly and indirectly owned by the same investor. It generally takes the form of a two-investor holding structure (typically as 99% / 1% unitholders), where one of the investors is a subsidiary of the other investor or the investors are commonly owned.
The ATO's concern targets the restructuring of Australian land holding from a non-MIT entity (e.g. an Australian company) into an Australian unit trust that seeks to qualify as a MIT based on a 'captive MIT' structure. The restructures are generally motivated by a purpose of allowing the unitholders to obtain the concessional final withholding tax rates for fund payments and capital gains made on a property sale by the unit trust.
The ATO expresses the concern that such restructures present the risk that:
- the Australian unit trust does not qualify as a managed investment scheme (MIS) as defined in the Corporations Act 2001 (Cth) where the unitholders in the trust are all companies within the same corporate group and the promoter of the trust is also a member of that corporate group. This is important as MIS-qualification is generally a criterion for MIT eligibility; and
- the dominant purpose of such restructures is to obtain a tax benefit, being access to the concessional final MIT withholding tax rate in circumstances where a higher tax rate would have otherwise applied if the land interest remained held by the original entity (e.g. an Australian company with a 30% tax rate). The tax benefit that arises due to the restructures is caught by the Part IVA anti-avoidance provision.
The MIT rules specifically allow a specified widely-held investor (except a collective investment trust) to be the single direct unitholder of a MIT. A specified widely-held investor includes a:
- pension fund / superannuation fund with at least 50 members;
- life insurance company;
- sovereign wealth fund; or
- a limited partnership where at least 95% of the membership interests are owned by any of the above entities and the remaining membership interests are held by a general partner.
It appears that the drafting of TA 2025/1 could target a 'captive MIT' that is, for example, 99% owned by a foreign pension fund and 1% owned by a subsidiary of the foreign pension fund, in circumstances where the foreign pension fund could instead have been MIT eligible if it had been the 100% unitholder from the outset.
It appears that this unintended consequence is the reason why the Treasurer announced on 13 March 2025 that the Government would amend the income tax laws to make clear that trusts ultimately owned by a single widely‑held investor (e.g. a foreign pension fund) are able to access the MIT concessions.
Although this is a welcome announcement, there is still a query on whether this amendment will apply to foreign collective investment vehicles (which under current law are specifically excluded from being the single direct unitholder of a MIT).
Deferral of withholding measure for clean building MITs
In the 2023–24 Budget, the Government had announced that it would extend the 10% concessional MIT withholding tax rate for fund payments made by a clean building MIT to data centres and warehouses where construction commences after 9 May 2023, 7:30 PM (AEST).
The data centres and warehouses are required to meet the relevant energy efficiency standard in order to attract the reduced MIT withholding rate. This would include a new minimum energy efficiency requirement of a 6-star rating from the Green Building Council Australia or under the National Australian Built Environment Rating System.
Originally, this measure was intended to apply from 1 July 2025.
The Government has now announced that it will defer the start date of this measure, so that it starts on the first 1 January, 1 April, 1 July or 1 October after the relevant legislation receives Royal Assent.
Deferral of the changes to the foreign resident capital gains tax regime
The Government will defer the start of the changes to the foreign resident capital gains tax (CGT) regime announced in the 2024/2025 Budget, from 1 July 2025, to the later of 1 October 2025 or the first 1 January, 1 April, 1 July or 1 October after the amending legislation receives Royal Assent.
The Government announced in the 2024-25 Budget that it proposed to amend the foreign resident CGT regime to expand its operation and ensure greater compliance by foreign residents with their CGT obligations in Australia. The proposal seeks to close a perceived gap on the amount of CGT being collected when foreign residents dispose of their indirect interests in Australian land. The original announcement predicted that the changes would raise $200 million per annum – which seemed ambitious – and the Government has said that the deferral of the start date will decrease the tax take by $50 million.
As we canvased in our Federal Budget 2024/25 Highlights article, the amendments are intended to:
- broaden the types of assets on which foreign residents are subject to CGT;
- amend the point-in-time principal asset test to a 365-day testing period; and
- require foreign residents disposing of shares, units and other membership interests exceeding A$20 million in value to notify the ATO, prior to the transaction being executed.
A consultation process was held in July/August 2024, during which the Government released 'Strengthening the foreign resident capital gains tax regime - Consultation paper'. To date, no draft legislation has been released.