• Withholding tax arrangements for managed investment trust fund payments

    Here you will find a general overview of the final withholding tax arrangements for the fund payment part of managed investment trust (MIT) distributions to foreign residents. Broadly, a fund payment represents the Australian source net income (other than dividends, interests and royalties) of the trust.

    If the fund payments are made to a foreign resident in a country which has an effective exchange of information agreement with Australia, the final withholding tax rate is 15%. In all other cases, withholding is required at the rate of 30%.

    A concessionary rate of 10% applies to fund payments by a clean building MIT, that is an MIT that holds only energy efficient commercial buildings constructed on or after 1 July 2012.

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    Who is affected?

    The MIT final withholding tax regime affects Australian MITs, Australian custodians and any other interposed Australian entities used by foreign investors to invest indirectly in Australian MITs.

    Foreign residents, other than foreign resident trustee beneficiaries, are also affected by this legislation.

    Overview of withholding obligations of Australian entities

    Trustees of Australian MITs and custodians may be required to withhold an amount from a fund payment, or an amount reasonably attributable to such payment, where they are authorised to make payment to a place outside Australia or the recipient has an address outside Australia.

    Other Australian entities may also be required to withhold an amount where both of the following conditions are satisfied:

    • the other entity receives a payment, all or part of which is a fund payment that is covered by a notice or information made available on a website
    • a foreign resident (recipient) is or becomes entitled to an amount attributable to the fund payment received by the other entity.

    If any of these entities are not required to withhold an amount from the fund payment (or an amount reasonably attributable to such payment) either because the place of payment or address of the recipient is not outside Australia or the person that becomes entitled to the payment is not a foreign resident, they may be required to notify the recipient of details of the payment (in order to give the recipient sufficient information to withhold if required).

    An entity that is required to withhold or to notify a recipient will be subject to a penalty if it fails to withhold or notify the recipient as required.

    What is a fund payment?

    A fund payment is a component of a payment made by the trustee of an MIT that, in effect, represents a distribution of its net income of the MIT, but excludes:

    • dividend, interest or royalty income
    • capital gains and losses from a capital gains tax asset that is not taxable Australian property
    • amounts that are not from an Australian source
    • deductions relating to any of the above amounts.

    A payment is a fund payment in relation to an income year only if it is made:

    • during the income year, or
    • within three months after the income year, or
    • within a longer period if agreed to by us but not exceeding six months from the end of the income year.

    When is an entity required to give a notice?

    An MIT, custodian or other entity that is not required to withhold still may be required to:

    • provide a notice to the recipient of a fund payment, or
    • make information available on their website,

    at or before the time the amount is paid to the recipient.

    Information on a website must be made available for five continuous years.

    What information is required in the notice or to be published on a website?

    The notice or website must specify the:

    • parts of the payment withholding would have been required from
    • whether the payment is, or is attributable to, a fund payment from a clean building MIT
    • income year of the MIT each of the parts of the payment relate to.

    What is an MIT?

    The definition of an MIT was amended as part of the new tax system for MITs that came into effect in May 2016. There were also significant amendments in 2010. Where a trust satisfies the criteria for being an MIT, it is an MIT for the whole of the income year.

    A trust is an MIT in relation to an income year if it:

    • makes a fund payment in the income year
    • has an Australian resident trustee or its central management and control is in Australia at the time of the first fund payment or earlier in the income year
    • is a ‘managed investment scheme’ as defined by section 9 of the Corporations Act 2001 at the time of the first fund payment
    • is not a trading trust (in the case of a unit trust) or is not carrying on or able to control a trading business (in the case of other trusts) at anytime in the income year
    • carries out a significant proportion of its investment management activities in Australia throughout the income year
    • meets the 'widely held' test in relation to the income year
    • is not 'closely held' at anytime in the income year
    • is an unregistered wholesale trust that is managed by a financial services licensee or by an authorised representative of such licensee.

    The 'widely held rules' vary depending on whether a trust is a registered retail trust, a registered wholesale trust or an unregistered wholesale trust. Similarly, the 'closely held rules' vary depending on whether a trust is a retail or wholesale trust.

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    What is a clean building MIT?

    An MIT is a clean building MIT if:

    • it holds one or more clean buildings, including the land in which the buildings are situated
    • it does not derive assessable income from any taxable Australian property other than from the clean buildings or assets that are reasonably incidental to those buildings.

    A clean building MIT is allowed to hold and receive income from any assets reasonably incidental to clean buildings provided that the income received from those assets is less than 5% of the total income received from clean buildings.

    A building is a clean building if:

    • the 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 of these
    • 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.

    A building is taken to have commenced construction when the works on the lowest level, including the basement level, of the building begins.

    Site preparation for construction and works undertaken below the lowest level of the building such as excavation or site stabilisation works do not amount to commencement of construction.

    What obligations does an MIT have?

    A trustee of an MIT must withhold when it makes a fund payment if:

    • the recipient of the payment has an address outside Australia
    • it is authorised to make a payment to a place outside Australia, except where the recipient is carrying on business at or through an Australian permanent establishment and the payment is attributable to that establishment.

    Where a trustee of an MIT is not required to withhold from a payment, it has an obligation to give a notice to the recipient or to publish information on a website in respect of the payment if:

    • the recipient has an Australian address, and
    • the trustee of the MIT is only authorised to make payment to an Australian address, but
    • withholding would have been required if the payment was made to an address outside Australia.

    What is a custodian?

    An entity is a custodian if it has an Australian financial services licence and carries on a business that predominantly consists of providing custodial or depository services (as defined by section 766E of the Corporations Act 2001).

    What obligations does a custodian have?

    A foreign resident may invest in an MIT through a custodian. The custodian will receive payments from the MIT and will make payments to the foreign resident.

    A custodian is required to withhold tax from a payment it makes if the following conditions are satisfied:

    • the payment is reasonably attributable to a fund payment received by the custodian that was covered by a notice or information made available on a website by the payer
    • the payment is made to an entity that has an address outside Australia or the custodian is authorised to make the payment to a place outside Australia (except where the recipient is carrying on business at or through an Australian permanent establishment and the payment is attributable to that establishment).

    Where a custodian is not required to withhold from a payment, it has an obligation to give a notice to the recipient or to publish information on a website in respect of the payment if:

    • the recipient has an Australian address, and
    • the custodian is only authorised to make payment to an Australian address, but
    • withholding would have been required if the payment was made to an address outside Australia.

    What is an ‘other entity’?

    The expression ‘other entity’ refers to any entity, for example, a trust, partnership or individual, which is not an MIT or a custodian.

    What obligations does an ‘other entity’ have?

    Foreign residents may also invest in an Australian MIT through other entities.

    The other entity is required to withhold where both of the following conditions are satisfied:

    • the other entity receives a payment, all or part of which is a fund payment that is covered by a notice or information made available on a website
    • a foreign resident is or becomes entitled to, an amount attributable to the fund payment received by the other entity.

    This may occur for example, where a trust has a foreign resident beneficiary, a partnership has a foreign resident partner, or an individual acts as an agent for a foreign resident.

    Where an entity is required to withhold, it must register for PAYG withholding. The other entity is required to withhold at the time the foreign resident is entitled to the payment, not when the actual payment is made to the foreign resident.

    • the recipient has an Australian address, and
    • the custodian is only authorised to make payment to an Australian address, but
    • withholding would have been required if the payment was made to an address outside Australia

    Where the other entity is not required to withhold from a payment, it has an obligation to give a notice to the recipient or to publish information on a website in respect of the payment if:

    • an Australian resident recipient becomes entitled to receive an amount attributable to the payment, or to have such an amount dealt with on their behalf, and
    • withholding would have been required if that recipient was a foreign resident.

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    What is required in a payment summary?

    Entities that are required to withhold under the MIT withholding tax regime must provide a payment summary at year end to recipients. The format of the payment summary is not prescribed by us, but it must contain, as a minimum:

    • names of the payer and recipient
    • the recipient’s tax file number or Australian business number (ABN) (if provided)
    • total of the withholding payments that it covers, and the total of the amounts withheld by the payer from those withholding payments
    • income year of the relevant MIT.

    If the information statement, or distribution statement, covers payments made for the whole income year and contains the above information, we will accept these statements as constituting a payment summary and they can be labelled as such.

    What are the penalties?

    An MIT, custodian or other entity that fails to withhold the required amount, is liable for a penalty equal to that amount.

    An MIT, custodian or other entity that is required to provide a notice to a recipient of a payment or make information available on a website, but does not do either, is generally liable for a penalty equal to the amount that would have been required to be withheld by a subsequent recipient of the fund payment.

    What are the reporting requirements?

    Under the MIT withholding regime, an entity which is required to withhold, must report annually to us on the amounts withheld by completing the Annual investment income report (AIIR).

    The AIIR is due six months and 14 days after the end of the MIT’s income year. For example, where the end of the MIT's income year is 30 June 2013, the MIT’s annual report is due by 14 January 2014.

    If an entity is an investment body that is already required to lodge an AIIR by 31 October following each income year, it can include the information about the fund payments in the AIIR.

    However, if amounts withheld under the MIT withholding regime are not able to be reported in the AIIR by 31 October each year, reporting of fund payments and amounts withheld will need to be provided by submitting a second AIIR at the later date.

    If it is not possible to lodge a second AIIR with only the fund payments and amounts withheld, the second AIIR should be clearly identified as a replacement AIIR.

    The following labels are to be used in the ‘Investment account data record’ in the AIIR:

    • MIT fund payments
    • amounts withheld from MIT fund payments.

    If you require any assistance in relation to lodging an AIIR, you can send your enquiry to:

    The Manager
    Data Matching and Integrity
    Australian Taxation Office
    PO Box 2090
    CHERMSIDE CENTRE QLD 4032

    Alternatively, you can email your enquiry to ato-dmi@ato.gov.au or phone our free call information line on 1800 072 681.

    What are the implications for foreign residents?

    MIT withholding tax is a final tax imposed on foreign residents in respect of fund payments (or an amount reasonably attributable to such payments) from Australian MITs.

    A foreign resident’s liability for MIT withholding tax will generally be met by an amount being withheld by the trustee of an Australian MIT, custodian or other entity.

    A foreign resident investor whose only Australian income is a fund payment from an MIT is not required to lodge an Australian tax return.

    However, mismatches may occur in certain situations where the address of the recipient of a fund payment (such as a global custodian), is different from the address of the ultimate foreign investor. As a result, the MIT withholding tax paid to us could be greater (or less) than the foreign investor's actual MIT withholding tax liability.

    Foreign resident recipients will need to apply for a refund if the amount of withholding tax paid to us is greater than their liability or make a top-up payment of MIT withholding tax if the amount paid to us is less than their liability.

    Foreign resident recipients requesting a refund must provide a copy of the payment summary that accompanied the fund payment made by the Australian payer.

    Interaction with other provisions of Assessment Acts

    Where an amount is subject to MIT withholding tax, it is non-assessable non-exempt income of an entity. It therefore is not subject to income tax on an assessment basis, either in the hands of the foreign resident liable to MIT withholding tax or the trustee of a trust.

    Where an amount is not subject to MIT withholding tax, for example because a trust does not meet any of the widely-held tests or the payment is not a fund payment, the rules about the taxation of trusts in Division 6 of the Income Tax Assessment Act 1936 will apply, rather than the withholding tax rules.

    Background to the final MIT withholding tax regime

    Under the former withholding tax regime, trustees of Australian MITs and certain intermediaries (financially licensed custodians), were required to withhold at a single, non-final rate of 30% on the fund payment part of managed fund distributions to foreign resident investors. Those investors were then subject to the normal Australian income tax rules on their distributions. As the amount withheld was of a non-final nature, the foreign resident recipients of the payments were still required to lodge Australian tax returns.

    Changes in 2008

    The final MIT withholding tax regime replaced the former non-final withholding arrangements, with effect from 1 July 2008. As this is a final tax on the relevant distributions, foreign investors are relieved of the compliance burden of filing Australian tax returns on those distributions.

    Further rate changes in 2012

    In 2012, the government amended the law to increase the MIT final withholding tax rate for fund payments from MITs to a resident of an information exchange country made on or after 1 July 2012.

    The government also introduced a concessionary 10% final withholding tax rate for eligible fund payments from clean building MITs.

    The table below provides a snapshot of the MIT final withholding tax rate applicable from 1 July 2008

    MIT final withholding tax rate for residents of information exchange countries

     

    Application

     

    22.5%

    Income years commencing on or after 1 July 2008.

    15%

    Income years commencing on or after 1 July 2009.

    7.5%

    Income years commencing on or after 1 July 2010 and before 1 July 2012.

    15% or

    10% - on eligible fund payments made by MITs that hold only investments in energy efficient commercial buildings.

    Income years commencing on or after 1 July 2012.

    MIT final withholding tax rate for residents of non- information exchange countries

    Application

    30%

    Income years commencing on or after 1 July 2008.

      Last modified: 28 Oct 2016QC 37278