House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon. J. B. Hockey MP)

Chapter 2 - Managed investment trust withholding regime for foreign pension funds

Outline of chapter

2.1 Schedule 2 to the Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to ensure that foreign pension funds can access the managed investment trust (MIT) withholding tax regime and the associated lower rate of withholding tax on income from certain Australian investments.

Context of amendments

2.2 The MIT withholding tax regime provides a reduced rate of withholding tax for foreign investors in Australian managed funds for the purposes of attracting and retaining foreign investment in Australia.

2.3 Broadly, the liability for MIT withholding tax is imposed on foreign residents in respect of the fund payments they receive either directly or indirectly from a MIT.

2.4 However, under the current law, the concessional MIT withholding tax regime does not apply in circumstances where an ultimate beneficiary cannot be established. This will occur where fund payments are made to a trust without presently entitled beneficiaries.

2.5 Consequently, a foreign pension fund, as a foreign beneficiary or foreign custodian, will not have access to the MIT withholding tax regime if it receives fund payments as a trustee and does not have beneficiaries that are presently entitled to the payments. Instead, the foreign pension fund may be liable to tax under the general provisions relating to the taxation of trusts in Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) and may be taxed at the highest marginal tax rate.

2.6 These amendments will ensure that foreign pension funds can access the MIT withholding tax regime and the associated lower rate of withholding tax on eligible Australian investments. This result is achieved by treating the foreign pension fund as the ultimate beneficiary in respect of fund payments flowing to the fund directly or indirectly from a MIT.

2.7 The amendments will apply to income years commencing on or after 1 July 2008. This application date will ensure that affected foreign pension funds can access the MIT withholding tax regime reflecting current industry practice.

Summary of new law

2.8 Schedule 2 to the Bill amends Division 840 of the ITAA 1997 to ensure that foreign pension funds can access the MIT withholding tax regime. Under the amendments, foreign pension funds will be treated as the final beneficiary of a fund payment and will be liable for MIT withholding tax.

Comparison of key features of new law and current law

Detailed explanation of new law

2.9 The MIT withholding tax regime provides a reduced rate of withholding tax for foreign investors in Australian managed funds for the purposes of attracting and retaining foreign investment in Australia.

2.10 Broadly, the liability for MIT withholding tax is imposed on foreign resident beneficiaries in respect of amounts received that represent, or are reasonably attributable to, the fund payments of a MIT. The jurisdiction in which the beneficiary is a resident will determine the rate of MIT withholding tax that applies.

2.11 These amendments ensure that a foreign pension fund that receives a fund payment as a trustee will be taken to be a beneficiary in its own right and, as a result, will be liable to income tax at the MIT withholding tax rate as determined by the residency of the fund. [Schedule 2, items 1 and 2, section 840-800 and subsection 840-805(4A)]

2.12 A foreign pension fund is either:

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an entity that has the principal purpose of funding pensions (including disability and similar benefits) for the citizens or other contributors of a foreign country, provided that:

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the entity is a fund established by an exempt foreign government agency (as defined in the ITAA 1997); or

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the entity is established under a foreign law (as defined in the ITAA 1997) for an exempt foreign government agency; or

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a foreign superannuation fund (as defined in the ITAA 1997) which has at least fifty members.

[Schedule 2, items 2 and 3, subsection 840-805(4B) and the definition of 'foreign pension fund' in subsection 995-1(1)]

2.13 As a foreign pension fund will be liable to income tax at the MIT withholding tax rate, the amendments make clear that in the event there exists a beneficiary of the fund that is presently entitled to income of the fund, that beneficiary will not also be liable to MIT withholding tax. [Schedule 2, item 2, subsection 840-805(4C)]

Consequential amendments

2.14 Consequential amendments are made to the Pay As You Go withholding rules in Division 18 of Schedule 1 to the Taxation Administration Act 1953 to ensure that the withholding tax regime, including the crediting provisions, apply appropriately. [Schedule 2, item 4, subsections 18-32(3) and (4)]

Application and transitional provisions

2.15 The amendments will apply to fund payments made in income years starting on or after 1 July 2008, the date when the MIT withholding tax regime commenced. [Schedule 2, item 5]

2.16 This will ensure that specified foreign pension funds can access the MIT withholding tax regime reflecting current industry practice.

Amendment of assessments

2.17 Generally, the Commissioner of Taxation has the power to amend an assessment of a trust (including where a taxpayer requests an amendment), other than a trust that is a small business entity, within four years from the date of the notice of assessment. As these amendments may apply to income years in respect of which the four-year amendment period has expired, the period for amending assessments will be extended. An assessment can be amended if:

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the assessment was made before the commencement of the amendments (that is, before the day on which the amendments receive Royal Assent);

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the amendment is made within two years after that date; and

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the amendment is made for the purpose of giving effect to these amendments.

[Subclause 4(2)]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Managed investment trust withholding regime for foreign pension funds

2.18 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

2.19 This Schedule ensures that foreign pension funds can access the managed investment trust (MIT) withholding tax regime and the associated lower rate of withholding tax on income from certain Australian investments.

Human rights implications

2.20 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

2.21 This Schedule is compatible with human rights as it does not raise any human rights issues.