Senate

Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Bill 2018

Income Tax (Managed Investment Trust Withholding Tax) Amendment Bill 2018

Income Tax Rates Amendment (Sovereign Entities) Bill 2018

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Josh Frydenberg MP)
This memorandum takes account of amendments made by the House of Representatives to the bill as introduced.

Chapter 1 Non-concessional MIT income

Outline of chapter

1.1 Schedules 1 and 5 to this Bill amend the ITAA 1997, the ITAA 1936 and the TAA 1953 to improve the integrity of the income tax law for arrangements involving stapled structures and to limit access to tax concessions for foreign investors by increasing the MIT withholding rate on fund payments that are attributable to non-concessional MIT income to 30 per cent.

1.2 An amount of a fund payment will be non-concessional MIT income if it is attributable to income that is:

·
MIT cross staple arrangement income;
·
MIT trading trust income;
·
MIT agricultural income; or
·
MIT residential housing income.

1.3 The Income Tax (Managed Investment Trust Withholding Tax) Amendment Bill 2018 makes consequential amendments to the Income Tax (Managed Investment Trust Withholding Tax) Act 2008 to specify that the MIT withholding rate on income attributable to non-concessional MIT income is 30 per cent.

Context of amendments

MIT cross staple arrangement, trading trust and agricultural income

1.4 A stapled structure is an arrangement involving two or more commonly owned entities (at least one of which is a flow-through entity), that are often legally bound together such that the interests in them cannot be bought or sold separately.

1.5 Stapled structures have been used in Australia by the property sector since the 1980s. Prior to the introduction of the MIT regime in 2008, profits made by stapled entities bore a similar level of Australian tax as if they had been made by companies. Domestic and foreign direct investors were taxed in Australia at their marginal tax rates on business income (although they enjoyed some timing benefits). Generally, foreign investors in managed funds would have paid tax at the corporate tax rate.

1.6 The MIT regime was aimed at increasing the attractiveness of Australia's fund management industry (especially property funds) to mobile foreign investment. It did this by lowering the withholding taxes deducted from certain distributions to foreign investors from MITs, particularly for distributions attributable to rental income. For members of a MIT who are residents of an exchange of information country, the rate of MIT withholding tax is generally 15 per cent.

1.7 As a result of the MIT regime, foreign investors investing through stapled structures no longer bear tax at the corporate tax rate. If the trust side of the staple is a MIT, tax is generally withheld on rental income at 15 per cent.

1.8 This does not raise significant integrity issues for traditional property stapled structures. The trust side of traditional property stapled structures generally hold portfolios of land assets that derive passive rental income from third party tenants. A lower tax rate on this income is an intended outcome of the MIT regime. Trading activities (for example, property development) are undertaken by the company side of the staple, which continues to pay corporate tax. There is no conversion of active income into passive income.

1.9 Over time, the tax rate differential has encouraged an increase in the use of stapled structures to convert active business income into passive rental income.

1.10 For example, a single business is fragmented between an asset entity and an operating entity. A foreign investor holds an interest in a MIT. The land assets necessary for use in the business are held by the MIT (either directly or indirectly through another asset entity) and leased to an operating entity. The taxable income of the operating entity is reduced by rental payments to the asset entity. The rental payments distributed from the asset entity obtain access to the 15 per cent MIT withholding tax rate when distributed to foreign investors. In this way, the active income of a trading business is converted into concessionally taxed passive income.

1.11 Increasingly, businesses in a broad range of sectors are seeking to access the MIT concession by using stapled structures and other similar arrangements to convert active income into passive income. Further, some foreign investors have entered into arrangements that generate debt greater than the prescribed thin capitalisation debt limits by using 'double gearing' structures, leading to the ability to claim greater debt deductions. In some cases, these arrangements have no clear commercial justification other than to reduce effective tax rates for foreign investors. Schedule 2 to this Bill addresses this concern.

1.12 Meanwhile, globally, sovereign wealth funds and pension funds have grown rapidly. As these types of investors have access to a range of additional tax concessions, effective tax rates on distributions from stapled structures for these investors can be between zero and 15 per cent. Schedules 3 and 4 to this Bill address these concerns.

1.13 These concessions combined with a stapled structure can result in very low rates of tax for some foreign investors.

1.14 In effect, stapled structures have resulted in the unintended emergence of a dual corporate tax system that taxes foreign institutional investors in land-rich industries at rates anywhere between zero and 15 per cent. Meanwhile, other large businesses remain subject to the current top corporate tax rate of 30 per cent. This creates a tax bias in investment decisions, potentially drawing capital away from businesses that are capital intensive, knowledge based and/or research and development intensive, rather than land-rich.

1.15 The Government has decided that it is necessary to address the use of stapled structures and to limit access to tax concessions for foreign investors in order to protect the integrity of Australia's tax system. This will provide more certainty for investors and a fairer and more predictable investment environment in the future.

1.16 Therefore, a final MIT withholding tax set at the top corporate tax rate will apply to distributions derived from trading income that has been converted into passive income using a MIT, excluding rent received from third parties.

1.17 In addition, distributions derived from investments in agricultural land will be non-concessional MIT income that is subject to a final MIT withholding tax set at a rate of 30 per cent.

1.18 The Government also decided as part of the stapled structures package of measures to:

·
close a loophole in the thin capitalisation rules;
·
narrow the superannuation funds for foreign residents withholding tax exemption; and
·
codify and limit the sovereign immunity tax exemption to certain portfolio-like investments.

1.19 These changes are explained in Chapters 2, 3 and 4.

MIT residential housing income

1.20 In the 2017-18 Budget, the Government announced a package of measures designed to improve outcomes across the housing sector.

1.21 Several of these measures specifically address housing affordability for members of the community earning low to moderate incomes by providing incentives for investors to increase the supply of affordable housing.

1.22 States and territories have their own affordable housing policies which are designed to encourage affordable housing investment and the Government's affordable housing measures are intended to complement these existing policies.

1.23 In the 2017-18 Budget package, the Government announced that MITs would be prevented from investing in residential premises unless they are commercial residential premises or affordable housing.

1.24 Following consultation, the announced approach has been refined to adopt an approach that is more consistent with the stapled structures measures that were subsequently developed.

1.25 As a result, MITs will be able to invest in residential housing that is held primarily for the purpose of deriving rent. However, distributions that are attributable to investments in residential housing that are not used to provide affordable housing will be non-concessional MIT income that is subject to a final MIT withholding tax at a rate of 30 per cent.

Summary of new law

1.26 Schedules 1 and 5 to this Bill amend the ITAA 1997, the ITAA 1936 and the TAA 1953 to improve the integrity of the income tax law for arrangements involving stapled structures and to limit access to tax concessions for foreign investors by increasing the MIT withholding rate on fund payments that are attributable to non-concessional MIT income to 30 per cent - that is, at the rate equal to the top corporate tax rate.

1.27 An amount of a fund payment will be non-concessional MIT income if it is attributable to income that is:

·
MIT cross staple arrangement income;
·
MIT trading trust income;
·
MIT agricultural income; or
·
MIT residential housing income.

1.28 Transitional rules apply to fund payments that are attributable to existing investments. If the transitional rules apply, the existing MIT withholding tax rate of 15 per cent will continue to apply until, broadly:

·
for MIT cross staple arrangement income relating to a facility that is not an economic infrastructure facility - 1 July 2026;
·
for MIT cross staple arrangement income relating to a facility that is an economic infrastructure facility - 1 July 2034;
·
for MIT trading trust income - 1 July 2026;
·
for MIT agricultural income - 1 July 2026; and
·
for MIT residential housing income - 1 October 2027.

Comparison of key features of new law and current law

New law Current law
MIT withholding tax applies to fund payments made by a MIT to foreign resident members.

For members who are residents of an exchange of information country, to the extent that the fund payment is attributable to non-concessional MIT income, the rate of MIT withholding tax is 30 per cent.

An amount of a fund payment is non-concessional MIT income if it is attributable to income that is:

·
MIT cross staple arrangement income;
·
MIT trading trust income;
·
MIT agricultural income; or
·
MIT residential housing income.

Transitional rules apply to fund payments that are attributable to existing investments. If the transitional rules apply, the existing MIT withholding tax rate of 15 per cent continues to apply until, broadly:

·
for MIT cross staple arrangement income relating to a facility that is not an economic infrastructure facility - 1 July 2026;
·
for MIT cross staple arrangement income relating to a facility that is an economic infrastructure facility - 1 July 2034;
·
for MIT trading trust income - 1 July 2026;
·
for MIT agricultural income - 1 July 2026; and
·
for MIT residential housing income - 1 October 2027.

MIT withholding tax applies to fund payments made by a MIT to foreign resident members.

For members of a MIT who are residents of an exchange of information country, the rate of MIT withholding tax is generally 15 per cent.

Detailed explanation of new law

1.29 Schedules 1 and 5 to this Bill amend the ITAA 1997, the ITAA 1936 and the TAA 1953 to improve the integrity of the income tax law for arrangements involving stapled structures and to limit access to tax concessions for foreign investors by increasing the MIT withholding rate on fund payments that are attributable to non-concessional MIT income from 15 per cent to 30 per cent - that is, the rate equal to the top corporate tax rate.

1.30 An amount of a fund payment is non-concessional MIT income if it is attributable to income that is:

·
MIT cross staple arrangement income;
·
MIT trading trust income;
·
MIT agricultural income; or
·
MIT residential housing income.

[Schedule 1, items 11 and 12, section 12-435 in Schedule 1 to the TAA 1953 and the definition of 'non-concessional MIT income' in subsection 995-1(1) of the ITAA 1997]

1.31 To the extent that a fund payment is attributable to non-concessional MIT income in an income year, the trustee of a trust that is a withholding MIT, a custodian and some other entities must withhold an amount from the fund payment at a rate of 30 per cent - that is, at the rate equal to the top corporate tax rate. [Schedule 1, items 6 to 8, paragraphs 12-385(3)(a), 12-390(3)(a) and 12-390(6)(a) in Schedule 1 to the TAA 1953]

1.32 The Income Tax (Managed Investment Trust Withholding Tax) Amendment Bill 2018 makes consequential amendments to the Income Tax (Managed Investment Trust Withholding Tax) Act 2008 to specify that the MIT withholding rate on income attributable to non-concessional MIT income is 30 per cent. [Schedule 1 to the Income Tax (Managed Investment Trust Withholding Tax) Amendment Bill 2018, items 1 and 2, the definition of 'non-concessional MIT income' in section 2A and paragraph 4(1)(a) of the Income Tax (Managed Investment Trust Withholding Tax) Act 2008]

1.33 If a MIT or a custodian that is a withholding MIT makes a payment to another entity, the MIT or a custodian must notify, or make information available to, that other entity of certain details relating to the payment.

1.34 Consequential amendments ensure that, if the payment is, or is attributable to, non-concessional MIT income, then the details relating to the payment that must be notified by, or made available by, the MIT or custodian includes the extent to which the payment is non-concessional MIT income. [Schedule 1, items 9 and 10, paragraphs 12-385(3)(ab) and 12-395(6)(ab) in Schedule 1 to the TAA 1953]

MIT cross staple arrangement income

1.35 A MIT will have an amount of MIT cross staple arrangement income if, broadly, it derives, receives or makes an amount that is attributable to a cross staple arrangement between an operating entity to an asset entity.

What is an asset entity?

1.36 An asset entity, in relation to an income year, is a trust or a partnership (if it were treated as a trust) that is not covered by subsection 275-10(4) of the ITAA 1997 in relation to the income year. [Schedule 1, items 11 and 12, subsections 12-436(1) and (3) in Schedule 1 to the TAA 1953 and the definition of 'asset entity' in subsection 995-1(1) of the ITAA 1997]

1.37 A trust is covered by subsection 275-10(4) of the ITAA 1997 if, broadly:

·
in the case where the trust is a unit trust, the trust is a trading trust for the purposes of Division 6C of Part III of the ITAA 1936; or
·
in the case where the trust is not a unit trust:

-
the trust carries on a trading business (within the meaning of Division 6C of Part III of the ITAA 1936); or
-
the trust controls, or is able to control directly or indirectly, the affairs or operations of another person in respect of the carrying on of a trading business by that other person.

1.38 Therefore, an asset entity includes a unit trust that is not a trading trust. In addition, an asset entity includes other types of trusts or a partnership that, if it were treated like a unit trust, would not be a trading trust.

1.39 In essence, an asset entity is an entity that only derives income from business that is eligible investment business (as defined in section 102M of the ITAA 1936). Eligible investment business is business that consists of, for example, investing in land for the purposes of deriving rent or trading in shares.

What is an operating entity?

1.40 An operating entity, in relation to an income year, is a trust that is covered by subsection 275-10(4) of the ITAA 1997 in relation to the income year. [Schedule 1, items 11 and 12, subsection 12-436(2) in Schedule 1 to the TAA 1953 and the definition of 'operating entity' in subsection 995-1(1) of the ITAA 1997]

1.41 An operating entity, in relation to an income year, is also a partnership or company that, if it were treated as a trust, would be covered by subsection 275-10(4) of the ITAA 1997 in relation to the income year. [Schedule 1, item 11, subsections 12-436(2) and (3) in Schedule 1 to the TAA 1953]

1.42 Therefore, unlike an asset entity, an operating entity would be an entity that can derive income from a trading business (as defined in Division 6C of Part III of the ITAA 1936). In essence, any entity that is not an asset entity will be an operating entity.

What is a cross staple arrangement?

1.43 A cross staple arrangement is an arrangement that is entered into by two or more entities (the arrangement entities) if:

·
at least one of the arrangement entities is an asset entity;
·
at least one of the arrangement entities is an operating entity; and
·
the following conditions are satisfied:

-
one or more other entities who are not party to the cross staple arrangement (the external entities) each hold a total participation interest (that is, direct and indirect participation interests) in each arrangement entity (that is, in both the asset entity and the operating entity); and
-
the sum of the total participation interests held by the external entities in each arrangement is 80 per cent or more.

[Schedule 1, items 11 and 12, subsection 12-436(4) in Schedule 1 to the TAA 1953 and the definition of 'cross staple arrangement' in subsection 995-1(1) of the ITAA 1997]

1.44 An arrangement is defined in subsection 995-1(1) to mean any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings.

1.45 In working out the sum of total participation interests held by external entities in each arrangement entity, a particular direct or indirect participation interest held in the arrangement entity is taken into account only once. [Schedule 1, item 11, subsection 12-436(5) in Schedule 1 to the TAA 1953]

Example 1.1 : Cross staple arrangement

Cross staple arrangement entity chart

Asset Trust is an asset entity and Op Co is an operating entity.Investor A holds 30 per cent of the units in Asset Trust and 30 per cent of the shares in Op Co.Investor B holds 70 per cent of the units in Asset Trust and 70 per cent of the shares in Op Co.Investor A and B, which are entities that are not parties to the cross staple arrangement, together hold 100 per cent of the participation interests in Asset Trust and Op Co.Therefore, the lease entered between Asset Trust and Op Co is a cross staple arrangement.

1.46 The total participation interests that an investor holds in another entity is adjusted if:

·
an entity (the test entity) has a total participation interest in two or more entities that entered into the cross staple arrangement; and
·
either:

-
the amount (the lowest participation interest amount) of one of those participation interests falls short of the amount of each of the other participation interests; or
-
the amount (the lowest participation interest amount) of two or more of those participation interests is the same but falls short of the amount of each of the other participation interests.

[Schedule 1, item 11, subsection 12-436(6) in Schedule 1 to the TAA 1953]

1.47 In these circumstances, for the purpose of working out the total participation interests that an investor holds in another entity, the test entity's total participation interest amount is equal to the lowest participation interest amount. [Schedule 1, item 11, subsection 12-436(7) in Schedule 1 to the TAA 1953]

1.48 This ensures that if external entities have disproportionate interests in the asset entity and operating entity, only the common ownership percentage is counted.

Example 1.2 : Cross staple arrangement - total participation interest Assume the facts are the same as Example 1.1, except that:

·
Investor A holds 40 per cent of the units in Asset Trust and 50 per cent of the shares in Op Co;
·
Investor B holds 60 per cent of the units in Asset Trust and 40 per cent of the shares in Op Co; and
·
Investor C holds no units in Asset Trust and 10 per cent of the shares in Op Co.

Investor A's 40 per cent participation interest in Asset Trust falls short of the 50 per cent participation interest in Op Co. Therefore, for the purpose of determining whether a cross staple arrangement exists, Investor A's 50 per cent participation interest is treated as being equal to the lowest participation interest (that is, 40 per cent).Similarly, as Investor B's 40 per cent holding in Op Co falls short of its 60 per cent holding in Asset Trust, its participation interest is treated as 40 per cent.Investor C is treated as holding a nil participation interest because it holds no participation interests in Asset Trust.Investor A and B are external entities (that is, they are entities that are not parties to the cross staple arrangement) which together hold 80 per cent of the participation interests in Asset Trust and Op Co.Accordingly the lease entered between Asset Trust and Op Co is a cross staple arrangement.

1.49 A cross staple arrangement that is for the lease of land (and fixtures on the land) between two or more parties would be covered by the definition of a cross staple arrangement. A cross staple financial arrangement, such as a total return swap, is also covered by the definition.

1.50 However, to avoid doubt, equipment will be industrial, commercial or scientific equipment to the extent that an amount paid or credited as consideration for the use of the equipment, or for the right to use the equipment, is not rent from land (including rent from an interest in land or rent from fixtures on land). [Schedule 1, item 15, the definition of 'industrial, commercial or scientific equipment' in subsection 6(1) of the ITAA 1936]

1.51 The purpose of this definition is to clarify the income tax law to remove any doubt that rent from land (including rent from an interest in land or rent from fixtures on land) is not a royalty.

What is a stapled entity?

1.52 Each of the entities that have entered into the cross staple arrangement is a stapled entity. [Schedule 1, items 11 and 13, subsection 12-436(8) in Schedule 1 to the TAA 1953 and paragraph (a) of the definition of 'stapled entity' in subsection 995-1(1) of the ITAA 1997]

When does a MIT have an amount of MIT cross staple arrangement income?

1.53 A MIT will have an amount of MIT cross staple arrangement income in relation to an income year if:

·
the MIT has an amount of assessable income for that income year;
·
the amount of assessable income is, or is attributable to, an amount that is derived, received or made from a separate entity (the second entity) - the second entity will generally make a payment of the amount (directly or indirectly through, for example, interposed trusts) to the MIT; and
·
the amount of assessable income is not an amount that is excluded from being a fund payment of a MIT - broadly, amounts that are not a fund payment of a MIT include:

-
dividends, interest and royalties;
-
net capital gains in relation to a CGT asset that is not taxable Australian property; and
-
amounts which are not Australian sourced income.

[Schedule 1, item 11, subsection 12-437(1) in Schedule 1 to the TAA 1953]

1.54 Therefore, interest income from a cross staple arrangement (for example, from a cross staple loan) is not MIT cross staple arrangement income.

1.55 An amount will be MIT cross staple arrangement income of a MIT if:

·
the MIT is an asset entity in relation to the income year and is a stapled entity in relation to the cross staple arrangement;
·
the second entity is an operating entity in relation to the income year and is a stapled entity in relation to the cross staple arrangement; and
·
the amount is derived, received or made by the MIT from the second entity - this amount would be an assessable amount to the MIT.

[Schedule 1, item 11, subparagraphs 12-437(2)(a)(i), (b)(i) and (c)(i) in Schedule 1 to the TAA 1953]

1.56 Therefore, where a MIT is a direct party to a cross staple arrangement and, for example, an amount of cross staple rent is paid from an operating entity to the MIT, that amount will be treated as MIT cross staple arrangement income. However, an amount will not be MIT cross staple arrangement income if it is covered by one of the exclusions contained in subsections 12-437(3), (4), (5), (6) or (8).

Example 1.3 : Direct cross staple arrangement

Direct cross staple arrangement entity chart

Asset Trust and Op Co are stapled entities.Asset Trust is a MIT that owns a hotel. Asset Trust earns $100,000 of rent from the hotel that it has leased to Op Co (an operating company).The $100,000 rent received by Asset Trust from Op Co (the second entity) is MIT cross staple arrangement income unless a specific exception applies.

1.57 An amount will also be MIT cross staple arrangement income of a MIT if:

·
the second entity is an asset entity in relation to the income year and is a stapled entity in relation to the cross staple arrangement;
·
another entity (the third entity) is an operating entity in relation to the income year and is a stapled entity in relation to the cross staple arrangement; and
·
the amount is attributable to an amount that is derived, received or made by the second entity from the third entity.

[Schedule 1, item 11, subparagraphs 12-437(2)(a)(ii), (b)(ii) and (c)(ii) in Schedule 1 to the TAA 1953]

1.58 Therefore, where a MIT is not a party to a cross staple arrangement but has an amount of income that is attributable to the arrangement, that amount will be MIT cross staple arrangement income.

1.59 This would occur if the MIT receives a distribution from an asset entity where the net income of the asset entity includes an amount of assessable income in relation to a cross staple arrangement. It would arise, for example, where the MIT is a beneficiary of another trust that is a party to a cross staple arrangement.

1.60 In addition, an amount will be attributable to a cross staple arrangement where there are multiple tiers of flow through entities interposed between the MIT and the second entity (which is the asset entity that is a party to the cross staple arrangement).

Example 1.4 : Amount attributable to cross staple arrangement

Cross staple arrangement entity chart

Assume the facts are the same as Example 1.3, except that:

·
Hold Trust, which is a MIT, owns all of the units in Asset Trust;
·
Asset Trust is not a MIT;
·
Asset Trust, in calculating its net income for the year, has no other assessable income and has deductible expenses of $30,000; and
·
Hold Trust is presently entitled to all of the income from Asset Trust and, for the purposes of calculating its net income for the income year, includes its share of the net income of Asset Trust ($70,000) in its assessable income.

Therefore, the assessable income of Hold Trust ($70,000) is attributable to the cross staple rent that Asset Trust (the second entity) receives from Op Co (the third entity) and is MIT cross staple arrangement income unless a specific exception applies.

1.61 There are four circumstances in which an amount that is attributable to a cross staple arrangement will not be MIT cross staple arrangement income of a MIT. These are:

·
where cross staple rent can be traced to an amount of third party rent from land investment charged by an operating entity;
·
where the income from a cross staple arrangement satisfies the de minimis rule for an asset entity;
·
where the income from a cross staple arrangement is, or is attributable to, rent from an approved economic infrastructure facility; and
·
where the income from a cross staple arrangement is, or is attributable to, a capital gain that arises because an operating entity acquires an asset from the asset entity.

[Schedule 1, item 11, subsections 12-437(3), (4), (5) and (7) in Schedule 1 to the TAA 1953]

The third party rent exception

1.62 An amount that is attributable to a cross staple arrangement will not be MIT cross staple arrangement income of a MIT to the extent that it is attributable to an amount of rent from land investment that is derived, received or made by a stapled entity in relation to the cross staple arrangement from an entity that is not a stapled entity in relation to the cross staple arrangement. [Schedule 1, item 11, subsection 12-437(3) in Schedule 1 to the TAA 1953]

1.63 An amount of rent is rent from land investment if it is derived or received from investments in land (including investments in certain moveable property that are specified in subsection 102MB(1) of the ITAA 1936). [Schedule 1, item 12, definition of 'rent from investment in land' in subsection 995-1(1) of the ITAA 1997]

1.64 If an operating entity derives a combination of third party income that is rent from land investment and other income, then the amount will be MIT cross staple arrangement income only to the extent that cross staple rent received by the asset entity from the operating entity is not attributable to that third party rent from land investment.

Example 1.5 : Amount attributable to cross staple arrangement

Cross staple arrangement entity chart

Asset Trust owns land and certain ancillary safety equipment, being moveable property that is taken to be an investment in land under section 102MB of the ITAA 1936.Asset Trust leases both the land and equipment in their entirety to Op Co in consideration for payments of rent. This arrangement is a cross staple arrangement entered into by Asset Trust (an asset entity) and Op Co (an operating entity).Op Co enters into a sub-lease agreement with a third party tenant. Under the terms of this agreement, Op Co also sub-leases safety equipment to the third party tenant. This is to ensure that the tenant can safely access and utilise the land.Op Co has no other income or expenses (other than the cross staple lease payment).The rent received by the Asset Trust will not be MIT cross staple arrangement income as it is wholly attributable to rent from land investment (comprising of rent payments for the use of both land and moveable property) that is derived by Op Co (a stapled entity in relation to the cross staple arrangement) from a third party tenant (that is, an entity that is not a stapled entity in relation to the cross staple arrangement).

Example 1.6 : Amount attributable to cross staple arrangement Asset Trust owns commercial property (a specialist homewares shopping centre). It leases that commercial property to Op Co in consideration for an annual rental payment of $80,000. This arrangement is a cross staple arrangement entered into by Asset Trust (an asset entity) and Op Co (an operating entity) with a cross staple payment of $80,000.Op Co enters into sub-lease agreements with third party tenants for exclusive possession of retail spaces. Separately, it enters into licence arrangements with respect to common areas for the use of temporary advertising or promotional displays.Op Co derives:

·
$90,000 in third party rental income from its sub-leases (net of attributable expenses other than the cross-staple rent); and
·
$10,000 from its licence arrangements (net of attributable expenses other than the cross-staple rent).

To determine the amount of income that is attributable to third party rental income, Op Co must reduce the third party rental income by part of the $80,000 cross staple payment on a proportionate basis.Therefore, because 90 per cent of Op Co's income is from third party rent, 90 per cent of the cross staple payment is attributable to that amount. Consequently, in relation to the cross staple payment of $80:

·
$72,000 (that is, $80,000 x 90 per cent) is attributable to third party rent and will not be MIT cross staple arrangement income; and
·
$8,000 will be MIT cross staple arrangement income.

The de minimis exception

1.65 An amount from a cross staple arrangement, or that is attributable to a cross staple arrangement, will not be MIT cross staple arrangement income of a MIT to the extent that it is covered by the de minimis exception in section 12-438. [Schedule 1, item 11, subsection 12-437(4) in Schedule 1 to the TAA 1953]

1.66 An amount is covered by the de minimis exception if:

·
the amount is MIT cross staple arrangement income for the income year of an asset entity in relation to a cross staple arrangement; and
·
the MIT cross staple arrangement income of the asset entity for the previous income year did not exceed five per cent of the asset entity's assessable income (disregarding any net capital gains) for that previous income year.

[Schedule 1, item 11, subsections 12-438(1) to (4) in Schedule 1 to the TAA 1953]

1.67 Therefore, although the MIT is an asset entity in relation to a cross staple arrangement, it may have no cross staple arrangement income because of the operation of the de minimis exception.

1.68 If the asset entity did not exist in the previous income year, the asset entity can work out whether the de minimis exception applies based on reasonable estimates of MIT cross staple arrangement income, assessable income and total assessable income for the current income year. [Schedule 1, item 11, subsection 12-438(5) in Schedule 1 to the TAA 1953]

1.69 In addition, if the asset entity did exist in the previous income year but is not a MIT, the asset entity is treated as a MIT for the purpose of working out whether the de minimis exception applies. [Schedule 1, item 11, subsection 12-438(6) in Schedule 1 to the TAA 1953]

Example 1.7 : Application of the de minimis exception Asset Trust and Op Co are stapled entities. Asset Trust is a MIT.In the current year, Asset Trust has cross staple rental income from Op Co of $60,000.In the previous income year, Asset Trust had cross staple rental income from Op Co of $45,000.Asset Trust's total assessable income in the previous year (disregarding any net capital gain) was $1 million.For that income year, the percentage of income attributable to cross staple arrangement income was 4.5 per cent of assessable income.Because Asset Trust's MIT cross staple arrangement income did not exceed 5 per cent of its assessable income in the previous income year, the de minimis exception will apply so that the amount of cross staple rent ($60,000) will not be MIT cross staple arrangement income of the MIT in the current income year.

Example 1.8 : Application of the de minimis exception where MIT receives a distribution from a trust that has a cross staple arrangement

Cross staple arrangement entity chart

Hold Trust is a MIT that owns all of the units in Asset Trust.Asset Trust (which is not a MIT) and Op Co are stapled entities in relation to a cross staple lease arrangement. Asset Trust is a second entity mentioned in section 12-437.In the 2020-21 income year:

·
Asset Trust received $70,000 of cross staple rental income from Op Co; and
·
Hold Trust, which is presently entitled to all of the income of Asset Trust, includes $70,000 in its assessable income - this amount will be MIT cross staple arrangement income unless the de minimis exception in section 12-438 is satisfied.

As Asset Trust is a second entity in relation to a cross staple arrangement, the de minimis exception is applied to Asset Trust (subsection 12-438(5)), rather than on an aggregate basis for the MIT.To determine whether the de minimis exception applies to the MIT cross staple arrangement income of Asset Trust, it is necessary to consider the amount of the Asset Trust's MIT cross staple arrangement income and assessable income for the previous income year.In the 2019-20 income year:

·
Asset Trust received $60,000 of cross staple rental income from Op Co; and
·
Asset Trust's total assessable income (disregarding any net capital gains) was $1 million.

Therefore, for the 2019-20 income year, the percentage of MIT cross staple arrangement income for Asset Trust was 6 per cent of its assessable income (disregarding net capital gains).As Asset Trust exceeded the de minimis exception threshold of 5 per cent in the 2019-20 income year, any MIT cross staple arrangement income for the 2020-21 income year will not be disregarded.Consequently, when the MIT cross staple arrangement income for the 2020-21 income year flows to a foreign investor through Hold Trust, it will be non-concessional MIT income that is subject to MIT withholding at a rate of 30 per cent. In this regard, it does not matter whether, on an aggregate basis, Hold Trust had less than 5 per cent of its assessable income attributable to MIT cross staple arrangement income in the 2019-20 income year.

The approved economic infrastructure facility exception

1.70 An amount that is attributable to a cross staple arrangement will not be MIT cross staple arrangement income of a MIT to the extent that it is, or is attributable to, rent from land investment that is:

·
attributable to a facility, or an improvement to a facility; and
·
referable to a time in the income year when the facility, or the improvement to the facility, is covered by the approved economic infrastructure facility exception in section 12-439.

[Schedule 1, item 11, subsection 12-437(5) in Schedule 1 to the TAA 1953]

1.71 The approved economic infrastructure facility exception applies to a facility or to an improvement to a facility. The transitional rule for MIT cross staple arrangement income (which is discussed later in this Chapter) also applies to a facility. The question as to when a collection of assets comprise a facility is considered in the explanation of the operation of that transitional rule.

1.72 The approved economic infrastructure facility exception applies to a facility at a time if:

·
the facility is covered by an approval of the Treasurer that is in force at that time; and
·
that time is no later than the end of the period of 15 years beginning on the day on which an asset that is part of that facility is first put to use.

[Schedule 1, item 11, subsection 12-439(1) in Schedule 1 to the TAA 1953]

1.73 The approved economic infrastructure facility exception also applies to an improvement to a facility at a time if:

·
the improvement to the facility is covered by an approval of the Treasurer that is in force at that time; and
·
that time is no later than the end of the period of 15 years beginning on the day on which an asset that is part of that facility is first put to use after it has been improved under the improvement.

[Schedule 1, item 11, subsection 12-439(2) in Schedule 1 to the TAA 1953]

1.74 This allows approved economic infrastructure projects to be held in a stapled structure and for cross staple rent from land investment to be eligible to access the 15 per cent MIT rate for a period of 15 years from the time when an asset that is part of that facility is first put to use. The facility or an asset that is part of that facility will be first put to use when it becomes operational (even if it does not produce assessable income). At the end of the 15 year period, the cross staple rent from land investment will be MIT cross staple arrangement income.

1.75 Importantly, to access this concession, the asset entity must satisfy the usual conditions in Division 6C of Part III of the ITAA 1936 which require the investment in the infrastructure facility to be an investment in land for the purpose, or primarily for the purpose, of deriving rent.

1.76 An Australian government agency (other than the Commonwealth) may make an application to the Treasurer in respect of a particular infrastructure facility, or an improvement to an infrastructure facility, specified in the application. [Schedule 1, item 11, subsection 12-439(3) in Schedule 1 to the TAA 1953]

1.77 An Australian government agency is defined in subsection 995-1(1) of the ITAA 1997 to mean:

·
the Commonwealth, a State or a Territory; or
·
an authority of a Commonwealth, a State or a Territory.

1.78 The Treasurer may approve the facility, or the improvement to the facility, specified in the application if the Treasurer is satisfied that the following criteria are met:

·
the facility is an economic infrastructure facility;
·
the estimated capital expenditure on the facility is $500 million or more;
·
the facility is yet to be constructed;
·
the facility will significantly enhance the long-term productive capacity of the economy; and
·
approving the facility is in the national interest.

[Schedule 1, item 11, subsection 12-439(4) in Schedule 1 to the TAA 1953]

1.79 Similarly, the Treasurer may approve the improvement to a facility specified in the application if the Treasurer is satisfied that the following criteria are met:

·
the facility is an economic infrastructure facility;
·
the estimated capital expenditure on the improvement to the facility is $500 million or more;
·
the improvement to the facility is yet to be constructed;
·
the improvement to the facility will significantly enhance the long-term productive capacity of the economy; and
·
approving the improvement to the facility is in the national interest.

[Schedule 1, item 11, subsection 12-439(4) in Schedule 1 to the TAA 1953]

1.80 Economic infrastructure facilities are enduring facilities that support or enable economic activity and improve national productivity in Australia. A facility is an economic infrastructure facility if it is:

·
transport infrastructure;
·
energy infrastructure;
·
communications infrastructure; or
·
water infrastructure.

[Schedule 1, items 11 and 12, subsection 12-439(5) in Schedule 1 to the TAA 1953 and the definition of 'economic infrastructure facility' in subsection 995-1(1) of the ITAA 1997]

1.81 Examples of economic infrastructure facilities include:

·
electricity distribution networks;
·
toll road networks; and
·
ports.

1.82 Examples of facilities that would not typically be economic infrastructure include a mining operation and a water facility built for use by a single commercial business.

1.83 The Treasurer's approval may apply to a new facility or to the substantial improvement of an existing facility.

1.84 In determining whether a facility (or a substantial improvement to a facility) will significantly enhance the long-term productive capacity of the economy, the Treasurer may consider whether:

·
the economic benefits resulting from the facility (or the substantial improvement) outweighs, or will outweigh, the economic costs; and
·
in the opinion of Infrastructure Australia, the facility is nationally significant infrastructure within the meaning of the Infrastructure Australia Act 2008.

1.85 The Treasurer may also consult with other Commonwealth Government departments and agencies to assess whether a facility (or a substantial improvement to a facility) will significantly enhance the long-term productive capacity of the economy.

Example 1.9 : Substantial improvement to a facility An application is made by a State Government to the Treasurer for the approved economic infrastructure facility exception.The application relates to a proposed expansion of an existing port facility which is projected to result in:

·
a significant increase in the port's capacity; and
·
a significant extension of the life of the port.

The estimated capital expenditure on the substantial improvement is $650 million.The proposed $650 million expansion of the port facility relates to a substantial improvement of an economic infrastructure asset. Therefore, the Treasurer may approve the proposed substantial improvement of the facility if the Treasurer is satisfied it meets the relevant criteria.

1.86 The Treasurer's approval of an economic infrastructure facility, or the improvement to an economic infrastructure facility:

·
must be in writing;
·
must specify the facility, or the improvement, that is approved;
·
must specify the date on which the approval comes into force; and
·
may contain any other information the Treasurer considers appropriate.

[Schedule 1, item 11, subsection 12-439(6) in Schedule 1 to the TAA 1953]

1.87 The Treasurer may publish an approval of a particular facility, or an improvement to a facility, in any way that the Treasurer considers appropriate. [Schedule 1, item 11, subsection 12-439(7) in Schedule 1 to the TAA 1953]

1.88 If the Treasurer decides not to approve a facility, or an improvement to a facility, the Treasurer must notify the applicant of the decision in writing as soon as practicable after making the decision. [Schedule 1, item 11, subsection 12-439(8) in Schedule 1 to the TAA 1953]

1.89 The Treasurer's decision to approve a facility, or an improvement to a facility, as an approved economic infrastructure facility is excluded from the operation of the Administrative Decisions (Judicial Review) Act 1977 and therefore is not reviewable on its merits. [Schedule 1, item 14, paragraph (gaaa) of the Administrative Decisions (Judicial Review) Act 1977]

1.90 The Treasurer's decision is not reviewable on its merits because key factors that must be taken into account when making a decision include whether:

·
the facility will significantly enhance the long-term productive capacity of the economy; and
·
approving the facility is in the national interest.

1.91 Consideration of these factors involves complex questions of government policy that can have broad ranging implications for persons other than those immediately affected by the decision. Therefore, it is not appropriate for the decision to be subject to merits under the Administrative Decisions (Judicial Review) Act 1977.

1.92 However, the Treasurer's decision will remain subject to judicial review under section 39B of the Judiciary Act 1903.

1.93 The approved economic infrastructure facility exception applies only in respect of MIT cross staple arrangement income that is attributable to rent from land investment arising from cross staple arrangements. It does not apply to other cross staple arrangements (for example, a total return swap) entered into in respect of the infrastructure facility or to MIT trading trust income.

1.94 In addition, although a facility may be an economic infrastructure facility, the facility would need to include an interest in land that is capable of giving rise to rent in order to benefit from the exception.

1.95 New section 25-115 of the ITAA 1997 provides a specific deduction to an operating entity that has entered into a cross staple arrangement in respect of an approved infrastructure facility for which it pays rent to the asset entity for the duration of the concession period, provided certain conditions are met.

1.96 In this regard, an entity that is an operating entity in relation to the cross staple arrangement can deduct an amount, for an income year, of rent from land investment if:

·
another entity derives, receives or makes an amount of rent from land investment from the operating entity in the income year;
·
the rent from land investment is derived or received on or after 27 March 2018;
·
the cross staple arrangement was entered into in relation to:

-
a facility that is an approved economic infrastructure facility at a time in the income year; or
-
an improvement to a facility, where the improvement is an approved economic infrastructure facility, at a time in the income year;

·
the other entity is an asset entity in relation to the cross staple arrangement;
·
apart from subsection 25-115(1), the operating entity could otherwise deduct the amount under the income tax law;
·
the amount is excepted MIT CSA income of the asset entity for the income year; and
·
each entity that is a stapled entity in relation to the cross staple arrangement has made a choice in relation to the cross staple arrangement.

[Schedule 1, item 2, subsection 25-115(1) of the ITAA 1997]

1.97 An amount is excepted MIT CSA income of a MIT in relation to an income year if the amount would be MIT cross staple arrangement income of the MIT but for:

·
the approved economic infrastructure facility exception; or
·
the MIT cross staple arrangement income transitional rule.

[Schedule 1, items 11 and 12, section 12-442 in Schedule 1 to the TAA 1953 and the definition of 'excepted MIT CSA income in subsection 995-1(1) of the ITAA 1997]

1.98 If the asset entity is not a MIT then, for the purposes of working out whether an amount is excepted MIT CSA income of the asset entity for the income year under paragraph 25-115(1)(e) of the ITAA 1997, the asset entity is taken to be a MIT in relation to the income year. [Schedule 1, item 2, subsection 25-115(2) of the ITAA 1997]

1.99 A choice that is made under subsection 25-115(3) of the ITAA 1997:

·
must be made by the entity in the approved form before the start of the income year in which the asset is first put to use or such later time as is allowed by the Commissioner;
·
must be given by the entity to the Commissioner within 60 days after the entity makes the choice; and
·
is irrevocable.

[Schedule 1, item 2, subsections 25-115(3) and (4) of the ITAA 1997]

1.100 The choice will only need to be made by the entities who are the parties to the cross staple arrangement in relation to the approved economic infrastructure facility that gives rise to rent from land investment. This will be the operating entity which incurs the rent and the asset entity which derives the rent.

1.101 Entities that make this choice will be subject to additional integrity rules to safeguard against aggressive cross-staple pricing arrangements during the concession period. The integrity rules apply if a MIT derives, receives or makes an amount (directly or indirectly) that is excepted MIT CSA income.

1.102 An amount is excepted MIT CSA income of a MIT in relation to an income year if the amount would be MIT cross staple arrangement income of the MIT but for, so far as is relevant, the approved economic infrastructure facility exception.

1.103 The integrity rules:

·
extend the scope of the non-arm's length income rule; and
·
apply a concessional cross staple rent cap.

1.104 As amounts that are covered by the transitional rules for MIT cross staple arrangement income are also excepted MIT CSA income, the operation of the integrity rules is explained later in this Chapter.

1.105 The general anti-avoidance rule in the income tax law (Part IVA of the ITAA 1936) applies only if a taxpayer has obtained a tax benefit in relation to a scheme. However, if a deduction is allowable to a taxpayer as a result of the making of a choice under the income tax law, then the taxpayer is not taken to have obtained a tax benefit in relation to the allowance of the deduction (subparagraph 177C(2)(b)(i) of ITAA 1936).

1.106 Consequently, if a choice is made under subsection 25-115(2) of the ITAA 1997 then, for the purposes of the general anti-avoidance rule, the operating entity will not be taken to have obtained a tax benefit in relation to the allowance of the deduction for the cross staple rental payment to the asset entity.

1.107 Paragraph 25-115(1)(e) of the ITAA 1997 limits the effect of this choice to deductions for payments that give rise to excepted MIT CSA income of the asset entity. Deductions that give rise to other forms of income of an asset entity are not affected by this choice.

The capital gains exception

1.108 An amount that is attributable to a cross staple arrangement will not be MIT cross staple arrangement income of a MIT to the extent that it is attributable to a capital gain if:

·
the capital gain is made in relation to the income year by an asset entity because an operating entity acquires an asset from the asset entity; and
·
the asset entity and the operating entity are stapled entities in relation to the cross staple arrangement.

[Schedule 1, item 11, subsections 12-437(6) and (7) in Schedule 1 to the TAA 1953]

Example 1.10 : MIT cross staple arrangement income that is attributable to a capital gain Asset Trust and Op Co are stapled entities.Asset Trust is a MIT that owns a building that has been held for rental purposes.Asset Trust sells the building to Op Co for $10 million (at market value).The capital gain made by Asset Trust on disposal of the building to Op Co (the second entity) will not be MIT cross staple arrangement income because of the capital gains exception.

MIT cross staple arrangement income - Transitional rules

1.109 The amendments generally apply to a fund payment made by a MIT in relation to an income year if:

·
the fund payment is made on or after 1 July 2019; and
·
the income year is the 2019-20 income year or a later income year.

1.110 However, transitional rules apply in relation to MIT cross staple arrangement income that is attributable to a facility that existed or is sufficiently committed to at the time of announcement of the measure.

1.111 These transitional rules will also cover future expansions and enhancements where assets are added to an existing facility to improve or extend its functionality. However, an assessment will need to be made on a case by case basis as to whether the additions or enhancements form part of the existing facility or are a new facility. If the new assets are a new facility in their own right, that new facility will not benefit from the transition rules.

1.112 The MIT cross staple arrangement income transitional rules will apply if:

·
before 27 March 2018, an Australian government agency:

-
decided to approve the acquisition, creation or lease of a facility;
-
publicly announced that decision; and
-
took significant preparatory steps to implement that decision;

·
either:

-
a cross staple arrangement was entered into in relation to the facility before 27 March 2018; or
-
it was reasonable on 27 March 2018 to conclude that a cross staple arrangement will be entered into in relation to the facility;

·
all the entities that are stapled entities in relation to the cross staple arrangement already existed before 27 March 2018; and
·
each entity that is a stapled entity in relation to the cross staple arrangement has made a choice to apply the transitional rule.

[Schedule 1, item 11, subsection 12-440(1) in Schedule 1 to the TAA 1953]

1.113 The MIT cross staple arrangement income transitional rules will also apply if:

·
either:

-
an entity entered into a contract before 27 March 2018 for the acquisition, creation or lease of a facility; or
-
an entity owns, or is the lessee of, a facility at a time before 27 March 2018;

·
either:

-
a cross staple arrangement was entered into by that entity in relation to the facility before 27 March 2018; or
-
it was reasonable on 27 March 2018 to conclude that a cross staple arrangement will be entered into by that entity in relation to the facility;

·
all the entities that are stapled entities in relation to the cross staple arrangement already existed before 27 March 2018; and
·
each entity that is a stapled entity in relation to the cross staple arrangement has made a choice to apply the transitional rule.

[Schedule 1, item 11, subsection 12-440(2) in Schedule 1 to the TAA 1953]

1.114 A contract to acquire land will not be a contract for the acquisition of a facility, as land is not a facility in and of itself.

1.115 A choice that is made under subsection 12-440(1) or (2):

·
must be made by the entity in the approved form no later than 30 June 2019 or such later time as is allowed by the Commissioner;
·
must be given by the entity to the Commissioner within 60 days after the entity makes the choice; and
·
is irrevocable.

[Schedule 1, item 11, subsections 12-440(5) and (6) in Schedule 1 to the TAA 1953]

1.116 The choice must be made by the entities who are the parties to the cross staple arrangement giving rise to rent from land investment. This will generally be the operating entity which incurs the rent and the asset entity which derives the rent.

Example 1.11 : Is an option a contract for the acquisition of a facility? An entity entered into a call option to purchase an infrastructure facility before 27 March 2018. The call option provides the entity with an option, but not the obligation, to purchase the infrastructure facility.The option is valid until 30 June 2018, but had not been exercised at 27 March 2018. The holder of the option exercised their rights to acquire the infrastructure facility on 1 June 2018 and the infrastructure facility became the subject of a cross staple lease.The option agreement is not a contract for the acquisition of the infrastructure facility.The transitional rules will not apply to MIT cross staple arrangement income attributable to the infrastructure facility.

What is a facility?

1.117 A facility is a collection of assets that are connected and together perform a particular function such as, for example, an infrastructure facility or a property facility.

1.118 In determining whether a collection of assets together comprise a facility, regard should be had to:

·
whether the assets are functionally interconnected;
·
whether the assets give rise to a separately identifiable revenue stream;
·
the legal rights of the parties in respect of the assets - such as:

-
the scope of any existing and proposed lease agreement;
-
the applicable regulatory framework; and
-
any applicable licence or concession arrangements;

·
whether the financial viability of assets that existed at the transition time are dependent on the expansions or enhancements that will occur to the facility after the transition time; and
·
any other factors that are relevant in the circumstances of a particular case.

1.119 The question as to whether a collection of assets comprise a facility must be determined taking into account all of the facts and circumstances of a particular case.

1.120 The list of factors above provides guidance as to matters that should be considered in determining whether a collection of assets together comprise a facility. None of the factors are determinative. It is possible that in some cases one or more of the factors may not be present or do not assist in the relevant determination.

Amount will not be MIT cross staple arrangement income

1.121 If the MIT cross staple arrangement income transitional rules apply to a MIT, an amount derived, received or made by the MIT will not be MIT cross staple arrangement income of the MIT if:

·
the amount is, or is attributable to, an amount derived, received or made from another entity (the second entity);
·
the amount relates to an asset that is part of the facility;
·
the second entity is a stapled entity in relation to the cross staple arrangement;
·
either:

-
if the MIT is an asset entity in relation to the income year and is a stapled entity in relation to the cross staple arrangement - the amount is rent from land investment paid from an operating entity to the MIT; or
-
if the second entity is an asset entity in relation to the income year and is a stapled entity in relation to the cross staple arrangement - the amount is attributable to rent from land investment paid from an operating entity to the second entity; and

·
the time when the amount was derived, received or made by the MIT meets the timing requirements in subsection 12-440(4) in Schedule 1 to the TAA 1953.

[Schedule 1, item 11, subsection 12-440(3) in Schedule 1 to the TAA 1953]

1.122 The renewal of a lease agreement, covering the same facility and between the same parties, during the applicable transitional period would not be expected to create a new cross staple arrangement.

Deduction for cross staple arrangement payments

1.123 If the MIT cross staple arrangement income transitional rules apply, an entity that is an operating entity in relation to the cross staple arrangement can deduct, for an income year, an amount of rent from investment in land if:

·
another entity derives or receives the amount of rent from investment in land from the operating entity at a time that:

-
is in the income year;
-
is on or after 27 March 2018; and
-
meets the timing requirements in subsection 12-440(4) in Schedule 1 to the TAA 1953;

·
the other entity is an asset entity in relation to the cross staple arrangement; and
·
apart from subsection 12-440(2) in Schedule 1 to the TAA 1953, the operating entity could otherwise deduct the amount of rent from investment in land under the income tax law; and
·
the amount is excepted MIT CSA income of the asset entity for the income year.

[Schedule 1, item 2, subsections 25-120(1) and (2) of the ITAA 1997]

1.124 If the asset entity is not a MIT then, for the purposes of working out whether an amount is excepted MIT CSA income of the asset entity for the income year under paragraph 25-120(2)(d) of the ITAA 1997, the asset entity is taken to be a MIT in relation to the income year. [Schedule 1, item 2, subsection 25-115(2) of the ITAA 1997]

1.125 The general anti-avoidance rule in the income tax law (Part IVA of the ITAA 1936) applies only if a taxpayer has obtained a tax benefit in relation to a scheme. However, if a deduction is allowable to a taxpayer as a result of the making of a choice under the income tax law, then the taxpayer is not taken to have obtained a tax benefit in relation to the allowance of the deduction (subparagraph 177C(2)(b)(i) of ITAA 1936).

1.126 Consequently, if a choice is made under section 12-440 in Schedule 1 to the TAA 1953 then, for the purposes of the general anti-avoidance rule, the operating entity will not be taken to have obtained a tax benefit in relation to the allowance of the deduction for the cross staple rental payment to the asset entity.

1.127 Paragraph 25-120(2)(d) of the ITAA 1997limits the effect of this choice to deductions for payments that give rise to excepted MIT CSA income of the asset entity. Deductions that give rise to other forms of income of an asset entity are not affected by this choice

Timing requirements

1.128 Where the facility to which the cross staple arrangement relates is not an economic infrastructure facility, the timing requirements are met if the time is both:

·
before 1 July 2031; and
·
before the later of:

-
1 July 2026; and
-
the end of the 7 year period beginning on the day upon which an asset that is a part of the facility is first put to use for the purpose of producing assessable income.

[Schedule 1, item 11, paragraph 12-440(4)(a) in Schedule 1 to the TAA 1953]

1.129 Where the facility to which the cross staple arrangement relates is an economic infrastructure facility, the timing requirements are met if the time is both:

·
before 1 July 2039; and
·
before the later of:

-
1 July 2034; and
-
the end of the 15 year period beginning on the day upon which an asset that is a part of the facility is first put to use for the purpose of producing assessable income.

[Schedule 1, item 11, paragraph 12-440(4)(b) in Schedule 1 to the TAA 1953]

1.130 Therefore, if the facility that qualifies under the MIT cross staple arrangement income transitional rules is an existing facility that is already in use and is currently producing income, the transitional rules apply to an amount that is derived, received or made before:

·
if the facility is an economic infrastructure facility - 1 July 2034;
·
otherwise - 1 July 2026.

1.131 If the facility that qualifies under the MIT cross staple arrangement income transitional rules is currently being constructed, or construction of the facility has not yet commenced, the transitional rules will apply to an amount that is derived, received or made after the time that an asset that is a part of the facility is first put to use and starts producing assessable income and:

·
if the facility is an economic infrastructure facility - before the earlier of:

-
1 July 2039; and
-
the end of the 15 year period beginning on the day upon which an asset that is a part of the facility is first put to use for the purpose of producing assessable income;

·
otherwise - before the earlier of:

-
1 July 2031; and
-
the end of the 7 year period beginning on the day upon which an asset that is a part of the facility is first put to use for the purpose of producing assessable income.

Examples of the operation of the MIT cross staple arrangement income transitional rules

Example 1.12 : Enhancement to an existing, non-income producing facility In June 2017, stapled entities entered into a contract with the State Government to acquire and expand an existing un-tolled public highway.The arrangement involved:

·
the asset entity acquiring a long term lease from the State Government over the highway; and
·
the asset entity sub-leasing the highway to the operating entity which runs the toll road business.

In July 2025, the expansion is completed and the toll road becomes operational and starts to earn assessable income.The expansion is an enhancement to the existing facility because:

·
the expansion is functionally connected to the existing un-tolled road;
·
the revenue stream generated from the enhancement to the road is not separately identifiable from the existing road; and
·
the legal arrangements support this outcome.

As at 27 March 2018, the facility (the un-tolled road) is an existing economic infrastructure facility that has never been used to produce assessable income.As a result, the transitional period for the facility will:

·
commence on 1 July 2025; and
·
cease on 1 July 2039 - as this is the earlier of the date listed in paragraph 12-440(4)(b) in Schedule 1 to the TAA 1953 and the end of the period of 15 years beginning on the day on which the toll road is first put to use for the purpose of producing assessable income.

Example 1.13 : Enhancements to an existing income producing facility Prior to and on 27 March 2018:

·
Electricity Network Trust (Asset Trust) and Electricity Network Co (Operating Entity) are parties to a cross staple arrangement;
·
Asset Trust has a leasehold interest in land on which there is an existing electricity network; and
·
Operating Entity:

-
leases that land from Asset Trust and operates a business of providing electricity, in accordance with a project deed with the State Government; and
-
holds certain other tangible assets that are required to operate the electricity network.

The project deed requires Operating Entity to deliver services under an electricity licence to a set standard and to a set geographical area. The project deed does not specify the enhancements to the network that may be required to satisfy legal requirements under the project deed. The total revenue that can be generated from the electricity network is regulated.The electricity network is an economic infrastructure facility that:

·
existed before 27 March 2018;
·
was held in a cross staple arrangement; and
·
has previously been used to produce assessable income.

As a result, the transitional period will commence on 1 July 2019 and end on 1 July 2034.In 2025, the State Government announces the development of a new suburb, and construction commences. Asset Trust incurs costs of expanding the existing electricity network to the new suburb (which is within the geographical area to which Operating Entity is required to deliver services under its electricity licence).Under the arrangement between the Asset Trust and Operating Entity, the rent that Asset Trust charges to Operating Entity is calculated by reference to the value of assets that are the subject of the cross staple lease (which includes the value of any enhancements).The new assets are functionally interconnected to the existing electricity network and are built to satisfy obligations that are inherently linked to the delivery of the services provided by the existing network. The existing facility and the expansion are subject to the same regulatory regime. Therefore, network connections to the new suburb are enhancements to the existing electricity network facility.Cross staple rent paid in respect of the extension will be able to access the transitional treatment until 1 July 2034.

Example 1.14 : Enhancement of a facility Hotel Asset Trust is party to a cross staple arrangement that includes Hotel Operating Co. Hotel Asset Trust owns a single building that has approval to operate as a hotel. Hotel Operating Co leases the hotel and has been operating a hotel business since early 2016.The facility is eligible for a seven year transitional period, commencing on 1 July 2019 and ending on 1 July 2026.In January 2020, the Trustee of Hotel Asset Trust and Board of Hotel Operating Co approved an expansion to the existing building to add four new floors. Hotel Operating Co intends to market the new floors as the new 'executive wing' of the Hotel once the expansion is complete. The executive wing is expected to become operational in late 2020.The new floors are an enhancement to the existing facility that has previously been used to produce assessable income. Therefore, the rent charged on the premium wing will not be treated as MIT cross staple arrangement income until 1 July 2026.

Example 1.15 : Application of transitional arrangements to a facility contracted before 27 March 2018 In May 2017, the Trustee of Hotel Asset Trust and the Board of Hotel Operating Co approved plans to add a commercial car park adjacent to the Hotel on the same block of land.The commercial car park is separate to the car park that the hotel has for its guests and will be available for use by the public for a fee.The car park will not be functionally interconnected with the operation of the hotel facility. The revenue stream arising from the car park will be separately identifiable.Before 27 March 2018, Hotel Operating Co had entered into a contract with Builder Co to build the car park. Documents considered by the Trustee and the Board outline that the car park, once constructed, would be operated by Hotel Operating Co through a cross staple arrangement with the Hotel Asset Trust.The commercial car park is a separate facility to the hotel and a new facility in relation to which a cross staple arrangement will be entered into. The commercial car park is built and first put to use for the purpose of producing assessable income on 1 January 2020.As the facility was contracted for before 27 March 2018, transitional treatment will apply for a period of seven years, commencing on 1 January 2020.

Example 1.16 : Non-concessional MIT income for a new facility In May 2017, the Trustee of Hotel Asset Trust and the Board of Hotel Operating Co considered plans to build a new hotel adjacent to the existing hotel (on the same block of land).In June 2018, the Trustee enters into a contract with Builder Co to build the new hotel and enters into a cross staple arrangement with Hotel Operating Co in relation to the new building.The operation of the new hotel facility will not be functionally interconnected with the operation of the existing hotel facility. The revenue stream arising from the new hotel facility will be separately identifiable.While the new hotel is located on the same block of land as the existing hotel, it is considered a separate and new facility, rather than an enhancement to the existing hotel facility.As no contracts were entered into for this new facility as at 27 March 2018, any cross staple rent relating to the hotel will be treated as MIT cross staple arrangement income - that is, it will not receive the benefit of the transitional rule.

MIT cross staple arrangement income - Integrity rules for excepted MIT CSA income

1.132 Integrity rules apply if a MIT derives, receives or makes an amount (directly or indirectly) that is excepted MIT CSA income.

1.133 The integrity rules will:

·
extend the scope of the non-arm's length income rule; and
·
apply a concessional cross staple rent cap.

1.134 If the facility that gives rise to the excepted MIT CSA income is not an economic infrastructure facility (and therefore benefits from the seven year MIT cross staple arrangement income transitional rule), only the non-arm's length income rule will apply to the facility.

1.135 If the facility that gives rise to the excepted MIT CSA income is an economic infrastructure facility (and therefore benefits from the approved economic infrastructure facility exception or the 15 year MIT cross staple arrangement income transitional rule), both the non-arm's length income rule and the concessional cross staple rent cap will apply to the facility.

MIT cross staple arrangement income - Extension to the non-arm's length income rule

1.136 The non-arm's length income rule in section 275-610 of the ITAA 1997 operates to treat an amount of ordinary or statutory income of a MIT as non-arm's length income if:

·
the amount is derived from a scheme where the parties were not dealing with each other at arm's length;
·
the amount exceeds the amount the entity might have derived if those parties had been dealing with each other at arm's length; and
·
the amount is not a particular type of distribution.

1.137 The Commissioner must make a determination that an amount is non-arm's length income. If a determination is made, the trustee of the MIT is liable to pay tax on the amount at the top corporate tax rate (that is, 30 per cent).

1.138 The non-arm's length income rule provides an appropriate safeguard against aggressive cross staple rent pricing for sectors that have readily available data on comparable Australian third party market transactions.

1.139 Therefore, the Commissioner will be able to make a determination to apply the non-arm's length income rule to a MIT if the amount of ordinary or statutory income is excepted MIT CSA income (regardless of whether or not the MIT is a party to the scheme that gave rise to the non-arm's length income). [Schedule 1, items 3 and 4, subsections 275-610(1A) and 275-615(1A) of the ITAA 1997]

1.140 If the Commissioner makes a determination to apply the non-arm's length income rule to a MIT, then the trustee of the MIT is liable to pay tax on the amount at the top corporate tax rate - that is, 30 per cent (subsection 275-605(2) of the ITAA 1997).

1.141 In addition, the net income of the MIT, or the assessable income of a MIT that is an AMIT, is reduced by the amount of the non-arm's length income (subsections 275-605(3) to (5) of the ITAA 1997). This ensures that the non-arm's length income is:

·
not included in a fund payment made by the MIT that is subject to MIT withholding tax; and
·
not included in the assessable income of Australian investors under Division 6 of Part III of the ITAA 1936.

MIT cross staple arrangement income - Concessional cross staple rent cap integrity rule

1.142 The concessional cross staple rent cap will apply to a MIT only if:

·
the MIT derives, receives or makes excepted MIT CSA income and the facility that gives rise to the excepted MIT CSA income is an economic infrastructure facility that benefits from:

-
the approved economic infrastructure facility exception; or
-
the 15 year MIT cross staple arrangement income transitional rule; and

·
the amount of excepted MIT CSA income is, or is attributable to, rent from land investment under a cross staple lease entered into by the asset entity and the operating entity that are parties to the cross staple arrangement.

[Schedule 1, item 11, subsection 12-441(1) in Schedule 1 to the TAA 1953]

1.143 The amount of the concessional cross staple rent cap will depend on whether or not, at the transition date (27 March 2018), the cross staple lease is an existing lease with an established method for working out the amount of the rent (including a method that specifies an amount of rent).

1.144 If the relevant asset entity is not a MIT, then the relevant asset entity is taken to be a MIT for the purpose of working out whether its excepted MIT CSA income exceeds the amount of its concessional cross staple rent cap under section 12-441 in Schedule 1 to the TAA 1953. [Schedule 1, item 11, subsection 12-441(3) in Schedule 1 to the TAA 1953]

1.145 This will ensure the cap is worked out at the asset entity level even where the asset entity is not a MIT (with the consequences of breaching the cap at the asset entity level flowing up to the MIT and its investors).

Amount of the cap - existing lease with an established rent method

1.146 An asset entity that has an existing lease arrangement in place with a method to determine the amount of the rent (including a method that specifies an amount of rent) agreed to between the asset entity and operating entity can continue to charge rent under their existing arrangements for the duration of the transition period and remain compliant with the concessional cross staple rent cap.

1.147 The amount of the cap in relation to a cross staple lease is worked out based on the existing amount of rent, or an existing method for working out the amount of the rent, if:

·
the amount is excepted MIT CSA income because the 15 year MIT cross staple arrangement income transitional rule applies;
·
the cross staple lease was entered into before 27 March 2018;
·
the cross staple lease, or any associated documents (such as a rental agreement), that existed before 27 March 2018 specified:

-
the amount of annual rent under the lease; or
-
an objective method for determining the amount of annual rent under the lease which is set out in the cross staple lease or in the associated documents.

[Schedule 1, item 11, subsection 12-443(1) in Schedule 1 to the TAA 1953]

1.148 If a method for determining the amount of annual rent under the lease is set out in the cross staple lease or in the associated documents, then the amount of the concessional cross staple rent cap for an income year of the MIT is the amount of annual rent determined for the income year in the method specified in the lease agreement and/or associated documents. [Schedule 1, items 11 and 12, subsection 12-443(2) in Schedule 1 to the TAA 1953 and the definition of 'concessional cross staple rent cap' in subsection 995-1(1) of the ITAA 1997]

1.149 In this regard, the cross staple lease or the associated documents must set out the method for determining the amount of annual rent in an objective manner and be in existence prior to 27 March 2018.

1.150 It is a question of fact as to whether a fully documented objective method exists. In determining this question, regard must be had to both the lease agreement and any other associated documents that support the calculation of rent under the lease.

1.151 It is not necessary for the method to be stipulated in the lease agreement itself. For example, the lease agreement may specify a fixed amount of rent but there may be other documents which evidence the method which is the basis for the calculation in the lease agreement.

1.152 In order to establish that there is a method that is set out in the documents, the method must be objective and sufficiently prescriptive so that the calculation of the rental charge relies upon objectively discernible information, and produces a result that would be the same for any reasonable person applying it.

1.153 Examples of circumstances where an objective method may exist in documentation prior to 27 March 2018 are as follows.

·
The lease agreement and/or associated documents provided a formula for the calculation of rent based on a percentage of the regulated asset base. The method is the approach in the formula.
·
The lease agreement and/or associated documents provided for rent to be charged as a percentage of the gross turnover of the operating entity. The method is the percentage of gross turnover that was specified.
·
A lease agreement specifies that the rent will be set at a market rate of rent. At the commencement of the lease, the parties sought a transfer pricing report prepared by an independent expert on 1 July 2017. The report's conclusions are based on a comparison to rates of rental return on certain assets in the industrial property sector. The report provided a data set of comparables and a rent pricing range based on the data set concluding that the midpoint of the range is an appropriate rent yield to apply to the accounting book value of the leased assets. The asset entity and operating entity agree this will be the method by which market rent will be ascertained for that year. The method is the midpoint of the range determined in accordance with the approach adopted in the transfer pricing report to determine the arm's length rent.
·
The lease agreement prescribes a method comprising five factors to which regard may be had in annual rent reviews. Rent has always been calculated as a set per cent of gross revenue, pursuant to a sub-lease. The way in which the five factors in the sub-lease should be taken into account to determine the set percentage of the gross revenue is set out in the rent notice for the income year ended 30 June 2017. The method is based on the manner in which a range of set factors are applied to determine the amount of the rent.
·
The lease agreement specifies that the amount of rent is to be calculated based on a percentage of gross turnover of the operating entity and provides for a market rent review every three years. Associated documents show that the method for determining the rent is based on a split of the profit between the asset entity and operating entity (that is, to ensure that both the asset entity and operating entity receive an equal rate of return on their investment) and that the percentage of turnover set in the lease as a proxy to achieve this outcome. The method is the profit split.

1.154 An objective method would not exist, for example, if the lease agreement provided for the rent to be determined at the discretion of the trustee or based on agreement between the trustee and the operating entity.

Example 1.17 : Existing lease with method for calculating rent agreed to prior to 27 March 2018 Asset Trust and Op Co entered into a cross staple lease arrangement, with effect from 1 July 2015, over an economic infrastructure facility.Asset Trust and Op Co are eligible to apply the 15 year MIT cross staple arrangement income transitional rule to the rent earned by Asset Trust on the economic infrastructure facility.Before 27 March 2018, Asset Trust and Op Co had entered into a lease agreement setting out the terms of the lease. The lease agreement has a lease payment schedule covering the 2017-18 and 2018-19 income years (the covered income years). The payment schedule denotes a fixed dollar amount of lease payments in each of the covered income years.There is documentary evidence that the method used to determine the rent in the payment schedule was to:

·
adopt the rental yield in a transfer pricing report prepared by an independent expert on 1 July 2017, which concluded that the rent for the covered income years should be determined based on a midpoint of a range of comparable returns for certain leased assets in the industrial property sector; and
·
apply that yield to the opening book value of the economic infrastructure facility (that is, the leased assets) for the year.

Because the amounts specified in the lease agreement were determined based on an objective method, Asset Trust would be able to use that objective method to determine its concessional cross staple rent cap.Therefore, the concessional cross staple rent cap will be based on the midpoint of the range of current market returns on the assets in the industrial property sector and the opening accounting book value of the leased assets in the relevant year throughout the transition period.

1.155 If the cross staple lease and any associated documents specify the amount of annual rent under the lease but do not set out a method for determining that amount, then the amount of the concessional cross staple rent cap for an income year of the MIT is:

·
for an income year where the lease, or the associated documents, specify the amount of annual rent for the corresponding year of the lease - the amount of annual rent specified in the lease for that corresponding year; or
·
for an income year where that amount is not so specified - that annual amount in relation to the most recent year of the lease for which an amount is so specified indexed annually by the All Groups Consumer Price Index (as set out in Subdivision 960-M of the ITAA 1997).

[Schedule 1, items 5, 11 and 12, subsection 12-443(3) in Schedule 1 to the TAA 1953; section 960-265 and the definition of 'concessional cross staple rent cap' in subsection 995-1(1) of the ITAA 1997]

1.156 For these purposes, an income year and a year of the lease correspond to each other if both of those years end:

·
after a particular 27 March; and
·
on or before the next 27 March.

[Schedule 1, item 11, subsection 12-443(4) in Schedule 1 to the TAA 1953]

Example 1.18 : Existing lease with specified amount of rent agreed to prior to 27 March 2018 Assume the facts are the same as Example 1.17, except that the lease agreement merely states that the parties will meet periodically to agree on a rental amount.Prior to 27 March 2018, it was determined that, for the income year ending 30 June 2018, Op Co would pay rent of $10 million to Asset Trust. There are no associated documents which outline an objective method that was used to determine the amount of the rent.The concessional cross staple rent cap for income years starting on or after 1 July 2019 will be set at $10 million (the rent for the income year ending 30 June 2018) and will be indexed annually by the All Groups Consumer Price Index (as set out in Subdivision 960-M of the ITAA 1997).

Example 1.19 : Existing lease with specified amount of rent agreed to prior to 27 March 2018 Assume the facts are the same as Example 1.18, except it was determined under the lease agreement that:

·
for the income year ending 30 June 2018, Op Co would pay rent of $10 million to Asset Trust; and
·
for the income year for the income year ending 30 June 2019, Op Co would pay rent of $10.2 million to Asset Trust.

For later income years, no amount is specified under the lease or the associated documents. In addition, there are no associated documents which outline an objective method which was used to determine the amount of the rent.The concessional cross staple rent cap for the 2019-20 income year will be set at $10.2 million (the rent for the income year ending 30 June 2019).The concessional cross staple rent cap for income years starting on or after 1 July 2020 will be set at $10.2 million (the rent for the income year ending 30 June 2019) and will be indexed annually by the All Groups Consumer Price Index (as set out in Subdivision 960-M of the ITAA 1997).

Amount of the cap - no existing lease with established rent method

1.157 The amount of the concessional cross staple rent cap is worked out differently if the amount is excepted MIT CSA income because:

·
the approved economic infrastructure facility exception applies; or
·
the 15 year MIT cross staple arrangement income transitional rule applies and section 12-443 in Schedule 1 to the TAA 1953 does not apply - that is, broadly, the cross staple lease and any associated documents do not, before 27 March 2018, set out a method to determine the amount of the rent (including a method that specifies an amount of rent).

1.158 This method should generally apply to stapled structures that are established, or leases that are entered into, on or after the transition date. However, this method will also apply to leases entered before 27 March 2018 where the rent had not been agreed by the parties (and therefore not specified in the lease or associated documents) before this date.

1.159 In these circumstances, a statutory concessional cross staple rent cap applies. The amount of the statutory cap broadly reflects the amount of rent that would be paid from the operating entity to the asset entity which would result in the asset entity having a current year net (taxable) income position equal to 80 per cent of the project's notional current year taxable income.

1.160 The amount of the statutory concessional cross staple rent cap for an income year is worked out applying the steps in Table 1.1.

Table 1.1 : Steps for working out the concessional cross staple rent cap

Step 1 Work out a reasonable estimate of the following amount for the relevant asset entity for the income year:

·
if the relevant asset entity is a trust (other than an AMIT) - the amount of its net income or tax loss;
·
if the relevant asset entity is an AMIT - the amount of its trust components with the character of assessable income or its tax loss;
·
if the relevant asset entity is a partnership - the amount of its net income or partnership loss.

Step 2 Work out a reasonable estimate of the following amount for the relevant operating entity for the income year:

·
if the relevant operating entity is a trust (other than an AMIT) - the amount of its net income or tax loss;
·
if the relevant operating entity is a partnership - the amount of its net income or partnership loss;
·
otherwise - the amount of its taxable income or tax loss

Step 3 Add the results of step 1 and step 2
Step 4 Multiply the result of step 3 by 0.8
Step 5 Subtract the result of step 1 from the result of step 4
Step 6 Add the amount of excepted MIT CSA income to the result of step 5

1.161 If the result of step 6 is a positive number, then the concessional cross staple rent cap is that result. Otherwise, the concessional cross staple rent cap is nil. [Schedule 1, items 11 and 12, section 12-444 in Schedule 1 to the TAA 1953 and the definition of 'concessional cross staple rent cap' in subsection 995-1(1) of the ITAA 1997]

1.162 For the purposes of steps 1 and 2 of Table 1.1:

·
the amount of a tax loss, or a partnership loss, is treated as a negative number; and
·
any prior year tax losses are disregarded.

[Schedule 1, item 11, subsection 12-444(3) in Schedule 1 to the TAA 1953]

Example 1.20 : Existing staple arrangement with no agreed rent Asset Trust and Op Co entered a cross staple lease arrangement, with effect from 1 July 2017, over an economic infrastructure facility.Asset Trust and Op Co are eligible to apply the 15 year MIT cross staple arrangement income transitional rule to the rent earned by Asset Trust on the economic infrastructure facility.Asset Trust and Op Co had not agreed the amount of rent to be charged under the lease before 27 March 2018. Therefore, the amount of the concessional cross staple rent cap for Asset Trust will be determined using the statutory method.Asset Trust would need to determine the concessional cross staple rent cap for the 2019-20 income year by applying the steps in Table 1.1.Step 1: Work out a reasonable estimate of Asset Trust's net incomeAt 30 June 2020, a reasonable estimate of Asset Trust's net income for the income year is as follows:

$ million
Cross staple rental income 85
Cross staple interest income 9
Depreciation (20)
External interest expense (9)
Prior year tax losses carried forward (10)
Net income 55
The step 1 amount is a reasonable estimate of Asset Trust's net income disregarding prior year tax losses - that is, $65 million.Step 2: Work out a reasonable estimate of Op Co's taxable incomeAt 30 June 2020, a reasonable estimate of Op Co's taxable income for the income year is as follows:
$ million
Third party income 105
Cross staple rent expense (85)
Cross staple interest expense (9)
Prior year tax losses carried forward 0
Taxable income 11
The step 2 amount is a reasonable estimate of Op Co's taxable income disregarding prior year tax losses - that is, $11 million.Step 3: Add the results of step 1 and step 2The step 3 amount is a reasonable estimate of the notional current year taxable income for the project. This is worked out by adding the results of step 1 ($65 million) and step 2 ($11 million) - that is, $76 million.Step 4: Multiply the result of step 3 by 0.8The step 4 amount is worked out by multiplying the notional project taxable income by 0.8. This represents the share of the project's taxable income that would be allocated to the trust if it received the maximum rent under the concessional rent cap. Therefore, the step 4 amount is:

$76 million * 0.8 = $61 million

Step 5: Subtract the result of step 1 from the result of step 4The step 5 amount compares this notional taxable income cap and the actual taxable income of the trust to determine whether there is an excess of taxable income allocated to the Asset Trust. This is worked out by subtracting the result of step 1 from the result of step 4. Therefore, the step 5 amount is:

$61 million - $65 million = ($4 million)

The negative amount of $4 million represents excess taxable income that is allocated to Asset Trust.Step 6: Add the amount of excepted MIT CSA income to the result of step 5The step 6 amount is worked out by adding the amount of excepted MIT CSA income to the result of step 5. The amount of excepted MIT CSA income is amount of the cross staple rent ($85 million). Therefore, the step 6 amount is:

($4 million) / $85 million = $81 million

Therefore, the amount of Asset Trust's concessional cross staple rent cap is $81 million.

Consequences of breaching the cap

1.163 If the amount of the relevant asset entity's excepted MIT CSA income exceeds the amount of its concessional cross staple rent cap for the income year, then the excess amount of excepted MIT CSA income will not benefit from the approved economic infrastructure facility exception or the 15 year MIT cross staple arrangement income transitional rule. [Schedule 1, item 11, subsection 12-441(2) in Schedule 1 to the TAA 1953]

1.164 As a result, the excess amount will be non-concessional MIT income that, to the extent it is reflected in a fund payment made to a foreign resident, is subject to MIT withholding at a rate equal to the top corporate tax rate (that is, 30 per cent).

1.165 In addition, if, for the income year, the relevant asset entity is entitled to a deduction against assessable income that arises from rent for land investment and its excepted MIT CSA income exceeds the amount of its concessional cross staple rent cap, then:

·
first, the amount must be deducted against assessable income from that arrangement that is excepted MIT cross staple arrangement income, to the extent that the excepted MIT cross staple arrangement income does not exceed the entity's concessional cross staple cap;
·
second, if an amount of the deduction remains, the amount can only be deducted against assessable income that is MIT cross staple arrangement income; and
·
third, if an amount of the deduction still remains, the amount can be deducted against any other assessable income.

[Schedule 1, item 11, section 12-445 in Schedule 1 to the TAA 1953]

1.166 If the relevant asset entity is not a MIT, then the relevant asset entity is taken to be a MIT for the purpose of:

·
working out whether its excepted MIT CSA income exceeds the amount of its concessional cross staple rent cap under section 12-441 in Schedule 1 to the TAA 1953; and
·
determining the amount of assessable income that is MIT cross staple arrangement income under section 12-445 in Schedule 1 to the TAA 1953.

[Schedule 1, item 11, subsections 12-441(3) and 12-445(3) in Schedule 1 to the TAA 1953]

Example 1.21 : Existing staple arrangement with no agreed rent Assume the facts are the same as Example 1.17. In addition, assume that:

·
Asset Entity is a MIT that (ignoring the application of the concessional cross staple rent cap and the expense allocation rule) had excepted MIT CSA income which is cross staple rent in relation to the economic infrastructure facility (Facility 1) of $60 million;
·
the concessional cross staple rent cap was $55 million;
·
Asset Entity had third party rental income in relation to a separate facility (Facility 2) it owned of $50 million;
·
Asset Entity had deductible expenses of $20 million; and
·
Asset Entity's net (taxable) income for the year was $90 million.

When determining the amount of non-concessional MIT income resulting from the breach of the concessional cross staple rent cap, Asset Entity must have regard to the expense allocation rule in section 12-445.Asset Entity had determined, based on the usual approach to the allocation of expenses, that expenses directly related to Facility 1 or Facility 2 are to be allocated directly against income from that Facility. Other indirect expenses are allocated on a pro-rata basis to the income. This allocation resulted in:

·
$12 million of expenses being allocated against the rental income from Facility 1; and
·
$8 million of expenses being allocated against the rental income from Facility 2.

Under the expense allocation rule, the expenses of $12 million that relate to earning the rental income from Facility 1 of $60 million must be first allocated to excepted MIT CSA income.Therefore, if Asset Entity made a fund payment equal to its net income of $90 million, it would have the following components:

·
a fund payment attributable to cross staple rent of $43 million (that is, $55 million - $12 million) - this amount is excepted MIT CSA income that is subject to 15 per cent MIT withholding;
·
a fund payment attributable to cross staple rent that is in excess of the concessional cross staple rent cap of $5 million (that is, $60 million - $55 million) - this amount is non-concessional MIT income that is subject to MIT withholding at the top corporate tax rate; and
·
a fund payment attributable to third party rental income of $42 million (that is, $50 million - $8 million) - this amount is subject to 15 per cent MIT withholding.

MIT trading trust income

1.167 The MIT trading trust income rules broadly ensure that distributions from a trading trust to a MIT (either directly or indirectly through a chain of flow-through entities) are treated as non-concessional MIT income and subject to MIT withholding at a rate of 30 per cent - that is, at the rate equal to the top corporate tax rate.

1.168 A MIT will have an amount of MIT trading trust income in relation to an income year if:

·
the MIT has an amount of assessable income for that income year;
·
the amount of assessable income is, or is attributable to, an amount that is derived, received or made from a separate entity (the second entity) - in this case, the second entity will generally make a payment (directly or indirectly through, for example, interposed trusts) to the MIT; and
·
the amount of assessable income is not an amount that is disregarded in calculating a fund payment of a MIT - these amounts include:

-
dividends, interest and royalties;
-
net capital gains in relation to a CGT asset that is not taxable Australian property; and
-
amounts which are not Australian sourced income.

[Schedule 1, item 11, subsection 12-446(1) in Schedule 1 to the TAA 1953]

1.169 The amount will be MIT trading trust income of the MIT if:

·
the MIT holds a total participation interest (as defined in section 960-180 of the ITAA 1997) in the second entity of greater than nil;
·
the amount arises because of that total participation interest;
·
the second entity is:

-
a trading trust in relation to the income year - a trading trust is defined in section 102N of the ITAA 1936 to mean, broadly, a unit trust that carries on trading business (that is, business other than eligible investment business) or that controls, directly or indirectly, the affairs or operations of another entity that carries on a trading business; or
-
a partnership or a trust that is not a unit trust that, if it was a unit trust throughout the income year, would be a trading trust; and

·
the second entity is not a public trading trust in relation to the income year.

[Schedule 1, items 11 and 12, subsection 12-446(2) in Schedule 1 to the TAA 1953 and the definition of 'MIT trading trust income' in subsection 995-1(1) of the ITAA 1997]

1.170 However, an amount is not MIT trading trust income of a MIT to the extent that it is attributable to a capital gain that arises because CGT event E4 or CGT event E10 happens - these CGT events happen if, broadly, a trust or an AMIT makes a non-assessable payment to a beneficiary or member. [Schedule 1, item 11, subsection 12-446(3) in Schedule 1 to the TAA 1953]

1.171 Therefore, an amount constitutes MIT trading trust income under section 12-446 in Schedule 1 to the TAA 1953 to the extent that a MIT receives distributions directly, or indirectly through interposed entities, from a trading trust (or another entity which would be a trading trust if it were a unit trust) because these amounts represent trading profits, and therefore are taxed at a rate of 30 per cent.

1.172 However, arrangements such as a cross staple lease between an asset entity and an operating entity that is a trading trust will be MIT cross staple arrangement income, rather than MIT trading trust income. This is because the rental income received by the MIT (or indirectly flowing to the MIT from a second entity which has a cross staple arrangement) from the trading trust does not arise because of the total participation interest held by the MIT.

Example 1.22 : Distributions from trading trusts

Trading trust distribution entity chart

Trading Trust is a trading trust (as defined in section 102N of the ITAA 1936). As it is not a public unit trust under section 102P of the ITAA 1936, it is taxed on a flow-through basis under Division 6 of Part III.For the income year ended 30 June 2020, Trading Trust has net income of $100,000 consisting of services income and a net capital gain on the sale of a parcel of land.Hold Trust is a MIT and holds 10 per cent of the units in Trading Trust. For the 30 June 2020 income year, Hold Trust is presently entitled to 10 per cent of the net income of Trading Trust, and includes $10,000 in its assessable income.The $10,000 is non-concessional MIT income for Hold Trust.

MIT trading trust income - Transitional rules

1.173 The amendments generally apply to a fund payment made by a MIT in relation to an income year if:

·
the fund payment is made on or after 1 July 2019; and
·
the income year is the 2019-20 income year or a later income year.

1.174 However, transitional rules apply in relation to MIT trading trust income that is attributable to assets that exist at the time of announcement of the measure.

1.175 The MIT trading trust income transitional rules apply if:

·
a MIT would have an amount of MIT trading trust income (the relevant amount) for an income year disregarding this transitional rule;
·
immediately before 27 March 2018, the MIT held a total participation interest in the second entity of an amount (the pre-announcement TPI amount) greater than nil; and
·
the amount was derived, received or made by the MIT before 1 July 2026.

[Schedule 1, item 11, subsection 12-447(1) in Schedule 1 to the TAA 1953]

1.176 If a MIT held all of its total participation interests in the second entity immediately before 27 March 2018, the MIT trading trust income transitional rules apply so that all of the relevant amount is taken not to be MIT trading trust income and will continue to be eligible for the concessional 15 per cent MIT withholding rate for the specified period. [Schedule 1, item 11, subsections 12-447(2), (3) and (5) in Schedule 1 to the TAA 1953]

1.177 If a MIT acquires new participation interests in the second entity on or after 27 March 2018, the MIT trading trust income transitional rules apply so that a part of the relevant amount is taken not to be MIT trading trust income and will continue to be eligible for the concessional 15 per cent MIT withholding rate for the specified period. The relevant part is worked out using the following formula:

Pre-announcement TPI divided by Post-announcement TPI

[Schedule 1, item 11, subsections 12-447(2), (3) and (4) in Schedule 1 to the TAA 1953]

1.178 The pre-announcement TPI is the amount of the total participation interests held by the MIT in the second entity immediately before 27 March 2018. [Schedule 1, item 11, paragraph 12-447(1)(b) in Schedule 1 to the TAA 1953]

1.179 The post-announcement TPI is the amount of the total participation interests held by the MIT in the second entity at the end of the most recent income year ending before it derived, received or made the relevant amount. [Schedule 1, item 11, subsection 12-447(4) in Schedule 1 to the TAA 1953]

Example 1.23 : Transitional rules for trading trusts Investment Trust (a MIT) owns 10 per cent of the units in Trading Trust (a trading trust) immediately before 27 March 2018. This represented a 10 per cent total participation interest in Trading Trust.On 1 July 2019, Investment Trust acquired an additional 5 per cent of the units in Trading Trust. As a result, the total participation interest held by Investment Trust in Trading Trust is increased to 15 per cent.Trading Trust is a flow-through trust at all times (as it is not a public unit trust under Division 6C of Part III of the ITAA 1936).On 30 June 2020, Investment Trust received a distribution of $45,000 from Trading Trust which it included in its assessable income. In the absence of the transitional rule, this entire amount would be MIT trading trust income for Investment Trust.The transitional rule is relevant in working out whether the amount is MIT trading trust income for Investment Trust because:

·
Investment Trust held a total participation greater than nil immediately before 27 March 2018; and
·
the distribution was received before 1 July 2026.

In this regard, only 67 per cent of the assessable distribution is eligible for the transitional relief under the MIT trading trust income transitional rules because:

·
Investment Trust's pre-announcement TPI was 10 per cent; and
·
Investment Trust's post-announcement TPI was 15 per cent.

Consequently, for Investment Trust:

·
$30,000 of the assessable distribution will be eligible for the transitional relief (and will not be MIT trading trust income); and
·
$15,000 of the assessable distribution will be MIT trading trust income.

MIT agricultural income

1.180 The MIT agricultural income rules ensure that amounts of assessable income of a MIT that are attributable to an asset (whether or not held by the MIT) that is Australian agricultural land for rent are treated as non-concessional MIT income and subject to MIT withholding at a rate of 30 per cent - that is, at the rate equal to the top corporate tax rate.

1.181 MIT agricultural income is an amount of assessable income of a MIT to the extent that the amount is attributable to an asset that is Australian agricultural land for rent (whether or not held by the MIT). [Schedule 1, items 11 and 12, subsection 12-448(2) in Schedule 1 to the TAA 1953 and the definition of 'MIT agricultural income' in subsection 995-1(1) of the ITAA 1997]

1.182 Australian agricultural land for rent is Division 6C land situated in Australia that:

·
is used, or could reasonably be used, for carrying on a primary production business; and
·
is held primarily for the purposes of deriving or receiving rent.

[Schedule 1, items 11 and 12, subsection 12-448(3) in Schedule 1 to the TAA 1953 and the definition of 'Australian agricultural land for rent' in subsection 995-1(1) of the ITAA 1997]

1.183 Division 6C land is land (within the meaning of Division 6C of Part III of the ITAA 1936) and includes a thing if an investment in the thing would be an investment in land under subsection 102MB(1) of the ITAA 1997. [Schedule 1, items 11 and 12, subsection 12-448(5) in Schedule 1 to the TAA 1953 and the definition of 'Division 6C land' in subsection 995-1(1) of the ITAA 1997]

1.184 Therefore, Division 6C land includes an interest in land and fixtures on land. It also includes investments in moveable property, being property that is:

·
incidental to and relevant to the renting of the land;
·
customarily supplied or provided in connection with the renting of the land; and
·
ancillary to the ownership and use of the land.

1.185 Agricultural land for rent will include land that is held primarily for the purpose of deriving rent where the lessee or another entity uses the land to carry on a primary production business.

1.186 However, if agricultural land was held in a trust not primarily for the purposes of deriving rent, the MIT trading trust income rules may apply.

1.187 Agricultural land that has been rezoned, where the new zoning does not allow use for a primary production business, would no longer constitute Australian agricultural land for rent.

1.188 If an economic infrastructure facility is a fixture on Australian agricultural land for rent:

·
the economic infrastructure facility is taken as being separate from the Australian agricultural land for rent; and
·
the economic infrastructure facility is not Australian agricultural land for rent.

[Schedule 1, item 11, subsection 12-448(4) in Schedule 1 to the TAA 1953]

Example 1.24 : Agricultural land left vacant A MIT holds land that is leased to a third party who previously used it for a dairy farm. Although the milking station and the shed are still standing, there are no more cows on the land. The land is left vacant by the tenant due to a recent drop in milk prices.The land is Australian agricultural land for rent because it:

·
could reasonably be used for carrying on another primary production business; and
·
is held by the MIT primarily for the purposes of deriving rent.

The rental income, and any gain made on the disposal of the land, is MIT agricultural income as it will be attributable to Australian agricultural land for rent. This remains the case even if the future purchaser intends to use the land for non-primary production business.

Example 1.25 : Share of MIT agricultural income Trust A holds an asset that is an Australian agricultural land for the purpose of deriving rent from a third party.MIT Q is not entitled to distribution from Trust A, but is entitled to receive an amount from Trust A that is calculated by reference to the rent income that Trust A receives on the land. This may include (but is not limited to) an entitlement that arises, through the use of a derivative.This amount is attributable to an asset that is an Australian agricultural land for rent and therefore is MIT agricultural income.

Capital gains from membership interests

1.189 MIT agricultural income includes amounts that are, or are attributable to, a capital gain that arises if a CGT event happens in relation to an asset that is a membership interest held in an entity that holds, directly or indirectly, one or more assets that are:

·
Australian agricultural land for rent; or
·
residential dwelling assets.

[Schedule 1, item 11, subsection 12-453(1) in Schedule 1 to the TAA 1953]

1.190 If a membership interest in the test entity passes a modified principal asset test, immediately before the time that the CGT event happens to the membership interest, then (subject to a tie breaker rule) the capital gain that arises from the CGT event may be attributable to:

·
Australian agricultural land for rent that gives rise to MIT agricultural income; or
·
residential dwelling assets that give rises to MIT residential housing income.

[Schedule 1, item 11, subsection 12-453(2) in Schedule 1 to the TAA 1953]

1.191 The operation of these rules is explained later in this Chapter.

MIT agricultural income - Transitional rules

1.192 The amendments generally apply to a fund payment made by a MIT in relation to an income year if:

·
the fund payment is made on or after 1 July 2019; and
·
the income year is the 2019-20 income year or a later income year.

1.193 However, transitional rules apply so that an amount (the relevant amount) is not treated as MIT agricultural income of a MIT if, among other things:

·
the relevant amount is included in the assessable income of the MIT;
·
the relevant amount would be MIT agricultural income (disregarding the transitional rule) of the MIT because it is attributable to an asset that is Australian agricultural land for rent;
·
the MIT derived, received or made the relevant amount before 1 July 2026.

[Schedule 1, item 11, section 12-449 in Schedule 1 to the TAA 1953]

1.194 The MIT agricultural income transitional rule ensures that assessable income attributable to Australian agricultural land for rent held, directly or indirectly, as at 27 March 2018 (the date of announcement for this measure) will not be treated as MIT agricultural income until 1 July 2026.

1.195 If the MIT derived, received or made the relevant amount because it held the asset directly, the transitional rule will apply if:

·
the MIT held the asset just before 27 March 2018; or
·
before 27 March 2018, the MIT entered into a contract for the acquisition or lease of the asset.

[Schedule 1, item 11, paragraph 12-449(1)(d) in Schedule 1 to the TAA 1953]

1.196 In these circumstances, the transitional rule will apply so that the relevant amount is not treated as MIT agricultural income and will continue to be eligible for the concessional 15 per cent MIT withholding rate. [Schedule 1, item 11, subsection 12-449(2) in Schedule 1 to the TAA 1953]

1.197 If the MIT derived, received or made the relevant amount because it held a total participation interest (the pre-announcement TPI) of greater than nil in another entity (the second entity) which held the asset, the transitional rule will apply if:

·
the second entity held the asset before 27 March 2018; or
·
before 27 March 2018, the second entity entered into a contract for the acquisition or lease of the asset.

[Schedule 1, item 11, paragraph 12-449(1)(e) and (f) in Schedule 1 to the TAA 1953]

1.198 In these circumstances, if the MIT held all of its total participation interests in the second entity immediately before 27 March 2018 (that is, if its pre-announcement TPI is 100 per cent), the whole of the relevant amount is not treated as MIT agricultural income and will continue to be eligible for the concessional 15 per cent MIT withholding rate for the specified period. [Schedule 1, item 11, subsections 12-449(3), (4) and (6) in Schedule 1 to the TAA 1953]

1.199 If a MIT acquires new participation interests in the second entity on or after 27 March 2018 (that is, if its pre-announcement TPI is less than 100 per cent), a part of the relevant amount is not treated as MIT agricultural income and will continue to be eligible for the concessional 15 per cent MIT withholding rate for the specified period. The relevant part is worked out using the following formula:

Pre-announcement TPI divided by Post-announcement TPI

[Schedule 1, item 11, subsections 12-449(3), (4) and (5) in Schedule 1 to the TAA 1953]

1.200 The post-announcement TPI is the amount of the total participation interests held by the MIT in the second entity at the end of the most recent income year ending before it derived, received or made the relevant amount. [Schedule 1, item 11, subsection 12-449(5) in Schedule 1 to the TAA 1953]

MIT residential housing income

1.201 The MIT residential housing income rules ensure that amounts of assessable income of a MIT that are attributable to an asset (whether or not held by the MIT) that is residential housing (other than affordable housing or disability accommodation) are treated as non-concessional MIT income and subject to MIT withholding at a rate of 30 per cent - that is, at the rate equal to the top corporate tax rate.

1.202 MIT residential housing income is defined as any assessable income of a MIT to the extent it is attributable to a residential dwelling asset (whether or not held by the MIT). [Schedule 1, items 11 and 12, paragraph 12-450(1)(a) and subsection 12-470(2) in Schedule 1 to the TAA 1953 and the definition of 'MIT residential housing income' in subsection 995-1(1) of the ITAA 1997]

1.203 However, an amount included in assessable income of a MIT is not MIT residential housing income if it is:

·
a dividend, interest or a royalty subject to, or exempted from, withholding tax;
·
a net capital gain from a CGT event that happens in relation to a CGT asset that is not taxable Australian property; or
·
not from an Australian source.

[Schedule 1, item 11, paragraph 12-450(1)(b) in Schedule 1 to the TAA 1953]

1.204 A residential dwelling asset is an asset that is:

·
a dwelling;
·
taxable Australian real property; and
·
residential premises but not commercial residential premises.

[Schedule 1, items 11 and 12, subsection 12-452(1) in Schedule 1 to the TAA 1953 and the definition of 'residential dwelling asset' in subsection 995-1(1) of the ITAA 1997]

1.205 MIT residential housing income of a MIT is the assessable income of a MIT that is attributable to residential dwelling assets (such as rent, net capital gains and licence fees). It also includes income from derivative arrangements such as an acquisition of a rental income stream from residential housing.

1.206 However, to encourage investment in affordable housing, an amount is not MIT residential housing income to the extent it relates to use of dwellings to provide affordable housing. [Schedule 1, item 11, subsection 12-450(3) in Schedule 1 to the TAA 1953]

Example 1.26 : MIT residential housing and income from mixed use developments MWT is a MIT that has an interest in a mixed use residential development consisting of a number of units.The units are dwellings that are residential premises (but not commercial residential premises) and taxable Australian real property. Some but not all of the units in the development are used to provide affordable housing.Amounts of the assessable income of MWT that are attributable to the units that are not used to provide affordable housing are MIT residential housing income. Fund payments attributable to those amounts are subject to MIT withholding tax at a rate of 30 per cent.However, amounts of the assessable income of MWT that are attributable to the units that are used to provide affordable housing are not MIT residential housing income. Fund payments attributable to those amounts are subject to MIT withholding tax at the existing rate (usually 15 per cent).

Dwelling

1.207 For income to be MIT residential housing income, it must be attributable to a residential dwelling asset. The first requirement to be a residential dwelling asset is that the asset must be a dwelling. In this context, dwelling takes its existing meaning in the income tax law. [Schedule 1, item 11, paragraph 12-452(1)(a) in Schedule 1 to the TAA 1953]

1.208 Dwelling, as defined in section 118-115 of the ITAA 1997, includes:

·
a unit of accommodation that is a building (for example a house) or part of a building (for example an apartment or townhouse) that consists wholly or mainly of residential accommodation; and
·
any land immediately under the unit of accommodation.

1.209 It also includes certain adjacent land that, together with the land under the dwelling, does not exceed two hectares, and adjacent structures (for example, a storeroom, shed or garage). This is achieved by applying section 118-120 of the ITAA 1997 that operates to extend adjacent land in relation to dwellings in the capital gains tax provisions in the tax law.

1.210 Schedule 1 ensures that the adjacent land concept can apply to common areas that are used by occupants of a number of different dwellings for private and domestic use. This ensures that section 118-120 of the ITAA 1997 applies appropriately to adjacent land in relation to assets held by MITs. [Schedule 1 item 11, subsections 12-452(2) and (3) in Schedule 1 to the TAA 1953]

Taxable Australian real property

1.211 The second requirement to be a residential dwelling asset is that the dwelling must be taxable Australian real property. [Schedule 1, item 11, paragraph 12-452(1)(b) in Schedule 1 to the TAA 1953]

1.212 The term taxable Australian real property is defined in section 855-20 of the ITAA 1997 to include, among other things, real property situated in Australia (including a lease of land, if the land is situated in Australia).

1.213 This requirement reflects that the policy of the Government relates to residential housing in Australia rather than in other jurisdictions.

Residential premises

1.214 The third requirement to be a residential dwelling asset is that the asset must be residential premises other than commercial residential premises. [Schedule 1, item 11, paragraph 12-452(1)(c) in Schedule 1 to the TAA 1953]

1.215 The term residential premises is defined in subsection 995-1(1) of the ITAA 1997 as having the same meaning as in the GST Act. Section 195-1 of the GST Act provides that the term residential premises means land or a building that:

·
is occupied as a residence or for residential accommodation; or
·
is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation.

1.216 The definition specifies that land or a building that meets these requirements is residential premises regardless of the term of the occupation or intended occupation.

1.217 Broadly, land or a building will be residential premises if it provides, at a minimum, shelter and basic living facilities and is either occupied by a person or designed for occupation. This is to be ascertained by an objective consideration of the character of the property - the purpose for which an entity may hold the property is not relevant.

1.218 Residential premises need only be suitable for occupation, rather than long-term occupation - it includes, for example, a room that may only be suitable for short term accommodation. However, it does not include things that people may occupy that are not land or a building, such as a caravan, houseboat or mobile home.

1.219 While caravans, houseboats and other mobile homes are included in the definition of dwelling for CGT purposes, they are not residential premises and are outside the scope of this measure.

Commercial residential premises

1.220 However, a residential dwelling asset does not include residential premises that are commercial residential premises. [Schedule 1, item 11, paragraph 12-452(1)(c) in Schedule 1 to the TAA 1953]

1.221 The term commercial residential premises is defined as having the same meaning as in the GST Act. Section 195-1 of the GST Act defines commercial residential premises as:

·
a hotel, motel, inn, hostel or boarding house;
·
premises used to provide accommodation in connection with a school;
·
a ship that is mainly let out on hire in the ordinary course of a business of letting ships out on hire;
·
a ship that is mainly used for entertainment or transport in the ordinary course of a business of providing ships for entertainment or transport;
·
a marina at which one or more of the berths are occupied, or are to be occupied, by ships used as residences;
·
a caravan park or a camping ground; or
·
anything similar to residential premises described in the preceding dot points.

1.222 The exclusion of commercial residential premises reflects the intention of the amendments to remove tax advantages for MITs investing in Australia in dwellings suitable for use as housing.

Disability accommodation

1.223 A residential dwelling asset also does not include residential premises if those premises are either:

·
both:

-
used primarily to provide specialist disability accommodation (within the meaning of the National Disability Insurance Scheme (Specialist Disability Accommodation Conditions) Rule 2018); and
-
enrolled to provide specialist disability accommodation in accordance with the National Disability Insurance Scheme (Specialist Disability Accommodation Conditions) Rule 2018; or

·
disability accommodation of a kind prescribed in the regulations.

[Schedule 1, item 11, paragraphs 12-452(1)(d) and (e) in Schedule 1 to the Taxation Administration Act 1953]

1.224 This ensures that MITs can receive concessional MIT taxation treatment when investing in dwellings used to provide disability accommodation.

1.225 A dwelling used to provide specialist disability accommodation will not be a residential dwelling asset if it is enrolled as specialist disability accommodation under the NDIS, as specified under the National Disability Insurance Scheme (Specialist Disability Accommodation Conditions) Rule 2018.

1.226 The regulations may also prescribe further categories of premises used to provide disability accommodation as not being a residential dwelling asset. This ensures this rule can be updated to reflect changes to the NDIS rules or other changes in the way accommodation support is provided to individuals with a disability. [Schedule 1, item 11, paragraph 12-452(1)(e) in Schedule 1 to the Taxation Administration Act 1953]

1.227 The amendments relating to disability accommodation do not affect the general requirement that, for a MIT's investment in land to be eligible investment business, the investment must be undertaken primarily for the purpose of deriving rent. The amendments also do not affect any of the other circumstances in which the income of a MIT may be non-concessional MIT income.

Providing affordable housing

1.228 An amount of income attributable to an asset will not be MIT residential housing income to the extent that it is referable to the use of the asset to provide affordable housing. [Schedule 1, item 11, subsection 12-450(3) in Schedule 1 to the TAA 1953]

1.229 The circumstances in which a dwelling is used to provide affordable housing are defined in section 980-5 in item 3 of Schedule 3 to the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018.

1.230 Broadly, to satisfy this definition for a day, an asset must be tenanted or available to be tenanted under the management of an eligible community housing provider and that provider must have issued the owner with a certificate covering the asset for the relevant period. The tenants or occupants must also not hold an interest of 10 per cent or more in the MIT.

1.231 Where an asset is used to provide affordable housing and for other income producing purposes from housing, only the amount of income that results from providing affordable housing potentially receives concessional treatment (and is not MIT residential housing income).

1.232 Schedule 5 to this Bill contains contingent amendments that apply if the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Act 2019 has not commenced at or prior to the commencement of Schedules 1 to 4 to this Bill. This ensures that the provisions in this Schedule apply to identify the meaning of providing affordable housing. [Schedule 5, items 1 to 6]

1.233 Schedule 5 includes the same meaning of providing affordable housing as Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018. [Schedule 5, item 1]

Capital gains from assets used to provide affordable housing

1.234 If an amount of assessable income is attributable to a capital gain, it will only be treated as being referable to the use of the dwelling to provide affordable housing (and therefore is not MIT residential housing income) if the asset has been used to provide affordable housing for at least 3,650 days. The use of the dwelling to provide affordable housing must occur on or after 1 July 2017 but before the CGT event happens and does not need to be a consecutive period. [Schedule 1, item 11, subsection 12-450(4) in Schedule 1 to the TAA 1953]

Indirect income

1.235 MIT residential housing income includes all amounts included in a MIT's assessable income that are attributable to residential dwelling assets. This can include amounts a MIT receives, whether directly or indirectly, if those amounts are ultimately attributable to the use of a residential dwelling asset by that entity or another entity.

1.236 This will be the case even if the MIT has an amount of assessable income that is ultimately attributable to income from such an asset that the MIT has received indirectly via a number of intermediaries.

1.237 This ensures that the same outcome applies to all amounts of assessable income of a MIT that are ultimately attributable to a residential dwelling asset.

Example 1.27 : MIT residential housing income A MIT holds an interest in Trust A, which holds an interest in Trust B.Trust B derives income that is:

·
attributable to a residential dwelling asset; and
·
is not used to provide affordable housing.

Therefore, any amount included in the assessable income of the MIT as a result of a distribution from Trust A that is attributable to the income from the dwelling received by Trust B is MIT residential housing income.

Example 1.28 : MIT residential housing income Trust C holds a residential dwelling asset that is not used to provide affordable housing) for the purpose of deriving rent from a third party.ABC MIT is not entitled to a distribution from Trust C. However, it is entitled to receive an amount from Trust C that is calculated by reference to the rental income (not merely because it is serviced out of rent income) that Trust C receives on the dwelling.This amount is MIT residential housing income as it is attributable to the dwelling.

Capital gains from membership interests

1.238 MIT residential housing includes amounts that are, or are attributable to, a capital gain that arises if a CGT event happens in relation to an asset that is a membership interest held in an entity that holds, directly or indirectly, one or more assets that are:

·
Australian agricultural land for rent; or
·
residential dwelling assets.

[Schedule 1, item 11, subsection 12-453(1) in Schedule 1 to the TAA 1953]

1.239 If a membership interest in the test entity passes a modified principal asset test, immediately before the time that the CGT event happens to the membership interest, then (subject to a tie breaker rule) the capital gain that arises from the CGT event may be attributable to:

·
Australian agricultural land for rent that gives rise to MIT agricultural income; or
·
residential dwelling assets that give rises to MIT residential housing income.

[Schedule 1, item 11, subsection 12-453(2) in Schedule 1 to the TAA 1953]

1.240 The operation of these rules is explained later in this Chapter.

MIT residential housing income - Transitional rules

1.241 The amendments generally apply to a fund payment made by a MIT in relation to an income year if:

·
the fund payment is made on or after 1 July 2019; and
·
the income year is the 2019-20 income year or a later income year.

1.242 However, transitional rules apply so that an amount (the relevant amount) is not treated as MIT residential housing income of a MIT if, among other things:

·
the relevant amount is included in the assessable income of the MIT;
·
the relevant amount would be MIT residential housing income of the MIT disregarding this transitional rule because it is attributable to a facility that consists of or contains a residential dwelling asset; and
·
the MIT derived, received or made the relevant amount before 1 October 2027.

[Schedule 1, item 11, section 12-451 in Schedule 1 to the TAA 1953]

1.243 The MIT residential housing income transitional rules ensure that MITs directly or indirectly holding residential premises when this measure was first announced on 14 September 2017 in a press release by the former Treasurer have a 10 year transitional period before the measure applies to assets they held at the time of the announcement.

1.244 The transitional rule provides certainty to MITs and their investors for existing investments by ensuring that existing investments at the time of the policy announcement are unaffected by the changes for the transitional period.

1.245 The transitional rules will be met if a MIT or another entity in which a MIT held any participation interest has entered into a contract for the acquisition or creation of a facility that consists of or contains a dwelling prior to the transition time. However, these rules will not be met if the MIT or the other entity has merely acquired land or entered into a contract for the acquisition of land without any commitment to acquire or create a dwelling on the land.

1.246 A contract to acquire land will not be a contract for the acquisition of a facility, as land is not a facility in and of itself.

1.247 If the MIT derived, received or made the relevant amount because it held the facility directly, the transitional rule will apply if:

·
the MIT held the facility just before the transition time; or
·
before the transition time, the MIT entered into a contract for the acquisition, creation or lease of the facility.

[Schedule 1, item 11, paragraph 12-451(1)(d) in Schedule 1 to the TAA 1953]

1.248 In these circumstances, the transitional rule will apply so that the relevant amount is not treated as MIT residential housing income and will continue to be eligible for the concessional 15 per cent MIT withholding rate. [Schedule 1, item 11, subsection 12-451(2) in Schedule 1 to the TAA 1953]

1.249 The transition time is 4.30 pm (by legal time in the Australian Capital Territory) on 14 September 2017. [Schedule 1, item 11, subsection 12-451(7) in Schedule 1 to the TAA 1953]

1.250 If the MIT derived, received or made the relevant amount because it held a total participation interest (the pre-announcement TPI) of greater than nil in another entity (the second entity) which held the facility, the transitional rule will apply if:

·
the second entity held the facility before the transition time; or
·
before the transition time, the second entity entered into a contract for the acquisition or lease of the facility.

[Schedule 1, item 11, paragraph 12-451(1)(e) and (f) in Schedule 1 to the TAA 1953]

1.251 In these circumstances, if the MIT held all of its total participation interests in the second entity immediately before the transition time (that is, if its pre-announcement TPI is 100 per cent), the whole of the relevant amount is not treated as MIT residential housing income and will continue to be eligible for the concessional 15 per cent MIT withholding rate for the specified period. [Schedule 1, item 11, subsections 12-451(3), (4) and (6) in Schedule 1 to the TAA 1953]

1.252 If a MIT acquires new participation interests in the second entity at or after the transition time (that is, if its pre-announcement TPI is less than 100 per cent), a part of the relevant amount is not treated as MIT residential housing income and will continue to be eligible for the concessional 15 per cent MIT withholding rate for the specified period. The relevant part is worked out using the following formula:

Pre-announcement TPI divided by Post-announcement TPI

[Schedule 1, item 11, subsections 12-451(3), (4) and (5) in Schedule 1 to the TAA 1953]

1.253 The post-announcement TPI is the amount of the total participation interests held by the MIT in the second entity at the end of the most recent income year ending before it derived, received or made the relevant amount. [Schedule 1, item 11, subsection 12-451(5) in Schedule 1 to the TAA 1953]

MIT agricultural income and MIT residential housing income - Capital gains from membership interests

1.254 MIT agricultural income and MIT residential housing income includes amounts that are, or are attributable to, a capital gain that arises if a CGT event happens in relation to an asset that is a membership interest held in an entity that holds, directly or indirectly, one or more assets that are:

·
Australian agricultural land for rent; or
·
residential dwelling assets.

[Schedule 1, item 11, subsection 12-453(1) in Schedule 1 to the TAA 1953]

1.255 In this regard, a capital gain is taken to be attributable to Australian agricultural land for rent or residential dwelling assets if the membership interest passes a modified version of the principal asset test in section 855-30 of the ITAA 1997 immediately before the time that the CGT event happens in relation to membership interests in the test entity.

1.256 The modified principal asset test requires references to taxable Australian real property in the test entity to be treated as if they are references to an asset that is:

·
Australian agricultural land for rent; or
·
a residential dwelling asset.

[Schedule 1, item 11, subsection 12-453(3) in Schedule 1 to the TAA 1953]

1.257 A membership interest will pass the standard principal asset test in the income tax law if the combined market value of all the assets of the test entity that are taxable Australian real property exceed the combined market value of all of its other assets.

1.258 The membership interest will satisfy the modified principal asset test if the sum of the market values of the test entity's membership interests that are Australian agricultural land for rent and/or residential dwelling assets exceeds the sum of the market values of the test entity's other assets.

1.259 If a membership interest in the test entity passes the modified principal asset test, immediately before the time that the CGT event happens to the membership interest, then (subject to a tie breaker rule) the capital gain that arises from the CGT event may be attributable to:

·
Australian agricultural land for rent that give rise to MIT agricultural income; or
·
residential dwelling assets that give rise to MIT residential housing income.

[Schedule 1, item 11, subsection 12-453(2) in Schedule 1 to the TAA 1953]

1.260 In these circumstances, if all the assets in the test entity are Australian agricultural land for rent, then the capital gain that arises from the CGT event is taken to be wholly attributable to Australian agricultural land for rent. [Schedule 1, item 11, subparagraph 12-453(2)(a)(i) in Schedule 1 to the TAA 1953]

1.261 Similarly, if all the assets in the test entity are residential dwelling assets, then the capital gain that arises from the CGT event is taken to be wholly attributable to residential dwelling assets. [Schedule 1, item 11, subparagraph 12-453(2)(a)(ii) in Schedule 1 to the TAA 1953]

1.262 However, if some assets in the test entity are Australian agricultural land for rent and some assets are residential dwelling assets, then:

·
if the market value of the membership interests that are attributable to Australian agricultural land for rent is equal to or exceeds the market value of the membership interests that are attributable to residential dwelling assets - the capital gain from the CGT event in relation to the membership interest is taken to be wholly attributable to Australian agricultural land for rent; or
·
if the market value of the membership interests that are attributable to Australian agricultural land for rent is less than the market value of the membership interests that are attributable to residential dwelling assets - the capital gain from the CGT event in relation to the membership interest is taken to be wholly attributable to residential dwelling assets.

[Schedule 1, item 11, subparagraphs 12-453(2)(a)(iii) and (iv) in Schedule 1 to the TAA 1953]

1.263 For these purposes, the market values of the relevant assets are the market values of those assets just before the time that the relevant CGT event happens. [Schedule 1, item 11, subsection 12-453(4) in Schedule 1 to the TAA 1953]

Example 1.29 : Capital gain on sale of membership interests attributable to Australian agricultural land for rent A MIT is the sole unit holder of Trust X. The trustee of Trust X is the sole unit holder of Trust A and Trust B. The MIT sells its interest in Trust X.Trust A holds only agricultural land that is leased to a third party who uses the land to operate an agricultural business. The market value of the agricultural land assets held by Trust A at the time of sale is $80 million.Trust B holds only commercial properties that are leased to a third party. The market value of the commercial properties held by Trust B at the time of sale is $20 million.As references in section 855-30 of the ITAA 1997 to taxable Australian real property are instead taken to be references to an asset that is Australian agricultural land for rent, units in Trust X will pass the principal asset test.This is because 80 per cent of the assets of Trust X are made up of its interest in Trust A, which under the modified principal assets test is treated as having the same character (Australian agricultural land for rent) as its underlying assets.Passing the modified principal asset test means that MIT's entire interest in Trust X is treated as being an asset that is a Australian agricultural land for rent.Accordingly, when the MIT disposes of its units in Trust X, the whole amount of any capital gain is attributable to Australian agricultural land for rent. If that amount is a net capital gain included in assessable income, the amount will be MIT agricultural income.

Example 1.30 : Capital gain on sale of membership interests attributable to residential dwelling assets MIT Q is the sole unit holder of Trust X.The trustee of Trust X is the sole unit holder of Trust A and Trust B.Trust A's only assets are residential dwelling assets that are not used to provide affordable housing. The market value of Trust A's assets is $80 million.Trust B's only assets are commercial properties that are leased to a third party. The market value of Trust B's assets is $20 million.As Trust X's interest in Trust A constitutes 80 per cent of its assets, MIT Q's interest in Trust X passes the modified principal asset test. This is because:

·
Trust X's interest in Trust A makes up more than 50 per cent of its assets; and
·
under the principal asset test, this interest is treated as having the same character as the underlying assets.

Passing the modified principal asset test means that MIT Q's entire interest in Trust X is treated as being an asset that is a residential dwelling asset.Accordingly, when MIT Q disposes of its units in Trust X, the whole amount of any capital gain is attributable to a residential dwelling asset. If that amount is a net capital gain included in assessable income, the amount will be MIT residential housing income.

Application and transitional provisions

1.264 The amendments made by Schedule 1 to this Bill apply to a fund payment made by a MIT in relation to an income year if:

·
the fund payment is made on or after 1 July 2019; and
·
the income year is the 2019-20 income year or a later income year.

[Schedule 1, subitem 16(1)]

1.265 The amendments also apply for the purposes of working out the MIT cross staple arrangement income of a MIT for a previous income year as mentioned in section 12-438 in Schedule 1 to the TAA 1953 - that is, for the purposes of applying the de minimis exception for MIT cross staple arrangement income. [Schedule 1, subitem 16(2)]

1.266 Therefore, for fund payments made in relation to the 2019-20 income year, the de minimis exception that applies to MIT cross staple arrangement income may be available if, in the 2018-19 income year, the amount of notional cross staple arrangement income of the relevant test entity would not have breached the de minimis thresholds set out in section 12-438 in Schedule 1 to the TAA 1953.

1.267 The amendments to insert a definition of industrial, commercial or scientific equipment into subsection (6)(1) of the ITAA 1936 applies in relation to amounts paid or credited on or after 1 July 2019. [Schedule 1, subitem 16(3)]

1.268 Section 25-115 of the ITAA 1997, which allows an entity that is an operating entity in relation to a cross staple lease of an approved economic infrastructure facility to deduct an amount of rent from land investment for an income year, applies in relation to an amount of rent from land investment that is derived or received in relation to the 2019-20 income year or a later income year. [Schedule 1, subitem 16(4)]

1.269 Section 25-120 of the ITAA 1997, which allows an entity that is an operating entity in relation to a cross staple lease to deduct an amount of rent from land investment for an income year if the MIT cross staple transitional rules apply to a cross staple arrangement:

·
applies in relation to an amount of rent from land investment that is derived or received on or after 27 March 2018; and
·
applies for the purposes of working out whether an entity can deduct an amount for rent from land investment for an income year that is before the 2019-20 income year.

[Schedule 1, subitems 16(4) and (5)]

1.270 This application of section 25-120 to allow an entity to deduct an amount for rent from land investment for an income year that is before the 2019-20 income year was sought by stakeholders to clarify the existing law and protect existing arrangements entered into by affected taxpayers.

1.271 The amendments made by Schedule 5 generally apply to in relation to tenancies starting before, at or after 1 January 2018. [Schedule 5, item 7]

1.272 The amendments made by Schedule 5 will commence only if the Schedule 3 to the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No 2) Act 2019 does not commence before the commencement of this Bill. [Section 2]

Transitional rules

1.273 Transitional rules apply to fund payments attributable to existing investments. These transitional rules have been sought by stakeholders to ensure that there is no adverse impact on MITs or investors for existing assets held or contracts that were entered into to acquire assets or create or construct assets where these arrangements were in place at the time the changes were announced.

1.274 If the transitional rules apply, the existing MIT withholding tax rate of 15 per cent will continue to apply until broadly:

·
for MIT cross staple arrangement income relating to a facility that is not an economic infrastructure facility - 1 July 2026;
·
for MIT cross staple arrangement income relating to a facility that is an economic infrastructure facility - 1 July 2034;
·
for MIT trading trust income - 1 July 2026;
·
for MIT agricultural income - 1 July 2026; and
·
for MIT residential housing income - 1 October 2027.

1.275 The details of the transitional rules are outlined earlier in this Chapter in the context of the explanation of each type of MIT cross staple arrangement income.


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