Following its announcement in November 2013, the Australian Government has released draft legislation to enable foreign pension funds to access concessional withholding tax rates under Australia's Managed Investment Trust (MIT) regime. These amendments, which apply retrospectively, provide certainty for foreign pension funds.
Australian MIT Regime
In 2008, the Australian Government introduced a concessional withholding tax rate with the aim of developing Australia as a regional financial services hub. The MIT withholding tax regime provides for a reduced rate of withholding tax for foreign investors in Australian MIT's for the purposes of attracting and retaining foreign investment in Australia. Currently, the reduced rate of withholding tax is 15% where the payments are made to a resident of a country with an effective exchange of information agreement.
A liability for MIT withholding tax is imposed on foreign residents in respect of the fund payments they receive from an Australian MIT. However, due to a technical deficiency in the current law the concessional MIT withholding tax does not apply in circumstances where a fund payment is received by a trustee of a trust or where there is no beneficiary presently entitled to the payment.
The effect of not being able to access the concessional withholding rate is that the foreign pension fund may be liable to tax under the general provisions relating to the taxation of trusts and may be taxed at the highest marginal tax rate of 45% in Australia.
Proposed Amendments
The proposed amendments will ensure that foreign pension funds can access the Australian MIT withholding tax regime and the associated lower rate of withholding tax on eligible Australian investments, including Australian property, shares and units. For these purposes, a foreign pension fund is an entity whose principal purpose is to fund pensions (including disability and similar benefits) for the citizens or other contributors of a foreign country (not Australia) where:
- the fund is established by an exempt government agency (or a wholly owned subsidiary of such an entity) or
- the fund is established under a foreign law for an exempt foreign government agency (or a wholly owned subsidiary of such an entity).
The amendments will apply to income years commencing from 1 July 2008. This application date will ensure that affected foreign pension funds can access the MIT withholding tax regime as originally intended, and it will also reflect current industry practice.
As the amendments will be backdated, changes to Australian tax law will also be made to enable a foreign pension fund to obtain an amended assessment back to the 2009 income year and obtain a refund plus interest if applicable. The Australian Taxation Office has also issued a media release confirming that taxpayers who apply the legislation based on the draft legislation do not need to do anything further, and that they will accept returns prepared in accordance with the draft legislation.
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