Managed investment trusts
In the 2018-19 Federal Budget, the Government announced that Managed Investment Trusts (MITs) will be prevented from applying the capital gains discount at the trust level. Additionally, new jurisdictions have been added to the list of information exchange countries, which means residents in these jurisdictions will be eligible to access the reduced MIT withholding tax rate of 15%.
MIT withholding tax
Currently, MITs are required to withhold a final withholding tax of 15% from fund payments made to non-Australian members who are resident in listed information exchange countries, or 30% if payment is made to a non-resident in a non-listed information exchange country.
The list of information exchange countries will be updated from 1 January 2019, to include 56 new jurisdictions, allowing residents in these countries to gain access to the reduced MIT withholding tax rate of 15%.
Removal of the capital gains discount
Broadly, a MIT or Attribution MIT’s (AMITs) fund payment consists of the net Australian-sourced income, including capital gains from Australian sources. Where the MIT or AMIT has made a capital treatment election, its net income may include capital gains eligible for the 50% discount. As such, the fund payment amount on which withholding tax is applied is post the capital gains discount.
From 1 July 2019, it is proposed that MITs and AMITs will no longer be eligible to apply the 50% capital gains discount at its own trust level. The net capital gains income of the MIT and AMIT will correspondingly be doubled and, as such, the fund payment and withholding tax will also be doubled.
This change will only affect non-resident members of the MIT or AMIT. The capital gains will continue to be discountable in the hands of any Australian resident beneficiaries.
This measure brings the MIT withholding regime in line with the Government’s recent measures taxing non-resident property holders, which included the removal of the capital gains discount for non-Australian tax residents. This imposes a higher final withholding tax amount and prevents non-resident beneficiaries who are not entitled to the capital gains discount in their own right from benefiting from the discount at the trust level.
Whether it acts as a disincentive for foreign investors remains to be seen.