Stapled Structures

Overview

Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 (Stapled Structures Act) introduced a number of measures to address risks posed by stapled structures and similar arrangements and limit access to concessions previously available to foreign investors for passive income.

This page focuses on Non-concessional MIT income (NCMI) - specifying the MIT withholding rate on income attributable to non-concessional MIT income is 30%.

Non-concessional MIT income

To improve the integrity of the income tax law for arrangements involving stapled structures and to limit access to tax concessions for foreign investors, the managed investment trust (MIT) withholding rate on fund payments that are attributable to non-concessional MIT income has been changed to 30%.

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
• MIT residential housing income.

These amendments apply from 1 July 2019. Transitional rules apply to appropriate existing arrangements from the impact of the amendments. See transitional rules below.

MIT cross staple arrangement income

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 and an asset entity.

What is a cross staple arrangement?

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
• 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 in each arrangement entity (that is, in both the asset entity and the operating entity)
  • the sum of the total participation interests held by the external entities in each arrangement entity is 80 per cent or more.
   

What is MIT cross staple arrangement income?

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 directly or indirectly through interposed entities from an operating entity under a cross staple arrangement
• 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 capital gains tax (CGT) asset that is not taxable Australian property
  • amounts which are not Australian sourced income.
   

Exceptions

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
• 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.

Approved economic infrastructure facility

If your facility or improvement to a facility is covered by the approved economic infrastructure facility exception under section 12-439 of Schedule 1 of the Taxation Administration Act 1953 (TAA 1953), the amount that is attributable to rent from the approved economic infrastructure facility will not be MIT cross staple arrangement income.

Further, the operating entity is able to obtain a specific deduction for an amount of rent from land investment that is derived by an asset entity, provided certain conditions are met. This includes that the relevant entities have made a valid choice in relation to the cross staple arrangement.

The operating entity may claim a specific deduction when the exception applies. The exception is for 15 years either from:

• the day an asset that is part of the facility is first put to use (for approved facilities)
• the day an asset that is part of the facility is first put to use after it has been improved under an improvement (for approved improvements).

For more information on the approved economic infrastructure facility exception and how to make the choice to apply the specific deduction, see Stapled Groups – Approved economic infrastructure facility exception.

Transitional provisions

Transitional relief is available in respect of fund payments that are attributable to MIT cross staple arrangement income where a cross staple arrangement is covered by section 12-440 of Schedule 1 of the TAA 1953 and the relevant entities have made a valid choice to apply the transitional provisions. The choice must have been made in the approved form by 30 June 2019 (or later time allowed by the Commissioner) and the Commissioner notified of the choice. The choice is an important condition precedent to the application of the transitional provisions and cannot be backdated.

Transitional relief may be available in respect of a facility where either:

• an entity owned or leased the facility prior to 27 March 2018
• an entity has entered into a contract before 27 March 2018 for the acquisition, creation or lease of the facility
• an Australian Government agency approved the acquisition, creation or lease of the facility before 27 March 2018.

Where the above is satisfied, transitional relief is available in respect of a cross staple arrangement:

• that was entered into in relation to the facility before 27 March 2018
• where it was reasonable on 27 March 2018 to conclude that it would be entered into in relation to the facility.

Transitional relief is generally available for the following periods:

• seven years in respect of a cross staple arrangement that relates to a facility that is not an economic infrastructure facility
• 15 years in respect of a cross staple arrangement that relates to an economic infrastructure facility.

Certain cross staple arrangements may have a shorter transition period, depending on when assets forming part of the facility are first put to use.

Entities to the cross staple arrangement must continue to satisfy requirements in order to apply the transitional provisions. For example, changes in ownership or to the MIT eligibility of the asset entity may cause the relevant entities to cease qualification for transitional relief for some or all of the transitional period.

Similarly, changes to the cross staple arrangement, ceasing to have a cross staple arrangement, or alterations to the facility, such that it ceases to be the facility identified by subsections 12-440(1) or (2) may cause the relevant entities to cease qualification for transitional relief. LCR 2020/2 provides further guidance and examples of scenarios that may cease qualification for transition.

Entities subject to transitional relief are still required to disclose full details of the trust's NCMI at the relevant labels of the trust income tax return, including excluded amounts. The correct disclosures of NCMI (and excluded from NCMI) for all trusts are essential to ensure the applicable withholding rate is applied at the withholding MIT level. Penalties may apply for incorrect reporting.

For more information on application of the Transitional provisions and reporting, see LCR 2020/2.

MIT trading trust income

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%.

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
• 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
  • amounts which are not Australian sourced income.

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 either:    
  • a trading trust in relation to the income year – a trading trust is defined in section 102N of the Income Tax Assessment Act 1936 (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
  • 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
  • the second entity is not a public trading trust in relation to the income year.

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. This can be 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 are taxed at a rate of 30%.

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.

Transitional rules

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
• the income year is the 2019–20 income year or a later income year.

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.

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
• the amount was derived, received or made by the MIT before 1 July 2026.

If a MIT held all of its total participation interests (TPI) 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% MIT withholding rate for the specified period.

MIT agricultural income

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% – that is, at the rate equal to the top corporate tax rate.

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).

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
• is held primarily for the purposes of deriving or receiving rent.

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
• ancillary to the ownership and use of the land.

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.

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.

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
• the economic infrastructure facility is not Australian agricultural land for rent.

Transitional rules

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
• the income year is the 2019–20 income year or a later income year.

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.

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.

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% MIT withholding.

MIT residential housing income

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) are treated as non-concessional MIT income and subject to MIT withholding at a rate of 30% – that is, at the rate equal to the top corporate tax rate.

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).

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
• not from an Australian source.

A residential dwelling asset is an asset that is:

• a dwelling
• taxable Australian real property
• any of the following:    
  • residential premises but not commercial residential premises
  • certain student accommodation such as tertiary student accommodation.

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.

Providing affordable housing

However, to encourage investment in affordable housing, an amount is not MIT residential housing income to the extent it relates to the use of dwellings to provide affordable housing.

The circumstances in which a dwelling is used to provide affordable housing are defined in section 980-5 of the ITAA 1997, which was inserted by the Stapled Structures Act.

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% or more in the MIT.

Transitional rules

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.

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
• the MIT derived, received or made the relevant amount before 1 October 2027.

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 by the former Treasurer) have a 10 year transitional period before the measure applies to assets they held at the time of the announcement.

The transitional rules also ensure that MITs have a 10 year transition period until 1 October 2027 before the measure applies to assets held immediately prior to the date of introduction of this Bill into Parliament that were used primarily to provide accommodation for students (other than in connection with a school within the meaning of the GST Act).

Changes to Total Participation Interests - transitional rules

An apportionment methodology applies where the relevant MIT's participation interest has increased for the following:

• Amounts attributable to an asset that is Australian agricultural land for rent where the MIT's participation interest in the entity holding the asset has increased since 27 March 2018.
• Amounts attributable to a trading trust where the relevant MIT's participation interest in the trading trust has increased since 27 March 2018.
• Amounts attributable to a residential dwelling asset where the relevant MIT's participation interest in the entity that holds, or contracted for the asset, has increased since 14 September 2017.

The transitional rules apply so that a part of the relevant amount is taken not to be MIT agricultural, trading trust or residential housing income and will continue to be eligible for the concessional 15% MIT withholding rate for the specified period. The relevant part is worked out using the following formula:

Pre – announcement TPI ÷ Post – announcement TPI

Legislation

Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 (Stapled Structures Act)

Guidance

LCR 2020/2 Non-concessional MIT income

An overview of the new measure dealing with stapled structures.