House of Representatives

Explanatory Memorandum

Circulated by the authority of the Treasurer, the Hon Wayne Swan MP

General outline and financial impact

Distributions of managed investment trust income to foreign residents

Schedule 1 to this Bill replaces the existing 30 per cent non-final withholding regime applying to certain distributions (called 'fund payments') from Australian managed investment trusts with a new withholding regime. An entity may have an obligation to withhold an amount from a payment of these distributions to an overseas person.

The rate of withholding tax under the new regime will depend on the residency of the foreign investor.

Most foreign investors will be subject to a reduced rate of withholding tax under the new regime, with the withholding tax rate applying to fund payments falling to a 7.5 per cent final withholding tax once this measure is fully implemented. This is expected to enhance the competitiveness of the Australian managed funds industry in attracting future foreign investment.

The reduced withholding tax rate will be restricted to residents of jurisdictions with which Australia has effective exchange of information for tax matters. A 30 per cent rate of withholding will apply to foreign investors resident in other jurisdictions. This will enhance the integrity of the new arrangements, and provide a strong signal of Australia's non-tolerance of international tax evasion and avoidance.

Date of effect : This measure applies to fund payments of income years starting on or after the first 1 July following Royal Assent.

Proposal announced : This measure was announced in the Treasurer's Press Release No. 043 of 13 May 2008.

Financial impact : This measure will have the following revenue implications.

Compliance cost impact : This measure is expected to impose medium compliance costs on managed investment trusts and interposed entities for the first and second transitional years, as they will need to modify their systems to adjust to the new withholding regime. Ongoing compliance costs are expected to be minimal.

Summary of regulation impact statement

Regulation impact on business

Impact : This measure will affect managed investment trusts; interposed entities (custodians and non-custodians) used by foreign investors to invest indirectly in managed investment trusts; foreign investors; and the Australian Government.

Main points :

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The reduced withholding rates that apply to most foreign investors will enhance the ability of managed investment trusts (particularly property trusts) to attract foreign investment.

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Managed investment trusts and interposed entities would be required to modify existing systems so they can withhold as required under the new withholding regime.

Income tax treatment of the Prime Minister's Literary Award

Schedule 2 to this Bill amends the Income Tax Assessment Act 1997 to exempt from income tax the Prime Minister's Literary Award, to the extent that the award would otherwise be assessable income.

Date of effect : This amendment applies to assessments for the 2007-08 income year and later income years.

Proposal announced : This measure was announced in the Minister for the Environment, Heritage and the Arts' Press Release No. PG/25 of 22 February 2008.

Financial impact : Nil.

Compliance cost impact : Negligible.