Government levels playing field for foreign investment in Aussie farms
This edition of the Agribusiness Bulletin reviews the “Stapled Structures Integrity Package” recently released by the Federal Government, and its impact on foreign investment in Australian agricultural land.
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A recent Government announcement in relation to proposed tax changes has the potential to significantly impact foreign investment in Australian agricultural land by removing certain tax incentives for foreign buyers.
On 27th March 2018, the Government released its Stapled Structures Integrity Package outlining proposed changes to the income tax treatment of certain investment structures.
The policy objective behind these new measures is aimed at protecting Australian taxpayers by tightening the rules around certain structures which provide a tax benefit to foreign investors. The concern appears to be that, under the current rules, foreigners could have a competitive advantage over domestic investors when purchasing certain Australian assets.
Eliminating tax concessions on trust distributions
One surprising change in the Integrity Package is the proposed elimination of certain tax concessions afforded to returns to foreign investors on passive income (i.e. rental income and capital gains) derived from agricultural land held through a Managed Investment Trust (MIT).
Under the current law, broadly, where an Australian trust qualifies as a MIT and holds a passive investment in Australian agricultural land, returns on that investment (i.e. rental and capital gains) would flow through the trust and be taxed in the hands of the trust beneficiaries (at their respective rates) or subject to withholding tax if distributed to a foreign beneficiary. For foreign beneficiaries (in certain countries with which Australia has an Exchange of Information Agreement), these returns would be subject to a concessional 15% final withholding tax rate. The trustee of the MIT would remit this withholding tax to the Australian Taxation Office (ATO).
As part of the Integrity Package, the Government expressed a concern that foreign investors enjoy lower tax rates on rent and capital gains from agricultural land compared to most domestic investors and, to address this, outlined that investments by MITs in agricultural land would no longer qualify as ‘eligible investment business’.
Whilst it was not made clear within the Integrity Package, the natural consequence of this would mean that distributions to foreign residents of rental returns and capital gains on agricultural property held through a MIT would no longer qualify for the 15% concessional withholding tax rate. This position was clarified in the Federal Budget Paper released on 8 May 2018 which stated that “investments in agricultural land will not be able to access the 15 per cent concessional MIT withholding tax rate”.
Instead it is expected that draft legislation will be released shortly that will provide that such distributions to foreign resident investors will be subject to a 30% withholding tax.
In terms of timing, the MIT agricultural land measures will come into effect on 1 July 2019, but there is one small upside for foreigners with an existing arrangement in Australia. The proposed measures provide that investments in existence at the date of the announcement can still enjoy access to the current rules for a further seven years. However, arrangements entered into after the 27th March 2018 will be subject to the new rules.
What does this all mean?
The introduction of such measures appears to be driven by a desire to ‘level the playing field’ between domestic and foreign investors when it comes to purchasing land in Australia and could potentially have a number of far-reaching consequences.
In September 2017, the ATO Agricultural Land Register reported that 14% of farms across Australia are now owned by foreign residents. At the same time, Chinese investment in land had grown ten-fold since the prior year in terms of Australian hectares owned, a statistic which has likely grown again since.
The introduction of new measures increasing the tax payable by foreign owned MITs could slow the rate of foreign acquired farming land – the flow-on effect to agricultural land values is yet to be determined.
One thing for certain is that these measures create further uncertainty for foreign investors investing in Australian property and infrastructure assets. In a time where Australia is looking to encourage foreign capital to our shores, will this legislative change mean that foreign investors look elsewhere when buying agricultural land? If so, will this have a marked impact on the value of Australian land as a core segment of buyers is focussed elsewhere? Time will tell…
Published: May 2018
Greig Hubbard, Director Tax
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