Treasury consultation paper flags changes to stapled structures

By Martin Fry
Funds Government Infrastructure Mergers & Acquisitions Property & Development Tax

In brief

Stapled structures have been used as an investment platform in the property and infrastructure sectors for decades, and more recently have been deployed into renewable energy, agriculture and other areas. Through the issue of its Taxpayer Alert on stapled structures on 31 January 2017, the ATO indicated that it had serious tax integrity concerns with the proliferation of stapled structures. The Commonwealth Treasury has now revealed that it has also been concerned at the increasing impact of stapled structures on the corporate tax base by releasing a Consultation Paper calling for submissions on potential policy options in relation to stapled structures, the taxation of real property investments and the recharacterisation of trading income. Partner Martin Fry and Senior Associate Igor Golshtein report.


Whereas the ATO's Taxpayer Alert was concerned with applying the existing law (in particular the general anti-avoidance rules in Part IVA) to stapled and other structures which fragment business income, and expressly excluded A-REITs and certain 'land based' privatisations, the Commonwealth Treasury's review is to be more holistic and does extend to REITs and property based assets more generally. The review emerges from concerns that stapled structures and other arrangements that achieve a fragmentation of business and passive income may be generating undesirable revenue outcomes and investment decisions. It creates the prospect of legislative changes to apply corporate tax treatment to investment income that has thus far been taxed on a trust flow-through basis and delivered concessional taxation outcomes for foreign investors.

Investors in property-based assets, particularly foreign investors in REITs, infrastructure and related assets, will need to carefully monitor the outcomes of this review. Submissions to Treasury are due by 20 April 2017.

Fragmentation and stapled structures

At the heart of Treasury's concern is the fragmentation of an integrated business operation into an active business side, carried on by an entity that is taxed at the company tax rate, and a passive investment side taxed on a concessional basis.

A stapled structure is viewed as one of the means by which such fragmentation can occur. In its simplest form, a staple will involve a passive trust owning some form of property interest and a company undertaking certain active business activities that relate to the property owned by the trust. The structure will generally be characterised by common ownership of the trust and the company; this will often be achieved by the units in the trust being stapled (contractually or otherwise) to the shares in the company, or by joint venture arrangements otherwise achieving common ownership. The concern is that such a structure can operate to effectively recharacterise some or all of the active business income into concessionally taxed passive income. For example, as the income of the passive trust may be taxed on a concessional basis, the concern is that the recharacterisation can be achieved by way of tax deductible payments by the active company to the passive trust.

Tax advantages of stapled structures

The Consultation Paper proceeds on the basis that having regard to longstanding Government policy as reflected in the introduction of Division 6C in 1985, business activity should naturally be undertaken via an entity taxed at the company tax rate. From that perspective, the use of a stapled structure is viewed as generating various tax advantages for investors, primarily:

  • the ability to preserve the flow-through taxation of the trust by housing the active business activities on the company side, thereby quarantining the trust from being taxed as a company under Division 6C of the Tax Act;
  • the ability of the trust to make tax-deferred distributions (particularly in the early stages of major projects in respect of which there has been a significant initial capital outlay which generates capital allowance deductions), thereby effectively allowing investors to obtain the benefit of tax losses generated from the early capital outlays;
  • concessional withholding tax rates for distributions to foreign investors under Australia's Managed Investment Trust regime, and royalty and interest WHT rules, which can cap the investor's exposure to Australian tax to 15 per cent of the gross payment or significantly less.

A holistic review of passive income investments

The Consultation Paper notes that although stapled structures have been in use since the late 1980s, their use has significantly expanded in recent years, beyond their traditional use in property and infrastructure into other sectors such as renewable energy assets, student accommodation and agriculture. This rise in the use of stapled structures is causing Treasury to consider whether staples pose an unacceptable risk of dilution to the corporate tax base, and otherwise create distortions in the investment market. 

While the Consultation Paper does not go so far as to identify a dividing line for structures that might be viewed as posing an unacceptable risk, there is clearly a concern that structures under which a substantial part of the total income is active income which is then recharacterised into passive income may be generating undesirable tax revenue outcomes and distortions in the investment market. A corollary would be that the traditional REIT structure, under which the activities of the company entity can appropriately be viewed as ancillary and complementary to the property investment, might be viewed as beyond the scope of inquiry.

Nevertheless, the Consultation Paper makes it clear that ...

the Government is revisiting the underlying policy basis and settings around the taxation of REITs and other passive income investments on a more holistic basis...



Options for reform and REITs

The Consultation Paper states that the 'Government is considering measures which remove the tax advantages of stapled arrangements'. Measures under consideration include:

  • disallowing certain deductions for cross-staple payments by the company side to the passive trust side of the staple;
  • taxing the recipient of cross-staple payments (either the trustee or foreign investors) at the Australian corporate tax rate1; or
  • deeming stapled entities to be consolidated for tax purposes.

If implemented these initial options for reform would tend to generate a result whereby the company tax rate would be applied to at least some of the income which is currently able to be distributed to investors on a concessional basis.

However, recognising the importance of foreign investment in the Australian REIT sector, the Consultation Paper poses the question of whether Australia should introduce a specific REIT regime, perhaps characterised by allowing the property owning trust to derive a greater proportion of active trading income without prejudicing the flow through taxation of the trust.


In calling for a holistic review of the taxation of passive income investments, the Consultation Paper raises some very real questions of preservation and transition.

Treasury clearly recognises the significance of the large sums of capital that have been invested into the Australian economy via stapled structures, particularly in the REIT and infrastructure sectors. As such, one can mount a strong case for preserving the tax treatment of existing investments.

Yet the Consultation Paper states (without substantiation):

experience internationally strongly suggests that any permanent grandfathering of existing structures would encourage inappropriate use of those grandfathered structures … [and]… would create equity issues.


The Consultation Paper calls for submissions on transitional arrangements, including a period of phasing into any new tax regime that may be implemented. 

Clearly, foreign investors in existing property, infrastructure and related assets, with their long-term investment profiles, will need to carefully monitor the implications of this significant new development. New investors into stapled and similar structures will face issues with FIRB, the ATO and, now, a significantly increased change in law risk.


  1. A similar rule was introduced in 2016 in relation to MITs and Attribution MITs, whereby cross-staple payments were taxed to the trustee at the corporate tax rate to the extent it constituted 'non arm's length income'.