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Focus: Foreign pension funds to access reduced withholding tax rate

10 November 2014

In brief: Legislation has been introduced into Federal Parliament to allow foreign pension funds to access the managed investment trust withholding tax regime, with effect from 1 July 2008. Partner Katrina Parkyn and Associate Scott Lang examine the proposed legislation, and its implications for foreign pension funds and the funds in which they invest.

 
 

How does it affect you?

  • The managed investment trust (MIT) withholding tax regime provides a final 15 per cent withholding tax for eligible foreign investors in a MIT.
  • The class of foreign investors who are eligible for this reduced withholding tax rate is being expanded to include foreign pension funds.
  • The amendments will apply retrospectively, from 1 July 2008. Eligible foreign pension funds will have two years from the commencement of the changes to apply for a reassessment of their income tax liability, going back to 1 July 2008.

MIT withholding tax regime

Under the MIT withholding tax regime, eligible foreign residents are subject to a reduced withholding tax rate of 15 per cent on certain payments they receive from investing in a MIT.

However, the reduced withholding tax rate does not apply to a foreign resident who receives a fund payment as trustee of a trust and does not have beneficiaries who are presently entitled to the payments. Since pension funds tend to be structured as trusts, these requirements have the practical effect of preventing most foreign pension funds (and their beneficiaries) from accessing the reduced withholding tax rate. Consequently, foreign pension funds are generally subject to income tax at the highest marginal rate under the general provisions governing taxation of trusts.

The amendments

Legislation has been introduced into Parliament, which, once enacted, will enable qualifying foreign pension funds to access the reduced withholding tax rate.

This will be achieved by effectively deeming a foreign pension fund to not be a trustee to the extent that they receive an amount that is, or is reasonably attributable to, a fund payment.

Where the foreign pension fund resides (for tax purposes) in a country with which Australia has an information exchange agreement, the foreign pension fund will qualify for the final 15 per cent withholding tax rate.1 In all other cases, the rate will be 30 per cent.

Definition of foreign pension funds

The changes will only apply to foreign pension funds that meet the new statutory definition of being:

  • an entity with the principal purpose of funding pensions (including disability and similar benefits) for the citizens or contributors of a foreign country that is either:
    • established by an exempt foreign government agency (meaning the government of a foreign country (or part thereof) or certain authorities of such a government); or
    • established under a foreign law for an exempt foreign government agency; or
  • a foreign superannuation fund that has at least 50 members.2  

The addition of foreign superannuation funds with at least 50 members is a welcome change from the exposure draft Bill, which had effectively restricted the definition of a foreign pension fund to foreign government pension funds.

Retrospective effect

The amendments will apply to fund payments made on or after 1 July 2008 (being the date that the MIT withholding tax regime commenced). In this respect, the changes are retrospective and will allow qualifying foreign pension funds to apply for an amendment of prior-year assessments, to take advantage of the reduced rate for fund payments they have received since 1 July 2008.

Where the amendment period for an assessment has already expired, the fund will have two years following the commencement of the changes (ie the date of Royal Assent) within which to seek an amendment. Amendments can only be made for the purpose of giving effect to the MIT withholding regime amendments, and not regarding any other matters.

Implications

The amendments will allow foreign pension funds to access the MIT withholding tax regime, rather than expose them to income tax under the general trust income tax provisions.

This will remove administrative burdens on, and simplify the income tax affairs of, foreign pension funds who have invested in MITs, and will greatly simplify the income tax affairs of foreign pension funds that have invested exclusively in MITs (as the latter class of entities should no longer need to lodge an Australian income tax return).

While this will no doubt encourage foreign pension funds to invest in MITs, access to the MIT withholding tax regime will depend upon whether a fund can satisfy the statutory definition of foreign pension fund (which involves tracing through a series of definitions). Care should be taken in applying these definitions to ensure that funds do in fact qualify to access the MIT withholding tax regime. For instance, the definitions require that foreign non-government pension funds must be indefinitely continuing, which is not always the case.

Footnotes
  1. The list of information exchange countries currently includes:  Argentina, Bermuda, Canada, China, Czech Republic, Denmark, Fiji, Finland, France, Germany, Hungary, India, Indonesia, Ireland, Italy, Japan, Kiribati, Malta, Mexico, Netherlands, Netherlands Antilles, New Zealand, Norway, Papua New Guinea, Poland, Romania, Russia, Slovakia, South Africa, Spain, Sri Lanka, Sweden, Taipei, Thailand, United Kingdom, United States of America, Vietnam, Antigua and Barbuda, British Virgin Islands, Isle of Man, Jersey, Gibraltar, Guernsey, Belize, Cayman Islands, Commonwealth of the Bahamas, Principality of Monaco, Republic of San Marino, Republic of Singapore, Saint Kitts and Nevis, Saint Vincent and the Grenadines, Anguilla, Aruba, Belgium, Malaysia, Turks and Caicos Islands, Cook Islands, Macau, Mauritius, Republic of Korea.
  2. For more detail, see the definition of 'Australian superannuation fund' in s295-95(2) of the Income Tax Assessment Act 1997 (Cth) and 'superannuation fund' in s10 of the Superannuation Industry (Supervision) Act 1993 (Cth).

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