On 28 June 2018, the Australian Treasurer released a public consultation paper (paper) on the integrity measures that follows the exposure draft law to implement the March package of measures to reform the tax treatment of stapled structures and similar arrangements.¹

The paper outlines the conditions for stapled entities to access the proposed infrastructure concession and transitional arrangements including 7-year and 15-year concessional periods. The Treasurer's release states that these conditions provide "a further safeguard against aggressive cross staple pricing arrangements during these transition and concession periods."

The paper lays out conditions for cross-staple rent to access the concessional rate of withholding tax under the Managed Investment Trusts (MIT) regime, including:

• Using the existing integrity rules for MITs, the non-arms' length income (NALIR) to require staples to set their rent at market prices; and
• New statutory caps on the amount for new and existing infrastructure projects. The reason for this is that for "economic infrastructure staples that are eligible for the 15 year transition period and new approved infrastructure staples, it is generally not possible to identify directly comparable Australian transactions … the NALIR by itself may not act as a sufficient safeguard" so additional safeguards have been provided including:
  • For existing pre-transition staples, they must continue to charge cross-staple rent in accordance with the existing rent calculation methodology.
  • For new infrastructure assets eligible for the 15 year concession, if the cross staple rent results in more than 80% of current year taxable income of the project allocated to the asset entity, the excess rent amount would be treated as non-concessional MIT income subject to the 30% MIT withholding. An expense allocation ordering rule would see expenses first allocated to the rental income that can access the 15% MIT rate.

A very short consultation period closes on 12 July 2018. This indicates the Government's objective to release the full package of draft legislation shortly.

The impact of these proposals on existing and proposed stapled structure transactions should be considered, and taxpayers should consider potentially developing submissions on the operational issues involved in the integrity rules.

———————————————
ENDNOTE

¹ See EY Global Tax Alert, Australia proposes changes to the taxation of stapled structures including measures on foreign investment beyond staples, dated 29 March 2018.

———————————————
CONTACTS

For additional information with respect to this Alert, please contact the following:

Ernst & Young (Australia), Energy and Infrastructure, Sydney

• Richard Lambkin
  richard.lambkin@au.ey.com

Ernst & Young (Australia), Energy and Infrastructure, Melbourne

• Bruno Dimasi
  bruno.dimasi@au.ey.com
• Richard Buchanan
  richard.buchanan@au.ey.com

Ernst & Young (Australia), Energy and Infrastructure, Brisbane

• Paul Laxon
  paul.laxon@au.ey.com
• Reid Zulpo
  reid.zulpo@au.ey.com

Ernst & Young (Australia), Real Estate, Sydney

• George Stamoulos
  george.stamoulos@au.ey.com
• Daryl M Choo
  daryl.choo@au.ey.com
• Stephen J Chubb
  stephen.chubb@au.ey.com

Ernst & Young LLP, Australian Tax Desk, New York

• David Burns
  david.burns1@ey.com

———————————————
ATTACHMENT

PDF version of this Tax Alert