On 7 August 2018, the Australian Treasury released exposure draft (ED) legislation of previously announced integrity rules which will apply to stapled entities. The ED follows the 28 June discussion paper,¹ and is intended to supplement the main amendments in the ED issued on 26 July.

The integrity rules will apply to stapled entities comprised of asset-owning managed investment trusts (MITs) and their stapled operating entities, where the stapled entity is permitted to continue under the transitional rules and/or approved economic infrastructure facility exception.

In line with the discussion paper, the integrity measures apply to all facilities that benefit under the transitional rules and/or approved economic infrastructure facility exception and will:

• Extend the current MIT non-arm's length income rule to require the asset-owning MITs to set their rent in respect of their land investment to the operating entity at market prices
• Introduce an additional concessional cross-staple rent cap

Any breach of the concessional cross-staple rent cap will result in withholding at 30% (top corporate tax rate) to the extent that the rent cap was exceeded, while income below the cap continues to have access to the 15% withholding rate. If the Commissioner makes a determination to apply the non-arm's length income rule then the trustee of the MIT will be liable to pay tax on the amount at 30% (top corporate tax rate).

The amount of the concessional cross-staple rent cap amount depends on whether an established method of determining rent is in place at 27 March 2018.

Where a cross-staple lease arrangement was entered into before 27 March 2018, and has a method to determine the amount of the rent agreed between the asset entity and operating entity (including a method for calculating an amount of rent), then the asset entity may be able to continue to charge rent under its existing arrangements for the duration of the transition period.

For concessional cross-staple rent arrangements entered into after 27 March 2018 or where there is no existing lease at 27 March 2018 for determining rent amounts, a statutory concessional rent cap applies equal to 80% of rental income derived. The rent cap is proposed to be calculated annually using the following method:

1. Calculate a reasonable estimate of the asset trust's net income
2. Calculate a reasonable estimate of the operating company's taxable income
3. Add step 1 result and step 2 result
4. Multiply by the statutory concessional rate of 80%
5. Subtract step 1 result from step 4 result

The ED short consultation period closes on 14 August 2018.

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ENDNOTE

¹ See EY Global Tax Alert, Australia releases consultation paper on draft integrity measures to reform tax treatment of stapled structures, dated 29 June 2018.

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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
• Edward Consett
  edward.consett@au.ey.com

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

• Reid Zulpo
  reid.zulpo@au.ey.com

Ernst & Young (Australia), Real Estate, Sydney

• George Stamoulos
  george.stamoulos@au.ey.com
• Stephen J Chubb
  stephen.chubb@au.ey.com

Ernst & Young (Australia), Asset Management, Sydney

• Antoinette Elias
  antoinette.elias@au.ey.com
• Daryl M Choo
  daryl.choo@au.ey.com

Ernst & Young (Australia), Private Equity, Sydney

• Matt Weerden
  matt.weerden@au.ey.com

Ernst & Young LLP, Australian Tax Desk, New York

• David Burns
  david.burns1@ey.com

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ATTACHMENT

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