Non-concessional MIT income: is your staple ready for life without relief?

For entities that own facilities that are not economic infrastructure facilities, the seven-year transitional relief period for managed investment trust (MIT) cross-staple arrangement income is due to expire on 30 June 2026. This means that the effective tax rate for foreign investors will increase from 15% to 30%. 

This article outlines the implications of the transitional relief ceasing to apply from 1 July 2026 and identifies the matters that entities should consider in anticipation of operating outside the transitional regime. 

A stapled structure is an investment structure commonly used in Australia by the infrastructure and real estate sectors, in which two or more separate legal entities are ‘stapled‘ together under common ownership. For example, the structure may include an asset entity and an operating entity, whereby the legal title to assets sits in a trust and the operating business sits in a company. Stapled structures previously came under heightened ATO scrutiny, particularly when considering the application of the MIT regime, where Treasury and the ATO noted that the concessional MIT withholding rate (being 15%) was being accessed in circumstances that did not reflect genuine passive investment. The ATO was concerned that foreign investors could receive favourable treatment intended for passive investors, even though the part of the return may have essentially been derived from business operations.

Accordingly, to improve the integrity of the income tax law for arrangements involving stapled structures and to limit access to tax concessions for foreign investors, in 2019 the MIT withholding rate on fund payments that are attributable to non-concessional MIT income (NCMI) was changed to 30%.

The provisions dealing with NCMI apply to a fund payment made by a MIT for the 2019-20 and later income years, where the fund payment is made on or after 1 July 2019 and relates to income that is MIT cross staple arrangement income. Broadly, a MIT will have an amount of MIT cross staple arrangement income if the amount it derives, receives or makes is from, or is attributable to, a cross-staple arrangement between an operating entity and an asset entity.

Transitional rules and relief 

Since 1 July 2019, transitional relief has been available to MIT cross staple arrangement income. This relief applies where the income is attributable to a facility that either existed or was sufficiently committed to at the date of announcement of the rules on 27 March 2018. It also applies  to expansions or enhancements of existing facilities to improve or extend their functionality. A facility includes a collection of assets that are connected and together perform a particular function, such as an infrastructure facility or a property facility.

However, entities must have made a choice in the approved form for the transitional rules to apply by 30 June 2019 or at such later time as the Commissioner allowed.

Where the transitional rules apply, the general MIT withholding rate of 30% is reduced to 15%, broadly from the facility’s relevant start date for a period of seven years, or if the facility is an economic infrastructure facility, 15 years.

The Commissioner’s guidance in Law Companion Ruling LCR 2020/2 provides a detailed interpretation of the transitional rules. Other key benefits of the transitional relief include:

• amounts of rent from land investment could be excluded from MIT cross staple arrangement income if the requirements in s 12-440(3) of Schedule 1 to the TAA 1953 were satisfied, subject to integrity rules; and
   
• an operating entity may be entitled to a deduction for an amount of rent from land investment if the requirements in s 25-120 of the ITAA 1997 were satisfied.

Transitional period to end on 30 June 2026

For entities that own or lease facilities that are not economic infrastructure facilities, the seven-year transitional period applicable under the transitional rules will come to an end on 30 June 2026. As this date approaches, entities that have relied on the transitional relief should begin assessing the consequences of the transitional relief ceasing to apply from 1 July 2026. 

In particular, relevant entities should consider the impact on the character of future rent from land investment, availability of deductions for payments of rent from land investment, and the reclassification of income as MIT cross staple arrangement income, which will result in a 30% MIT withholding rate.

Entities should evaluate the ongoing appropriateness of their structures and consider whether restructuring, refinancing and operational changes may be required in anticipation of the transitional relief expiring.

Key considerations ahead of the expiry of the transitional period

Relevant entities will require specialist advice regarding the implications of these changes on their current structure and next steps. The following key issues will need to be carefully considered:

• the impact of altering the structure on each entities’ tax attributes, including accumulated tax losses;
   
• implications from unwinding any cross-entity arrangement, including financing (see further below);
   
• the application of Australia’s thin capitalisation provisions;
   
• the application of Australia’s anti avoidance provisions, including Part IVA and the new Debt Deduction Creation Rules;
   
• the impact on member distribution and overall equity return for each member, having regard to the change in forecasted future distributions (for example, corporate dividends v trust distributions) and each member’s tax profile;
   
• duty impost of altering the structure; and
   
• any known procedural steps that would need to be followed to implement an alternative structure (including consents under and amendments to shareholder arrangements to reflect the new structure and entities) and an estimate of time required to execute the change.

Additionally, for groups that have financing in place, the key issue is ensuring that any restructuring does not have consequences for asset level financings. For example:

• changes in upstream ownership or control of the obligor entities may trigger review events or events of default;
   
• transfers or distributions of assets may require consent;
   
• the removal of entities from the structure (whether through transfers or winding up) may require consent or may result in unintended consequences in the financing documents (e.g. where  finance documents include hard coded references to upstream entities);
   
• where security has been given by the stapled entities, or by the shareholders over their equity interests in the stapled entities, consents may be required to any release of that security to facilitate the restructuring and this is likely to require all lender approvals;
   
• releasing and retaking security over equity in the holding entities of the stapled structure;
   
• changes to the terms of the downstream financing arrangements; and
   
• changes to the financial covenants for the holding company financing to reflect the revised structure of the downstream group and potentially additional tax costs for the obligor group for the holding company financing.

If there are holding company financings in place, similar consents will likely be required from the holding company financiers. This might include consents for:

• releasing and retaking security over equity in the holding entities of the stapled structure;
   
• changes to the terms of the downstream financing arrangements; and
   
• changes to the financial covenants for the holding company financing to reflect the revised structure of the downstream group and potentially additional tax costs for the obligor group for the holding company financing.