Treasury Announcement on ‘Stapled Structures’ – An infrastructure perspective

27 March 2018

Treasury has today announced a package of tax measures to address the perceived sustainability and tax integrity risks posed by "stapled structures" (Package). The Package limits concessions currently available for foreign investors in receipt of passive income, subject to certain transitional rules for arrangements in existence as at the date of the announcement and a 15 year concession for new investment in economic infrastructure assets approved by the Government. A number of the changes have implications far beyond stapled structures.

The fact that it has taken Treasury over a year to conduct private consultation and provide its preferred approach is reflective of the Government’s objective of striking a balance between perceived integrity risks and obtaining foreign investment as a means of supporting growth, particularly in the infrastructure space.

This Riposte focusses on the Package from an infrastructure perspective.

A "stapled structure" is described in the Package as "an arrangement where two or more entities that are commonly owned (at least one of which is a trust) are bound together, such that they cannot be bought or sold separately." However, the measures contained in the Package extend beyond "stapled structures".

The Package contains the five measures described below (the references A to E correspond with the referencing contained in the Treasury paper accompanying the announcement). We then describe the time limited transitional rules applicable to all measures apart from B and the time limited exemption applicable to Measure A.

The Measures

A    Preventing active business income from accessing the 15% MIT rate

It is proposed that the rate of MIT withholding for fund payments of 15% will be increased to the prevailing corporate tax rate (currently 30%) for fund payments derived from cross staple rental payments, cross staple payments made under some financial arrangements such as total return swaps, or where the MIT receives a distribution from a trading trust (e.g. if the MIT has a non-controlling interest in the trading trust). The higher withholding tax rate will not apply to 3rd party rent, or to cross-staple interest. 

B    Preventing double gearing structures through the thin capitalisation rules

For income years commencing on or after 1 July 2018, it is proposed that the thin capitalisation associate entity test (for the purpose of determining associate entity equity and associate entity debt) will be amended so that for these purposes any interest of 10% or more in a flow-through entity (e.g. partnerships and trusts) will give rise to an associate entity relationship. The effect of this is to significantly limit upstream gearing to prevent "double" gearing, i.e. gearing at multiple levels with debt capacity determined by reference to the same underlying assets. The arm’s length debt test will also be amended to clarify that it requires consideration of gearing against the underlying assets for interests in any entity.

C    Limiting foreign pension fund withholding tax exemptions

Foreign pension funds which are exempt from income tax in their home country of residence are currently exempt from Australian interest and dividend withholding tax, whether or not the income is associated with a non-portfolio interest in the paying entity.

It is proposed that this exemption will be limited to income associated with portfolio-like investments, which is described in the announcement as where the foreign pension fund holds an ownership interest of less than 10% and does not have influence over the entity’s key decision-making.

D    Limiting the sovereign immunity tax exemption

Australia generally provides an exemption on income derived by sovereign investors where the sovereign investor is not acting in a commercial capacity. The exemption is currently not codified. 

It is proposed that a legislative framework be created for the sovereign immunity exemption which will limit the exemption to situations where sovereign investors have an ownership interest of less than 10% and do not have influence over the entity’s key decision-making. Current ATO practice has allowed sovereign immunity for investments of up to around 20% in limited circumstances.

Importantly, the Treasury paper states that "the exemption will not extend to distributions of active business income from trusts (including where the active income has been converted to rent through cross staple payments)." This would seem to effectively limit sovereign immunity to  investments in debt, or distributions on portfolio interests in MITs (other than distributions of cross-staple rent), non-trading trusts and companies (where it is relevant only in respect of unfranked dividends). Capital gains on disposal of portfolio interests are already exempt under Division 855.

E    Preventing Agricultural MITs

It is proposed that rent from agricultural land would not qualify as income from an "eligible investment business" with the effect that trusts holding agricultural land, like trusts holding residential property other than affordable housing, may not qualify as MITs with consequences including that the concessional 15% MIT withholding rate for fund payments would not be available.

Timing & Transitional Rules (Measures A, C, D & E)

Measures A, C, D & E will commence on 1 July 2019, but arrangements in existence at the date of the announcement of the Package (27 March 2018) will have access to a blanket seven year transitional period. This means that the earliest these changes (other than Measure B) will apply is 1 July 2026.

Given the long life of infrastructure assets, the announcement provides that existing economic infrastructure staples will be provided a 15 year transitional period with respect to Measure A.

Treasury will consult separately on the conditions stapled entities must comply with to access the transitional arrangements available under Measure A (we assume that this relates to both the seven year blanket transitional period and the longer 15 year transitional period).

During the transitional period, concessional tax rates will only apply in relation to investments made, or in the case of Measure A, committed at the date of announcement.

It is proposed that sovereign investors that have a ruling from the ATO on sovereign immunity for a particular investment which extends beyond the transitional period will be able to access the transitional period until the later expiry of the ruling.

Importantly for all stapled structures, the announcement provides that following the implementation of the Package, the general anti-avoidance rule will not apply with respect to the choice of a stapled group to obtain a deduction in respect of cross staple rent during the transitional period.

Additional Concession for certain infrastructure projects under Measure A

Separate from the transitional rules, the announcement also provides that the Government will introduce a 15 year concession for new investment in economic infrastructure assets approved by the Government. This exemption will allow approved infrastructure assets held in a stapled structure to access the 15% MIT withholding rate for cross-staple rent during the 15 year exemption period. At the end of the 15 year period the MIT withholding rate would convert to the corporate tax rate. The announcement provides that the exemption is intended to facilitate investment in "productivity enhancing projects". It would appear that only rent referable to newly constructed assets will qualify for this exemption, however, this would need to be considered further upon the release of draft legislation. For example, if the investment involves an improvement or addition to an asset already in existence then there is a question whether the rent must be bifurcated between the new investment and the existing asset. 



Aldrin De Zilva

Director, Head of Projects & Infrastructure


Manuel Makas

Managing Director, Head of Real Estate


Julian Pinson



Chris Colley



Nicholas Rouse

Special Counsel


Scott Luetjens

Senior Associate


Ryan Leslie

Senior Associate