Matt Thistlethwaite (Kingsford Smith, Australian Labor Party, Shadow Assistant Minister for Treasury) Share this | Hansard source

I'm speaking in support of these bills subject to the second reading amendment moved by the member for Fenner. These bills deal with stapled structures and tightening tax concessions for foreign investors. The bills do four things. They increase the managed investment trust withholding rate on fund payments that are attributable to non-concessional managed investment trust income to 30 per cent, they modify the thin capitalisation rules to prevent double-gearing structures, they limit the withholding tax exemption for superannuation funds for foreign residents and they codify the limits and scope of the sovereign immunity tax exemption.

In respect of stapled structures, according to the government, the measures in these bills are designed to improve the integrity of tax laws relating to stapled structures. Prior to the introduction of the managed investment trust regime in 2008, profits made by stapled entities had a similar tax burden to companies. The MIT regime is aimed at increasing the attractiveness of certain funds to mobile foreign investment, lowering withholding taxes deducted from certain distributions from foreign investors. That rate is generally at 15 per cent. That means that foreign investors investing through stapled structures don't pay the company tax rate. The unintended consequence of the system is that we have foreign institutional investors being taxed anywhere between zero and 15 per cent, versus the company tax rate of 30 per cent. Obviously, that's an anomaly that we wish to clear up through these provisions.

In terms of the thin capitalisation rules that prevent double-gearing structures, these rules apply to foreign controlled Australian entities, Australian entities that operate internationally and foreign entities operating in Australia. Generally, they broadly deny deductions for debt-financing expenses if the entity's debt exceeds certain limits. Foreign investors have been entering into double-gearing structures that allow them to convert more of their active business income into interest income, which is subject to a 10 per cent interest withholding tax, or less in some cases. The explanatory memorandum states:

Double-gearing structures involve multiple layers of flow-through holding entities (trusts or partnerships) that each issue debt against the same underlying asset. This allows investors to provide a greater proportion of their capital as investor debt and gear higher than the thin capitalisation limits allow. As a result, investors are able to maintain and deduct higher levels of debt financing expenditure.

Currently, it goes on:

For the purposes of determining associate entity debt, associate entity equity and the associate entity excess amount under the thin capitalisation provisions, a trust … or partnership that is an associate of the other entity referred to in the relevant provisions will be an associate entity of that other entity if the other entity holds an associate interest of—

50 per cent or more in that trust or partnership. Schedule 2 of the Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Bill lowers that associate entity threshold from 50 per cent to 10 per cent. The explanatory memorandum states:

In addition, in determining the arm’s length debt amount, an entity must consider the debt to equity ratios in entities that are relevant to the considerations of an independent lender or borrower.

It's good to see that the government has adopted this. It's similar to a measure that Labor has proposed in our nearest reforms—if we're elected—associated with thin capitalisation rules and cracking down on multinational tax avoidance.

This proposal that we're dealing with here today in these bills doesn't go as far as Labor's proposal, but it is a step in the right direction. We would urge the government to give further consideration to Labor's proposal, which will provide greater integrity and efficiency to our tax system and ensure that we get a fairer share from companies that have had a history—in particular, those larger companies—of using thin capitalisation rules to transfer debt to other countries.

The previous Treasurer and now Prime Minister unilaterally announced, on 14 September 2017, that managed investment trusts would no longer be able to acquire residential property, other than affordable housing. This did take the property and construction sector completely by surprise, putting the potential billion-dollar build-to-rent market in Australia at risk. After more than 10 months of uncertainty and confusion, the former Treasurer, the Prime Minister, finally backflipped and changed that, allowing MITs to invest in residential housing that is held primarily for the purpose of deriving rent.

Distributions attributed to investments in residential housing that are not used to provide affordable housing will not be concessional MIT income that is subject to a final MIT withholding tax rate of 30 per cent. The Property Council supports this element of the legislation, saying that the presentation of these bills is another step towards providing greater certainty around the rules for institutional investment in real estate, benefitting millions of Australians and their retirement savings. Tax justice advocates are supportive of this measure.

A report on the use of stapled structures has led to a Senate inquiry, chaired by Senator McAllister, that looks at the for-profit aged-care sector and stapled structures. Some sovereign wealth funds and institutional investors have criticised the package for not being fully prospective and have said that the measures will create a disincentive to investment in large-scale Australian projects, including infrastructure. The Financial Services Council has opposed much of that package.

The Tax Institute has raised the issue of why the Australian Taxation Office doesn't simply use Part IVA, the general anti-avoidance rule, to target the recharacterisation of active income to passive income, to exploit low withholding tax rates designed for passive investor income. It welcomes the transitional arrangements for infrastructure as a second-best option. But some stakeholders have raised the medium-term effect on horizontal fiscal equalisation. In particular, the package largely removes the ability for states to promote the use of stapled structures to inflate asset prices for the purposes of privatisation, and state governments of various political situations have championed the use of these stapled structures to increase the sale of assets for privatisation purposes. That's something the Labor Party has had some difficulty with in previous years, particularly the sale of essential assets associated with electricity that have led to some of the massive increases in electricity prices that we've been seeing for some years.

In conclusion, Labor supports the passage of these bills. While there are measures in here that go some of the way to closing some of the tax loopholes in Australia, particularly those around managed investment trusts and changes to thin capitalisation rules, in our view the reforms do not go far enough. The government should look at the proposals Labor has put in place around a fairer multinational tax system and some of these entities that are being used by big corporations to not pay their fair share of tax in Australia. It should look at implementing the very sound recommendations that have been put forward by Labor that would be fair dinkum about closing some of these tax loopholes for multinational corporations.

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