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Tax Laws Amendment (Clean Building Managed Investment Trust) Bill 2012

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2010-2011-2012

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

SENATE

 

 

 

tax laws amendment (clean building managed investment trust) bill 2012

 

 

 

 

REVISED EXPLANATORY MEMORANDUM

 

 

 

 

(Circulated by the authority of the

Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP

 



 



Table of contents

Glossary.............................................................................................................. 1

General outline and financial impact............................................................ 3

Chapter 1               Clean Building Managed Investment Trusts................... 5

Chapter 2               Statement of Compatibility with Human Rights........... 15

Index................................................................................................................. 17

 

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The following abbreviations and acronyms are used throughout this revised explanatory memorandum.

Abbreviation

Definition

ITAA 1997

Income Tax Assessment Act 1997

ITMITA 2008

Income Tax (Managed Investment Trust Withholding Tax) Act 2008

MITs

Managed Investment Trusts

NABERS

National Australian Built Environment Rating System

TAA 1953

Taxation Administration Act 1953

 



 



Clean Building Managed Investment Trust

The Tax Laws Amendment (Clean Building Managed Investment Trust) Bill 2012 amends the Income Tax ( Managed Investment Trust Withholding Tax) Act 2008 , the Income Tax Assessment Act 1997 and the Taxation Administration Act 1953 to provide a final withholding tax rate of 10 per cent on fund payments from eligible Clean Building Managed Investment Trusts (MITs) made to foreign residents in information exchange countries.

Date of effect This measure will only apply to fund payments from a clean building managed investment trust in relation to the income years starting on or after 1 July 2012.

Proposal announced The measure was announced by the Assistant Treasurer and the Parliamentary Secretary for Climate Change and Energy Efficiency in Joint Media Release No. 053 of 27 June 2012.

Financial impact This measure is estimated to have a small and unquantifiable cost to revenue over the forward estimates period.

Human rights implications :  This Bill does not raise any human rights issue.  See Statement of Compatibility with Human Rights — Chapter 2, paragraphs 2.1 to 2.9.

Compliance cost impact Low.

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Outline of chapter

1.1                   The Tax Laws Amendment (Clean Building Managed Investment Trust) Bill 2012 amends the Income Tax (Managed Investment Trust Withholding Tax) Act 2008 (ITMITA 2008) , the Income Tax Assessment Act 1997 (ITAA 1997) and the Taxation Administration Act 1953 (TAA 1953).

1.2                   The amendments will provide for a final withholding tax rate of 10 per cent on fund payments from Clean Building Managed Investment Trusts (MITs) made to foreign residents in countries with which Australia has effective exchange of information (information exchange countries).

Context of amendments

1.3                   On 27 June 2012 the Assistant Treasurer and the Parliamentary Secretary for Climate Change and Energy Efficiency announced that the Government would introduce legislation to reduce the MIT final withholding tax rate to 10 per cent for eligible fund payments made by MITs that hold newly constructed energy efficient commercial buildings.

1.4                   The Tax Laws Amendment (Clean Building Managed Investment Trust) Bill 2012 gives effect to this announcement.

Summary of new law

1.5                   The amendments in this Bill will provide for a final withholding tax rate of 10 per cent on fund payments from Clean Building MITs made to foreign residents in information exchange countries.

1.6                   In order to be a Clean Building MIT and access the concessional final withholding tax rate, a MIT must hold one or more clean buildings. 

1.7                   Clean buildings are new energy efficient buildings for which construction began on or after 1 July 2012.  These buildings must be office buildings, hotels or shopping centres, or a building consisting of a combination of these.

1.8                   Clean Building MITs will also be able to hold and receive income from assets ‘reasonably incidental to’ those clean buildings held by the MIT, provided the total income received by the MIT from those assets is less than 5 per cent of the total income received from the MIT’s clean buildings. 

1.9                   Where a MIT fails to satisfy the criteria to be a Clean Building MIT, its fund payments made to foreign residents in information exchange countries will be taxed at 15 per cent.

Comparison of key features of new law and current law

New law

Current law

The MIT final withholding tax applies to fund payments from a MIT to a foreign resident, including where made indirectly through one or more Australian intermediaries.

Where withholding is required, fund payments made by a Clean Building MIT will be subject to a rate of the final withholding tax of 30 per cent. 

This rate will be reduced to 10 per cent where the recipient is in an information exchange country as listed in Regulation 44E of the Taxation Administration Regulations 1976

A Clean Building MIT is a MIT that holds one or more clean buildings of which construction commenced on or after 1 July 2012. 

The MIT final withholding tax rate applies to fund payments from a MIT to a foreign resident, including where made indirectly through one or more Australian intermediaries.

Where withholding is required, the rate of the final withholding tax is 30 per cent, but is reduced to 15 per cent where the recipient is in a foreign jurisdiction that is listed in Regulation 44E of the Taxation Administration Regulations 1976 .

Detailed explanation of new law

1.10               The MIT final withholding tax rate applies to fund payments made by a MIT to a foreign resident, including where made indirectly through one or more Australian intermediaries.  A fund payment is a distribution of income and capital gains from taxable Australian property by an Australian MIT.  The trustee of a MIT is required to withhold an amount from a fund payment it makes to an entity with an address outside of Australia (or where the payer is authorised to make payments outside Australia). 

1.11               The concessional MIT final withholding tax rate is prescribed in paragraph 4(1)(a) of the ITMITA 2008 and subsections 12-390(3) and 12-390(6) of Schedule 1 to the TAA 1953. 

1.12               The concessional rate is only available in respect of ‘fund payments’ from a MIT as defined in sections 12-400 and 12-405 of Schedule 1 to the TAA 1953.  Dividends, interest, royalties, foreign sourced income, and capital gains and losses from assets that are not taxable Australian property are specifically excluded. 

1.13               Where withholding is required and the fund payment is not from a Clean Building MIT the rate of the final withholding tax is 30 per cent.  The rate is reduced to 15 per cent where the recipient of the fund payment is in an information exchange country as listed in Regulation 44E of the Taxation Administration Regulations 1976 .

1.14               Fund payments from a Clean Building MIT will be subject to a final withholding tax rate of 30 per cent.  However, where the recipient is in an information exchange country as listed in Regulation 44E of the Taxation Administration Regulations 1976 , this rate will be reduced to 10 per cent.  [Schedule 1, items 3to6, after section 2, paragraph 4(1)(a), at the end of paragraph 4(1)(a) and subsection 4(2) of the ITMITA 2008]

What is a clean building MIT

1.15               To be considered a Clean Building MIT, a trust must first satisfy the definition of a MIT under the broader MIT regime.  This definition is contained in section 12-400 in Schedule 1 of the TAA 1953.  [Schedule 1, items 8 and 20, at the end of section 12-375 and paragraph 12-425(1)(a) of Schedule 1 to the TAA 1953]

1.16               For such a trust to be considered a Clean Building MIT it must also hold one or more clean buildings.  [Schedule 1, items 2 and 20, subsection 995-1(1) of the ITAA 1997 and section 12-425 of Schedule 1 to the TAA 1953]

1.17               Clean Building MIT fund payments only consist of income and capital gains from clean buildings and assets that are ‘reasonably incidental to’ those clean buildings.  Therefore, a Clean Building MIT cannot derive assessable income from any taxable Australian property other than the trust’s clean buildings and assets ‘reasonably incidental to’ those clean buildings.  For the purposes of these amendments, a clean building includes the land on which the clean building is a fixture.  Taxable Australian property is defined in section 855-15 of the ITAA 1997.  [Schedule 1, item 20, subsection 12-425(1) of Schedule 1 to the TAA 1953]

1.18               Whether an asset is ‘reasonably incidental to’ a clean building is a question of fact and degree.  Generally, for an asset to be ‘reasonably incidental to’ a clean building, there must be a clear and generally accepted connection that the asset naturally appertains to the clean building.  This connection must be of some substance and not a general facilitation or of minor effect.  [Schedule 1, item 20, paragraph 12-425(1)(c) of Schedule 1 to the TAA 1953]

1.19               Assets that could be considered ‘reasonably incidental to’ clean buildings include car parking facilities, telecommunications infrastructure attached to the building (mobile phone towers on top of a building) and advertising infrastructure (such as billboards). 

1.20               Clean Building MITs are not precluded from holding taxable Australian property that is not producing assessable income.  This allows Clean Building MITs to hold land (from which no income is being derived) for the purpose of developing and constructing clean buildings.  However, if a taxable Australian property asset, other than the clean building or an asset ‘reasonably incidental to’ the clean building, does produce assessable income then the MIT will no longer be a Clean Building MIT and the normal MIT rules will apply.  This outcome arises irrespective of whether or not the non-incidental income producing assets are affixed to land on which a clean building is also affixed.  [Schedule 1, item 20, paragraph 12-425(1)(c) of Schedule 1 to the TAA 1953]

1.21               For example, a MIT will not be a Clean Building MIT if it receives income from a non-clean building or non-incidental assets to the clean building it holds.  This is regardless of whether or not these assets are on the same legal title or on separate legal titles to the clean building. 

1.22               However, a Clean Building MIT is not precluded from holding and receiving income from assets that are not taxable Australian property, such as cash or shares.  Any income derived from these assets does not form part of the Clean Building MIT’s fund payment and therefore is not subject to MIT withholding tax.

1.23               Where a MIT fails to meet the requirements to be a Clean Building MIT, its fund payments will be subject to the general MIT withholding regime.

Meaning of clean building

1.24               Broadly, a building is a clean building if:

•        the construction of the building commenced on or after 1 July 2012;

•        the building is a commercial building that is an office building, hotel or shopping centre, or a building consisting of a combination of these; and

•        the building meets and maintains at least a 5 Star Green Star rating as certified by the Green Building Council of Australia or a 5.5 star energy rating as accredited by the National Australian Built Environment Rating System (NABERS). 

[Schedule 1, items 1 and 20, subsection 995-1(1) of the ITAA 1997 and section 12-430 in Schedule 1 of the TAA 1953]

Construction began on or after 1 July 2012 requirement

1.25               To be a clean building, the construction of the building must have commenced on or after 1 July 2012. 

1.26                A building will be taken to have commenced construction when the works on the lowest level of the building begins.  [Schedule 1, item 20, paragraphs 12-430(1)(a)  and 12-430(2)(a) of Schedule 1 to the TAA 1953]

1.27               Any works preparing the site for construction and works undertaken below the lowest level of the proposed building do not represent the commencement of construction for the purposes of this measure.  This includes any excavation, environmental remediation or site stabilisation works.  [Schedule 1, item 20, paragraph 12-430(2)(b)] 

1.28               Therefore, buildings such as those built on top of previous foundations or on top of shared car parking facilities will not be considered to have commenced construction until works on the lowest level of the building commences.  [Schedule 1, item 20, paragraph 12-430(2)(a)] 

1.29               What constitutes a particular building is guided by the relevant rating tool adopted.  The building is not necessarily identified by reference to legal title of the land to which it is affixed.  For example, buildings such as shopping centres which are erected on a number of separate land titles will be rated as one building. 

1.30               Existing buildings that are retrofitted or extended are not within the scope of this measure.  A building which is substantially or significantly extended or retrofitted will not change its character from an existing building and are not clean buildings.

Building use requirements

1.31                For a building to be a clean building, it must be an office building, hotel or a shopping centre, or a building with a combination of such uses.  [Schedule 1, item 20, subsection 12-430(3) of Schedule 1 to the TAA 1953]

1.32               For the purposes of these provisions, the meaning of office building, hotel and shopping centre will take their ordinary meanings.

1.33               An office building is a commercial building used to provide office space and associated facilities.  Incidental uses, such as a child care centre, limited retail and food outlets will not exclude the building from being an office building.  In each case, whether or not a building is considered to be an office building is a question of fact. 

1.34               For example, a distribution centre that stores goods and has an office component is not an office building under ordinary concepts.  This is regardless of whether the distribution centre is currently in use or not.

1.35               To be eligible as a hotel, a building must wholly or mainly provide short-term accommodation for travellers. 

1.36               To be eligible as a shopping centre, a building must be predominantly used for retail purposes.  However, a shopping centre would ordinarily include facilities such as cafes and restaurants.  Such associated facilities would not preclude a building from being considered a shopping centre. 

1.37               However, any building, office, hotel, shopping centre or any combination thereof will be excluded from the measure if it provides any amount of non-commercial residential accommodation. 

1.38               These provisions also include a regulation making power to allow the scope of buildings to which the measure applies to be modified.  [Schedule 1, item 20, paragraph 12-430(3)(b) of Schedule 1 to the TAA 1953]

Energy efficiency requirements

1.39               In order for a building to be a clean building it must have received and maintained at all times during the income year a minimum energy efficiency rating or satisfy the requirements prescribed by regulation. 

1.40               Prior to, and at the time the building starts producing assessable income, the building must have at least a 5 Star Green Star rating as certified by the Green Building Council of Australia or a 5.5 star energy rating as accredited by NABERS.  [Schedule 1, item 20, subsection 12-430(4) of Schedule 1 to the TAA 1953]

1.41               For the purposes of a new building accessing the regime under the Green Building Council of Australia certification, the building must have received at least a 5 Star Green Star rating ‘ by Design ’ under the applicable rating tool.  The building must also obtain a 5 Star Green Star rating ‘ as Built ’within a reasonable time of practical completion of the project, usually 24 months, in order to maintain its eligibility. 

1.42               For the purposes of a new building accessing the regime under the NABERS accreditation, the building must have received a NABERS 5.5 star energy rating Commitment Agreement.  As soon as practically possible, an actual NABERS energy rating must be undertaken and a 5.5 star energy rating will be required to maintain eligibility as a clean building. 

1.43               Where the building is an office building, it will need to achieve a 5.5 star energy NABERS rating for the base building only, in order to be eligible as a clean building.  Where the building is a shopping centre or a hotel, the building will be required to achieve a 5.5 star energy NABERS rating, as base building ratings do not currently exist for such buildings.

1.44               Only accredited NABERS ratings will be accepted.  Self-assessed ratings will not be accepted for the purposes of these amendments.  As NABERS accreditations are valid for 12 months, buildings must maintain a NABERS 5.5 star energy rating for each yearly assessment.

1.45               A building will be eligible as a clean building for a particular income year provided it satisfies all the relevant provisions.  That is, a building may be a clean building notwithstanding the building may not have always had or maintained the minimum energy efficiency ratings required under the provisions in previous income years.

1.46               For instance, a building at construction stage (assuming construction commenced after 1 July 2012) may not obtain the minimum energy efficiency requirements (or be rated at all) during construction.  However, if at some time post-completion the building obtains the minimum energy efficiency requirements, for the purpose of these provisions the building will then be considered a clean building. 

180 day grace period

1.47               Where a building previously satisfied the energy efficiency requirements to be eligible as a clean building, and subsequently fails to maintain that requirement, the MIT will have 180 days from the date of failure to re-establish the building’s eligibility.  Where a building is re-assessed and re-meets the energy efficiency requirement within the 180-day period, the trust will be considered to have been a Clean Building MIT for the entire period.  [Schedule 1, item 20, subsection 12-430(4) of Schedule 1 to the TAA 1953]

1.48               Where the trust fails to rectify any deficiencies and the building falls short of the energy efficiency requirement to be a clean building, the MIT will not be a Clean Building MIT for the entire income year.  The trust will be considered to be ineligible as a Clean Building MIT from the date that the building first failed to meet the energy efficiency requirement, not the later date of the expiry of the 180-day grace period.

Consequential amendments

1.49               Consequential amendments have been made to allow for the current MIT withholding tax obligations and liability provisions to apply to Clean Building MIT payments.  That is, the same withholding tax obligations and liabilities apply to both MIT fund payments and Clean Building MIT fund payments, albeit at a different rate provided the recipient is in an information exchange country. 

1.50               The Bill makes amendments to the tax law to ensure that fund payments made by Clean Building MITs continue to maintain their character, where those fund payments pass through certain entities that are not required to withhold — such as other MITs and trusts.  [Schedule 1, items 4, 5 and 9 to 19, paragraph 4(1)(a) and at the end of paragraph 4(1)(a) of the ITMITA 2008; section 12-375 (fourth paragraph), subparagraph 12-385(3)(a)(i), subparagraphs 12-385(3)(a)(ii) to (iv), at the end of paragraph 12-385(3)(a), subparagraph 12-390(3)(a)(i), subparagraphs 12-390(3)(a)(ii) to (iv), at the end of paragraph 12-390(3)(a), subparagraph 12-390(6)(a)(i), subparagraphs 12-390(6)(a)(ii) to (iv), at the end of paragraph 12-390(6)(a), after paragraph 12-395(3)(a), after paragraph 12-395(6)(a) of Schedule 1 of the TAA 1953]

1.51               Where a Clean Building MIT makes a fund payment to another MIT which subsequently makes a fund payment to a foreign resident in an information exchange country, the part of the subsequent fund payment that is attributable to the Clean Building MIT fund payment will be subject to a 10 per cent final withholding tax.

1.52               In accordance with subsection 12-390(1) of Schedule 1 of the TAA 1953, a custodian must withhold an amount from a payment representing a fund payment (reasonably attributable to) paid by a Clean Building MIT, to an entity whose address or place of payment is outside Australia.  Where the address or place of payment of the recipient is in an information exchange country, the final withholding tax rate will be 10 per cent. 

1.53               In accordance with subsection 12-390(4) of Schedule 1 of the TAA 1953, an entity that is neither a trustee of a MIT nor a custodian must withhold an amount from a fund payment it receives when a foreign resident is, or becomes entitled, to all or part of the payment.  Where the recipient is a resident of an information exchange country, the part of the payment attributable to a fund payment from a Clean Building MIT will be subject to a final withholding tax rate of 10 per cent. 

1.54               The notice requirements in section 12-395 of Schedule 1 of the TAA 1953 have also been amended to accommodate for Clean Building MIT fund payments.  These requirements are the same as those required for MIT payments.

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Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Tax Laws Amendment (Clean Building Managed Investment Trust) Bill 2012

2.1                   This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

2.2                   This Bill amends the Income Tax (Managed Investment Trust Withholding Tax) Act 2008 , the Income Tax Assessment Act 1997 and the Taxation Administration Act 1953 to provide a final withholding tax rate of 10 per cent on fund payments from eligible Clean Building Managed Investment Trusts (MITs) made to foreign residents in information exchange countries.

2.3                   This Bill provides for a differentiated treatment of certain classes of taxpayers.  Firstly, the Bill differentiates between residents and non-residents.  Secondly, it differentiates between those non-residents who are from information exchange countries and those who are not.

Human rights implications

2.4                   In the context of this Bill and international taxation practice more generally, this differentiation is considered reasonable and justified.

2.5                   With respect to the differentiation between residents and non-residents, there is a well-established body of international law and practice recognising that taxation laws of a State can differentiate between the tax treatment of residents of that State and the tax treatment of non-residents.  For example, treaties to prevent double taxation use residence status as a way to allocate taxing rights between States.  At the same time, discrimination between residents of the same State on the basis of their nationality is prohibited. 

2.6                   The different treatment, implied in this measure, of taxpayers according to their residence status (as opposed to their nationality) is consistent with that body of international law and practice.

2.7                   The differentiation between non-residents from information exchange countries and other non-residents is a feature of the existing MIT withholding regime.  Allowing only those non-residents from information exchange countries to access the MIT withholding concessions, including the concession provided for in this Bill, is an integrity measure that is intended to provide a strong signal of Australia’s non-tolerance of international tax evasion and avoidance.

2.8                   In light of this, there is no basis to conclude that this different treatment amounts to discrimination on the basis of ‘other status’ under the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Conclusion

2.9                   This Bill is compatible with human rights as it does not raise any human rights issues.

Assistant Treasurer, the Hon David Bradbury

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Schedule 1:  Clean Building Managed Investment Trust

Bill reference

Paragraph number

Items 1 and 20, subsection 995-1(1) of the ITAA 1997 and section 12-430 in Schedule 1 of the TAA 1953

1.24

Items 2 and 20, subsection 995-1(1) of the ITAA 1997 and section 12-425 of Schedule 1 to the TAA 1953

1.16

Items 3 to 6, after section 2, paragraph 4(1)(a), at the end of paragraph 4(1)(a) and subsection 4(2) of the ITMITA 2008

1.14

Items 4, 5 and 9 to 19, paragraph 4(1)(a) and at the end of paragraph 4(1)(a) of the ITMITA 2008; section 12-375 (fourth paragraph), subparagraph 12-385(3)(a)(i), subparagraphs 12-385(3)(a)(ii) to (iv), at the end of paragraph 12-385(3)(a), subparagraph 12-390(3)(a)(i), subparagraphs 12-390(3)(a)(ii) to (iv), at the end of paragraph 12-390(3)(a), subparagraph 12-390(6)(a)(i), subparagraphs 12-390(6)(a)(ii) to (iv), at the end of paragraph 12-390(6)(a), after paragraph 12-395(3)(a), after paragraph 12-395(6)(a) of Schedule 1 of the TAA 1953

1.50

Items 8 and 20, at the end of section 12-375 and paragraph 12-425(1)(a) of Schedule 1 to the TAA 1953

1.15

Item 20, subsection 12-425(1) of Schedule 1 to the TAA 1953

1.17

Item 20, paragraphs 12-430(1)(a)  and subsection 12-430(2)(a) of Schedule 1 to the TAA 1953

1.26

Item 20, paragraph 12-425(1)(c) of Schedule 1 to the TAA 1953

1.18, 1.20

Item 20, paragraph 12-430(2)(a) of Schedule 1 to the TAA 1953

1.28

Item 20, paragraph 12-430(2)(b)of Schedule 1 to the TAA 1953

1.27

Item 20, subsection 12-430(3) of Schedule 1 to the TAA 1953

1.31

Item 20, paragraph 12-430(3)(b) of Schedule 1 to the TAA 1953

1.38

Item 20, subsection 12-430(4) of Schedule 1 to the TAA 1953

1.40, 1.47

 

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