Finalised ATO guidance on non-concessional MIT income

7 December 2020 

In brief

On 18 November 2020, the Australian Taxation Office (ATO) issued its finalised guidance in the form of a Law Companion Ruling LCR 2020/2 (the Final LCR) on the concept of “non-concessional MIT income” (NCMI). NCMI fund payments made by a Managed Investment Trust (MIT) to non-residents from 1 July 2019 are subject to a withholding tax rate of 30 per cent unless transitional rules apply.

The Final LCR addresses various aspects of the new stapled structure law as it relates to NCMI, including:

• MIT cross staple arrangement, including the meaning of ‘arrangement’ and ‘facility’
• MIT cross staple arrangement income and the transitional rules
• Integrity rules, particularly in relation to concessional cross staple rent
• MIT trading trust income
• MIT residential housing income, and
• MIT agricultural income.

The Final LCR has been updated from its predecessor, draft LCR 2019/D2, which was released on 26 June 2019 (see our earlier summary of the Draft LCR). Although the guidance remains largely unchanged, there are some changes that will assist taxpayers with applying the law. However, not all issues and scenarios have been addressed and significant uncertainty remains. 

We have set out below our key observations in relation to the Final LCR. 

In detail

Eligible investment business and the meaning of rent 

As part of the consultation on the draft LCR, a number of submissions were made to remove the commentary included in the draft LCR in relation to the definition of “rent” and “investing in land primarily for the purpose of deriving rent” on the basis that they are long standing principles that have much broader application than the provisions of the stapled structure law, and that the purpose of a Law Companion Ruling is to provide insights into the practical implications or detail of recently enacted law. 

Notwithstanding the submissions made, the Final LCR still contains the commentary regarding “rent” and “investing in land primarily for the purpose of deriving rent”. However, some clarifications have been made. 

Investing in land 

The Draft LCR highlighted several factors that the ATO considered relevant for the purpose of determining whether the trustee is investing in land for the purpose, or primarily for the purpose, of deriving rent. However, the factors did not highlight the importance of the test time in order to assess the intention of the trustee, which is critical. 

Following submissions, the Final LCR helpfully confirms that a relevant factor includes consideration of the intended holding period for the asset and any strategy for its disposal, and that this must be assessed at the time of acquisition (and continually). This clarification is now consistent with the intention of Division 6C and the position historically applied by the ATO and industry in relation to the application of Division 6C. 

Amounts of rent attributable to movable property 

Under the view expressed in the Draft LCR, there was a risk that moveable property and items not characterised as fixtures could not comprise part of a facility notwithstanding that they would form part of the definition of eligible business for the purposes of Division 6C.  

The Final LCR clarifies that moveable property will not necessarily be excluded from forming part of a facility. 

Payment in substitution for rent

The Final LCR makes a distinction between an amount paid in “substitution” for rent as opposed to in “satisfaction” of rent. In another helpful change from the draft, the Final LCR clarifies where a periodic amount of rent is satisfied by a means of payment other than cash that is specifically provided for under the lease agreement, that payment in kind may still be a payment in the nature of rent (i.e. it is not an amount in substitution for rent).

Concept of facility

The transitional provisions in respect of MIT cross staple arrangement income can apply to the “acquisition, creation or lease of a facility” that occurred or was entered into before 27 March 2018. As such, the concept of what constitutes a facility is critical to the application of the transitional provisions to existing structures. 

The concept of the ATO’s view on what constitutes a facility has been refined and clarified in the Final LCR. While this is a positive change, uncertainties still exist which means that taxpayers may need to approach the ATO on a case by case basis to obtain certainty in relation to their specific circumstances. 

Concept of ultimate facility removed  

The Draft LCR introduced a new concept of “facility”, and also “ultimate facility”. In particular, the Draft LCR suggested that notwithstanding that facilities are part of an integrated system or network which may be considered a broader facility, they may be considered discrete and separate facilities for the purposes of the stapled structure law. This created significant uncertainty as to what constitutes a facility for the purposes of the transitional provisions and whether a facility as a whole is eligible to be an economic infrastructure facility. 

The Final LCR has removed all references to ‘ultimate facility’. The ATO has acknowledged that given the term ‘ultimate facility’ was neither legislated, nor referenced in the Explanatory Memorandum to the applicable law, it would lead to confusion when determining what is the facility. This is a positive clarification for taxpayers.

Enhancements to existing facilities 

In another welcome change, the Final LCR confirms that it is possible that subsequent works which expand or alter a facility may still form part of the existing facility provided that the works do not substantially alter the functions of the facility.

Expanded commentary on economic infrastructure facilities 

The Final LCR has provided further detailed commentary on what constitutes an economic infrastructure facility for the purposes of applying the law which is helpful for taxpayers in identifying whether they will be an economic infrastructure facility and eligible for the 15 years transitional period. 

However, a new paragraph (paragraph 208) has been inserted advising that taxpayers should not assume that merely because an asset, or collection of assets form part of an identified facility, that all assets forming part of the facility will constitute a single economic infrastructure facility. The Final LCR provides that regard must still be had to all the relevant facts and circumstances relevant to the identification of a 'facility' and 'economic infrastructure facility'.

Notwithstanding that the concept of ‘ultimate facility’ has been removed, this additional paragraph could still impact taxpayers who may have anticipated the entirety of their assets to be a single facility which meets the “economic infrastructure facility” definition. This approach may lead to two transitional periods for the single “facility” (i.e. 15 years for the economic infrastructure facility component and seven years for other parts of the facility). This may result in an additional tax cost for certain investors and a heavy compliance burden on taxpayers to “reasonably apportion” cross staple income. 

Concessional cross staple rent cap - objective method

The Draft LCR did not provide any additional guidance on what would constitute an “objective method” for determining the annual rent under the lease but rather reproduced comments from the Explanatory Memorandum to the law. 

The Final LCR provides helpful guidance on what is an objective method. However the commentary still raises a number of questions and uncertainties. In particular, there is no additional guidance on what are ‘associated documents” for the purposes of determining whether an objective method exists, and it is still not clear as to when a method is objective. 

Based on the level of detail, it seems that the ATO’s preference will be to ensure taxpayers seek ATO guidance on their specific rent clauses, which will allow the ATO to administer the transitional rules on a case by case basis. 

Changes to existing arrangements  

The Final LCR does not provide any additional guidance on when changes made to a cross staple arrangement may result in a new arrangement and therefore not qualify for access to the transitional provisions.

In the Compendium to the Final LCR, the ATO indicates that whether changes made to a cross staple arrangement are so substantial as to risk continuing existence of a transitional cross staple arrangement will be dependent on the specific facts and circumstances. The lack of additional guidance will create additional uncertainty for taxpayers. It is clear from the ATO commentary that where changes are made to arrangements or terms of the arrangements, the ATO expects that taxpayers would engage with them to obtain certainty.

The takeaway

The Final LCR contains a number of helpful clarifications which will assist taxpayers with applying the law. However, not all issues and scenarios have been addressed and there is still significant uncertainty in applying the law.

In the Compendium to the Final LCR, the ATO indicated in a number of its responses that the Final LCR could not address all possible circumstances.  Although the principles outlined in the Final LCR provide general guidance to be applied, the ATO invites taxpayers to engage with them to discuss their specific circumstances. In this regard, taxpayers will need to approach the ATO to obtain any certainty on the application of law and in particular what constitutes a facility and if that facility in its entirety is an “economic infrastructure facility”. 

We recommend that impacted taxpayers reassess their positions and consider possible next steps.