5 January, 2013

Foreign investors in Australian managed investment trusts (MITs) investing in newly constructed energy efficient buildings will be subject to a concessional withholding tax rate. The Tax Laws Amendment (Clean Building Managed Investment Trust) Act 2012 lowers the current withholding tax rate of 15% to 10% for payments from clean building managed investment trusts. 

Clean Building Managed Investment Trusts

The concessional tax rate applies to MiTs that only invest in clean buildings and assets that are reasonably incidental to those buildings. Up to 5% of the income received from the clean buildings can be derived from “reasonably incidental” assets (e.g. car parking facilities). 

A building will be considered to be a clean building if:

• the construction of the building commenced on or after 1 July 2012; 
• the building will be a commercial building which is any combination of office building, hotel or shopping centre; and
• the building has, and continues to maintain:
  • a 5 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. 

Construction of the building is taken to have commenced at the time works on the lowest level or basement level of the building begins. 

Who will be impacted?

Foreign residents in countries with which Australia has an effective exchange of information will receive the concessional withholding tax rate. approximately sixty countries currently have an effective exchange of information with Australia, including the UK, US, Canada, Singapore and Japan.

Key Issues

• The reduced withholding tax will apply in very limited circumstances. of particular concern is that it does not extend to MiTs improving existing buildings to a 5 green star level.
• The rules bring about yet another change to australian tax law, providing uncertainty for foreign investors.
• MiTs holding clean buildings on which construction had begun prior to 1 July 2012 will be arbitrarily excluded from the reduced withholding tax rate.
• The impact of the rules will be delayed as payments will only be made when income is received from the clean buildings which will only occur once they are built and tenanted.