New withholding tax rates for Australian managed funds

Currently, Australian managed investment trusts (‘MIT’) collect a non-final withholding tax at the company tax rate of 30% on fund payments made to non-resident investors that:

A non-final withholding tax means that non-resident investors can lodge an Australian income tax return and claim a refundable credit for the Australian tax withheld if they are subject to a lower marginal tax rate or if they incurred deductible expenses, such as interest, in earning the trust income.

The new legislation proposes a two-tier final rate structure, but with a delayed and phased introduction.  For recipients who are residents of countries listed in the new legislation, the rates will be:

The list in the legislation will set out the countries with which Australia has an exchange of information agreement, presumably in either a bilateral income tax treaty or an exchange of information-only agreement (such as agreements with Bermuda and Netherlands Antilles).

For recipients who are residents of other countries, the withholding tax rate will remain at 30% but it will be a final rate.  Therefore under the new regime these non-resident investors will no longer be able to lodge an Australian income tax return to claim a refundable credit for the Australian tax withheld. 

The new legislation also proposes some changes to the current definition of a non-resident investor.

The following table broadly sets out the definition of a non-resident investor under the current regime and the proposed changes in the new legislation:

	Current regime	New regime
Definition of a non-resident investor	Investor would be treated as a non-resident investor: if the MIT has reasonable grounds to believe the recipient is a foreign resident; or if the MIT has not taken steps to ascertain the recipient’s residence	Investor will be treated as a non-resident investor: if the recipient has advised an address or place for payment outside of Australia; or the payer is authorised to make payment at a place outside Australia

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