Tax changes to promote international competitiveness of investment funds

On 4 April, the Minister for Revenue, the Hon Peter Dutton announced proposed tax changes to allow stapled groups to interpose a unit trust as a head trust between the stapled entities and ultimate investors.

The change is intended to enhance the competitiveness of such structures as they expand offshore. It is perceived that there is a lack of understanding of stapled structures by potential foreign investors.

As stated in the Press Release:

• The rollover will allow the interposition of a holding unit trust between a stapled group and unit-holders; and
• Modifications will be made to Division 6C to ensure that the tax status of the new head unit trust will not be tainted by merely holding units in a stapled entity that is subject to Division 6C.

We have had discussions with Mr Dutton's office to seek more information for our clients. From these discussions we understand:

• For the rollover to be available, the group must have otherwise been subject to Division 6C either before or because of the interposition of the new head unit trust.
• Examples provided were a stapled group that includes an operating company or a group that includes a trust taxed as a company under Division 6C will qualify for the rollover.
• The current thinking is that stapled groups that would not be "impacted" by Division 6C (eg. those made up of only "flow through" unit trusts) will not be eligible for rollover.

We need to wait to see what form the rollover will take, although scrip for scrip would seem most likely. However, the scope of the rollover still remains uncertain so it will be difficult to apply with confidence until the draft legislation is available.

The Press Release anticipates the need for industry consultation and such input is being welcomed by the Minister's office. Some of the issues for resolution include:

• How eligible stapled groups will be defined. It is not uncommon for a stapled group to be made up of "flow through" unit trusts that each own an interest in an operating entity, where no single trust controls the operating business of the entity.

From our discussions there was some hesitation as to whether such a "stapled group" would qualify for the rollover. There appears no logical reason to exclude such a group. Division 6C may not be currently applicable but could be if the head unit trust is put in place. This may work through during consultation.

• Whether the opportunity will be taken to clarify the control test and anti avoidance rules to recognise stapled structures as an acceptable tool to manage Division 6C implications when investing.
• Whether the Division 6C modifications will allow new investments to be structured in this way with protection from Division 6C. There would appear to be no reason to restrict their application to existing stapled groups interposing a head unit trust.
• Can stapled groups owning Australian property, exclusively or as part of a global portfolio apply the rollover or is it exclusively for international investors? There appears to be no reason to limit its application to international investors.
• Stapled groups with Australian properties will need to consider state-based stamp duty rules if they wish to utilise the rollover. Lobby efforts could also focus on the need for exemptions at the state level.

It seems from the Press Release that the repeal of Division 6C as a solution remains a longer term issue.

The amendments will apply to transactions entered into during and after the 2006/07 tax year.

Treasury expects to begin consultation in June, with legislation to be introduced in the Spring sitting of Parliament at the earliest.