Navigating Investment Structures in Australia

Navigating the investment landscape

Choosing the correct investment or business structure is critical to achieving your objectives. Each investment structure has its own tax advantages and disadvantages. In this section, we outline the details of suitable investment structures to consider.

The company structure

An Australian resident company is subject to tax on its worldwide income and capital gains. The tax is imposed on the net income of the company.

The applicable tax rate is 25% for ‘base rate entities’ or 30% for all other resident and non-resident companies.

Non-resident companies investing in Australia will be subject to tax on income derived from Australian sources (excluding those amounts subject to withholding tax such as dividends and royalties paid offshore) and capital gains made on TAP.

A company structure is ordinarily chosen where there is an operating business being carried on, rather than for collective investment. Profits can be retained at the company level and fully franked dividends can be paid out when required (if the profits are subject to tax).

Companies can also generate significant tax attributes, such as carried forward tax losses, and can form TCGs and MECs. Furthermore, there are certain concessions which only apply to companies, such as disregarding capital gains on the sale of non-portfolio shareholdings (i.e. 10% or more) in foreign active companies.

An Australian resident company is subject to tax on its worldwide income and capital gains. The tax is imposed on the net income of the company.

The trust structure

A ‘trust’ is not a separate legal entity but rather a term used to reference a relationship between the legal owner (‘the trustee’) of the asset (‘trust property’) and the beneficial owners of the asset (‘beneficiaries’). Generally, a trust is not liable to pay tax as it is paid at the beneficiary level at the applicable rate of tax (i.e. it is a flow-through structure).

A trust will only pay tax on the income in very limited circumstances, for example when there are no beneficiaries who have been made presently entitled to the income by, typically, 30 June.

There are several different types of trusts with the most common investment vehicle type being Managed Investment Trust (MIT) and the Attribution Managed Investment Trust (AMIT). These vehicles have a unitised trust arrangement so that investors can hold units and have clearly defined rights to the income and capital of the unit trust.

Broadly, a trust will be a MIT where it is a managed investment scheme under Australian corporate law, managed or operated by an entity holding an Australian Financial Services Licence and meets the ‘widely held’ requirement and ‘closely-held’ restriction.

An AMIT is a type of MIT. AMIT investors in the MIT must have ‘clearly defined rights’ to the income and capital of the MIT, and the trustee of the MIT must make an irrevocable election into the AMIT regime.

Key benefits of investing in a MIT

Flow through tax treatment: income and gains retain their identity and source as they flow through the MIT to the beneficiaries (i.e., they remain dividends, capital gains, non-assessable income etc).
MIT withholding rates: where a MIT is also a ‘Withholding MIT’, distributions of income (excluding dividends, interest, and royalties) to foreign beneficiaries in an information exchange country may be subject to a concessional withholding tax rate of 15%. The concessional rate does not apply to distributions sourced from rental income from residential accommodation.
Capital account election: a MIT can elect to treat certain assets as ‘capital assets’ such as shares, units in a unit trust and land. The capital treatment may allow foreign resident investors to obtain an exemption from Australian income tax on gains arising from such assets and reduce the tax on the gain for Australian resident investors (i.e., apply the CGT discount if available).

Key benefits of electing to be an AMIT

Fixed trust status: this is particularly beneficial when applying the trust loss provisions.
Attribution model: beneficiaries of MITs and other trusts are generally taxed under a ‘present entitlement’ model, while investors in AMITs are taxed under an ‘attribution’ model. This means a trust can attribute amounts of taxable income, exempt income, non-assessable non-exempt income, tax credits and tax offsets to investors on a fair and reasonable basis in accordance with the constituent documents. Investors pay tax on the amount attributed to them even if the amount distributed is different.
Unders and overs: trustees of AMITs have flexibility when there is a variance between the amount attributed to investors and the amount attributable.
Upward adjustment to cost base: when the amounts distributed to the investor are less than the amount attributed, there is an upward adjustment in the cost base of the units in the AMIT held by the investor.

A ‘trust’ is a term used to reference a relationship between the legal owner (‘the trustee’) of the asset (‘trust property’) and the beneficial owners of the asset (‘beneficiaries’).

Build-to-rent projects

On 9 April 2024, Treasury released exposure draft legislation to implement the income tax concessions proposed in the 2023-24 Federal Budget to encourage investment and incentivise construction in the “build-to-rent” (BTR) housing sector.

The BTR measures include:

increasing the rate for the capital works tax deduction (depreciation) to 4% per year; and
reducing the final withholding tax rate on eligible fund payments from MIT investments from 30% to 15%.

There are a number of strict requirements that BTR developments will need to satisfy to qualify for the BTR income tax concessions and include:

construction commenced after 7:30pm (AEST) on 9 May 2023;
must have 50 or more ‘dwellings’ available for rent to the general public;
all of the dwellings (including common areas) must continue to be owned by a ‘single entity’ for at least 15 years (commencing when the dwellings are first made available to rent);
lease terms for the dwelling must be at least 3 years throughout the 15-year period unless a tenant requests a shorter lease term;
at least 10% of the dwellings (must be a mixture of varying floor spaces and not the ‘lowest standard dwelling’ in the development) must be offered as affordable tenancies (i.e. rent at 74.9% or less of comparable market rents) throughout the 15-year period.

BTR projects may also qualify for land tax and duty concessions at individual state and territory levels which broadly include reductions in land tax payable and exemptions from foreign surcharges. See further comments under ‘BTR Concessions’.

The CCIV regime

The Corporate Collective Investment Vehicle (CCIV) regime is designed to internationalise the Australian funds’ management industry, incorporating elements of similar regimes in Singapore, Hong Kong, the United Kingdom, and other jurisdictions.

In effect since 1 July 2022, the new regulatory and tax regime introduces flow-through corporate entities that, despite being an incorporated company paying legal form dividends, will effectively be treated as a trustee of one or more unit trusts (referred to as ‘sub-fund trusts’) for all tax law purposes. The tax regime operates through a series of complex deeming principles to create this tax law fiction. For tax law purposes, a CCIV may be a trustee of an ordinary unit trust, a MIT, an AMIT or a combination of all depending on the nature of each sub-fund trust.

Investors in CCIVs will generally be taxed as if they had invested directly in the underlying assets. This means that taxpayers can offset the capital gains and losses against their own income, as opposed to getting a dividend which will always be income.

Given the infancy of the new regime, it will surely be an area generating novel tax issues for investors and fund managers. The ATO has released Draft Law Companion Ruling LCR 2023/D1 for industry consultation in November 2023 which outlined the ATO’s views on the operation of the CCIV regime.

Current emerging tax issues under the CCIV regime

Rollover: No specific CGT rollover provisions have been included in the legislation to convert existing structures (such as current AMITs) to the CCIV regime. Investors and existing funds will need to rely on current CGT rollover provisions provided for under the tax law.
Tax and capital losses: No trust loss transfer provisions are included in the legislation to allow for the transfer of carried forward tax and capital losses from existing structures to a CCIV, where existing structures are converted.
Franking credits: No holding period modifications for the purposes of the ‘qualified person’ rules, specifically the 45-day holding period rule. This means where an existing structure is converted to a CCIV, it will not inherit the historic 45-day holding period qualification such that it will need to satisfy the requirement again.
CFC attribution accounts: No transfer mechanism has specifically been provided for, to transfer current attribution account balances under the controlled foreign company (CFC) regime where an entity transitions into the CCIV regime. This may result in double taxation where income already attributed is repatriated to the CCIV.

Venture capital

In addition to the investment vehicles mentioned previously, there are a number of specialised investment vehicles for investing in start-up or early-stage businesses in Australia.

The two main vehicles are venture capital limited partnerships (VCLPs) and early-stage venture capital limited partnerships (ESVCLPs). These two vehicles receive favourable tax treatment for eligible venture capital investments, which generally means investment in smaller companies or start-ups. Tax concessions extend to investors in Early Stage Innovation Companies (ESICs).

Venture Capital Limited Partnerships (VCLP)

Broadly, gains (revenue and capital) made on the disposal of eligible investments by the VCLP will be exempt from Australian income tax for the foreign investors (referred to as limited partners).

The manager’s carried interest in the VCLP is subject to concessional treatment.

Early Stage Venture Capital Limited Partnerships (ESVCLP)

The tax concessions available to foreign resident investors in the VCLP are extended to resident and non-resident investors in the ESVCLP.

Investors may be eligible to obtain a 10% non-refundable tax offset for new capital invested in the ESVCLP.

Early Stage Innovation Companies (ESIC)

While not itself an investment vehicle, an Early Stage Innovation Company (ESIC) is a newly established corporate entity which itself is a start-up. Concessions are available to investors who invest in ESICs. Tax concessions include a 20% non-refundable tax offset for equity investments up to 30% of the total ESIC equity (capped at $200,000 per investor inclusive of all investments in the ESICs made by the investor) and an exemption from CGT on disposal of shares in the ESIC where the investor has held the shares for a period of between 12 months up to 10 years.

Contact our team

If you have any questions about the above or would like assistance with tax advice for doing business in Australia, please contact one of our team members below.