Australia announces tax changes in rebuff to foreign ag investors

The Australian government has singled out agriculture for tax changes in a move critics claim could stifle foreign investment.

From July 1, 2019, investments in agricultural land will not be able to access the 15 percent concessional Managed Investment Trust withholding tax rate.

The concessional rate has been available to foreign investors resident in “information-exchange jurisdictions,” including the UK and US. The 15 percent rate applied to any fund-payment distributions aside from dividends, payments and royalties – including items such as rent and capital-gains tax. Otherwise, the rate stood at 30 percent.

The federal government’s move ensures rent from agricultural land will no longer qualify as “eligible business income” for MITs, meaning foreign investors will be subject to the same 30 percent tax rate on rental income as domestic investors.

Looking elsewhere

As well as the 2019 deadline for the concessional tax rate, the federal government has promised it will amend thin capitalization rules from July 1, 2018, to prevent foreign investors from using multiple layers of flow-through entities (ie, trusts and partnerships) to convert trading income into interest income receiving favorable tax treatment.

Sources indicated to Agri Investor that foreign investors are already aware of the alterations to the tax regime, with some looking at alternative markets such as Brazil when considering where to deploy capital.

Through the use of stapled structures – where two commonly owned entities, one of which is a trust and the other usually an operating company, are bound together so that neither can be bought or sold separately – foreign investors have been able to offset some of the profits they would have paid through the operating company by moving them into the MIT and taking advantage of the concessional rate.

Of concern to the investment community, is that agriculture has been “singled out” – stapled structures that take advantage of the tax concession in infrastructure and real estate will remain unaffected.

“This has come with no warning whatsoever. We’ll be lobbying government with others and hopefully they’ll listen”
David Sackett, Growth Farms

“It’s a purely political move,” said David Sackett, managing director of Growth Farms. “Stapled structures are very common in Australia, and while the rules are changing for everyone, agriculture has been singled out for more onerous treatment, supposedly to level the playing field with family farms.

“A number of us will be directly affected by this and our concern is that we don’t know where this is going. The government needs to set the rules, not keep tinkering as they have done over the last few years, because ag investment is long term and rules need to reflect that. Sure, occasionally the rules might need fine-tuning but that needs to be done properly through consultation. This has come with no warning whatsoever.

“We’ll be lobbying government with others and hopefully they’ll listen.”

Tipping the balance

Danny Thomas, director at CBRE Agribusiness, described the changes as “bad form.”

“If they want to change the rules, that’s fine. But money has been raised already [for funds] and if it’s retrospective, it’s bad form, quite frankly.

“And if this was happening in isolation, fine. But coming off the back of two recent FIRB changes, it doesn’t send a good message. I don’t think more needed to be done.”

Those Foreign Investment Review Board changes have altered the rules on the sale process of agricultural land in recent years to tip the balance of power toward domestic buyers. Amendments announced in February require sellers to advertize their property for a minimum of 30 days on “channels that Australian bidders could reasonably access,” while rules introduced in 2015 reduced the FIRB screening threshold from A$252 million to A$15 million and created an agricultural land register.

The government is preparing legislation to enact the changes into law. Transitional arrangements over seven years will apply to existing stapled structures and trusts.