As is often the way in life, seemingly small details can have unexpectedly large consequences.
This may prove to be the case in Australian ag investment in 2019, with changes to Managed Investment Trusts.
The federal government announced last year that it intended to single out agriculture, stopping foreign investors in agricultural land from being able to access the 15 percent concessional MIT withholding tax rate. Instead, from July 1, 2019, foreign investors will face a tax rate of 30 percent, the same as domestic investors.
Previously, foreign investors resident in “information-exchange jurisdictions”, including the US and the UK, could access the rate that applied to any fund-payment distributions aside from dividends, payments and royalties – this included rent and capital gains tax.
While the changes haven’t taken effect yet, they are already having an impact.
One fund manager told Agri Investor they had been forced to rejig the structure of one of their vehicles to ensure it remained as attractive as possible to foreign capital.
Another told us that a major US institutional investor had indicated it would not be investing in Australian ag at all due to the rug being pulled from under investors with these MIT changes (as well as the perception that the government can be somewhat hostile to foreign investment here, fair or not).
Demand for Australian farmland remains strong for many foreign investors, but the uncertainty created by changes like this – which single out the sector – are not helpful, to say the least.
As well as potentially putting off much-needed foreign capital, it could have another unintended consequence: an increase in listed real estate investment trusts.
This would allow foreign investors access to Australian agriculture without necessarily taking full control of assets. This approach won’t be everyone’s cup of tea, of course, as many institutional investors want control of an asset to ensure they are able to maximise its value.
But for those seeking exposure to the sector in a more passive way, REITs might prove to be a more attractive option.
Of course, a federal election is due early next year – and if the Labor opposition wins power as the polls suggest, policy might take a sharp turn in yet another direction.