Trusts are a common investment vehicle in Australia, particularly for groups of investors seeking to pool funds into passive income-generating assets such as property or infrastructure. For tax purposes, trusts are typically treated as flow-through entities, meaning they are not taxed at the trust level if income is fully distributed to beneficiaries or unitholders each year.
However, when income is distributed to foreign beneficiaries, different tax rules apply—including withholding tax obligations, which can materially affect the returns of overseas investors.
Withholding Tax on Distributions to Foreign Investors
Australian trusts that distribute income to foreign beneficiaries must withhold tax at the applicable rates before making the payment. These rates are generally:
- 30% for foreign companies
- 45% for foreign individuals and foreign trusts
The specific rate depends on the type of beneficiary and whether any tax treaties apply between Australia and the foreign investor’s home jurisdiction.
Managed Investment Trusts (MITs): A Concessional Tax Regime
To attract more foreign investment and support Australia’s funds management sector, the government offers concessional tax treatment for trusts that qualify as Managed Investment Trusts (MITs).
Under Division 275 of the Income Tax Assessment Act 1997, MITs benefit from two major concessions:
- Reduced Withholding Tax Rates
- 15% withholding on fund payments to residents of countries that have an information-sharing agreement with Australia
- 30% withholding otherwise
- Capital Gains Tax (CGT) Election
MITs can make a CGT election to treat certain eligible assets (e.g. shares, property) as capital assets, potentially lowering their effective tax rate on gains.
Eligibility Requirements for MIT Status
To qualify as an MIT in any income year, a trust must:
- Be widely held, meaning it must have a broad investor base;
- Be operated by a trustee that holds an Australian Financial Services Licence (AFSL);
- Function as a genuine collective investment vehicle, not a contrived structure for tax minimisation.
These requirements help preserve the integrity of the concessional regime and ensure it is used for legitimate investment purposes.
ATO Scrutiny: TA 2025/1 on MIT Restructuring
On 7 March 2025, the Australian Taxation Office (ATO) released Taxpayer Alert TA 2025/1, signalling its concerns about MIT restructures that seek to exploit concessional tax treatment without genuine commercial justification.
The alert highlights arrangements that may attract ATO review, including:
- Restructures linked to the sale of trust property or underlying assets;
- The insertion of an Australian unit trust into an inbound investment structure without commercial rationale;
- Changes to trust management designed to satisfy MIT eligibility (e.g. outsourcing to a licensed manager) purely for tax benefits.
The ATO is particularly focused on structures that appear artificial or motivated solely by tax outcomes. Entities involved in such arrangements will be expected to clearly demonstrate that the restructure was commercially driven and not designed to improperly access MIT concessions.
How the ATO Identifies Risky Structures:
- Submissions to the Foreign Investment Review Board (FIRB)
- Disclosures in income tax returns and reporting documents
- Intelligence from industry data and cross-border information sharing
Policy Updates: Clarifying MIT Eligibility for Foreign Investors
On 13 March 2025, Assistant Treasurer and Minister for Financial Services, Stephen Jones MP, released a media statement announcing proposed amendments to the MIT regime. The changes are aimed at clarifying the eligibility rules and addressing concerns raised by both industry participants and the ATO.
Key Proposed Amendment:
Trusts that are ultimately owned by a single, widely held foreign investor—such as a foreign pension fund—will remain eligible for MIT concessions. This aims to:
- Eliminate confusion over current ownership structures
- Preserve access to concessional rates for genuine long-term institutional investors
This clarification was reaffirmed in the 2025–26 Federal Budget, confirming the government’s intention to protect legitimate use of MIT structures while discouraging aggressive tax planning.
Key Takeaways for Fund Managers and Investors
- Be proactive: The ATO is closely monitoring MIT arrangements, especially restructures. The release of TA 2025/1 underscores the need for commercial justification behind any changes to trust structures.
- Engage early with advisors: Before restructuring or establishing a trust intended to operate as an MIT, consult with tax and legal professionals to ensure your structure complies with ATO expectations.
- Document your rationale: Maintain thorough records explaining the business purpose of your structure or restructure. This may include board minutes, investment strategy reports, or due diligence memos.
- Monitor regulatory updates: Stay informed of changes to the MIT regime, including eligibility criteria, disclosure rules, and any relevant guidance from the ATO or Treasury.
Conclusion: Striking the Right Balance Between Opportunity and Compliance
The MIT framework remains a powerful tool for attracting foreign capital to Australia’s investment sector. When used appropriately, it allows investors to benefit from reduced tax rates while supporting national economic growth.
However, as scrutiny increases and the legislative landscape evolves, it’s more important than ever to ensure your investment trust structure is commercially sound, properly disclosed, and in line with ATO and government expectations.
By seeking early advice and documenting your decisions clearly, you can navigate this complex area with confidence—and preserve access to the valuable concessions available under the MIT regime.
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