Following announcements earlier this year, the Government has issued draft legislation for public consultation proposing to reduce the final withholding tax rate for certain managed investment trusts (MITs) from 15% to 10%. This will apply to circumstances, where the MIT owns newly constructed energy efficient/environmentally sustainable commercial buildings. This change, when enacted, will be relevant not only to proposed MITs, but to all developers and property owners seeking to develop property. It now makes the development of energy efficient/environmentally sustainable commercial buildings a more attractive proposition owing to such buildings' attractiveness to MIT purchasers by virtue of the tax saving the MIT will be entitled to.
What the proposed amendments will do
Amendments to the Income Tax Assessment Act 1997 and the Taxation Administration Act 1953 will provide MITs that hold only newly constructed energy efficient/environmentally sustainable commercial buildings, described as "Clean Buildings", with a concessional withholding tax rate of 10% effective from 1 July 2012. This is a proposed change from the current withholding rate of 15%.
Which buildings are eligible for the Concession?
The following must be satisfied to receive the proposed concession:
a) The MIT must own a Clean Building, directly or indrectly through another Clean Building MIT, being a commercial building that:
• commenced construction of its foundations on or after 1 July 2012;
• is used for office, hotel and/or shopping centre purposes; and
• receives and maintains during the relevant income year a minimum environmental rating. This means that:
‑ Prior to the time the building starts producing assessable income, it must have at least a 5 Star Green Star rating or a 5.5 star NABERS Energy rating.
‑ Once the building starts producing assessable income, it must have received at least a 5 Star Green Star rating within 24 months of practical completion or a 5.5 star NABERS Energy rating;
b) The MIT must not receive any assessable income from any taxable Australian property (which very broadly includes direct or indirect interests through entities in which it holds at least 10%, in Australian real property including leasehold interests, mining, quarrying and prospecting rights if the materials are situated in Australia and/or options to acquire the preceding assets) other than a Clean Building or from fund payments made to it from interests in other Clean Building MITs.
Refresher: How the Australian green rating tools operate
The proposed amendment will essentially allow an owner to elect to obtain a Green Star or NABERS Energy rating to qualify for the concession. These are two fundamentally different ratings measuring different environmental outcomes. For instance, it is possible for a building to achieve a 5.5 Star NABERS Energy rating and not 5 Star Green Star rating. The intention of the proposed amendment would seem to be to give wide application to the concession.
The Green Star rating is an evaluation of a building's overall environmental/ecological design and construction. It measures more than just energy efficiency.
In order to obtain a Green Star rating, projects are scored according to the requirements of nine different categories. These categories include management of construction, Indoor Environment Quality (IEQ), water, transport, materials, land use and ecology, innovation, emissions and energy.
A rating can be obtained for both “design” and “as-built” stages of the building, with the "as-built" rating requiring a higher evidentiary burden to be satisfied.
To be classified as a "Clean Building"
To be classified a "Clean Building" and receive the concession, a project must achieve and maintain at least a 5 Star Green Star rating in both the "design" as well as "as-built" stage within 24 months of practical completion. It has been a common occurrence that building owners obtain a "design" rating but not an "as-built" rating as a result of the time and expense involved in obtaining the "as-built" rating. The proposed amendment would deny to a building owner the ability to obtain the concession if they do not proceed to obtain the "as-built" rating.
The National Australian Built Environment Rating System (NABERS)
The NABERS Energy rating measures a building's energy efficiency performance during hours of operation. Energy ratings are calculated on the energy related greenhouse gas emissions per unit of floor space in the building, using the actual data collected for the past 12 months of occupation. As such, the NABERS Energy rating is not concerned with the design and construction of the building, although the manner in which the building is designed and constructed could impact on how it will perform.
To be classified as a "Clean Building"
To be classified a "Clean Building" and receive the concession, the building must have received a 5.5 star Energy Rating.
Other issues to consider
Mixed use buildings
Mixed use buildings are eligible for the concession provided they do not contain anything other than office, hotel or shopping space.
For this purpose, the Government has stated that "office building" and "shopping centre" are to take their ordinary meanings. It also notes that cafés and restaurants may be included in shopping centres.
MIT cannot derive assessable income from any other taxable Australian property
To qualify for the concession, a Clean Building MIT must only receive assessable income from Clean Buildings. This means a Clean Building MIT cannot receive any assessable income from any taxable Australian property, other than from the Clean Buildings which it holds, or from fund payments made to it from its interest in other Clean Building MITs. The above does not preclude a Clean Building MIT from holding taxable Australian property that is not producing assessable income. The reason behind this is to allow Clean Building MITs to hold land for the purpose of developing Clean Buildings.
The Government is accepting submissions on the draft legislation until 13 September 2012. If you are interested in making a submission, or would like further information, please contact the authors of this legal alert.