Doubling of withholding tax scares off foreign buyers

SINGAPORE'S Mapletree Logistics Trust is understood to have withdrawn from negotiations to buy Stockland's $822 million industrial portfolio in response to the government's move to double the tax imposed on overseas investors.

By InvestSMART · 16 May 2012

By InvestSMART ·
16 May 2012

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Stockland declined to comment, but the group said last year it was selling its commercial and industrial assets to focus on its three Rs strategy of retail, residential and retirement.

Analysts said they believed the Mapletree deal had been shelved and were fearful it was the start of a trend of overseas investors pulling out of sales in reaction to the proposed higher tax charges.

In the past year, more than 37 per cent of the $9.8 billion of commercial property sales were undertaken by overseas buyers.

They have targeted all assets classes, with the latest being Malaysia's YTL Group competing with the Abu Dhabi Investment Authority for a portfolio of three Marriott hotels worth $430 million.

But in last week's federal budget, the government proposed doubling to 15 per cent the withholding taxes that are charged on income earned by international investors who own Australian commercial properties.

The chief executive of the Property Council of Australia, Peter Verwer, said that when the then Rudd government cut the withholding tax to 7.5 per cent, "the world responded by sending us more of their money to manage". "Increasing the tax makes Australia look either arrogant or capricious," he said.

Winston Sammut, the managing director of Maxim Asset Management, said when the government lowered the managed investment trust final withholding tax rate from 30 per cent to 7.5 per cent in the 2010 budget, it was seen as an incentive to attract investment funds into Australia.

"But last week's move to increase it back to 15 per cent will be seen as a negative outcome for countries that have an exchange of information agreement with Australia," Mr Sammut said.

"This may result in an increased revenue for the Australian government but may be a disincentive in the future for overseas investors to place funds into Australia."

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Frequently Asked Questions about this Article…

What withholding tax change did the Australian government propose and who does it affect?

The federal budget proposed doubling the withholding tax on income earned by international investors who own Australian commercial properties — raising it to 15%. This change targets overseas investors in Australian commercial real estate.

Why did Singapore’s Mapletree Logistics Trust pull out of buying Stockland’s $822 million industrial portfolio?

Mapletree Logistics Trust is understood to have withdrawn from negotiations to buy Stockland’s $822 million industrial portfolio in response to the government’s proposal to double withholding taxes on overseas investors, which made the deal less attractive to a foreign buyer.

How might the higher withholding tax affect overseas investment in Australian commercial property?

Analysts quoted in the article said the increase to 15% could prompt overseas investors to pull back from transactions, making Australia less attractive to foreign capital. Industry figures warned it could act as a disincentive for investment even though it might raise short-term government revenue.

How significant are overseas buyers in Australia’s commercial property market right now?

According to the article, overseas buyers accounted for more than 37% of the $9.8 billion of commercial property sales in the past year, showing that foreign capital has been a substantial part of recent transactions.

Which overseas groups have been active buyers of Australian commercial assets?

The article mentions buyers such as Singapore’s Mapletree Logistics Trust, Malaysia’s YTL Group, and the Abu Dhabi Investment Authority — with YTL and ADIA competing recently for a portfolio of three Marriott hotels worth $430 million.

What do industry groups say about past and proposed withholding tax changes?

The Property Council’s CEO, Peter Verwer, said cutting the withholding tax to 7.5% previously attracted global capital, and warned that increasing it could make Australia look ‘arrogant or capricious.’ Winston Sammut of Maxim Asset Management noted that a cut from 30% to 7.5% in 2010 was seen as an incentive, and that reversing course to 15% may deter investors from placing funds in Australia.

Could the tax increase increase government revenue but still hurt investment?

Yes. The article notes industry views that while raising the withholding tax to 15% may boost short-term revenue for the Australian government, it could also discourage overseas investors from investing in Australian commercial property in the future.

What should everyday investors watch for following this withholding tax proposal?

Everyday investors should monitor market reactions such as foreign buyer activity, changes in commercial property sale volumes, and any follow-up government policy announcements. The article highlights early signs — like Mapletree withdrawing from a major deal — that foreign demand may respond quickly to tax changes.