The government's push to double a withholding tax for investors in managed investment trusts (MIT) has hit a hurdle with proposed amendments to legislation being referred to the house economics review for further debate.
Late last week, the House of Representatives referred changes the Income Tax (Managed Investment Trust Withholding Tax) Amendment Bill 2012 to the house economics review.
Henry Davis York partner Greg Reinhardt said referring the legislation of this magnitude is not unusual.
"I don't think it's unusual for what is clearly a significant piece of legislation," Reinhardt said.
"I'm glad that they are referring it to the Economic committee because it is something that should be considered properly rather than simply left to the political process. As to the outcome I'm not sure."
Under measures of the 2012 federal budget, the Labor government announced that it will increase the withholding tax rate applying to distributions from managed investments to residents of a country that Australia has a tax information exchange agreement, from 7.5 to 15 per cent.
"This measure is projected to raise an additional $260 million over the forward estimates period," the budget papers said.
"The 30 per cent tax rate will continue to apply to distributions made to residents of another country with whom Australia does not have such an agreement."
The budget measure has come under fire from Australia's investment industry, with reactions stating the imitative will "jeopardise investment in crucial infrastructure", a government statement on industry reaction said.
In its defence, the government said withholding tax regimes are "very common" within the Organisation for Economic Cooperation and Development (OECD), the statement said.
In the United Kingdom, United States, and Singapore the rate is 15 per cent, while France's rate is 18 to 30 per cent.
"An increase in the withholding tax rate to 15 per cent would place Australia on a similar level with like countries within the OECD," it said.
The increase was a reversal of the government's plan to progressively lower the tax from 30 per cent to 7.5 per cent, Reinhardt said.
He said the immediate impact of the changes will be in relation to funds that are either operating in Australia or intending to operate here as they will need to assess the economics of their investment.
"Particularly as these measures apply to overseas investors, the investors will look at the return and will need to evaluate whether the position of higher level of Australian tax makes the investment un-economic," he said.
"On a more holistic level, I do think that it will create some uncertainty in the minds of fund managers and even if the 15 per cent rate is still seen as economically competitive they may be slightly more hesitant to invest just given the way the change was announced."
