Stapled structures have been a prevalent arrangement forproperty...

Stapled structures have been a prevalent arrangement forproperty and infrastructure businesses in the Australian listed and unlistedmarket for decades. In 2016, stapled structures comprised approximately$199 million of ASX market capitalisation. Stapled structures were usedby almost 90% of infrastructure funds in 2016 because of their advantages inattracting infrastructure investment from foreign pension funds. Theiruse was particularly significant in the privatisation of state government ownedinfrastructure and helped facilitate the delivery of large up-front proceedsfor state governments from these sales.

The use of stapled structures began to spread to othersectors like agriculture and mining in the early 2000s precipitating concernsin government, see Treasury Paper, that their use was leading to “fragmentation of integrated businesses in order to separate tradingincome and more concessionally taxed passive income into different entities”. Concerns were also raised about “passiveincome flows structured as cross-staple transactions rather than directoffshore transactions, which may have different transfer pricing or thincapitalisation outcomes”.

The tax advantages of stapled structures are described by theAustralian Government Treasury Consultation Paper in March 2017 referred toabove as follows:

• Stapled structures enable investors in property or financial assets to earn additional income from related operating activities, such as management fees, property development or car park revenue, in a separate company, without jeopardising the flow-through tax status of the trust.
• The receipt of tax deferred distributions (cash distributions that are not taxable income because of factors such as accelerated depreciation) from the trust in the stapled structure, typically at the earlier stages of a property or infrastructure project. In contrast, property and infrastructure businesses held in companies may face restrictions on distributing cash to investors. For some domestic investors, this may be a timing benefit only, as resultant cost base adjustments mean the amount is factored into future capital gains or reduced capital losses. However, the full value of capital gains is not always taxed, as certain resident investors may obtain a permanent benefit or non-residents an exemption in some circumstances.
• Foreign investors can access concessional withholding tax rates on distributions under Australia’s managed investment trust and royalty or interest withholding tax rules. Under these rules, taxable payments are typically subject to a final withholding rate of 15 per cent or less.

Changes to Australian tax rulessince 2019 have eroded some of the benefits of a stapled structure andsimilarly, more recent changes to US tax rules on interest deductability havelimited the efficiency of a stapled structure.

In addition to the reducedefficiency of a stapled structure, NEW has advice that the trading activity ofNEW on the ASX is sufficient for NEW to qualify as a “regularly traded”security which would allow NEW to access the US/Australian Double Tax Treatybenefits that will facilitate tax efficient distributions from the US withoutthe necessity of a stapled structure.

The unstapling of the stapledstructure and the winding up of the trust will reduce the administration andgovernance costs of NEW and also simplify the presentation of NEW’s financialstatements. There will also be no need for the Responsible Entity.