A number of taxation-related changes in the Federal Government’s latest Budget could cause foreign investors to reconsider Australia according to legal practitioners.

The government announced on Tuesday night that it will increase the final withholding tax for investors in Managed Investment Trusts (MITs) from 7.5 percent to 15 percent from 1 July 2012. “The doubling of the rate has caught many foreign investors by surprise – a number had invested into Australia based upon the 7.5 percent rate and so have raised concerns that the government has “changed the goal posts without consultation,” said King & Wood Mallesons partner Richard Snowden.

Arnold Bloch Leibler senior associate Clint Harding agrees, stating that this in turn will make Australia less attractive to foreign investments, especially in the property sector. “Some of the biggest beneficiaries of the existing rules are foreign investors in Australian property funds.  It was quite a low withholding tax rate by international standards, and was very favourable amongst investors, at 7.5 percent,” he told ALB. “This change will completely throw all of the financial modelling and plans of potential foreign investors, not to mention those who have already invested in Australian managed investment trusts, out of the window.”

According to Harding, the government’s budget creates confusion for foreign investors as it seeks to make Australia less attractive on one hand, but more attractive on the other. “There seems to be contradictory messages coming from the government,” he said. “On one hand they are trying to increase Australia’s attractiveness as a location for foreign funds, through measures such as the investment manager regime, but then they are suddenly doubling withholding tax rates on fund payments to foreign investors.”

The Budget also included changes to the Living Away from Home Allowance (LAFHA) concessions, increases to taxes on non-residents and abolishing the capital gains tax discount for non-resident individuals. “The additional costs of greatly restricting the LAFHA will likely cause foreign companies to relocate employees back to regional headquarters such as Hong Kong and Singapore,” said Snowden. 

Harding added:  “It’s going to have a massive impact, particularly all the companies and groups in Western Australia who are struggling to find skilled workers to meet their labour requirements and who rely heavily on imported workers… It was a genuine way that such employers could structure their remuneration packages to make Australia attractive to temporary workers on visas.”

As a result of this change, both Snowden and Harding expect the change to impact the number of skilled foreign workers who come to Australia in addition to hurting Australia’s image as being a financial centre for the Asia Pacific.