By Tina Perinotto

29 June 2012  – The federal government has bowed to pressure on its doubling of the withholding tax for foreign investors announced in the budget, but only partially and only in a green way. And then, only in a partly green way.

Greens Leader Christine Milne pushed through agreement to the proposed amendments but the legislation on the main withholding tax was passed last night (Thursday) in the closing hours of the current Parliamentary session.

Senator Milne has promised she will ensure the legislation for the green amendments are passed  in August, when Parliament resumes from its winter sojourn.

So, what’s the state of play?

First, a doubling of the withholding tax, which is charged to income from managed investment schemes for foreign investors, from 7.5 per cent to 15 per cent.

Now, a concession to 10 per cent of WHT for some green commercial buildings ­­– offices, non residential accommodation, and retail ­ – that are rated five star Green Star and 5.5 NABERS – commenced after 1 July 2012.

Not included are refurbished green buildings, existing green buildings, medical and educational facilities, aged care and retirement living, clean energy carbon sinks, tourism property such as convention or transport related facilities.

The property and green property lobby groups had a predictably mixed response.

Chief executive officer of the Property Council of Australia Peter Verwer backed the move, but “within the context of the foolishness of doubling the withholding tax and creating a two tiered system.”

Yes it was good that there were some concessions for green buildings and very fortunate [in an ironic way] that all the work that would be needed to properly determine the qualifying benchmarks on the rating tools had already pretty well been done, thanks to the now ditched Tax Breaks for Green Buildings program.

But why all the omissions?

The Green Building Council of Australia felt similarly.

It thanked The Greens for the work in securing the amendments and said it was pleased with the Australian Government’s decision to embed Green Star into the new withholding tax rate structure.

Australian Greens Leader, Senator Christine Milne, said ”The Greens were always concerned to ensure that changing the withholding tax regime wouldn’t damage investment in energy efficient buildings, which often rely on global superannuation funds with high ethical standards to fund their construction.

GBCA’s executive director of advocacy Robin Mellon said: “This represents a massive incentive for foreign investment into new projects that achieve an ‘Australian Excellence’ rating of five star Green Star or a ‘World Leadership’ rating of six star Green Star.”

But he urged the government to include “other high-performance developments”, such as education and healthcare facilities, and to reconsider the application of the new standard rate of WHT to our existing green building projects.

“Australia’s sustainable building leaders should not be punished by such retrospective penalties,” Mr Mellon said.

The new rules made Sydney’s 1 Bligh Street, Melbourne’s The Gauge and Perth’s 2 Victoria Avenue less attractive to investors, he said.

Mr Verwer told The Fifth Estate that there had been “numerous discussions” between the PCA the Green Building Council and The Greens.

“As Senator Milne said last night, August is when she want to see the legislation pass and when it is to be delivered,” Mr Verwer said.

The legislation could have faced huge delays but Mr Verwer said: “The valuable work that has been done on the Tax Breaks for Green Buildings ­– how you set the benchmarking systems like NABERS and Green Star and a lot of the issues that are relevant to his have already been tackled.”

But there were still, “all sorts of problems,” he said.

The WHT confuses international investors, for a start.

In a media statement Mr Verwer said:

“The 7.5 per cent withholding tax rate, introduced in 2008, successfully attracted patient international capital that was invested in high quality green assets and community facilities.

“The decision to double the withholding tax rate to 15 per cent sends a negative signal to investors who will now actively seek stronger after-tax returns in other countries”.

“Under a deal negotiated with the Greens, Australia will now operate a two-tier withholding tax system that replaces a simple, elegant scheme with a highly complex arrangement.

“By doubling the rate to 15 per cent the Government has hobbled Australia’s capacity to attract patient global capital.

“In addition, a 15 per cent rate is higher than the tax applied to debt structured finance, which means the government favours debt over equity.

“This is the wrong time to increase Australia’s reliance on debt, given increasingly volatile global financial markets.”

The higher withholding tax also contradicts the Henry Review recommendations, which said that international investors are “particularly likely to be sensitive” to withholding tax.

Mr Verwer said the Treasury was particularly to blame on this issue and needed to be held to account.

“Treasury has consistently refused to reveal any of its assumptions or modelling. It has criticised the evidence-based analysis of the Allen Consulting Group, while refusing to release its critique for public examination,” he said.

“In addition, the only published Government material to analyse withholding tax rates across countries was embarrassingly flawed and omitted several countries with low rates.”

“Treasury’s sloppy advice to the Government has weakened our national competitiveness and should be scrutinised to ensure further policy blunders do not occur.”

Interestingly, it would be Department of Climate Change and Energy Efficiency that will be managing the amendments instead of Treasury.

It will have a few unanswered questions to tackle, such as working out what exactly is a commencement date for a development? Will the Green Star a design rating or an “as built”? And will the ratings need to be renewed annually?

Treasury will probably be relieved it’s lost that job.