In brief

  • The rewrite of the trust rules for MITs was announced nearly 5 years ago. Changes to MIT withholding and the deemed capital account elections have already been bedded down. The latest exposure draft legislation has now been publicly released for the final and most significant proposed changes. The changes will apply where a trust meets the requirements to be an attribution managed investment trust (AMIT).
  • The vast majority of funds under management in the investment management industry are held via managed investment trusts. As such, the introduction of the MIT Regime and accompanying changes will have significant implications.
  • Participants in the investment management industry will need to consider what the potential impact of the MIT Regime means for them. The changes provide certain concessions to trusts and their members, but have the potential to impose a range of obligations and potential penalties. They may provide greater certainty than existing “industry practice”, but that certainty may or may not be welcome news.

In detail

What are the key changes that will arise from AMIT status?

  • the allocation of taxable income to members based upon “attribution” rather than on present entitlement to “income” of the trust
  • the codification of the treatment of unders and overs – an “uplift” and penalties may result where safe harbour thresholds are exceeded.
  • deemed fixed trust status
  • upward cost base adjustments for members where the attribution of certain amounts exceeds the amount distributed.
  • greater certainty as to the treatment of tax deferred distributions
  • the option to recognise individual classes of multi-class funds as distinct AMITs for tax purposes
  • detailed and complex withholding tax changes, aimed at ensuring withholding applies to “attributed” amounts, rather than the amount distributed
  • an arm’s length rule imposing a tax liability on the trustee on net income deemed to be “non-arm’s length income”
  • a range of penalties that may be levied on the trustee.

The draft legislation also proposes some changes to the existing definition of the trusts that qualify to be a MIT, and makes some other minor related amendments.

Some of these points are discussed further below, together with the action points that we consider arise from them. A more detailed TaxTalk Alert, Draft legislation for proposed new Managed Investment Trust regime released provides further details on these points.

Which MITs will qualify to be an AMIT?

To be an AMIT for an income year, the interests of members in the trust must be clearly defined at all times.

For a registered MIT: this essentially requires that the entitlements of the members can be determined on a “fair and reasonable” basis, and cannot be materially diminished through the exercise of a power or right.

For an unregistered MIT: in addition to the above requirement, the trustee must be under an obligation to treat members of the same class equally, and members of different classes fairly, and there must be specified restrictions on the modification, replacement or repeal of the constitution of the trust.

What is the proposed start date?

The draft legislation released on 9 April 2015 reflects the previously announced start date of 1 July 2015 for the new regime. However, it is understood that the Government intends to defer the start date for another year, such that the MIT regime will apply to income years commencing on or after 1 July 2016. It is intended that there will be an option to early adopt in the income year preceding this. Again, whilst not addressed in the draft legislation, it is understood that existing eligible MITs will need to exercise a choice to apply the new rules.

AMIT characters and attribution

The central change proposed is to replace the current allocation of net income based upon present entitlement to a system where trustees determine the trust components of particular “AMIT characters” and attribute a share of those amounts to members, as reported on an AMIT member annual (“AMMA”) statement. Attribution must be determined on a “fair and reasonable” basis in accordance with membership interests per the constitution of the trust, and without consideration of the tax characteristics of members. Examples are provided of powers of the trustee that will be considered acceptable in  applying this test.

There are four broad categories of AMIT characters:

Click here to view table.

Unders and overs

One of the most challenging areas for the MIT Regime to deal with has been the codification of unders and overs, the treatment of which has developed over many years as “industry practice”.

The basic mechanics of the provisions broadly reflect that industry practice. If an under or over relating to the calculation of trust components in a “base” year is “discovered” in a later income year, the provisions allow it to be adjusted in calculating the trust component amounts of that discovery year. There is a four year time limit on the discovery of unders and overs. (Alternatively, the trustee may reissue AMMA statements for the base year to eliminate the under or over). Netting of overs of income AMIT characters against amounts of other income AMIT characters on a “reasonable basis” is permitted. Overs remaining are carried forward to the next income year.

However, if there is an “overall base year shortfall” that exceeds a “net variance threshold” (broadly, the greater of (i) 5% of the sum of the trust’s net income and its NANE and exempt income, and (ii) 0.4% of the net asset value of the trust), then to compensate the revenue, an “uplift” amount must be calculated (with reference to the shortfall interest charge rate) and added to each income AMIT character where there is a net under and deducted from tax offset amounts where there is a net over.

In addition, if there is an overall base year shortfall (as above) or an “overall base year excess amount” that exceeds the net variance threshold and it is determined that this resulted from either recklessness or

an intentional disregard of the law, the trustee may be required to pay an administrative penalty at the top marginal individual rate plus applicable levies, on the following amounts:

Click here to view table

The takeaway

Key actions to be considered

The new provisions are expected to require changes to operations, service arrangements, reporting to investors and product planning and development.

The following key actions will need to be considered in the lead up to the commencement of the MIT Regime:

  • Whether AMIT status will be beneficial for all MITs. Should early adoption be considered for some MITs? What will be the approach to unders overs for non-MITs and MITs that are not AMITs?
  • Whether amendments to trust deeds are required or desirable to deal with attribution, clearly defined interests etc. and potential resettlement risks arising from such changes.
  • Impact on processes for year end on tax policies and on the tax risk management framework.
  • Implications for the MIT (or non-MIT) status of trusts arising from the related changes to the definition of what is a MIT.
  • Whether the attribution system creates opportunities for distribution policies.
  • Impact on product offerings.
  • Dealing with unders and overs leading into the start date.
  • Impact on due diligence procedures where trusts are acquired.
  • Updates required to PDS and marketing material
  • Considering systems implications including accommodating AMIT characters and providing cost base adjustment information in AMMA statements
  • Dealing with other new compliance requirements e.g. AMIT income tax returns.
  • Communication of opportunities and risks arising from the new regime to business stakeholders.
  • Allocating responsibilities and determining a time line for the required actions