US – developments for super funds investing in US property

After many years in the making the United States (US) congress finally passed legislation that applies to exempt any US real property interests held by a foreign retirement or pension fund from Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) in some circumstances. The provisions apply to dispositions and distributions on or after the date of enactment. This was signed by President Obama on 18 December 2015 and is discussed below.

On 8 December 2015, an Act that included two proposals that impact foreign funds was introduced. First, the Act included a proposal that increased the ‘portfolio investor' exception for sales of stock and capital gains dividends of listed Real Estate Investment Trusts (REITs) from 5 per cent to 10 per cent, including for qualified non-US collective investment entities investing in US real estate. REIT dividends paid to non-US portfolio investors remain subject to US withholding (but not FIRPTA) tax.

Second, the Act treats foreign pension funds the same as domestic pension funds under FIRPTA, therefore exempting investments of foreign pension funds from FIRPTA altogether, hence potentially attracting investment from a large and growing source of foreign capital into the US real estate market.

Whilst the developments are good news, some clarification may be necessary for the rules to operate to exclude Australian super funds. Nevertheless, funds with investments in the US should consider the impact of these changes. This may also impact the way in which Australian entities invest into the US. 

The Mid-Year Economic and Fiscal Outlook (MYEFO)

On 15 December 2015, the MYEFO was released. The MYEFO did not contain any new tax measures that impact superannuation funds. The MYEFO papers restated the roll-over measures previously announced on 29 June 2015; that is, providing capital gains tax roll-over relief for mandatory transfers within a super fund in the transition to MySuper. The rollover will be available for mandatory transfers made from 29 June 2015 to 1 July 2017.

Attribution Managed Investment Trust (MIT) rules introduced into Parliament

On 3 December 2015, the Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015 was introduced into Parliament. Included in the Bill are proposals to implement the new attribution regime for MITs (i.e. AMIT regime),various related amendments including the introduction of a new arm's length income rule for all MITs, changes to the definition of MIT, removal of the ‘20% super fund’ rule in the Public Trading Trust Rules in Division 6C (from 1 July 2016). Broadly, the new rules operate from 1 July 2016.Trusts that are 100 per cent owned by super funds will not qualify as an AMIT under the new regime.

Ward v FCT – Administrative Appeals Tribunal (AAT) confirms - no special circumstances

In the case of Ward and Commissioner of Taxation (Taxation) [2015] AATA 919 (30 November 2015), in essence, the taxpayer (Mr Ward) in early 2008 withdrew his super and put this into a term deposit. On 9 July 2008, Mr Ward contributed $450k into another super fund before again withdrawing this amount (over a period to April 2009) and placing the funds in a term deposit. Mr Ward and Mrs Ward subsequently contributed $450k each into a self managed fund in September 2010. The second contribution by Mr Ward resulted in a $209k excess contribution tax liability (due to the excess non-concessional contributions and a breach of the three year cap). Mr Ward sought the ATO’s discretion to disregard the excess contributions and the Commissioner refused to exercise his discretion.

The AAT noted that the circumstances facing the taxpayer were exceedingly unfortunate, and not of his own making but the imposition of excess contributions tax on him was the natural and foreseeable consequence of the decisions he and his advisers made, albeit in ignorance. The AAT stated that, as it transpired, the taxpayer had suffered a penalty of 19,527 per cent of any ‘tax advantage’ (his advisers’ calculation), an outcome which cannot be regarded as conscionable but this did not amount to ‘special circumstances’ and therefore the ATO’s decision not to exercise its discretion was upheld.

Treasury Consultation - Commissioner’s power to modify law

On 1 May 2015, the Government announced it would legislate to provide the ATO with power to ensure that taxation and superannuation laws can be administered consistently with their purpose. The ATO's power would allow a modification to the operation of the law to address unforeseen or unintended outcomes in administration. It is intended that the power would be exercised to the extent that it would have a beneficial outcome for taxpayers, has a negligible revenue impact, and is only applied as a last resort.

Treasury issued a discussion paper in relation to these proposals.

Although not directly relevant to super funds, this power may be useful to both the ATO and taxpayers in quickly resolving some unforeseen technical issues.