The introduction of a new taxation treatment for managed investment trusts represents a significant reform. It may be one of the single greatest tax reforms in the industry since the introduction of capital gains tax.

  • You will need to take action so your unit holders can take advantage of the new regime.
  • Your deeds and systems need to be updated to accommodate the new requirements of the regime.

Today the Assistant Treasurer released the long awaited draft legislation for the new managed investment trust (MIT) regime.

What does it do?

  • It will create a new standalone tax regime to apply to MITs.
  • It will provide much greater flexibility in terms of the distribution of income and the allocation of tax liabilities to unit holders.
  • It recognises some of the previously administrative arrangements in relation to over and under distribution.
  • It will allow much more flexibility to create new product opportunities. This is particularly so in relation to the creation of separate currency classes within Australian funds.
  • It seeks to overcome some of the ambiguity associated with the operation of the trust rules to managed investments, for example, the vexed question of whether a MIT will get the benefit of the fixed trust rules.

When does it all begin?

The regime is set to commence from 1 July 2015. We would hope that amendments may still be made to this commencement date for MITs (other than new MITs) to allow time for Responsible Entities to amend their documentation.

What does reform mean for me?

As with any reform, transitional issues and opportunities will need to be dealt with.

What do I need to do to comply? 

In order to comply it will require you to review your systems and deeds to ensure that they can support the requirements of the new regime.

There are a number of key areas of existing constitutions which will require amendments to both take advantage of the new regime, and to deal with some of its more complex aspects.

A waiting game on the power issue

The new regime will require amendments to existing constitutions to facilitate compliance with the requirements of the new regime. These changes are likely to require either specific ASIC relief or legislative amendment to the corporations law. This will be a key aspect to the success of the initiative.

Some other important changes

  • Expansion of the range of “good investors” for establishing MIT status.
  • An extension of the range of investors which have concessional treatment for the purposes of establishing that MIT status is available for it.
  • The contraction of the scope of the application of division 6C to exclude entities which have exempt status. This is of particular relevance for the superannuation industry.

What should I be looking out for?

  • The gateway to the provision, the existence of clearly defined rights, is more limited than we hoped for. This may mean that there are some unexpected exclusions from the regime. The open-ended requirements regarding reclassification of income may unnecessarily exclude some funds.
  • Introduction of an expanded arm’s length rules will be critical for all funds.
  • The new regime has greater flexibility but commensurately, greater liability and responsibilities.
  • There are complex new rules which allow unit holders to challenge the way in which a responsible entity has made a tax allocation to them.
  • There are complex new rules which deal with the manner in which withholding obligations of tax liability are imposed on custodians holding interests in the funds.
  • There is a significant penalty regime for non-compliance with the over and under arrangements.

What does the reform not do?

The existing tax rules will continue to apply to funds which are outside the scope of the new regime.

There are a number of significant tax issues which remain unresolved after the reform. These include, amongst other things, the status of existing funds as a fixed trust with the ability to pass on franking credits or carry forward losses.

What are my next steps?

  • Consider what steps you need to undertake to bring your entities within the new regime.
  • There is a brief consultation process which we would encourage you to be involved in. Submissions are due 23 April 2015.
  • Start thinking about how you will manage the transition to the new regime.
  • Consider what new product opportunities this regime presents.

The treasury press release and draft legislation can be found here.

How can KWM help?

We have had significant involvement in the development and consultation in relation to the regime. Throughout this process we have given significant consideration to the impact of these reforms on your industry.