- A new tax regime will apply to managed investment trusts that qualify as an Attribution Managed Investment Trust (AMIT).
- Qualifying AMITs can apply a more streamlined approach to distributing trust income to investors, through the ‘attribution model’ which replaces the current ‘present entitlement’ model.
- Qualifying AMITs will also enjoy other benefits, including deemed fixed trust treatment and codified ‘unders and overs’ rules, which will provide additional tax certainty and reduce compliance costs.
- To be ready for the new regime from 1 July 2016, trustees of managed investment trusts should act now by reviewing their trust deed and tax and accounting systems.
The bottom line
- These are very good reforms for AMITs and AMIT Investors, which reflects the fact they were developed in consultation with the fund management industry to be consistent with the commercial practices of the industry.
- The reforms to a large extent deal with the problems that arise by having a ‘one-size-fits-all’ set out trust taxation rules (Division 6) applying to sophisticated and widely held MITs.
- Many of the ‘bugbears’ for the industry around dealing with ‘present entitlement’ and triggering unplanned trustee assessments can be more easily managed under the new regime.
- Importantly, the new regime will reduce the administrative and compliance burden for AMIT trustees in the medium to long term, although the new regime does come with some additional documentation requirements for AMIT trustees and in reporting to AMIT investors.
Action plan – next 6 months
- Understand the implications of the new regime and make a decision about electing to be an AMIT (if not already done).
- Review the terms of the trust deed and consider whether:
- the current terms create ‘clearly defined rights’ in favour of members;
- the provisions relating to the determination and distribution of income will permit the new ‘attribution’ model and statutory methodology to apply;
- the rights attaching to particular classes of membership interests in the MIT will allow for streaming in the way it is contemplated by the new regime;
- Review current accounting and tax management systems, to ensure that they can be readily adapted to meet the requirements of the new regime (including determining attributable income under the ‘attribution model’).
- Review current distribution information to unitholders and ensure that it will, or can be readily adapted, to meet the requirements of an AMIT Member Annual Statement (AMMA Statement).
The new AMIT regime
The Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015 (Bill) was introduced into Parliament on 3 December 2015. The Bill has refined the concepts raised in the Exposure Draft legislation that was released in April and materially reduced or eliminated a number of contentious and complex provisions that were in the ED.
The Bill will bring in a new and very different regime for the taxation treatment of qualifying AMITs and AMIT investors.
The new regime will apply from 1 July 2016. Some trustees may choose to elect that the new regime apply from 1 July 2015.
Accompanying the Bill is a number of Draft Law Companion Guidelines (Guidelines) released by the ATO, which set out the Commissioner’s view on the interpretation of key concepts and aspects of the new regime. When the Bill passes into law, the Guidelines will become public rulings.
In this update, we explain the reforms and outline what action MIT trustees should be taking in the short term to prepare for the new regime.
Entry into the regime
The new regime will apply to managed investment trusts that meet the definition of an AMIT.
The basic requirement is that the trust be a Managed Investment Trust (MIT). The existing law already sets out the conditions for a trust to qualify as a MIT1 which, if met, enable the trustee to make a capital account election.
For an MIT to be an AMIT, these additional requirements must be met:
- the members must have ‘clearly defined interests’ in the income and capital of the MIT, under the constituent documents of the Fund; and
- the MIT trustee makes an election to be an AMIT which, once made, is irrevocable.
The requirement that the members have ‘clearly defined interests’ in the income and capital of the MIT is crucial. Registered funds are deemed to have such interests. In the case of unregistered funds, this will be the case if, under the terms of the MIT’s constituent documents, the rights to income and capital of the MIT are the same (excluding differential fees charged between unitholders and different issue/redemption pricing).
Benefits of the new regime
The benefits of the new regime for qualifying AMITs include the following.
Deemed fixed trust treatment
An AMIT will be deemed to be a ‘fixed trust’ for income tax purposes.
This provides certainty about an AMIT’s ability to carry forward and deduct tax losses by satisfying the ‘fixed trust’ loss integrity rules and enable imputation credits to flow to members.
This change addresses an area of ongoing uncertainty and risk for trustees and responsible entities. Even though most trusts with unitised interests are held out as being ‘fixed trusts’, there are very few which would meet the ATO’s strict interpretation of the fixed trust provisions.
Attribution model of trust taxation
The most significant change in the new regime is the departure from the ‘present entitlement’ model of trust taxation for AMITs. Instead, AMITs will determine members’ entitlements to income and capital on an ‘attribution’ model, the key features of which are as follows.
The Fund’s different classes of taxable income, offsets and credits will be attributed to unitholders based on their ‘clearly defined interests’.
This is a departure from the ‘present entitlement’ basis which now applies to all trusts, where the Fund’s income is allocated to unitholders based on their proportionate share of the Fund’s income. Practically, many trust deeds will need to be reviewed to ensure they can accommodate this aspect of the rules.
Under the new regime, an AMIT applying the attribution model will need to follow a statutory methodology to determine and report its attributable income and making the attribution to the AMIT members.
Broadly, the AMIT trustee must determine the income of the trust according to its particular character, on the basis that it is an Australian resident taxpayer (the determined trust components). In doing so, deductions must be matched to income of a particular character based on the relationship of the deductible amount to the income (this occurs in most cases already). The determined trust components are then attributed to the AMIT members, based on what is fair and reasonable in light of their clearly defined interests in the AMIT.
The AMIT trustee must issue a statement, an AMIT member annual statement (AMMA statement), to the AMIT members advising them of their attributable amount.
The regime codifies the rule that the character of the income received by the AMIT retains that character in the members’ hands.
It will also be possible to ‘stream’ income of a particular character to a particular member, if their ‘clearly defined interests’ give them an entitlement to particular types of income.
Multiple classes of units
Under the attribution model, AMITs with multiple classes of units will be able to treat each class as though it were a separate trust, and apply the attribution method only to that class.
Practically, this will allow assets to be segregated within the AMIT, and the income or losses of from those assets to be attributed only to the AMIT members whose class rights give them an interest in those assets. At present, it is difficult to achieve this segregation without setting up actual separate trusts, which brings added administration and tax compliance.
We expect that this feature will be of particular benefit to the new wave of innovative crowd funding and P2P lending arrangements.
‘Unders’ and ‘overs’
There will be a statutory mechanism to address errors in distributions (‘unders and overs’), by increasing or decreasing the distribution to reflect the error in the year that the error is discovered.
Currently, most managed funds adopt an ‘unders and overs’ methodology in the following year, which has been accepted by the ATO as an administrative practice. The new regime provides legislative support for this practice and so certainty for AMIT trustees.
Fairer cost base adjustments
For AMIT members, new cost base adjustment rules have been introduced, and the Bill introduces CGT event E10.
Broadly, an upward adjustment is made to the AMIT member’s cost base where an attributable amount is allocated to the member (which the member is required to include in their assessable income) and a downward adjustment arises when distributions are made.
The effect of this is that any difference between the amount of income allocated and the amount distributed will cause an adjustment in the AMIT member’s cost base. This defers the cash effect for the AMIT member to the time when their interest in the AMIT is realised. However, it will require a yearly adjustment to be made to the AMIT members’ cost base. The relevant cost base adjustment will need to be advised to the member in the AMMA statement.
Amendments to the trust deed
In many cases, it will be necessary to make amendments to the terms of the trust deed to enable the new regime to apply efficiently. It is likely that amendments to most trust deeds will be required to enable the fund to participate in the AMIT regime. As always, when making changes to the terms of a trust deed, it will be necessary to consider:
- the risks of resettlement, remembering that the approach of the ATO to determining a resettlement risk in TD 2012/21 is not necessarily aligned with the view or approach of state revenue authorities;
- the requirements of the trust deed; and
- whether any unit holder or regulatory approval will be required.
Hall & Wilcox is participating in consultations with ASIC about its response to the AMIT regime (for instance, in what circumstances will unitholder meetings be required to approve amendments to the deed). Hall & Wilcox’s experts in taxation and funds management can help guide MIT trustees through each of these steps.
The new regime will also introduce:
- A new non-arm’s length income rule that applies where an AMIT derives a higher than arm’s length income under an arrangement with another party that is not an AMIT. The trustee will be liable to pay income tax at the top marginal tax rate on the amount that exceeds the arm’s length amount;
- Where certain types of units are issued with debt-like features, those units will be treated as debt interests for tax purposes, so that returns on those units are treated as interest for tax purposes and liable to withholding tax if paid to non-residents.
- Amendments will be made to the ‘public trading trust’ rules in Division 6C so that super funds will no longer to be treated as ‘exempt’ unitholders for the purposes of these rules. Currently, if super funds own 20% of a trust that carries on a trading business, the trust is taxed as if it is a company.