After extensive consultation the Government has released the long- anticipated exposure draft legislation to modernise the tax system for managed investment trusts (MITs).
The exposure draft legislation follows recommendations made by the Board of Taxation in August 2009 in its Report on the Review of the Tax Arrangements Applying to Managed Investment Trusts.
It will solve some of the issues that have risen in relation to the treatment of MITs and their income for income tax purposes.
For example, it will ensure that the character of the income in the hands of the trustee retains that character in the hands of the beneficiaries i.e. a character flow through model will apply which accords with the principles in the High Court decision of Charles v Federal Commissioner of Taxation (1954) 90 CLR 598. It will also ensure that MITs are treated as fixed trusts notwithstanding the decision in Colonial First State Investments Limited v Federal Commissioner of Taxation  FCA 16.
The new tax system proposed in the exposure draft legislation only applies to attribution managed investment trusts (AMITs). To qualify as an AMIT a trust must be a MIT and the members of the MIT must have clearly defined interests in relation to the income and capital of the trust.
The key consequences that arise if a MIT qualifies as an AMIT are that:
- an attribution model will apply to the MIT instead of the general trust provisions; and
- the MIT will be treated as a fixed trust for the purposes of income tax law.
The attribution model
The attribution model is complex so consideration of the detail will need to be given if finally enacted. The following is a snapshot of the attribution model for AMITs:
- for income tax purposes, the trust will be able to attribute amounts of taxable income, exempt income, non-assessable non-exempt income, tax offsets and credits to members on a fair and reasonable basis in accordance with their interests as set out in the constituent documents of the trust;
- if a trust discovers a variance between the amounts actually attributed to members for an income year, and the amounts that should have been attributed, the trust will be able to reconcile the variance in the income year that is discovered by using the ‘unders and overs’ regime;
- trustees are liable to pay tax in some circumstances;
- the rules ensure that PAYG withholding provisions and withholding tax liability provisions apply appropriately;
- a character flow-through model will apply to ensure that amounts derived or received by the trust that are attributed to members remain the character they had in the hands of the trustee for income tax purposes;
- double taxation that might otherwise arise will be reduced because members will be able to make annual upward and downward adjustments to the cost bases of their interest in the trust; and
- the taxation treatment of tax deferred distributions made by the trust is clarified.
As part of the above reforms, the definition of MIT has minor changes to:
- extend the start-up period during which a trust does not need to meet the widely-held and not closely-held requirements to qualify as a MIT; and
- modify the widely-held requirements to extend the list of eligible investors in a MIT.