There is one hidden gem amidst the exposure draft legislation relating to managed investment trusts (MITs).
SMSFs (and other superannuation funds) that hold units or interests in certain types of trusts can inadvertently cause the trust to be treated as a company for income tax purposes under what is known as the public trading trust rules. In effect, the flow-through tax treatment of using a trust could be lost if the membership or unit holdings involve superannuation funds holding at least 20% of the interests in the trust.
THE PROPOSED MANAGED INVESTMENT TRUST (MIT) REGIME EXPOSURE DRAFT LEGISLATION
In April this year, exposure draft legislation for a new tax system for MITs was released by the Federal Government. It seeks to modernise the tax rules for eligible MITs and increase certainty for both MITs and their investors.
INTERESTING EFFECT ON PUBLIC TRADING TRUST RULES
The explanatory material to the exposure draft of the legislation refers to the changes under the innocuous heading of “Miscellaneous Amendments” in Chapter 8.
The changes will repeal the public unit trust rules in Division 6B of the Part III ofIncome Tax Assessment Act 1936, and more importantly will exclude superannuation funds from the application of the 20% tracing rules for public trading trusts in Division 6C of Part III.
Although the public unit trust provisions will be repealed, Division 6C will still have its own public unit trust definition in section 102P, which remains relevant for determining whether a trust is a public trading trust under Division 6C.
However, under the amended provisions, superannuation funds will no longer be deemed to be exempt entities for the purpose of the 20% tracing rule. Therefore, interests held by funds will not cause a trust to be a public unit trust, and by extension, will not cause a trust to be a public trading trust.
This will provide welcome relief to those trusts that have previously been treated as companies for tax purposes.
Often this has caused issues with respect to the franking of distributions – or dividends – from these trusts, particularly when income in a year exceeds the previous year’s income.
It is unclear what, if any, transitional measures will apply to existing public trading trusts, and whether they will be simply allowed to “switch over” to the non-public trading trust regime, but otherwise carry forward and utilise any franking credits.
At the moment the measures are in the form of an exposure draft which is yet to be finalised. The closing date for submissions in respect of the exposure draft was 23 April 2015.
We await further details of any revised legislation on this issue, and its possible effect on trusts that have superannuation funds as unitholders or members.