The Commonwealth Government announced in its recent Budget 2015-16 that it will be proceeding with the implementation of a new tax system for qualifying managed investment trusts (MITs). In summary, the proposed tax regime will:
- confer fixed trust treatment to MITs, which is significant for MITs being able to carry forward prior year revenue losses;
- treat MITs as conduit vehicles for tax purposes, that is, flow through vehicles where the character and source of the MITs’ income flow through to members for income taxation purposes; and
- provide mechanics to correct estimated amounts of trust income within a four (4) year period without the need to amend trust tax returns or for members to amend their tax returns.
The proposed start date will be 1 July 2016 with MITs being able to elect to transition into the new tax regime from 1 July 2015.
A MIT is a type of collection investment vehicle which is a trust that is widely held and primarily makes passive investments. Examples of MITs are real estate investment trusts, trusts for managed funds and infrastructure trusts whereby the main source of return is in the form of dividend, interest, rent and/or capital gains on sale.
Currently, where an investment trust qualifies as a MIT:1
- the concessional withholding tax at the rate of 15% applies to fund payments made to non-resident investors from countries that have entered into information exchange treaties with Australia. Where the concession does not apply, the withholding tax at the rate of 30% applies; and
- the capital account election regime2 can be accessed if elected. This election, once made, results in certain assets (such as land held for passive purposes) being treated as capital account and therefore removes the risk that the Commissioner of Taxation may treat such assets on revenue account.
In addition to the above treatment, the proposed changes will provide a specific taxation regime for MITs. While not yet legislated or even presented to Parliament in Bill form, the current proposed regime is contained in an Exposure Draft Bill which was released for comment by the Commonwealth Treasury on 9 April 2015.3 The Exposure Draft Bill can be accessed via this link.
We will give a further update on the proposed changes when a Bill is presented to and passed by Parliament. The following overview is based on the Exposure Draft Bill, which may be subject to change.
The proposed taxation regime will apply to trusts which qualify as MITs and whose members have ‘clearly defined interests’. These MITs will be referred to as Attribution MITs or AMITs. The relevant trust will therefore need to qualify as both an MIT and an AMIT.
For the trustee of the AMIT
The trust will be treated as a fixed trust for the purposes of the income tax law. This removes the uncertainty created by theColonial First State4 decision and will enable such trusts to use their prior year revenue losses based on the current loss tests.
An ‘attribution model’ of taxation will apply which will mean that different types of receipts will retain their character when they pass through to members and are subject to tax in their hands. Receipts will be grouped and dealt with by character and these characters will include: taxable income, exempt income, non‑assessable, non‑exempt income and tax offsets. Other receipt characters can be added by the Commissioner by way of regulation.
These character amounts, referred to as amounts of particular AMIT characters, will be attributed to members on a ‘fair and reasonable basis’ in accordance with their interests as set out in the constituent documents of the trust (e.g. the trust’s constitution or other information disclosure documents etc).
A specific regime will apply to enable trustees of AMITs to reconcile differences between ‘attributed amounts’ and ‘actual tax amounts’ (which may not be known until some time after 30 June of an income year) that may be discovered within a four (4) year period. This will be known as the ‘unders and overs’ regime. This will remove the need to amend the tax returns of members and trustees.
The instances when the trustee will be liable to pay tax will be clarified. One notable change is the introduction of a non-arm’s length income rule whereby trustees of AMITs will be subject to income tax at the highest individual tax rate (currently 49%) on income derived from non-arm’s length arrangements. This will be particularly relevant to stapled structures and their intra-group dealings (this is aimed at AMITs charging excessive fees or rents to associated trading companies for the purposes of diverting income otherwise subject to corporate tax rates).
There will be a specific PAYG withholding regime for AMITs (including for their custodians). Having said this, the current regime for withholding from dividends, interest and royalties paid to non-residents is not expected to change substantially.
For members of the AMIT
The attribution model will provide a ‘character and source flow‑through’ model. The member will be treated as if it were the ultimate holder of the asset from which returns are made and therefore the AMIT is treated as a transparent vehicle. Double taxation will reduced by enabling members to adjust the cost base of their interests up or down in line with the extent of attribution of receipts by the AMIT. This is particularly relevant when members exit their investment in the AMIT. It also intended that the treatment of tax deferred distributions will be clarified.
As part of the proposed changes to the taxation arrangements for MITs, the following changes are also proposed:
- the abolition of the public unit trust rules in Division 6B of Part III; and
- the exclusion of superannuation and exempt entities that are entitled to excess imputation credits from the application of the 20% ‘tracing rule’ for public trading trusts.