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[King and Woord Mallesons]
16 July 2015
New taxes to shape up Australian Managed Investment Trusts
Knowledge & Insights
Australian Managed Investment Trusts
This article was written by Andrew Clements and Elizabeth Park.
On 9 April 2015 the government released an exposure draft of Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015, and on 12 May confirmed that it would proceed with implementation of the regime. The ATO have issued on 30 June 2015 a guidance note on the transitional operation of the new regime.
The proposed Attribution Managed Investment Trust (AMIT) reform is compulsory from 1 July 2016, but any trust which qualifies can elect to have the new regime apply from 1 July 2015. Although this seems to be a long way away, it is important to look at updating your deeds, systems and risk management practices now to ensure you are compliant on 1 July 2016.
Under the new regime, Managed Investment Trusts (MITs) can be a regular MIT, a withholding MIT, an AMIT, or a withholding AMIT. It is important you consider what kind of MIT is most suitable for you, and ensure that your trust documents comply with the requirements of that category.
Advantages of the new AMIT rules
For trusts that satisfy the requirements to qualify as an AMIT, there will be a number of significant benefits. Whilst retaining the classic ‘flow through’ characteristics of trusts, AMITs will be able to access a simpler but wholly different regime for the allocation of tax liabilities to members. The trustee of an AMIT will be able to attribute particular income and offsets to members on a fair and reasonable basis.
AMIT’s will also automatically qualify as ‘fixed trusts’ for tax purposes, which means the AMIT will be able to access additional tax concessions such as easier utilisation of tax losses.
As well as this, the beneficiary’s cost base can be adjusted when the beneficiary is taxed on more income than it receives, instead of an adjustment only being available when the beneficiary is taxed on less income than it receives.
It is possible for trusts to elect into the new regime from 1 July 2015. This creates some practical problems as the legislation has not yet been enacted.
To assist taxpayers who wish to elect into the scheme from 1 July 2015, the ATO have issued a guidance note. The note seeks to provide practical support to taxpayers wishing to elect into the regime early.
There are very important systems and constitution issues which should be considered before electing into the regime from 1 July 2015.
New product opportunities
The new regime will offer new product opportunities. The most significant arise from the introduction of segregated tax classes within a single trust.
Historically, the ability to have segregated classes within a single trust has been limited because of the risk of tax contagion from one class to another. That is, a tax treatment for one class impacts the tax status of the holders of units in the other class.
The new regime facilitates segregated tax classes within a single trust. This creates opportunities to create different asset classes or currency classes within a single trust. It is an important first step towards the more flexible investment structures which are offered globally.
The new regime should also provide greater flexibility in providing entitlements to existing unit holders.
Review existing risk management policies and practice in light of the new AMIT rules
The regime provides greater flexibility to trustees to allocate the tax consequences of the participation in a trust amongst unit holders.
With these changes comes the potential for greater responsibility for trustees. A key aspect to successfully making the change will be to manage this additional responsibility. This will be both through alterations to constitutions and through new risk management practices.
There are a number of important gateway requirements that must be met for a trust to qualify as an AMIT. The most significant is that the trust constitution must provide members of the trust with ‘clearly defined’ interests in the income and capital of the trust. This requires that the trust is under an obligation to treat members who hold the same class of interests equally and members of different classes fairly, and that the trust documents can only be changed in particular limited circumstances.
Investors with existing trust structures should consider whether the new AMIT regime and the associated tax concessions would be of benefit to them. Existing trusts will need to review their trust deeds to ensure that the AMIT gateway requirements are satisfied and undertake amendments where necessary.
Based on current industry practice, we expect there will be a significant number of changes which will be required to the constitutions of trusts that wish to take advantage of this regime.
Trusts will need to consider whether the relevant amendments can be made by reliance on the trustee’s amendment power alone, or whether a unitholder meeting is required.
Tax barrier to superannuation funds investing through trusts removed
There have traditionally been a number of important advantages in using trust structures to invest in active businesses, for example, agribusiness. Trust structures are taxed on a ‘flow through’ basis and are eligible for discounted capital gains tax treatment. Trusts also offer the ability to provide tax deferred distributions to investors, and may in some instances qualify for additional tax concessions applicable MITs.
Under the current law, there are significant impediments to superannuation funds investing into trust structures in active business. There are specific rules which apply to tax certain ‘public trading trusts’ as companies.
These rules are to cease to apply to investments by complying superannuation entities. This should facilitate the use of trust structures by superannuation funds investing into active businesses. It will in some circumstances improve the after-tax returns available from such investments.
Arm’s length dealing requirements for trusts under new regime
Whilst there are a range of important benefits available for AMITs, trust structures which qualify as AMITs will also need to abide by some strict requirements and new integrity measures.
It will be important for all existing trust structures to review their third party arrangements to ensure they can properly be regarded as being at arm's length for tax purposes. This is critical to ensure that an adverse tax consequence does not arise for the fund.
The new regime introduces a specific arm’s length dealing rule that will apply to trusts under the regime. This means trusts will need to ensure that income derived from non-arm’s length dealings must not exceed the amount that the trust would have received had the parties been dealing at arm’s length.
Any amount of non-arm’s length income will be taxed to the trustee at the penal rate of 47%.
Importantly, the arm’s length rule is of general application and is not restricted to transactions between related entities in stapled arrangements.
There are some significant exclusions from the arm’s length requirements for:
distributions to the trust from a corporate entity;
distributions from another trust that is not a party to the non-arm’s length scheme; and
returns on debt determined by reference to benchmark interest rates.
All trusts within the scope of the new AMIT regime must ensure that any arrangements they enter into can be properly regarded as being made at arm’s length.
We expect that traditional transfer pricing principles can provide considerable guidance as to what this requires. A clear focus for trusts should be taking what they know about transfer pricing and applying it in what is effectively an onshore transfer pricing regime for trusts.
Banking & Finance
Banking & Financial Markets Regulation
Non-Bank Financial Institutions
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