There has been much discussion surrounding the recently announced changes to the tax law which will allow certain funds to elect to apply the capital gains tax regime for taxing certain disposals of assets.
The ability to elect capital account treatment is restricted to "managed investment trusts" – a term which is presently intended to be broadly consistent with the concept of a "managed investment trust" as used in the recently enacted withholding tax regime for managed funds.
Therefore, the anticipated requirements for a "managed investment trust" in the capital account treatment rules are:
- the trustee of the trust must be an Australian resident or the trust's central management and control must be in Australia;
- the trust is a "managed investment scheme" (MIS) (defined in section 9 of the Corporations Act) operated by a "financial services licensee" (defined in section 761A of the Corporations Act) whose licence covers operating such a MIS; and
- subject to an exception (where a foreign individual holds interests representing 10% or more of the value of the trust, the ability to control 10% or more of the rights attaching to membership in the trust, or the right to receive 10% or more of the distributions from the trust), one of the following applies:
- the units of the trust are listed for quotation in the official list of an approved stock exchange in Australia; or
- the trust has at least 50 members (other than objects of a trust); or
- one of the members of the trust is the kind listed below:
- a complying superannuation fund, a complying approved deposit fund, or a foreign superannuation fund, being a fund that has at least 50 members;
- an Australian resident trust that is a MIS (registered, although this is not stated in the law) operated by a financial services licensee whose licence covers operating such a scheme and where the units in that trust are listed for quotation in the official list of an approved stock exchange in Australia or the trust has at least 50 members (other than objects of the trust);
- an entity that is recognised, under a foreign law relating to corporate regulation, as having a similar status to a MIS and that has at least 50 members; and
- certain trusts which are directly or indirectly owned (through a chain of trusts) by an entity listed in the immediately preceding four paragraphs.
As with the current managed fund withholding rules, there is considerable uncertainty as to whether "unregistered" MISs for Corporations Act purposes can meet the definition. Although the withholding tax provisions for managed investment trusts do not specify a registration requirement, this requirement seems to be inferred by Treasury and many commentators.
One policy reason as to why registration may be seen as necessary is that an MIS which is registered is more readily seen as a genuine collective investment vehicle. However, this view fails to acknowledge that not all MIS that are "widely held" (even taking the broader definition of "widely held" above) are required to be registered – based presumably on a policy recognition that such trusts (given their investor base) do not need the level of oversight that registration provides.
It is clear that if a "managed investment trust" is required to be registered, it significantly narrows the availability of both the withholding tax regime and the election to apply the capital gains tax regime for taxing certain disposals of assets – making it much less useful for private equity or, for that matter, wholesale funds in general.
For further details on these proposed reforms, please click here for the link to the recent tax update prepared by our Tax group.