The Assistant Treasurer has issued draft legislation, together with explanatory material, on the proposed changes to the taxation of gains and losses on disposal of investments by managed investment trusts (MITs).
There has been an issue for some time as to how to treat gains made by managed investment trusts namely whether they should be treated on revenue or capital account. The benefit of such gains being treated on capital account is that unit holders may be entitled to take advantage of the discount capital gain which would reduce the incidence of taxation on those gains.
Previously case law has been relied upon for MITs to argue that gains made by such MITs should be treated on capital account. However there was some speculation that the Commissioner of Taxation was about to issue a ruling in relation to MITs that may have cast doubt on this treatment of gains. Representations were made by the industry which has not resulted in the proposed legislation.
In broad terms, an eligible MIT for the purposes of the legislation is a public unit trust that is listed, widely held or publicly offered. Any managed investment trust which does not fall within the definition will have to continue to rely upon the current case law to determine whether their gains are taxed on revenue or capital account.
In summary the exposure draft legislation provides:
- Eligible MITs may irrevocably elect to apply the CGT provisions as the primary code to gains and losses on disposal of certain assets (primarily shares, units and real property), subject to certain integrity rules
- If an MIT is eligible to make an election but it has not done so, then the consequences are that any gains or losses on the disposal of certain assets (excluding land, an interest in land, or an option to acquire or dispose of such an asset) will be on revenue account (notwithstanding the case law)
- For trusts established prior to the 2009/10 income year, the election has to be made on the latest of the last day in the 3 month period starting on the day on which the provisions commence, the last day of the 2009/10 income year or if the Commissioner allows a later day for the MIT, that later day
- For trusts established in the 2009/10 income year or a later income year the election must be made on or before the day it is required to lodge its income tax return for the income year in which it became a MIT
- However amounts from distributions on and disposals of a “carried interest” in an eligible MIT are included in assessable income, to the extent that they are not already included in the assessable income of the carried interest holder other than under the CGT provisions.