On 1 June 2009, a discussion paper containing further details of the Budget measure allowing MITs to elect a capital account treatment for gains and losses which they derived and incurred (the MIT capital account treatment).
The measure is intended to allow MITs to make an election which has the effect of making the capital gains tax provisions an exclusive code for the taxation of gains derived by the MIT. It is noted that a number of important points of principle have been borrowed from the MIT withholding rules in Subdivision 12-H of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953).
Overview of the proposed measures
In the discussion paper, Treasury outlines some further details on the key requirements which need to be satisfied by an MIT in order to obtain the MIT capital account treatment, namely:
- the MIT needs to be "an eligible Australian MIT"
- the gains or losses are attributable to the disposal of "eligible assets"
- the disposal is an "eligible disposal"
- the trustee of the MIT has made an irrevocable election that the capital gains tax regime will apply in relation to all eligible disposals.
Eligible Australian MIT
In order to be eligible to obtain the MIT capital account treatment:
- the trust must be a unit trust
- the trust must be an "Australian MIT" for the whole of an income year
- the unit trust must not be taxed like a company (ie, it is not a corporate unit trust or public trading trust for the purposes of Division 6B or 6C of the Income Tax Assessment Act 1936 (ITAA 1936)).
The test time for determining eligibility for an income year is at the time of the first "fund payment" (as defined in section 12-405 of the TAA 1953). It is noted in the discussion paper that where no fund payment is made, the relevant test time could be:
- the time of making the first dividend, interest or royalty payment where applicable, or
- the first and last day of the income year.
For a trust to be an Australian MIT, all three of the following conditions need to be satisfied at the relevant test time noted above:
1. Connection with Australia (ie the Australian residence test)
- the trustee of the trust is an Australian resident, or
- the trust's central management and control is in Australia
2. Corporations Act 2001 requirements
- the trust is a 'managed investment scheme' operated by a 'financial services licensee' whose licence covers operating the scheme. The terms 'managed investment scheme' and 'financial services licensee' are defined in sections 9 and 761A of the Corporations Act respectively.
3. Listed and widely held
- 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 (who have a fixed entitlement to a share of the income and capital of the trust), or
- one of the members of the trust is of 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 managed investment scheme 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 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 managed investment scheme and that has at least 50 members
- certain trusts which are directly or indirectly owned (through a chain of trusts) by an entity listed in the immediately preceding four paragraphs.
- Note that there will be an exception which states that requirement 3 above is not satisfied for a trust at a time if, at that time, any one foreign resident individual, directly or indirectly:
- held, or had the right to acquire, interests representing 10 per cent of more of the value of the interests in the trust, or
- had control of, or the ability to control, 10 per cent or more of the rights attaching to membership interests in the trust (ie, units or other beneficial interests in the trust), or
- had the right to receive 10 per cent or more of any distribution of income that the trustee may make.
Treasury has proposed that the only assets which will be eligible for the MIT capital account treatment are:
- investments in real property (land), including interests in real property
- investments in shares in companies
- investments in unit in a unit trust.
The following will not be eligible for the MIT capital account treatment:
- assets that do not satisfy the "eligible investment business" rules in Division 6C of the ITAA 1936
- assets which are debt interests for the purposes of the debt / equity rules in Division 974 of the ITAA 1997
- "Financial Arrangements" under the provisions of Division 230 of the ITAA 1936
- trading stock.
The last carve out is significant and in that it requires taxpayers to still form a view as to whether or not the asset is held as trading stock or solely on capital – one of the key reasons why MITs want this elective treatment is so that complex characterisation issues (as these can be) do not have to be addressed.
In order for a transaction to be eligible, it has to constitute a CGT Event arising from the disposal or realisation of ownership of the asset for CGT purposes.
The rules are intended to apply to MITs which make the election for all eligible disposals of eligible assets from the first income year commencing on or after the 2008-09 income year.
As the election applies across all eligible assets and is irrevocable, prospective MITs should consider:
- whether the proposed measures provide any additional assurance (eg if the position on capital account treatment is strong, is there any benefit in entering into an irrevocable election which could prove limiting at a later stage
- whether the election is optimal having regard to potential revenue losses which might arise on realisation of investments. Clearly, this needs to be weighed up against the longer term benefits of being able to offer discount CGT treatment for qualifying unitholders
- that the "trading stock" carve out provides some residual practical difficulties with the implementation of these rules
the impact on prior year tax returns – it is hoped that entities which make the election would be able to ensure that that if they opt into the regime, prior year returns would not be adjusted by the Commissioner.