Client Update: Proposed changes to taxation of MITs' disposal of investments
14 December 2009
In brief: The Federal Assistant Treasurer has released exposure draft legislation on the taxation of gains and losses on the disposal of investments by managed investment trusts. Under the proposed legislation, trustees of eligible managed investment trusts will be able to elect capital account treatment for gains and losses on certain assets. Partner Michael Rigby and Lawyer Jonathan Lee report.
- What the legislation entails
- Key implications of the proposed changes
- What is an 'eligible MIT'?
- What are 'eligible assets'?
- When does an election have to be made?
- The result of capital account treatment
- Retrospective application
The proposed changes will affect responsible entities, Australian unit trusts that qualify as a managed investment trust (MIT) and investors in those MITs. MITs will be able to elect capital account treatment for gains and losses on disposals of investments. If an election is not made, any gains or losses will be deemed to be on revenue account (although this deeming rule will not apply if the asset is land).
The capital gains tax (CGT) election will generally apply for eligible CGT events from 1 July 2008. Measures that deem certain assets to be on revenue account and amendments concerning 'carried interests' will apply from the date of Royal Asset.
The Government proposes to introduce the Bill in early 2010. The closing date for submissions on the exposure draft is Thursday, 24 December 2009.
In the 2009-10 budget, the Federal Government announced its intention to ensure that the taxation treatment of disposals of assets (primarily shares in a company, units in a unit trust and real property investments) by MITs is consistent with the taxation treatment of disposals of similar investments by complying superannuation funds. These proposed measures build on the concessional withholding tax regime previously introduced by the Government, which is currently applicable to certain distributions of MITs.
Irrevocable CGT election
Eligible MITs can irrevocably elect to apply the CGT provisions as the primary code for gains and losses on disposal of shares, unit trust units, real property and options, or rights to acquire or sell any of these assets. If an election is made, it may be possible for an MIT to pass on to unitholders the benefit of the CGT discount in respect of assets the MIT has held for at least 12 months before disposal.
Deemed revenue treatment
If an MIT is eligible to make an election and they have not done so, any gains or losses on the disposal of eligible assets (excluding land, an interest in land, or an option to acquire or dispose of such an asset) will be on revenue account. Whether land is on revenue or capital account in these circumstances will be determined on general law principles.
Treatment of 'carried interests'
Amounts from distributions on, and disposals of, a 'carried interest' in an eligible MIT will be treated as income to the extent that this is not already the case. Therefore, the CGT discount will not apply to such amounts. Broadly, a carried interest is an interest in an MIT that was acquired because of services provided to the MIT.
Restrictions on prior year amendments
If an election to apply the CGT provisions applies from the 2008-09 income year, the Commissioner will be prevented from amending assessments for income years before that year to recharacterise capital gains arising on the disposal of assets in those earlier years as revenue gains, if capital account treatment would have applied in those earlier years had the election regime applied.
A trust is an 'eligible MIT' if it qualifies for the withholding tax concessions under Subdivision 12-H, Sch 1 of the Taxation Administration Act 1953 (Cth) or if it meets the extended concept of an MIT for the purposes of the new measures.
The extended concept of MITs for the purposes of the new measures includes state-operated trusts and managed investment schemes not required to be registered (eg wholesale trusts). However, this does not extend the definition of MIT for the purposes of the concessional withholding tax regime under Subdivision 12-H, Sch 1 of the Taxation Administration Act.
An Australian resident unit trust will also be an eligible MIT if it is operated by a financial services licensee, and the only members of the trust are MITs, life insurance companies, or complying superannuation funds, complying approved deposit funds or foreign superannuation funds with at least 50 members, or if the trust is a wholesale trust that has at least 50 members.
'Eligible assets' to be covered by capital account treatment are shares, units in unit trusts, land (including an interest in land), and a right or option to acquire or dispose of shares, units or land.
An asset will not be covered by a capital account election if it is a financial arrangement to which Division 230 of the Income Tax Assessment Act 1997 (Cth) applies or a debt interest. For example, the new measures would not generally apply to a bond or other debt funds.
- For MITs that come into existence in the 2009-10 or later income years, the election needs to 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.
- For all other MITs, an election must be made on or before the later of:
- the last day in the three-month period from the commencement of the measure;
- the last day of the 2009-10 income year; or
- a later day allowed by the Commissioner.
If an eligible MIT elects capital account treatment for gains and losses on disposals of investments:
- gains and losses that are treated on capital account will be taxed under the CGT regime; and
- Australian beneficiaries of the MIT that are individuals and superannuation funds should be entitled to the CGT discount on distributions of capital gains they receive if the gains arose from assets held by the MIT for at least 12 months.
The CGT election will generally apply in relation to eligible CGT events from 1 July 2008. Measures that deem certain assets to be on revenue account and amendments concerning 'carried interests' will apply from the date of Royal Asset.
If you have any queries about this, or any other tax matter, please contact any of the people below.
- Martin FryPartner,
Ph: +61 3 9613 8610
- Peter AllenConsultant,
Ph: +61 7 3334 3350