Managed investment trusts - the new regime

Banking Financial Services Royal Commission Funds Tax

In brief

Exposure draft legislation to implement long-awaited changes to the tax regime for managed investment trusts is expected to be issued shortly, ahead of the regime's recently announced start date of 1 July 2015. Partner Katrina Parkyn recaps some of its expected key features and likely impacts on the funds management industry.

How does it affect you?

  • The new tax regime for managed investment trusts will commence on 1 July 2015.
  • Qualifying managed investment trusts that opt into the new regime will no longer be subject to the general rules that apply to the taxation of trusts and will, instead, be subject to their own specific regime.
  • Aside from the technical changes, the new rules may also require amendments to tax disclosures, trust deeds and changes to reporting requirements that will all need to be addressed well ahead of the regime's 1 July 2015 start date.


In May 2010, the then Federal Assistant Treasurer, Nick Sherry, announced the Government's intention to introduce a new tax system for managed investment trusts (MITs).

Although the start date for the new rules has been deferred on a number of occasions1, the current Federal Government recently announced, as part of its 2014-15 budget, a revised start date of 1 July 2015.

Exposure draft legislation to implement the proposed regime is expected to be released in the next couple of months, to allow for consultation ahead of the anticipated start date.

The most significant aspect of the proposed regime is that MITs that meet the qualifying criteria and opt in to the new regime will not be subject to the existing present entitlement rules in Division 6 of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act). They will instead be subject to their own specific MIT rules.

Some of the key aspects of the new regime are expected to include the following.

Key aspects

Defining what constitutes a qualifying MIT

A threshold issue will be the qualifying criteria used to determine whether an MIT can elect into the new regime. Based on announcements to date, these are expected to include:

(i) a 'widely held' requirement;

(ii) a requirement that the trust be 'engaged in primarily passive investment'; and

(iii) a 'clearly defined rights' requirement.

Requirements i and ii pick up on concepts that already feature in the existing capital election regime for MITs and the public trading trust provisions in Division 6C of the 1936 Act. The 'clearly defined rights' requirement is something new and how it is approached will be a key aspect of the exposure draft legislation. A definition that is too prescriptive and does not adequately deal with the range of discretions commonly conferred in 'ordinary' unit trust deeds will undermine the practical impact of the regime.

Changing the definition of public unit trust

It is not expected that the concept of 'eligible investment business', which is used to determine whether or not a public unit trust is a 'trading trust', will be redefined.

However, it is expected that the definition of 'public unit trust' will be relaxed, so a trust will no longer be treated as a public unit trust simply because one or more complying superannuation funds owns 20 per cent or more of the beneficial interests in the trust.

The current 'control test' in Division 6C is expected to remain unchanged, at least for now, although there is the possibility of limited modifications, as recommended by the Board of Taxation, to allow trust (ie flow through) taxation to be retained where an MIT owns, directly or indirectly, 100 per cent of the ownership interests in a single taxable subsidiary.

It remains to be seen whether the Government will extend Division 6C to all widely held MITs (as well as public unit trusts).

Attribution model

The key feature of the new regime will be to allow qualifying MITs to opt out of Division 6 of the 1936 Act, and instead apply what is referred to as an 'attribution model' to determine the tax liability of the MIT and its beneficiaries.

In high-level terms, the attribution model is expected to operate based on the following principles:

  • A beneficiary will be assessable on the amount of the taxable income of the MIT that the trustee allocates to the beneficiary.
  • The trustee must allocate the taxable income of the MIT between beneficiaries on a fair and reasonable basis, consistent with their rights under the MIT's constituent documents and the duties of the trustee.
  • The trustee will be taxed on any taxable income of the MIT that the trustee fails to allocate to beneficiaries within three months of the end of the financial year.

The effect of this is that the existing (and, many would say, out of date) Division 6 concepts of 'present entitlement' and 'trust income' will no longer be relevant to determine the tax liabilities of MIT beneficiaries.

It is not expected that the application of the new attribution regime will be compulsory for qualifying MITs. Rather, attribution taxation will be by way of election, which, once made, will be irrevocable.

It is envisaged that the new rules will provide for cost base adjustments for beneficiaries of an MIT in a wider range of circumstances than is currently the case. However, the extent of these changes remains to be seen.

It is likely that the new rules will impose various statutory reporting requirements on MITs that elect for attribution taxation. MITs will need to consider how any new statutory requirements differ from their existing reporting regimes and what system changes they might need to implement in order to comply.

The draft legislation is expected to incorporate 'safe harbour' rules to enable MITs that fail to satisfy the qualifying criteria to maintain their tax treatment, provided the failure was a result of inadvertent or minor circumstances and reasonable steps are taken to rectify the failure in a reasonable time.

No doubt the draft legislation will also include various integrity measures, which are likely to include provisions to address streaming of tax benefits (including situations where the rights attaching to units are structured such that taxable income of the trust is attributed to a tax exempt entity, while other unitholders receive tax deferred or tax exempt distributions).

Dealing with 'unders' and 'overs'

In a bid to ease the compliance problems currently faced by MITs in preparing accurate end-of-year trust income and taxable income calculations in the required timeframes, it is proposed to legislate for the treatment of 'unders' and 'overs'.

This is an attempt to deal with what the Board of Taxation called 'the practical reality for MITs…that 'overs' and 'unders' occur frequently due to incorrect information, errors and incorrect estimations at the time that distribution statements are prepared'. The Board also recognised that 'requiring MITs to reissue distribution statements and beneficiaries to seek to amend tax returns for 'unders' and 'overs' that fall within the common error range for MITs would impose a compliance burden and cost on MITs and beneficiaries and an administrative cost on the ATO which is likely to outweigh any revenue that may be collected'.

To address this, the new rules are expected to provide for all 'unders' and 'overs', however arising, below a de minimus threshold to be carried forward into the next income year following identification of the 'under' or 'over'. Where an 'under' or 'over' exceeds the de minimus threshold, the trustee must either reissue distribution statements and/or attribution statements to beneficiaries or (in the case of 'unders' only) elect for the trustee to be taxed at the top marginal rate.

Fixed trusts

It is anticipated that a qualifying MIT that has clearly defined entitlements will be deemed to be a 'fixed trust' for all relevant tax purposes. This will provide welcome relief for the funds management industry and end the present uncertainty as to whether an MIT qualifies for fixed trust status.

The existing definition of fixed trust is interpreted in a very narrow way, which means that very few trusts are capable of satisfying it. For example, the courts have held that where a trust has a trust deed that is capable of being amended, the trust is not a fixed trust.2 Given that most trust deeds contain a power to amend, this makes it practically impossible for most trusts to meet the strict technical criteria to be a fixed trust.

While the Commissioner does have a discretion to deem a trust to be a fixed trust (where the technical requirements are not satisfied but the Commissioner is satisfied that it is appropriate for the trust to be treated as fixed), the only way to be sure that the discretion would be exercised in a particular case is to apply for a private ruling from the Commissioner, requesting him to exercise the discretion. By deeming qualifying MITs to be fixed trusts, the need for private rulings on this issue will be removed.

Impact on existing tax measures for MITs

The new regime is intended to supplement, rather than replace or amend, the existing tax measures that have been introduced for MITs in recent years; most notably, the MIT withholding tax regime for payments to non-residents and the capital account election.

What's next?

No doubt the exposure draft legislation, once it is issued, will throw up a myriad of technical issues for consideration. While by no means exhaustive, some of the key issues that are expected to require careful analysis will include:

  • The 'clearly defined rights' requirement and whether the proposed requirement, as drafted, is workable in practice. Understanding how the requirement will apply to existing trust deeds will be critical in determining this.
  • The impact of any changes to Division 6C. Given the complexities of the existing Division 6C and the various structures that have developed over time to deal with those complexities, careful analysis will be required to determine how any proposed changes might impact (positively or negatively) on existing arrangements.
  • Understanding how the attribution model (particularly the regime for dealing with 'unders' and 'overs') will work in practice will be critical.

Aside from the purely technical aspects of the new MIT regime, its introduction will have a significant impact on compliance and reporting requirements for entities subject to the new rules. The changes will impact on both existing and new funds.

Some issues to consider may include:

  • whether there is a need to update the tax disclosure statements in existing offer documents;
  • whether trust deeds will require amendment to enable compliance with the new regime, and, if so, what are the commercial, income tax and stamp duty consequences of doing this; and
  • how the new regime will impact on reporting requirements.

The release of exposure draft legislation is expected shortly. The Allens Tax team will then provide an updated analysis of the proposed regime, and how it will affect the funds management sector and those who invest in trusts that are impacted by the new regime.



  1. The new regime was originally anticipated to commence operation on 1 July 2011.
  2. Colonial First State Investments Ltd v Commissioner of Taxation [2011] FCA 16.