In brief
New legislation has been introduced into Federal Parliament that will replace the existing taxation regime for trusts which qualify as Attribution Managed Investment Trusts. Partner Charles Armitage and Managing Associate Judith Taylor look at what is different from the original Exposure Draft.
How does it affect you?
- The AMIT regime will apply to qualifying trusts, on an elective basis (the Exposure Draft envisaged a compulsory regime for qualifying AMITs), for income years commencing on or after 1 July 2016, although trustees may elect to apply it to their 2015-16 income year commencing on or after 1 July 2015. Any election to apply the AMIT regime to a trust will be irrevocable.
- The ATO has also released 'Draft Law Companion Guidelines' regarding some of the key elements of the AMIT regime and has called for submissions from industry by 15 January 2016. The draft Guidelines state that if a taxpayer relies on the draft guidelines in good faith before they are finalised and the law is enacted as introduced, the taxpayer will not have to pay any underpaid tax, penalties or interest in respect of matters covered by the guidelines if they do not correctly state how a relevant provision applies to the taxpayer.
- It is envisaged that the draft guidelines might eventually take the form of Public Rulings when the legislation is enacted.
Background
The long-awaited new AMIT regime for the taxation of managed investment trusts (MITs), which will replace the existing Division 6 'present entitlement' provisions for certain MITs, was introduced into Parliament on 3 December 2015 in the Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015 and it contains a number of differences from the original Exposure Draft (see our Focus: Managed investment trusts exposure draft legislation: impacts on funds management industry), which, in the most part, appear to be improvements.
What else is new?
- The list of entities that will qualify as 'eligible investors' for the purposes of the 'widely-held' requirements for MITs will be further expanded to include a limited partnership, if, throughout the income year:
- at least 95 per cent of its membership interests are owned, directly or indirectly, by eligible investors; and
- the remaining membership interests are owned by a general partner that habitually exercises the management power of the limited partnership.
- Under new safe harbour rules, the following trusts will automatically satisfy the requirement that the rights to income and capital are 'clearly defined':
- trusts that are managed investment schemes registered under the Corporations Act 2001 (Cth); and
- trusts where the rights to income and capital are the same for each membership interest in the trust.
Otherwise, taxpayers will have to refer to the ATO Guidelines (when they are released in their final form) for assistance in ascertaining whether beneficiaries have 'clearly defined rights'.
- Trustees can irrevocably elect to have classes of units treated as separate trusts. This should enable holders of a particular class of units to have exclusive exposure to the performance of specific assets, which is difficult to achieve in practice under Division 6. However, for the purpose of determining whether a MIT qualifies as an AMIT, and is thus eligible to make this election, a trust with multiple classes must first satisfy all of the requirements for being an AMIT as a single entity. For example, the MIT, as a whole, must satisfy the 'clearly defined rights' requirement.
- AMITs that are not subject to the MIT withholding tax rules will be required to pay tax on amounts of Australian-sourced trust income attributed to non-resident unitholders with a statutory right of indemnity against non-resident unitholders for the tax paid.
- There will be a four-year time limit within which trustees can fix mistakes made in AMIT Member Annual Statements.
This measure will apply to all MITs (ie not just AMITs).
Other issues: Arm's length rule
The proposed new anti-avoidance rule that will permit the Commissioner to tax 'non-arm's length income' received by a MIT at the rate of 30 per cent (the original Exposure Draft envisaged 49 per cent) will apply to all MITs, irrespective of whether they qualify as AMITS, although pre-existing MITs will not be subject to this rule until the income year beginning on 1 July 2018.
Actions for trustees
Trustees of MITs will need to:
- assess the potential impact of the new regime on current MITs;
- review existing trust deeds for eligibility for the AMIT regime;
- decide whether changes will need to be made to trust deeds to qualify for the AMIT regime;
- consider whether an election might be made for the AMIT regime to apply to a MIT and when any such election should take effect; and
- review existing arrangements to ensure that they comply with the new arm's length requirements.