- New Attribution Managed Investment Trust Regime (Full Report)
On 3 December 2015 the government introduced the Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015 together with three supporting Bills, to implement a new tax regime for attribution managed investment trusts (AMITs) and to make several amendments to the existing tax rules governing trusts.
It is expected the Bills will be passed by Parliament in the Autumn 2016 sitting.
Fund managers will need to thoroughly consider the implications of the AMIT regime and the other amendments. Managed Investment Trusts (MIT) should generally welcome the new AMIT regime as it provides greater certainty and consistency. Decisions will need to be made now about the 2016 Financial Year.
Fund managers will need to determine whether they elect into the AMIT regime and if they do, whether their documentation, processes and templates are ready for the year end. More specifically matters to which consideration may be given include:
- whether a trust will cease to be a corporate unit trust or a public trading trust and if so whether it will become a MIT
- whether a trust will become a MIT due to the expansion of the definition of MIT
- whether a trust will derive any non-arm’s length income
- whether the members of a MIT have clearly defined rights and whether it is eligible to be an AMIT
- if a MIT is eligible to be an AMIT, whether it should become one and if so from what date (should early adoption be considered)
- if a MIT has multiple classes of members, whether each class should be treated as separate AMIT
- whether a trust deed will need to be amended to facilitate to the attribution model, and if so whether this will have income tax and stamp duty consequences (i.e. will amendments to the trust deed constitute a resettlement)
- whether the product disclosure statements and marketing materials need to be updated
- what changes are required to the accounting and tax management systems to apply the AMIT regime (e.g. determining components, preparation of AMMA statements and withholding obligations)
1 The AMIT regime
Trusts which qualify as AMITs (refer 1.1) will be able to elect to apply the new AMIT regime from 1 July 2015.
Trusts which are not subject to the new AMIT regime will continue to be taxed in accordance with the existing tax rules governing trusts.
Key features of the new AMIT regime are:
- an attribution model will apply instead of the general trust provisions in Division 6 of Part III of the Income Tax Assessment Act 1936 (refer 1.3)
- rules for dealing with variances in the amounts attributed to members of an AMIT trust (such variances are referred to as ‘overs’ and ‘unders’) (refer 1.4)
- the cost base of membership interests may be increased or decreased, broadly, where the taxable distribution is respectively more or less than the cash distribution; (refer 1.5)
- tax-free and tax-deferred distributions will be non-assessable (refer 1.6)
- AMITs with multiple classes of membership interests can make an irrevocable choice to treat each class as a separate AMIT for the purposes of the AMIT regime (refer 1.7)
- debt-like trust instruments issued by an AMIT will be treated as debt interests rather than as membership interests for the purposes of determining whether a managed investment trust qualifies as an AMIT and applying the attribution model (refer 1.8)
- AMITs will be deemed to be fixed trusts for the purposes of the income tax law (refer 1.9)
- AMITs will be deemed to be widely held unit trusts (refer 1.10)
- the dividend, interest and royalty withholding tax provisions and the MIT withholding tax provisions will be amended so they operate with the attribution model (refer 1.11)
1.1 Qualification as an AMIT
A trust will qualify as an AMIT if:
- the trust is a MIT
- the rights to income and capital arising from each of the membership interests in the trust are clearly defined (refer 1.20
- the trustee of the MIT makes an irrevocable choice to apply the AMIT regime
1.2 Clearly defined interests
A legislative safe harbour provides that members of a trust will be taken to have clearly defined interests to the income and capital of a trust if:
- the trust is a managed investment scheme that is registered under section 601EB of the Corporations Act 2001
- the rights to income and capital arising from each of the membership interests in the trust are the same, disregarding the following:
- fees or charges imposed by the trustee on members of the trust
- issue and redemption prices of membership interests in the trust
- exposure of membership interests in the trust to foreign exchange gains and losses
If a trust does not come within one of the safe harbours, then the ordinary meaning of clearly defined interests must be considered. Factors included in the Explanatory Memorandum to the Bills as being relevant in this regard include:
- whether the constituent documents of the trust provide an objective benchmark for the trustee to attribute amounts to members annually
- whether, assuming that the trust is an AMIT for the income year in which the time occurs, the amount of each member component for the income year of each member of the trust can be worked out on a fair and reasonable basis in accordance with the constituent documents of the trust
- whether the right of each member of the trust to the income and capital of the trust can be materially diminished or expanded through the exercise of a power or right
- whether the trustee has an obligation to treat members who hold membership interests in the same class equally and members who hold membership interests in different classes fairly
- whether the trustee can easily modify the rights of those membership interests to the income and capital of the trust by changing the constituent documents of the trust
LCG 2015/D4 provides guidance on how the ATO will assess whether the rights to income and capital are clearly defined. In particular, it provides a power of a trustee of a MIT that could materially diminish or expand the interests of its members will be treated as a mere theoretical possibility (and therefore will be disregarded), unless the power is actually exercised. It also includes a list of trustee powers and features of a trust which are consistent with members having clearly defined rights.
1.3 The attribution model
Under the current tax law, MITs and their members are subject to the general trust provisions in Division 6 of Part III of the Income Tax Assessment Act 1936. Under these provisions:
- the assessable income of members for an income year includes their share of the MIT’s net (taxable) income that is proportional to the share of the MIT’s (distributable) income to which they are presently entitled
- the trustee is taxed on any of the MIT’s net (taxable) income which is not included in the assessable income of a member
The AMIT regime introduces an attribution model whereby the trustee attributes amounts of ‘trust components’ of a particular character to members on a ‘fair and reasonable’ basis in accordance with the AMIT’s constituent documents. The amounts so attributed are referred to as ‘determined member components’.
There are four categories of trust components:
- assessable income
- exempt income
- non-assessable non-exempt income
- tax offsets
Examples of amounts of assessable income that are of a particular character which typically need to be identified by an attribution MIT include:
- discount capital gains
- non-discount capital gains
- dividends, interest or royalties that are subject to withholding tax
- foreign source income
The trust components of each particular character must be calculated as if the trustee was liable to pay tax and was an Australian resident. The sum of all trust components relating to the assessable income of an AMIT for an income year must equal the AMIT’s taxable income for the income year.
In determining the amounts of trust components of a particular character, the following deduction allocation rules must be followed:
- deductions that relate directly to an amount that is a character of assessable income must initially be applied only to reduce that character of assessable income
- deductions that relate to two or more amounts that are characters of assessable income must be apportioned between those amounts and applied to reduce those characters of assessable income on a reasonable basis
- any remaining deductions (after applying the first two rules) must be apportioned between the remaining amounts that are characters of assessable income on a reasonable basis
As noted above, the attribution of trust components of a particular character must be done on a fair and reasonable basis in accordance with the AMIT’s constituent documents. LCG 2015/D7 provides guidance on the meaning of attribution on a fair and reasonable basis. It notes that the constituent documents include the trust constitution or deed and any supporting documentation, such as a product disclosure statement or other document that sets out the terms of the members' interests. Importantly, it further notes there is no requirement that the constituent documents refer to the AMIT regime or otherwise to attribution for tax purposes.
It is specifically provided that the attribution of trust components of a particular character must not involve streaming based on the tax characteristics of a member. However, attribution that reflects a member’s economic interest in AMIT’s income or assets should not constitute streaming. This is acknowledged in LCG 2015/D7.
There are three safe harbours which allow trustees to:
- direct the proceeds of selling particular assets to members who are redeeming their membership interests
- direct unders or overs to members who were not members at the time when the unders or overs arose
- direct capital gains to members who were not members at the time the capital gain or capital loss was made
The trustee of an AMIT must provide members with an AMIT member’s annual statement (AMMA statement), which details the determined member components attributed to them, by no later than three months after the end of the income year. A revised AMMA statement can be issued within four years from the end of the AMIT’s income year to which it relates.
A member can challenge the determined member components on the AMMA statement. The member must provide written notification to the trustee and the ATO within four month from the end of the member’s income year. The notification must state what the member considers the determined member component should be and the reasons why the attribution by the trustee was, broadly, not fair and reasonable. If the challenge is upheld, the trustee may be liable for tax on the differences.
1.4 Unders and overs
The AMIT rules contain rules for dealing with variances in trust components for an income year that are discovered after the AMMA statements for the year have been issued. A variance is an over if the relevant trust component was overstated and an under if the relevant trust component was understated.
When a trustee of an AMIT discovers an under or over for an income year (the base year), the trustee can either:
- reissue AMMA statements for the base year to members of the AMIT in respect of that base year, which has the effect of reconciling a variance in the income year to which the under or over relates
- attribute the under or over to members in the discovery year by adjusting the trust component of the relevant character in that discovery year, which has the effect of reconciling a variance in the income year in which the variance is discovered
If an under or over is the result of an intentional or reckless disregard of the law by the trustee, the trustee may be liable to a penalty. LCG 2015/D10 provides guidance on what behaviours of a trustee may be considered reckless.
1.5 Cost base adjustments
Under the current tax law, the cost base of membership interests in a trust are reduced in relation to certain non-assessable distributions (referred to as tax deferred distributions) made by the trust. If the cost base is reduced to nil, further tax deferred distributions result in a capital gain. However, the cost base of membership interests are not increased to the extent that the assessable amount in relation to a distribution exceeds the cash or property distributed.
Under the new AMIT regime, the cost base adjustment mechanism will be more symmetrical as it provides for both increasing and decreasing adjustments to the cost base of membership interests. Each year (or just before certain CGT events happen in relation to a membership interest) the CGT cost base will be adjusted by the AMIT cost base net amount. The AMIT cost base net amount will be equal to the excess or shortfall of the AMIT cost base reduction amount compared to the AMIT cost base increase amount.
If the AMIT cost base net amount is an excess, then the CGT cost base of the membership interest will be reduced by the AMIT cost base net amount (but not beyond nil). To the extent an AMIT cost base net amount exceeds the cost base, then the member will make a capital gain equal to that excess if the membership interest is a post-CGT asset.
If the AMIT cost base net amount is a shortfall, then the CGT cost base of the membership interest will be increased by the AMIT cost base net amount.
The AMIT cost base reduction amount for an income year will be equal to the total of:
- any money and the market value of any property that the member starts to have a right to receive from the AMIT in the income year; plus
- any tax offsets attributed to the member in relation to the AMIT in the income year
The AMIT cost base increase amount for an income year will be equal to the total of the following amounts worked out on the assumption that the member is an Australian resident:
- all amounts (disregarding the AMIT’s net capital gain for the income year) included in the member’s assessable income or non-assessable non-exempt income for the income year; plus
- the amount of determined capital gain component (inclusive of the discount component of a discount capital gain) attributed to the member in relation to the AMIT for the income year
Where membership interests are held on revenue account and are not Division 230 financial arrangements, the revenue cost base of the membership interest will be increased or reduced respectively by the AMIT cost base net amount excess or shortfall. To the extent an AMIT cost base net amount exceeds the revenue cost base, then the excess will be included in the member’s assessable income.
The amount of the AMIT cost base net amount for an income year is required to be disclosed on the AMMA statement.
1.6 Tax free and tax deferred distributions
Under the AMIT regime, tax free and tax deferred distributions on membership interests in an AMIT that are neither trading stock nor Division 230 financial arrangements will not be included in the member’s assessable income under provisions outside of the AMIT regime.
Transitional rules provide that tax free and tax deferred distributions paid on or after 1 July 2011 and before the starting time will be non-assessable if the trust becomes an AMIT for the starting income year, unless the distributions were included in the assessable income of the recipient member. The starting income year is the first income year starting on or after 1 July 2017, unless the trustee of a MIT makes a choice to apply the AMIT regime in respect of:
- the 2015-16 income year, in which case the starting income year is the first income year starting on or after 1 July 2015
- the 2016-17 income year, in which case the starting income year is the first income year starting on or after 1 July 2016
1.7 AMITs with multiple classes of membership interests
AMITs with multiple classes of membership interests can make an irrevocable choice to treat each class as a separate AMIT for the purposes of the AMIT regime. If this choice is made, the trustee will need to work out the taxable income or tax loss for an income year separately for each class.
A class may be supported by solely segregated assets or pooled assets, or by a mixture of both. If the choice is made to treat each class as a separate AMIT then:
- income, expenses and other tax attributes in relation to pooled assets will need to be allocated to each class on a fair and reasonable basis
- income, expenses and other tax attributes in relation to segregated assets will need to be allocated to the classes to which they relate
- expenses related to more than one class will need to be allocated to the relevant classes on a fair and reasonable basis
- carried forward tax attributes (such as tax losses or capital losses) must be allocated between classes on a fair and reasonable basis
- notional transactions between classes (e.g. transfers of segregated assets between classes) must be recognised for income tax purposes
If the choice is made to treat each class as a separate AMIT, each class does not need to separately qualify as an AMIT. Where a MIT is eligible to be an AMIT and the trustee chooses for the MIT to be an AMIT, the whole MIT will be an AMIT including all of its classes.
The choice to treat each class as a separate AMIT does not affect the administrative requirements that apply to trusts. AMITs will be required lodge single income tax returns, Business Activity Statements, Annual Investment Income Reports and Foreign Account Tax Compliance Act reports and will have a single public officer and tax file number.
1.8 Debt-like trust instruments
A debt-like trust instrument in an AMIT is treated as a debt interest in the AMIT. This will be particularly relevant for the application of the thin capitalisation provisions.
Distributions on debt-like instruments:
- are treated as interest for the purposes of the interest withholding tax provisions
- may be treated as a deduction in working out the trust components of the AMIT
A membership interest in an AMIT will be debt-like instrument if it has all of the following features:
- any distribution relating to the interest is fixed, at the time the interest was created, by reference to the amount subscribed for the interest
- any distribution relating to the interest is made solely at the discretion of the trustee of the AMIT
- the interest, and any other interest in the AMIT that is in the same class as the interest, would rank above all other membership interests (other than other debt-like trust instruments) in the AMIT in the event
- the AMIT ceases to exist
- where the AMIT is a managed investment scheme, the scheme is under administration or is being wound up
- the constituent documents of the AMIT prohibit distributions on other membership interests in the AMIT or membership interests in other entities that are stapled to membership interest in the AMIT before distributions on the debt-like trust instruments.
1.9 Deemed fixed trust treatment
AMITs will be deemed to be fixed trusts and members of AMITs will be deemed as having vested and indefeasible interests in a share of the income and capital of the AMITs throughout the income year. This will provide certainty in relation to the application of:
- the trust loss rules
- the holding period rule for accessing franking credits
- certain CGT roll-overs (e.g. CGT scrip-for-scrip roll-over)
1.10 Deemed widely held treatment
AMITs will be deemed to be widely held unit trusts for the purposes of applying the trust losses rules.
Where the trustee of an AMIT with multiple classes of membership interests has chosen to treat each class of membership interest as a separate AMIT, each class is taken to be a widely-held unit trust for the purposes of the trust losses rules.
1.11 Withholding taxes
Currently, the trustee of a MIT has withholding obligations in relation to dividend, interest or royalty income it pays foreign residents or to which they become presently entitled, and in relation to fund payments that it makes to entities whose address, or place for payment, is outside Australia.
The operation of the withholding provisions will be modified so that they operate with the attribution model. When an AMIT gives a member an AMMA statement, the trustee will be deemed to have made a payment to the member. The amount of the deemed payment is, broadly, equal to the excess of the total relevant determined member components that are attributed to the member as shown on the AMMA statement over the total amount of any pre-AMMA actual payments made to those members. The trustee of an AMIT that makes a deemed payment must pay the ATO an amount equal to the amount the trustee would have to withhold if the deemed payment was an actual payment.
The current withholding obligations will continue to apply to actual payments or present entitlements made by an AMIT prior to the issuance of the relevant AMMA statement. However, a post-AMMA actual payments or present entitlements in respect of a deemed payment will not be subject to withholding if:
- the actual payment and the deemed payment are both attributable to the same member component for the AMIT
- the actual payment is made at the same time as, or after, the time the AMMA statement is given to the member
2. Non-arm’s length income rule for MITs
The trustee of a MIT will be taxed at 30 per cent on amounts determined by the Commissioner to be ‘non-arm’s length income’ less any deductions attributable only to that income.
Non-arm’s length income is defined as income that:
- is derived from a scheme the parties to which were not dealing with each other at arm’s length in relation to the scheme
- exceeds the amount that might have been expected to have been derived if those parties had been dealing with each other at arm’s length
- is not an amount that is specifically excluded from being non-arm’s length income
There are five types of income that are specifically excluded from being non-arm’s length income:
- distributions from corporate tax entities
- a distribution from a trust that is not a party to the non-arm’s length scheme
- a return on a debt interest if the rate (expressed on an annual basis) of the return does not exceed the greater of:
- the benchmark rate of return for the debt interest
- the base interest rate for the day on which the return is paid or provided, plus three percentage points (i.e. a rate of return equal to the rate of the shortfall interest charge)
- a distribution from a trust (the underlying trust) that is a party to the non-arm’s length scheme, of arm’s length income of the underlying trust (determined assuming the underlying trust is a MIT)
- a distribution from a trust that is a party to the non-arm’s lengths scheme (the first amount) where the MIT’s assessable income includes a distribution from another trust (whether or not the other trust is a party to that scheme) (the second amount) and it is reasonable to conclude that the second amount would have been higher but for the first amount
To prevent double taxation, the amount of non-arm’s length income that a trustee is taxed on is taken to be an ‘over’ (refer 1.4) in the income year in which the determination is made.
The non-arm’s length income rule will apply for income years starting on or after:
- 1 July 2016
- 1 July 2015, if the trustee has chosen to apply the AMIT regime for its 2015-16 income year which starts on or after 1 July 2015
However, it will not apply to non-arm's length income derived before the start of the 2018-19 income years from a scheme that a MIT became a party to prior to 3 December 2015 (when the Bill was introduced into Parliament)
LCG 2015/D15 provides guidance on when the Commissioner will make a determination that income is not arm’s length income.
3. Definition of a MIT
The definition of a MIT is to be transferred from Schedule 1 of the Taxation Administration Act 1953 into new Subdivision 275A of the Income Tax Assessment Act 1997. In addition, the amendments note below will be made to definition of a MIT.
3.1. Expansion of the start-up period
The start-up period during which trusts are taken to meet the widely-held and not closely-held requirements will be extended to a maximum of two years (the year of formation and the following income year) from the existing maximum of 18 months (the year of formation and the following six months).
3.2 Extent the list of eligible investors
A registered MIT can qualify as widely-held if:
- one of the entities that is a member of the trust is an eligible investor (specified widely-held entities) that holds a 25 per cent interest in the trust
- no other single entity holds more than a 60 per cent interest in the trust
The list of eligible investors in a MIT will be expanded, with effect from 1 July 2014, to include:
- foreign life insurance companies regulated under a foreign law
- 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
- the remaining membership interests are owned by a general partner that habitually exercises the management power of the limited partnership
- an entity that is, directly or indirectly, a wholly owned subsidiary of an entity that is an eligible investor, or two or more entities that are eligible investors
3.3 Clarify the operation of section 275-45
A trust can qualify as a MIT, in relation to an income year, if it is covered by section 275-45. Currently, section 275-45 is expressed in terms of the trust having a single member that qualifies as an eligible investor in a MIT. The section will be modified to clarify that it applies if the trust has more than one member, where all of the members are entities that qualify as eligible investors in a MIT.
3.4 Clarify the operation of section 275-50
A trust can qualify as a MIT, in relation to an income year, if it is covered by section 275-50 in relation to an income year. A trust is covered by section 275-50 if the trustee does not make a fund payment during an income year, where the trust would be a MIT if the trustee had made a fund payment during the income year. The section will be modified to clarify that it operates appropriately where a trust has been in existence for only part of the income year.
4. Repeal Division 6B
Division 6B, which taxes corporate unit trusts similarly to companies, will be repealed with effect from 1 July 2016.
Transitional rules will allow trusts which cease to be subject to Division 6B to make franked distributions to unitholders until 30 June 2018.
5. Removal of the 20 per cent tracing rule in Division 6C
Division 6C taxes public trading trusts similarly to companies.
From 1 July 2016, a trust will no longer be a public unit trust for the purposes of Division 6C because 20 per cent or more of its membership interests are held by tax exempt entities and complying superannuation entities which are entitled to a refund of franking credits.
If a trust is not a public unit trust it will not be a public trading trust even if it carries on trading business.
Transitional rules will allow trusts which cease to be subject to Division 6C to make franked distributions to unitholders until 30 June 2018.