• Amendments to the definition of managed investment trust (MIT)

    The definition of a MIT was amended as part of the new tax system for MITs that came into effect in May 2016. There were also significant amendments in 2010.

    Amendments in 2016

    As part of the new tax system for MITs in 2016, the definition of a MIT was moved from the withholding provisions in Subdivision 12-H of Schedule 1 to the Tax Administration Act 1953 into Subdivision 275-A of the Income Tax Assessment Act 1997 (ITAA 1997).

    Some minor changes were made to the definition at the time of its relocation. Broadly, the changes:

    • clarify the scope of the rule that allows a trust whose only members are specified widely held entities or managed investment trusts to qualify as a MIT
    • expand the list of specified widely held entities to include foreign life insurance companies regulated under foreign law, certain limited partnerships and entities directly or indirectly wholly owned by specified widely held entities
    • extend the start-up period during which trusts do not need to meet the widely held and not closely held requirements to qualify as a MIT
    • clarify the operation of the rule that allows a trust to qualify as a MIT in some circumstances where no fund payment is made in relation to an income year.

    Amendments in 2010

    In 2010 amendments were made to the definition of a MIT in Subdivision 12-H of Schedule 1 of the Tax Administration Act 1953 (TAA). The changes also applied to the capital treatment rules in Division 275 of the ITAA 1997.

    Broadly, the key changes were:

    • the extension of the definition to cover wholesale managed investment schemes (MISs) and government-owned MISs
    • the exclusion of trading trusts and trusts that carry on a trading business
    • the exclusion of closely held trusts
    • the modification of the widely held requirements
    • the inclusion of a requirement that a substantial proportion of the trusts' Australian assets are managed in Australia
    • an expansion of the list of specified entities for the widely held requirements to include foreign government pension plans, sovereign wealth funds and widely held foreign equivalents of a managed investment scheme.

    Qualifying as a MIT in 2010

    Under the 2010 amendments, for a trust to qualify as a MIT in relation to an income year, the following criteria (set out in previous subsection 12-400(1) TAA) had to be satisfied:

    • Either the trustee had to be an Australian resident or the central management and control of the trust had to be in Australia at or before the time of the first fund payment in relation to the income year.
    • The trust could not be:
      • a trading trust (in the case of a unit trust) in relation to the income year, or
      • carrying on or able to control a trading business (in the case of other trusts) at any time in the income year.
       
    • A significant proportion of the investment management activities in respect of all specified assets of the trust had to be carried out in Australia throughout the income year.

    At the time of the first fund payment, the trust had to be a MIS, as defined by section 9 of the Corporations Act 2001 (Corporations Act):

    • At the time of the first fund payment, the trust had to be either a registered MIS or a MIS that met additional requirements and was not required to be registered.
    • The trust had to satisfy a relevant widely held requirement in relation to the income year.
    • The trust could not be closely held at any time in the income year, and
    • If the trust was an unregistered MIS, it had to satisfy licensing requirements at the time of the first fund payment.

    Specified assets

    The specified assets are assets that, at any time in the income year, were:

    • situated in Australia
    • taxable Australian property, or
    • shares, units or interests listed for quotation in the official list of an approved stock exchange in Australia.

    Licensing requirements

    A trust satisfied the licensing requirements if it was operated or managed by:

    • the holder of an Australian Financial Services Licence
    • an authorised representative of the holder of an Australian Financial Services Licence
    • an entity that would be required under the Corporations Act to hold a financial services licence but for subsection 5A(4) of that Act (about the Crown not being bound by certain requirements of that Act), or
    • an entity that is a wholly-owned subsidiary of such an entity and that would be required to hold a financial services licence but for an instrument issued by ASIC.

    MISs that are not required to be registered (wholesale trusts)

    A trust that was not registered in accordance with section 601ED of the Corporations Act had to meet additional requirements at the time of the first fund payment in order to be a MIT.

    The additional requirements were:

    • the trust was not required to be registered in accordance with section 601ED of the Corporations Act because of subsection 601ED(2) of that Act (whether or not it is registered)
    • no more than 20 members of the trust were 'retail clients', and
    • 'retail clients' had a total 'participation interest' in the trust of no more than 10%.

    Retail clients are members that became members because a financial product or a financial service was provided to, or acquired by, them as a retail client (within the meaning of sections 761G and 761GA of the Corporations Act).

    A trust that met these requirements (irrespective of whether the trust was registered) is a 'wholesale trust'.

    Participation interest

    An entity's 'participation interest' in a MIT is the greatest of the following percentages:

    • the percentage of the value of the interests in the trust that the entity, directly or indirectly holds, or has the right to acquire
    • the percentage of the rights attaching to membership interests in the trust that the entity, directly or indirectly has the control of, or the ability to control, and
    • the percentage of any distribution of income that the trust may make that the entity, directly or indirectly has the right to receive.

    Widely held rules

    The widely held rules introduced in 2010 have not been amended (see Widely held requirement).

    Closely held restriction

    The closely held restriction introduced in 2010 has not been amended (see Closely held restriction).

    See also:

    Definition prior to 2010

    Prior to the 2010 amendments, a trust was a MIT if:

    • at or before the time of the first fund payment in relation to an income year, the trustee was an Australian resident or the central management and control of the trust was in Australia
    • at the time of the first fund payment, the trust was a MIS as defined by section 9 of the Corporations Act 2001 (Corporations Act)
    • the trust was operated by a financial services licensee as defined by section 761A of the Corporations Act 2010, and
    • the trust met one of the widely held requirements.

    However, genuine collective vehicles that were not registered under the Corporations Act, and were not required to be registered (certain wholesale MISs and government-owned MISs), could not satisfy that MIT definition.

    The 2010 amendments extended the definition of MIT to enable certain wholesale MISs and government-owned MISs to qualify as MITs. This was to ensure that the MIT withholding tax rules applied consistently to all widely held collective investment vehicles undertaking passive investments.

    The changes also included an 'Australian management' requirement in the MIT definition to enhance the competitiveness of the Australian managed funds industry, and more closely aligned the trusts covered by the MIT withholding tax regime with the trusts eligible to apply the MIT capital treatment rules.

      Last modified: 12 May 2016QC 23757