Our priority is to provide support and assistance to taxpayers wanting to comply with the law. We welcome engagement with taxpayers, advisers and industry associations who wish to evaluate tax risk in relation to particular circumstances.
The following information summarises our compliance approach in three key areas affected by the new rules for MITs:
- Post-balance date variances in member entitlements
- Distributions in excess of beneficiaries’ shares of net income
- AIIR requirements for AMITs
'Unders' and 'overs' arise where net income and tax offset entitlement amounts reported to unit holders understate or overstate the amounts correctly determined under the law.
The existing trust income rules in Division 6 of the Income Tax Assessment Act 1936 make no provision for unders and overs adjustments. That is, Division 6 does not provide for amounts of over- or under-reported net income for an earlier year to be taken into account in a later year.
The new MIT rules have specific provisions for dealing with unders and overs of amounts attributed to members, allowing AMITs (and their members) to bring those under and over amounts to account in a later income year.
For MITs that choose to apply the new AMIT rules from 1 July 2015 or 1 July 2016, we will not generally apply compliance resources to specifically review prior-year under and over amounts.
For MITs that do not elect into the new rules from these dates, we expect trustees to advise unit holders of their net income entitlements based on the trust taxation rules set out in Division 6. However, while we reserve the right to focus on this issue in specific cases, it will not be a focus area in allocating compliance resources for income years ending before 1 July 2017.
From 1 July 2017, we will be monitoring the treatment of unders and overs by trusts not electing into the new rules and allocating compliance resources based on overall risk management principles.
Trust distributions in excess of the amounts assessed to beneficiaries are known as tax deferred distributions (TDDs).
Generally, we will not seek to assess TDDs as ordinary income where taxpayers hold interests in trusts as:
- investments, either on capital account, or subject to the CGT primary code rules applying to superannuation entities, MITs and the superannuation business of life insurance companies, and have consistently treated the TDDs as non-assessable amounts under the CGT cost base and reduced cost base rules
- revenue assets (not subject to CGT primary code rules), and have taken TDDs, including CGT concessional amounts, fully into account in working out revenue gains and losses on those interests.
Situations where the assessing of TDDs as ordinary income will be considered include (but are not necessarily limited to):
- the type referred to in Taxation Ruling IT 2512, which deals with ‘Financing unit trusts’, and similar arrangements involving the use of a trust structure to raise finance where TDDs are received in lieu of interest or similar amounts that would normally form part of assessable income
- the type referred to in Taxation Ruling TR 2014/D1, which involves the use of trusts to make distributions to persons as a reward for the performance of services, whether as an employee or otherwise
- arrangements where there may have been tax planning to maximise the extent to which trust distributions are characterised as TDDs.
The assessability of TDDs will also be considered where they relate to trust interests that are:
- subject to the taxation of financial arrangements (TOFA) regime and treated as assessable income under TOFA rules
- held as trading stock – in these situations a corresponding closing stock adjustment may also be appropriate in some situations when a cost basis is being used.
Based on industry feedback, we recognise there may be difficulties in implementing the AIIR changes for AMITs that choose to apply the new rules from 1 July 2015, including flow-on affects for other MITs and custodians.
In response to this feedback, we are postponing the finalisation of the new reporting requirements for AMITs until the 2016–17 reporting period.
Entities that are reporting trust distributions in 2015–16, including MITs who choose to apply the new MIT regime from 1 July 2015, will report using existing specifications (V10.0 and v4.0 (PC spreadsheet format)).
See also:What you need to know about managed investment trusts (MITs) and attribution managed investment trusts (AMITs).