Following a Board of Taxation recommendation, Division 6B of the ITAA 1936 has been repealed.
Division 6B was introduced in 1981, prior to the company imputation system and capital gains tax systems and applied to tax certain public unit trusts at the corporate tax rate. It was introduced to discourage the reorganisation of companies involving the transfer of assets or businesses into a resident public unit trust in which shareholders would take equity to access more beneficial trust tax treatment.
Generally, trusts (including MITs) can have tax advantages over companies. As examples, they may be able to distribute non-assessable tax-free and tax-deferred amounts, and the CGT discount is available to trusts but not companies. There is also opportunity to access tax rates lower than the 30% company tax rate, such as the 15% final MIT withholding tax rate for non-resident beneficiaries.
The repeal of Division 6B coincides with the introduction of a new arm's length income rule.
There have also been changes that affect the 20% tracing rule in Division 6C.
Before 1 July 2016, if Division 6B applied to a trust (an affected trust), the trust was taxed as a corporate tax entity. Generally, these trusts are described as a corporate unit trust.
As a result of the 2016 amendments to repeal Division 6B, affected trusts cease to be a corporate unit trust for income years starting on or after 1 July 2016.
Trustees of affected trusts need to consider how the trust is affected by the repeal and determine the impact on their registration requirements and tax obligations.
Some affected trusts will continue to be treated as a corporate tax entity. For example, if the trust is the head company of a consolidated group because it has made a choice under Subdivision 713-C of the ITAA 1997, the trust will continue to be treated as a company for income years commencing on or after 1 July 2016 despite the repeal of Division 6B. Similarly, some trusts that were corporate unit trusts under Division 6B may satisfy the requirements of a public trading trust and be taxed as a corporate tax entity under Division 6C.