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Application of the arm’s length income rule to existing arrangements
A transitional rule will apply if a MIT became a party to a non-arm’s length scheme before the date that the Bill was introduced into the House of Representatives on 3 December 2015.
In these circumstances, any income derived by the MIT before the start of the 2018–19 income year, will not be taxed as non-arm’s length income.
Transitional rules for unders and overs
Transitional rules will apply to existing MITs that enter into the new tax system with unders and overs relating to an earlier income year. The transitional rules apply when:
- a trust becomes an AMIT for the starting income year
- the trust existed in an earlier income year (the base year)
- the trust is an AMIT for the discovery year that is the starting income year (the first year the trust elects to become an AMIT) or a later income year.
The transitional rule applies if the AMIT has an under or over of a particular character in the discovery year in relation to a base year. For these purposes:
- the trust is taken to be an AMIT for the base year and for every income year between the base year and the starting income year
- if the trust sent distribution statements to members for an income year prior to the starting income year, the trust is taken to have sent AMMA statements to those members.
If the transitional rule applies, the under or over in relation to a base year is taken to be an under or over of the same character in the discovery year. In addition, where the under or over would have produced a particular effect under existing income tax law had it been discovered before the starting income year, then that other (pre-AMIT) particular effect is taken not to arise. That is, the discrepancy is dealt with solely by the unders and overs system.
Transitional rules for tax deferred and tax-free distributions
The transitional rules in relation to tax deferred and tax-free distributions will apply if the trustee of a trust made a payment to an entity on or after 1 July 2011 and before the income year in which the trust became an AMIT. The new cost-base adjustment rules will be used to work out the non-assessable part of the payment for CGT event E4 purposes. These sections do not, however, apply to payments already included as assessable income in the income tax return lodged for the income year the payment was made.
These transitional rules ensure that tax-deferred and tax-free distributions made by a MIT prior to the commencement of the new tax system will be taken into account under the capital gains tax regime, rather than being taxed as ordinary income. This does not apply where an entity has already included the distributions as assessable income in the income tax return lodged for the income year the payment was made.
Where the member holds their interests in the AMIT as a revenue asset, we will similarly treat tax-free and tax-deferred distributions as giving rise to an adjustment to the cost of the interests for the purpose of calculating the revenue gain or loss on disposal of the interests, rather than being assessable up front (where the distributions have not already been included in assessable income).
These transitional rules will benefit taxpayers and ensure that industry practice relating to the taxation treatment of tax-deferred and tax-free distributions is not disturbed.
Transitional rules for trusts that cease to be corporate unit trusts or public trading trusts
If Division 6B or Division 6C applies to a trust, the trust is effectively taxed as a corporate tax entity. As a result, the trust is required to keep a franking account and can distribute franking credits to its members.
As a result of the 2016 amendments to repeal Division 6B and modify Division 6C, some trusts will cease to be taxed as corporate tax entities. If a trust that ceases to be taxed as a corporate tax entity has a surplus in its franking account, a significant disadvantage may arise as the trust will no longer be able to pass franking credits on to its members.
To overcome this problem, transitional rules will apply if, as a result of these amendments, a trust ceases to be taxed as a corporate unit trust or a public trading trust.
There are two transitional rules:
- Where an event that causes a franking credit or franking debit to arise happens between the trust ceasing to be a corporate unit trust or a public trading trust and 1 July 2019, and that event is, broadly, either the payment or refund of income tax for an income year starting before 1 July 2016, or the franking of a distribution, then the trust is taken to be a resident corporate tax entity at the time of the event for the purposes of determining franking credits or debits.
- If the trust makes a distribution after it ceases to be a corporate unit trust or public trading trust and before 1 July 2019, and the trust's franking account is in surplus just before it makes the distribution, the trust will be taken to be a resident corporate tax entity at the time it makes the distribution.
Under these transitional rules, a trust that ceases to be taxed as a corporate tax entity as a result of these amendments will have until 30 June 2019 to use any surplus in its franking account, provided that the trust meets any imputation system integrity rules.
Other consequences for unit trusts
Trustees of trusts affected by the repeal of Division 6B and changes to Division 6C of the ITAA 1936 need to consider the impact of these changes on their registration requirements and tax obligations.
Some affected trusts 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 after 1 July 2016, despite the amendments. 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.
For trusts that continue being treated as a corporate tax entity, the trustee should update the entity type and description on any forms lodged with us to reflect any change.
Transitioning affected trusts
For the 2015–16 income year, an affected trust (a trust that ceases to be treated as a corporate tax entity for the income year starting on or after 1 July 2016) should lodge its company income tax return using its current company TFN and indicate that the return is its final return.
For the 2016–17 income year, the trust should apply for a new trust TFN and ABN.
For any income years commencing on or after 1 July 2016, if the trust already has an appropriate trust TFN and ABN, and it:
- is not taxed as a company, it can continue to use the trust TFN and ABN for that year
- becomes eligible to be taxed like company for a later income year, use the company TFN to lodge a company tax return for that year.
The trust can apply for a new TFN and ABN at any time at abr.gov.au including before the 2015–16 year company tax return is lodged. Make this application as soon as possible to allow the trust to meet its obligations from the start of the 2016–17 income year.
Extension of interim trust streaming provisions for MITs
The trust streaming rules allow MITs to choose whether to apply the rules to stream capital gains and franked dividends to beneficiaries, for the 2010–11 to 2013–14 income years.
The option to make a choice was intended to operate until the new tax system for MITs commenced.
However, as a result of the need to change business systems, some AMITs may not be immediately ready to make a choice to apply the new tax system.
As a result, the transitional rules will allow the trustee of a MIT to continue to be able to make a choice as to whether to apply the trust streaming provisions up to and including the 2016–17 income year. MITs that have previously made the election to apply the interim trust streaming provisions can continue to apply those provisions for 2014–15 to 2016–17. After the 2016–17 income year, the choice to apply the trust streaming provisions will no longer be available to MITs.