Law Companion Guideline
Attribution Managed Investment Trusts: attribution on a 'fair and reasonable' basis
|Table of Contents||Paragraph|
|What this Guideline is about|
|Date of effect|
|Fair and reasonable attribution|
|What is 'fair and reasonable'?|
|Streaming because of tax characteristics|
|Example 1: attribution to a class reflecting interests in the assets of the class|
|Examples of attributions that may be fair and reasonable|
|Example 2: attribution to an outgoing member|
|Example 3: attribution to redeeming member based on length of membership period|
|Example 4: attribution calculations based on 'as at' and 'year to date' methods|
|Example 5: attribution reflects tax directly attributable to member|
Relying on this Guideline
This Guideline describes how the Commissioner will apply the law as amended by the Tax Laws Amendment (New Tax System for Managed Investment Trusts) Act 2016.
If you rely on this Guideline in good faith, you will not have to pay any underpaid tax, penalties or interest in respect of matters it covers if it does not correctly state how a relevant provision applies to you.
What this Guideline is about
1. This Guideline explains the meaning of attribution on a 'fair and reasonable' basis as that term is used in Division 276 of the Income Tax Assessment Act 1997 (ITAA 1997) (the attribution regime for Managed Investment Trusts (MITs)).
Date of effect
- 1 July 2016, or
- if the trustee has made an irrevocable choice to apply the new tax system for its 2015-16 income year which starts on or after 1 July 2015 - 1 July 2015.
Fair and reasonable attribution
4. Under subsection 276-210(2), a member's 'member component' of a character in respect of an income year is so much of the 'determined trust component' of that character as is attributable to that member worked out according to the attribution rules in subsections 276-210(3) and (4).
5. Those rules require the trustee of an attribution MIT (AMIT) to attribute amounts relating to income and tax offsets to members on a fair and reasonable basis, consistent with its constituent documents. 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). There is no requirement that the constituent documents refer to Division 276 or otherwise to attribution for tax purposes.
6. Provided the trustee has attributed amounts on a fair and reasonable basis, the provisions will be satisfied. It does not matter that there may be a basis of attribution that might be regarded as more fair and reasonable in the circumstances.
What is 'fair and reasonable'?
- the decision is consistent with the AMIT constituent documents, and
- it does not involve streaming amounts of a particular character because of the tax characteristics of the member.
9. The attribution system does not require the trustee to have regard to the amount of any actual distributions when determining the attribution amounts. However, depending on the nature of the trust, it may be fair and reasonable for the trustee to take actual distributions into account and to seek to align attributed tax amounts to actual distributed cash, so long as the requirements in subsections 276-210(3) (consistency with trust constituent documents) and 276-210(4) (no tax based streaming) are met.
10. As the attribution system applies to members in respect of a year of income, it does not require that determined trust components be attributed only to members who were members during the relevant income year. Depending on the AMIT's constituent documents, an attribution may be fair and reasonable where amounts are attributed to a person who was not a member during the income year but was a member on the relevant distribution record date.
11. An amount will not fail to be worked out on a fair and reasonable basis merely because one of the safe harbour rules in subsections 276-210(5), (6) or (7) apply. Broadly, those safe harbour rules cover the circumstances where an amount attributed to a member reflects:
- the fact that the trustee has directed an amount arising from the sale of assets to the member in order to fund a redemption of their interests in the AMIT
- an amount of an under or over in relation to a base year where the member was not a member of the AMIT, and
- an amount of a capital gain or capital loss made by the AMIT trustee in an income year at a time the member was not a member in respect of the income year.
Streaming because of tax characteristics
12. The attribution will not be considered to involve streaming based on the tax characteristics of a member merely because the attribution reflects the member's economic interest in underlying assets of the AMIT. This will be the case even where the member has interests in a class of units that provide the type of returns that would mean that investors with a particular tax profile would be more likely to invest in that class than other investors.
Example 1: attribution to a class reflecting interests in the assets of the class
13. An AMIT has a number of classes of units on issue. Each class of units is supported by different assets. Class C units are supported by assets that return foreign source income, non-TAP capital gains and interest. The Class C unit holders are entitled to share proportionately in the income and capital of the class. Because of the nature of the returns payable on the Class C units, foreign resident investors hold Class C units in preference to other classes of units. The trustee of the AMIT attributes to the Class C members in accordance with their rights and entitlements to the income and capital of the class. The attribution does not involve streaming based on tax characteristics.
Examples of attributions that may be fair and reasonable
14. The following examples demonstrate that attribution on a fair and reasonable basis does not necessarily require equal or proportionate attribution. However, while the trustee may choose one of a range of methods, it is essential that the attribution accord with the trust's constituent documents.
Example 2: attribution to an outgoing member
15. A significant member of an AMIT redeems its interests. To restore liquidity, the AMIT must sell trust property. If permitted by the trust constituent documents, streaming the disposal gains to that significant outgoing member would be considered fair and reasonable. This kind of attribution is permitted by subsection 276-210(5). The trustee may also attribute an amount of income relating to the period up to the date of redemption (or some other fair and reasonable amount of income determined consistent with the constituent documents) to the redeeming member.
Example 3: attribution to redeeming member based on length of membership period
16. A redeeming member has held an interest in the AMIT during the year for less than 12 months. The AMIT attributes a non-discount capital gain to that member. In this case, attributing 'short term' gains of the trust to 'short term' investors, if consistent with the AMIT's constituent documents, would be considered fair and reasonable. This does not mean, however, that other methods of attributing capital gains would not be fair and reasonable. For example, attribution of capital gains on a proportional basis without regard to the length of holding of membership interests could also be fair and reasonable.
Example 4: attribution calculations based on 'as at' and 'year to date' methods
17. Under an As At approach , components are generally 'locked-in' for the interim period in which they are distributed and are not subject to revision after year end when the full year components have been calculated. Components such as capital gains, may be 'held back' until the net position for the full year is known.
18. Under a Year to Date approach , tax components shown in the AMIT member annual statement issued to members are based on the calculation of trust components for the full tax year. Tax components stated in interim distribution statements are subject to restatement to reflect the calculation of components for the full tax year.
19. Both of these methods if consistent with the constituent documents of the AMIT are fair and reasonable methods of making an attribution of determined trust components to members under section 276-210.
Example 5: attribution reflects tax directly attributable to member
20. An AMIT invests in a US Real Estate Investment Trust (REIT). The AMIT has a member that has an indirect interest in the US REIT of 10% or more. The US withholding tax paid in respect of distributions to the AMIT is directly attributable to the member. The trustee may reduce the attribution to the member to reflect the US withholding tax. This would represent a fair and reasonable basis of attribution.
Commissioner of Taxation
5 May 2016
All legislative references in this Guideline are to the ITAA 1997 unless otherwise indicated.
An AMIT is a managed investment trust that has elected in to the attribution regime for the taxation of MITs contained in Division 276.
Explanatory Memorandum to the Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015 at paragraph 2.20.
ITAA 1997 Div 276
ITAA 1997 276-210
ITAA 1997 276-210(2)
ITAA 1997 276-210(3)
ITAA 1997 276-210(4)
ITAA 1997 276-210(5)
ITAA 1997 276-210(6)
ITAA 1997 276-210(7)
Tax Laws Amendment (New Tax System for Managed Investment Trusts) Act 2016