Explanatory Memorandum(Circulated by the authority of the Minister for Small Business and Assistant Treasurer, the Hon Kelly O'Dwyer MP)
Chapter 1 - Overview of the new tax system for managed investment trusts
Outline of chapter
1.1 The Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015 and the supporting Bills amend the Income Tax Assessment Act 1997 (the ITAA 1997), the Taxation Administration Act 1953 (the TAA 1953) and associated Acts to introduce a new tax system for managed investment trusts.
1.2 This chapter provides an overview of the new tax system for managed investment trusts.
1.3 All legislative references in this explanatory memorandum are to the ITAA 1997 unless otherwise indicated.
Context of amendments
1.4 The new tax system for managed investment trusts follows recommendations made by the Board of Taxation in its Report on the Review of the Tax Arrangements Applying to Managed Investment Trusts in August 2009 (the Board's Report).
1.5 In undertaking its Review, the Board concluded that the current taxation arrangements applying to trusts create a level of complexity and uncertainty for managed investment trusts that is unacceptable for an industry of its significance to the economy. This is primarily the result of the current trust taxation provisions in Division 6 of Part III of the Income Tax Assessment 1936 (ITAA 1936) being largely developed at a time before trusts were used in Australia as widely-held, commercially operated, collective investment vehicles.
1.6 This Bill implements the recommendations of the Board of Taxation to create a new tax system for certain managed investment trusts.
1.7 The new tax system for managed investment trusts will ensure that the managed funds industry is able to continue to operate through trust structures having regard to:
- the commercial needs of the industry;
- the needs of investors;
- the need to ensure appropriate integrity;
- the compliance costs of managed investment trusts and their members; and
- the administrative costs of the Australian Taxation Office.
1.8 The new tax system will significantly improve the operation of the taxation law for managed investment trusts by increasing certainty, allowing greater flexibility and reducing compliance costs. These reforms will enhance the competitiveness of Australia's funds management industry.
1.9 The new tax system has been actively sought by the managed funds industry. Industry representatives and other key stakeholders have been extensively consulted during the development of the new tax system for managed investment trusts.
Summary of new law
1.10 This Bill will introduce a new tax system for certain managed investment trusts.
1.11 The circumstances in which the new tax system will apply to a managed investment trust are explained in Chapter 2. Broadly, the new tax system will apply to a managed investment trust only if:
- the members of the managed investment trust have clearly defined interests in relation to the income and capital of the trust; and
- the trustee of the managed investment trust makes a choice to apply the new tax system.
1.12 Managed investment trusts that choose to apply the new tax system are referred to as attribution managed investment trusts (attribution MITs or AMITs).
1.13 Under the new tax system, attribution MITs will have the following benefits:
- the trust will be treated as a fixed trust for income tax purposes (see Chapter 2);
- for income tax purposes, the trust will be able to attribute amounts of taxable income, exempt income, non-assessable non-exempt income, tax offsets and credits to members on a fair and reasonable basis in accordance with their interests as set out in the constituent documents of the trust (see Chapter 3); and
- if a trust discovers a variance between the amounts actually attributed to members for an income year, and the amounts that should have been attributed, the trust will be able to reconcile the variance in the income year that it is discovered by using the 'unders and overs' regime (see Chapter 4).
1.14 In addition, the amendments:
- make the trustees of attribution MITs liable to pay tax in some circumstances (see Chapter 5); and
- ensure that the Pay As You Go (PAYG) withholding provisions and the withholding tax liability provisions apply appropriately to attribution MITs and their members, including members that are custodians (see Chapter 6).
1.15 The new tax system will provide benefits to members of an attribution MIT (as explained in Chapter 7) because:
- a 'character flow-through' model will apply to ensure that amounts derived or received by the trust that are attributed to members retain the character they had in the hands of the trustee for income tax purposes;
- double taxation that might otherwise arise will be reduced because members will be able to make annual upward and downward adjustments to the cost bases of their interests in the trust; and
- the taxation treatment of tax deferred and tax free distributions made by the trust is clarified.
1.16 Finally, the amendments will:
- transfer the definition of a managed investment trust from the TAA 1953 to the ITAA 1997 (see Chapter 8);
- exclude superannuation funds and exempt entities that are entitled to a refund of excess imputation credits from the application of the 20 per cent tracing rule for public trading trusts in Division 6C of Part III of the ITAA 1936 (see Chapter 9);
- repeal the corporate unit trust rules in Division 6B of Part III of the ITAA 1936 (see Chapter 9); and
- introduce an arm's length income rule for managed investment trusts (see Chapter 9).
1.17 Associated Bills support the introduction of the new tax system for managed investment trusts. That is:
- the Income Tax Rates Amendment (Managed Investment Trusts) Bill 2015 makes consequential amendments to the Income Tax Rates Act 1986;
- the Medicare Levy Amendment (Attribution Managed Investment Trusts) Bill 2015 makes consequential amendments to the Medicare Levy Act 1986; and
- the Income Tax (Attribution Managed Investment Trusts - Offsets) Bill 2015 will impose tax on trustee of an attribution MIT in relation to amounts of a character relating to tax offsets in certain circumstances.
Application and transitional provisions
1.18 The amendments to introduce a new tax system for managed investment trusts apply to income years starting on or after 1 July 2016.
1.19 Managed investment trusts will be able to make a choice to apply the new tax system for an income year that starts on or after 1 July 2015.
1.20 Transitional rules will apply when an existing managed investment trust comes into the new tax system to recognise unders and overs that arise for an earlier income year.
1.21 Transitional rules will also ensure the amendments which clarify the taxation treatment of tax deferred and tax free distributions will apply on or after 1 July 2011.
1.22 The amendments which extend the list of entities qualifying as eligible investors for the purpose of the widely held requirements that must be satisfied for a trust to qualify as a managed investment trusts apply from 1 July 2014.
1.23 The amendments which repeal the corporate unit trust rules and modify the operation of the 20 per cent tracing rule for public trading trusts apply on or after 1 July 2016.
1.24 The application and transitional provisions are explained in detail in Chapter 10.