House of Representatives

Income Tax (Attribution Managed Investment Trusts - Offsets) Bill 2015

Income Tax (Attribution Managed Investment Trusts - Offsets) Act 2016

Income Tax Rates Amendment (Managed Investment Trusts) Bill 2015

Medicare Levy Amendment (Attribution Managed Investment Trusts) Bill 2015

Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015

Explanatory Memorandum

(Circulated by the authority of the Minister for Small Business and Assistant Treasurer, the Hon Kelly O'Dwyer MP)

Chapter 2 - Eligibility to apply the managed investment trust reforms

Outline of chapter

2.1 This Chapter explains:

·
the criteria that a managed investment trust must satisfy to qualify as an attribution MIT; and
·
the broad consequences that arise if a managed investment trust qualifies to be an attribution MIT.

Context of amendments

2.2 The new tax system will apply to a trust if, generally:

·
the trust is a managed investment trust for income tax purposes;
·
the members of the trust have clearly defined interests; and
·
the trustee of the managed investment trust makes a choice to apply the new tax system.

2.3 These eligibility criteria are consistent with the recommendations of the Board of Taxation. In this regard, the Board stated (at paragraph 2.28 of the Board's Report) that:


Accordingly, the Board considers that the most appropriate balance between allowing access to the attribution rules and other measures and maintaining certainty and integrity is to introduce a requirement that, in order to qualify as a Regime MIT, the beneficiaries' rights to income, including the character of income, and capital must be clearly established at all times in the trust's 'constituent documents'. The rights should only be able to be changed by a change in the trust's 'constituent documents'.

Summary of new law

2.4 The new tax system will apply to a trust if, generally:

·
the trust is a managed investment trust;
·
the members of the trust have clearly defined interests; and
·
the trustee of the managed investment trust makes a choice to apply the new tax system.

2.5 If the trustee of a trust makes a choice to apply the new tax system for an income year, the choice is irrevocable and will therefore apply for subsequent income years.

2.6 The key consequences that arise if a managed investment trust qualifies as an attribution MIT are that:

·
an attribution model will apply to the managed investment trust, instead of the general trust provisions in the income tax law in Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936); and
·
the managed investment trust will be treated as a fixed trust for the purposes of the income tax law.

2.7 For the purposes of working out whether a managed investment trust qualifies as an attribution MIT, and for applying the attribution model, debt-like trust instruments issued by the trust will be treated as debt interests (rather than as membership interests).

Comparison of key features of new law and current law

New law Current law
A trust will qualify to be an attribution MIT that is eligible to apply the new tax system if, broadly:

·
the trust is a managed investment trust; and
·
the members of the trust have clearly defined interests.

If a managed investment trust qualifies as an attribution MIT in relation to an income year, the trustee must make a choice to apply the new tax system for that income year. The choice is irrevocable and will therefore apply for subsequent income years.

No equivalent.
Debt-like trust instruments issued by the trust will be treated as debt interests for the purposes of:

·
working out whether a managed investment trust qualifies as an attribution MIT; and
·
applying the attribution model.

Debt-like instruments issued by a managed investment trust are not treated as debt interests.
The new tax system in Division 276 of the ITAA 1997 will apply to an attribution MIT and its members. The general trust provisions in Division 6 of Part III of the ITAA 1936 apply to a managed investment trust and its members.
A managed investment trust that is an attribution MIT will be treated as a fixed trust for the purposes of the income tax law. A managed investment trust is a fixed trust for the purposes of the income tax law only if the beneficiaries of the trust have vested and indefeasible interests in the income and capital of the trust.

Detailed explanation of new law

2.8 This Chapter outlines:

·
when the new tax system applies to a trust; and
·
the consequences that arise if the new tax system applies to a trust.

When does the new tax system apply to a trust?

2.9 A trust will be an attribution MIT (or AMIT) that is eligible to apply the new tax system for an income year if:

·
the trust is a managed investment trust in relation to the income year;
·
the members of the trust have clearly defined interests at all times when the trust is in existence during the income year;
·
where the trust is a managed investment trust in relation to the income year solely because of paragraph 275-10(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997), the only members of the trust are managed investment trusts in relation to the income year; and
·
any criteria specified in the regulations are satisfied in relation to the trust.

[Schedule 1, item 1, section 276-5; Schedule 6, items 1 and 3, definitions of 'AMIT' and 'attribution managed investment trust' in subsection 6(1) of the ITAA 1936; Schedule 9, items 1 and 4, definitions of 'AMIT' and 'attribution managed investment trust' in subsection 995-1(1) of the ITAA 1997]

2.10 If a managed investment trust qualifies as an attribution MIT in relation to an income year, the trustee must make a choice to apply the new tax system for that income year. The choice is irrevocable and will therefore apply for subsequent income years. [Schedule 1, item 1, section 276-10]

Trust is a managed investment trust

2.11 A trust will be a managed investment trust in relation to an income year if it satisfies the requirements in section 275-10 for the whole of the income year that it is in existence.

2.12 A trust is a managed investment trust for income tax purposes if, broadly:

·
the trustee of the trust is an Australian resident, or the central management and control of the trust is in Australia;
·
the trust does not carry on or control an active trading business;
·
the trust is a managed investment scheme (within the meaning of the Corporations Act 2001);
·
the trust is sufficiently widely-held and not closely-held - in this regard, special counting rules apply where investors in a managed investment trust are specified widely-held entities; and
·
the trust is operated or managed by an appropriately regulated entity.

2.13 However, if, due to temporary circumstances that are outside the control of the trustee, the trust fails the requirements that must be satisfied in order for it to qualify as a managed investment trust, the trust will continue to be treated as being a managed investment trust in relation to the income year if it is fair and reasonable to do so (based on the criteria specified in paragraph 275-55(d)). [Schedule 4, item 3, paragraph 275-10(2)(b) and section 275-55]

2.14 Paragraph 275-10(1)(b) allows a trust to be a managed investment trust for certain purposes if, among other things:

·
the only members of the trust are specified widely-held entities (with some exceptions); or
·
the only members of the trust are managed investment trusts.

[Schedule 4, item 3, section 275-45]

2.15 If a trust is a managed investment trust in relation to an income year solely because of paragraph 275-10(1)(b), the trust will qualify as an attribution MIT provided that the only members of the trust are managed investment trusts in relation to the income year. [Schedule 1, item 1, paragraph 276-10(1)(c)]

2.16 Therefore, a trust will not qualify as an attribution MIT if:

·
the trust is a managed investment trust in relation to an income year solely because of paragraph 275-10(1)(b); and
·
one or more members of the trust are entities that are not managed investment trusts.

Clearly defined interests

2.17 To qualify as an attribution MIT, the rights to income and capital arising from each of the membership interests in the trust must be clearly defined at all times when the trust is in existence in the income year. [Schedule 1, item 1, paragraph 276-10(1)(b)]

2.18 An entity is a member of a managed investment trust if they are a beneficiary, unitholder or object of the trust (section 960-130). A membership interest of a member is defined in section 960-135 to be:

·
each interest, or set of interests, in the trust by virtue of which the entity is a member of the trust; or
·
each right; or set of rights, in relation to the trust by virtue of which the entity is a member of the trust.

2.19 The clearly defined interests test is an integrity measure to ensure that:

·
there is an objective benchmark for the attribution of the tax consequences of the activities of the trust to its members; and
·
trusts in which the trustee has significant discretionary powers do not receive the benefits available to attribution MITs - such as deemed fixed trust treatment.

2.20 The question as to whether the rights to income and capital arising from the membership interests in a trust are clearly defined is one of fact that will be determined having regard to the constituent documents of the trust. The constituent documents include the trust constitution and any supporting documentation (such as a product disclosure statement or other document that sets out the terms of the members' interests).

2.21 Legislative safe harbours apply to provide certainty for common arrangements where the rights to income and capital arising from the membership interests in a managed investment trust would be expected to be clearly defined. Under these safe harbours, the rights to income and capital arising from the membership interests in a trust will be taken to be clearly defined at a particular time if:

·
the trust is a managed investment scheme that is registered under the Corporations Act 2001; or
·
the rights to income and capital arising from each of the membership interests in the trust are the same.

[Schedule 1, item 1, subsection 276-15(1)]

2.22 For the purposes of working out whether the rights to income or capital arising from each of the units or interests in the trust are the same, the trustee should disregard:

·
fees or charges imposed by the trustee on the members of the trust;
·
issue and redemption prices of the membership interests in the trust; and
·
exposure of the membership interests in the trust to foreign exchange gains and losses.

[Schedule 1, item 1, subsection 276-15(2)]

2.23 If a trust does not come within one of the safe harbour tests, factors that will be taken into account in determining whether the rights to income and capital arising from the membership interests in a trust will be taken to be clearly defined at a particular time include:

·
whether the constituent documents of the trust provide an objective benchmark for the trustee to attribute amounts to members annually;
·
whether, assuming that the trust is an attribution MIT for the income year in which the time occurs, the amount of each member component for the income year of each member of the trust can be worked out on a fair and reasonable basis in accordance with the constituent documents of the trust;
·
whether the right of each member of the trust to the income and capital of the trust can be materially diminished or expanded through the exercise of a power or right;
·
whether the trustee has an obligation to treat members who hold membership interests in the same class equally and members who hold membership interests in different classes fairly; and
·
whether the trustee can easily modify the rights of those membership interests to the income and capital of the trust by changing the constituent documents of the trust.

2.24 In this regard, if a trustee of a trust has the discretion to determine the entitlement to the income and capital of the trust of a particular member of the trust, or to determine the character of income distributed to a member, then, with some limited exceptions, the rights to income and capital arising from the membership interests in the trust will not be clearly defined.

Example 2.1


ABC Trust is an unlisted managed investment trust with a single class of units. The ABC Trust is not registered under the Corporations Act 2001.

The constituent documents for the ABC Trust specify that members of the trust have an entitlement to a share of the income and capital of the trust based on the number of units that they hold in the trust.

The trustee is unable to differentiate between members when making distributions of income and capital except where a member that holds a large number of units redeems their unit holding and the trustee is required to dispose of assets to fund the redemption.

As the ABC Trust has a single class of units and the rights to income or capital arising from each of those units is the same, the rights to income and capital arising from the membership interests in the ABC Trust are clearly defined.

Therefore, if the trustee of the ABC Trust makes a choice to be an attribution MIT, the new tax system will apply to the ABC Trust.

Example 2.2


DEF Trust is an unlisted managed investment trust with two classes of units - Class A units and Class B units. The DEF Trust is not registered under the Corporations Act 2001.

The constituent documents for the DEF Trust specify that:

·
members of the trust that hold Class A units have an entitlement to a share of all of the income of the trust based on the number of Class A units that they hold in the trust; and
·
members of the trust that hold Class B units have an entitlement to a share of all of the capital of the trust based on the number of Class B units that they hold in the trust.


The rights to income and capital arising from the membership interests in the DEF Trust are clearly defined.

Therefore, if the trustee of the DEF Trust makes a choice to be an attribution MIT, the new tax system will apply to the DEF Trust

Example 2.3


XYZ Trust is a discretionary hybrid managed investment trust with two classes of members - Class A members and Class B members. The XYZ Trust is not registered under the Corporations Act 2001.

At the end of each income year, the trustee is able to determine how much income and capital is allocated to Class A members. The trustee is also able to determine the character of the income that is allocated to Class A members. Any remaining income and capital is allocated to Class B members.

The rights to income and capital arising from the membership interests in the XYZ Trust are not clearly defined.

Therefore, the trustee of the XYZ Trust will not be able to make a choice to apply the new tax system to the XYZ Trust.

Criteria specified in the regulations

2.25 Additional criteria that must be satisfied for a trust to be eligible to be an attribution MIT may be specified in the regulations. [Schedule 1, item 1, paragraph 276-10(1)(d)]

Trustee must choose to apply the new tax system

2.26 The new tax system will apply to an eligible managed investment trust only if:

·
the trustee of the trust makes a choice to apply the new tax system for an income year; or
·
the trust was an attribution MIT for an earlier income year.

[Schedule 1, item 1, paragraph 276-10(1)(e)]

2.27 If a trustee of a managed investment trust makes a choice to be an attribution MIT, the choice cannot be revoked. [Schedule 1, item 1, subsection 276-10(2)]

2.28 If the trustee of a managed investment trust that meets the requirements to be an attribution MIT does not make a choice to apply the new tax system, the general trust provisions in Division 6 of Part III of the ITAA 1936 will continue to apply to that managed investment trust and its members.

Attribution MIT with multiple classes of members

2.29 If the membership interests of an attribution MIT are divided into classes, the attribution MIT will be able to apply the attribution regime separately to each class of membership interests if:

·
the rights arising from each of the membership interests in a particular class are the same as the rights arising from every other of those membership interests in that class;
·
each of those membership interests in a particular class is distinct from each of those membership interests in another class; and
·
the trustee of the attribution MIT has made a choice to apply the attribution regime separately to each class of membership interests.

[Schedule 1, item 1, subsections 276-20(1) and (2)]

2.30 The question as to whether an attribution MIT has more than one class of membership interests is one of fact. In this regard, the membership interests in a trust will form a class if they have the same, or substantially the same, rights.

2.31 An attribution MIT may have more than one class of membership interests if, for example, different members have exposure to different groups of assets of the attribution MIT. As a result, the tax attributes of a particular class of assets can effectively be ring-fenced to a particular class of membership interests. In this regard, it is possible for a class to have just one member.

2.32 The ability for an attribution MIT to apply the attribution regime separately to each class of membership interests can result in significant compliance cost savings. For example, a master trust will not need to set up separate trusts in order to take advantage of the attribution regime.

2.33 The choice by an attribution MIT to apply the attribution regime separately to each class of membership interests applies for the income year in which the choice is made and to every subsequent income year and is irrevocable. [Schedule 1, item 1, subsections 276-20(4) and (5)]

2.34 If the trustee of an attribution MIT makes a choice to apply the attribution regime separately to each class of membership interests, the attribution regime will apply separately to each class of membership interests of the attribution MIT. However, for the purpose of determining whether a managed investment trust qualifies as an attribution MIT (Subdivision 276-A), an attribution MIT with multiple classes will continue to be treated as a single entity. [Schedule 1, item 1, subsection 276-20(2)]

2.35 If the trustee of an attribution MIT makes a choice to apply the attribution regime separately to each class of membership interests, each class will effectively be treated as a separate trust with separate trust property. Therefore, the trustee will effectively need to work out the taxable income for an income year separately for each class.

2.36 To facilitate this, the assessable income, exempt income, non-assessable non-exempt income, tax losses, net capital losses and other similar amounts of the attribution MIT for an income year must be allocated between each class on a fair and reasonable basis. [Schedule 1, item 1, subsection 276-20(3)]

2.37 In this regard, to the extent that assets and expenditure relate solely to a particular class of membership interests, the assessable income and deductions and other trust attributes relating to that class will need to be identified by reference to the assets supporting that class. In addition, transactions and events involving those assets (including intra-entity dealings within the actual attribution MIT involving the deemed separate attribution MITs) will need to be recognised for tax purposes as though the class was in fact a separate entity.

2.38 To the extent that assets and expenditure relate to more than one class of membership interests, the related assessable income and deductions must be allocated to each class on a fair and reasonable basis.

Debt-like trust instruments

2.39 A debt-like trust instrument in an attribution MIT is treated as a debt interest in the attribution MIT. A distribution in relation to the instrument is treated as interest for the purposes of the interest withholding tax provisions. The distribution may also be treated as a deduction in working out the trust components of an attribution MIT. [Schedule 1, item 1, section 276-500]

2.40 The objective of treating a debt-like trust instrument in an attribution MIT as a debt interest in the attribution MIT is to ensure that:

·
the criteria to qualify as an attribution MIT operate appropriately for managed investment trusts with debt-like interests (as holders of debt-like trust instruments will not be members of the trust);
·
the attribution rules do not apply to the holders of debt-like trust instruments;
·
an attribution MIT can deduct distributions paid to holders of debt-like trust instruments in appropriate circumstances; and
·
debt-like trust instruments are treated as debt for the purposes of applying other provisions in the income tax law (such as the thin capitalisation provisions).

2.41 An instrument that gives rise to an interest in an attribution MIT is a debt-like trust instrument in relation to the attribution MIT if it has all of the following features:

·
any distribution relating to the interest is fixed, at the time the interest was created, by reference to the amount subscribed for the interest;
·
any distribution relating to the interest is made solely at the discretion of the trustee of the attribution MIT;
·
the interest, and any other interest in the attribution MIT that is in the same class as the interest, would rank above all other membership interests (other than other debt-like trust instruments) in the trust in the event that:

-
the trust ceases to exist; or
-
where the attribution MIT is a managed investment scheme, the scheme is under administration or is being wound up; and

·
if, in relation to a particular period, the trustee of the attribution MIT does not make a distribution relating to the interest, then the constituent documents of the attribution MIT prohibit:

-
the making of a distribution relating to any other membership interest in the attribution MIT in relation to that period; and
-
the making of a distribution relating to a membership interest in another entity in relation to that period if the interest is stapled together with a membership interest in the attribution MIT.

[Schedule 1, item 1, section 276-505; Schedule 9, item 4, definition of 'debt-like trust instrument' in subsection 995-1(1)]

2.42 For the purposes of the income tax law:

·
a debt-like trust instrument in relation to an attribution MIT is treated as a debt interest in the attribution MIT; and
·
a distribution on a debt-like trust instrument in relation to an attribution MIT is treated as a cost incurred by the attribution MIT in relation to a debt interest issued by the attribution MIT.

[Schedule 1, item 1, subsection 276-510(1)]

2.43 However, a debt-like trust instrument in relation to an attribution MIT is not treated as a membership interest for the purposes of working out whether a trust qualifies as a managed investment trust or as an attribution MIT. As a result, the holder of a debt-like trust instrument is not a member of the trust for the purpose of:

·
the widely-held and not closely-held tests for determining if the trust is a managed investment trust;
·
the clearly defined interests test for determining if the trust is an attribution MIT; and
·
the attribution model (including the unders and overs regime) that applies to an attribution MIT.

2.44 In addition, for the purposes of applying the tests to determine whether a trust is a managed investment trust, debt-like trust instruments are not taken to be membership interests.

2.45 For the purpose of applying the dividend, interest and royalty withholding tax provisions in the income tax law, a distribution to an entity that is the holder of a debt-like trust instrument is treated as having the character of interest. [Schedule 1, item 1, subsection 276-510(3)]

2.46 In addition, if the trustee of an attribution MIT makes a distribution to an entity that is the holder of a debt-like trust instrument, the amount of the distribution is treated as a return that the attribution MIT pays or provides on a debt interest for the purpose of working out the trust component of an assessable income character under the attribution model, except to the extent that the distribution is attributable to exempt income or non-assessable non-exempt income. [Schedule 1, item 1, section 276-515]

2.47 As a result, section 25-85 will apply to allow the attribution MIT to deduct the amount of the return in most circumstances.

Changes to constituent documents to qualify as an attribution MIT

2.48 Trustees of existing managed investment trusts will need to embark on due diligence activities to determine whether changes are required to be made to trust deeds, other constituent documents, product disclosures and other investor material in order to qualify for the new tax system.

2.49 Concerns have been raised that income tax consequences may arise if the constituent documents of a trust are changed in order to qualify for the new tax system.

2.50 In this regard, the Australian Taxation Office has issued a Taxation Determination stating that, if the terms of a trust are changed pursuant to a valid exercise of a power contained in the trust's constituent documents, no capital gains tax consequences arise as a result of the change (see Taxation Determination TD 2012/21).

2.51 Trustees will need to consider whether other taxation consequences (such as stamp duty implications) arise as a consequence of changing trust deeds on a case-by-case basis.

What are the consequences of being an attribution MIT?

2.52 If a managed investment trust is an attribution MIT in relation to an income year, then:

·
the attribution MIT is treated in the same way as a fixed trust throughout the income year;
·
amounts related to the income and tax offsets of the attribution MIT, determined by the trustee to be of a particular character, are attributed to members, generally retaining that character; and
·
underestimates and overestimates of amounts at the trust level are carried forward and dealt with in later years on a character-by-character basis.

[Schedule 1, item 1, section 276-1]

An attribution MIT is taken to be a fixed trust

2.53 A managed investment trust that is an attribution MIT is taken to be a fixed trust for income tax purposes. In addition, each entity that is a member of the attribution MIT in respect of an income year is taken to have a vested and indefeasible interest in a share of the income and capital of the attribution MIT throughout that income year. [Schedule 1, item 1, sections 276-50 and 276-55]

Attribution MIT taken to be a widely held unit trust

2.54 A managed investment trust that is an attribution MIT is taken to be a widely held unit trust for the purposes of applying the trust losses rules in Schedule 2F to the ITAA 1936. [Schedule 6, item 20, subsection 272-105(1) of Schedule 2F to the ITAA 1936]

2.55 In the case of an attribution MIT with multiple classes of members where the trustee has made an election under section 276-20 to treat each class as an attribution MIT, each class is taken to be a widely-held unit trust for the purposes of the trust losses rules in Schedule 2F to the ITAA 1936.

Division 6 of Part III of the ITAA 1936 does not apply

2.56 The new tax system in Division 276 of the ITAA 1997 will apply to an attribution MIT and its members. As a result, the provisions in Division 6 of Part III of the ITAA 1936 that generally apply to trusts and their beneficiaries will not apply to an attribution MIT and its members. [Schedule 6, item 4, section 95AAD of the ITAA 1936]


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