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 4 - Reconciling variances in calculating trust components of particular characters

Outline of chapter

4.1 This Chapter explains how an attribution MIT can reconcile variances between the amounts actually attributed to members for an income year, and the amounts that should have been attributed, by:

·
reissuing AMMA statements to members for the income year to which the variance relates; or
·
applying the unders and overs system in the income year in which the variance is discovered.

Context of amendments

4.2 Trusts, including managed investment trusts, are currently taxed under the general trust provisions in Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936).

4.3 The Board of Taxation identified a range of practical difficulties that arise for managed investment trusts in complying with the rules in Division 6. In this regard, the Board concluded that:


'As a result of complexity and time constraints, trustees of managed investment trusts can experience difficulty in obtaining final information to allow them to calculate, within a reasonable time at the end of each financial year, the income and net income of the trust. Revisions may be required at a later time to ensure that the correct amounts are reported to the ATO and beneficiaries.' (Paragraph 4.32 of the Board's October 2008 Discussion Paper on the Review of the Taxation Arrangements Applying to Managed Investment Trusts)

'If a revision occurs, the amounts initially reported to beneficiaries may overstate or understate the correct amount of their share of the net income of the trust. Before the error is identified to them, beneficiaries may have already included the incorrect amounts in their income tax returns.' (Paragraph 4.34 of the Board's October 2008 Discussion Paper)

4.4 Trustees of attribution MITs are likely to continue to make revisions to the trust components of particular characters because:

·
the calculations are complex;
·
rounding discrepancies arise because, for example, the taxable income of an attribution MIT cannot be divided between members in proportion to the number of units held in a way that gives rise to practical distribution numbers; and
·
an attribution MIT typically has incomplete or interim information at the time it needs to do these calculations and needs to rely on external estimates.

4.5 In this regard, for example, an attribution MIT will often have incomplete or interim information at the time it needs to work out the trust components of particular characters for an income year where it holds units in other attribution MITs and has not received AMMA statements from those other attribution MITs for that income year. In these circumstances, the trustee has no alternative but to work out trust components of particular characters based on estimated amounts of those components.

4.6 Under the new tax system, attribution MITs will be able to reconcile a variance in calculating trust components of particular characters for an income tax year in the income year that the variance is discovered.

4.7 The unders and overs system that applies to reconcile variances has been developed in consultation with key stakeholders and is broadly consistent with the current approach used by managed investments trusts to reconcile variances in reporting amounts to their members.

Summary of new law

4.8 Under the new tax system for attribution MITs, an under or over will arise if a variance in a trust component is discovered.

·
If a variance results in the amount of a trust component of a particular character being less than the amount it was previously calculated to be, the attribution MIT generally has an under of that character.
·
If a variance results in the amount of a trust component of a particular character being more than the amount it was previously calculated to be, the attribution MIT generally has an over of that character.

4.9 When a trustee of an attribution MIT discovers an under or over of a particular character for an income year, the trustee can:

·
reissue AMMA statements for the base year to members of the attribution MIT in respect of that base year, which has the effect of reconciling a variance in the income year to which the under or over relates; or
·
attribute the under or over to members in the discovery year by adjusting the trust component of the relevant character in that discovery year, which has the effect of reconciling a variance in the income year in which the variance is discovered.

4.10 If a trust that was an attribution MIT ceases to be an attribution MIT for an income year, the trust will need to continue to identify unders and overs relating to the income years for which the trust was an attribution MIT that are discovered in later income years.

Comparison of key features of new law and current law

New law Current law
If a variance occurs in calculating the trust component of amounts with a particular character, the trustee of an attribution MIT can:

·
revise the determined trust components for the base year to which the variance relates and reissue AMMA statements for that base year to members of the attribution MIT in respect of that base year, which has the effect of reconciling the variance in the income year to which the variance relates; or
·
apply the unders and overs system to attribute the variance to members in the discovery year by adjusting the trust component of the relevant character in that year, which has the effect of reconciling the variance in the income year in which the variance is discovered.

If a variance occurs in calculating the amount of net income of the trust, the variance is reconciled in the income year to which the variance relates. As a result:

·
the trust may be required to reissue distribution statements to beneficiaries; and
·
beneficiaries may need to seek amendments to their income tax returns.

Detailed explanation of new law

4.11 The unders and overs system applies to a trust that is an attribution MIT for an income year. Key features of the unders and overs system are that:

·
an underestimate in an income year of a particular character results in an under of that character;
·
an overestimate results in an over of that character; and
·
unders and overs arise, and are generally dealt with, in the income year in which they are discovered (rather than the income year to which they relate).

[Schedule 1, item 1, section 276-300]

4.12 To apply the unders and overs system, the trustee of an attribution MIT must:

·
determine if there is an under or over for an income year (the base year); and
·
adjust a trust component in the income year in which the under or over is discovered (the discovery year).

4.13 If the under or over is the result of an intentional or reckless disregard of the law by the trustee, the trustee may be liable to pay an administrative penalty. [Schedule 1, item 4, section 288-115 of Schedule 1 to the TAA 1953]

What is an under or over?

4.14 To work out the amount of an under or over of a particular character for a base year, the attribution MIT must compare:

·
the trust component for that character for the base year worked out based on the trustee's knowledge at the discovery time - that is, the discovery year amount; and
·
the amount of base year running balance - that is:

-
if the discovery year is the first income year after the base year - the attribution MIT's determined trust component of the particular character for the base year; or
-
otherwise - the discovery year amount worked out under a previous operation of this section for the most recent income year before the discovery year.

[Schedule 1, item 1, subsections 276-345(1) and (3)]

4.15 The amount of an under or over must be worked out at the discovery time. The discovery time for a discovery year is just before the determined trust component of a particular character is worked out for the discovery year. This will allow the under or over to be included in the determined trust component for that discovery year. [Schedule 1, item 1, subsection 276-345(2)]

4.16 To the extent that the base year running balance falls short of the discovery year amount, the amount of the shortfall is an under of that particular character for the base year that the attribution MIT has (and accounts for) in the discovery year. [Schedule 1, item 1, subsection 276-345(4); Schedule 9, item 12, definition of 'under' in subsection 995-1(1)]

4.17 To the extent the base year running balance exceeds the discovery year amount, the amount of the excess is an over of that particular character for the base year that the attribution MIT has (and accounts for) in the discovery year. [Schedule 1, item 1, subsection 276-345(5); Schedule 9, item 12, definition of 'over' in subsection 995-1(1)]

4.18 The base year running balance ensures that, where variances relating to a particular trust component emerge over more than one year, an attribution MIT that has reconciled variances in a particular discovery year does not have to adjust its trust components for under and overs relating to the same variance in a later discovery year.

4.19 A trustee does not have to reconcile unders or overs of a particular character for a base year once the amendment period for the base year has expired (that is, generally four years after the document for working out the determined trust component for the base year was created). [Schedule 1, item 1, section 276-350]

How is an under or over reconciled?

4.20 If the trustee of an attribution MIT discovers an under or over for a trust component of a particular character in relation to a base year, the trustee can:

·
reconcile the under or over in the income year to which it relates by revising the determined trust components for the base year and reissuing AMMA statements for that base year to members of the attribution MIT in respect of that base year; or
·
reconcile the under or over in the income year in which it is discovered by adjusting the trust component of the relevant character in the discovery year.

4.21 It is up to the trustee of an attribution MIT to determine how it will reconcile unders and overs - that is, whether to reissue AMMA statements for the base year or use the unders and overs system to make adjustments to the trust components of particular characters in the discovery year.

Example 4.1


The ABC Trust is an attribution MIT. For the 2016-17 income year, the ABC Trust calculates that it has determined trust components of:

·
$320,000 of discount capital gains;
·
$200,000 of non-discount capital gains; and
·
$50,000 of other ordinary or statutory income.


During the 2017-18 income year, the ABC Trust receives further information regarding the 2016-17 income year. Therefore, it realises that the trust components for the 2016-17 income year actually consisted of:

·
$400,000 of discount capital gains;
·
$120,000 of non-discount capital gains; and
·
$50,000 of other ordinary or statutory income.


Therefore in the 2017-18 income year, the ABC Trust has, in relation to the 2016-17 income year:

·
an under of discount capital gains of $80,000 (that is, $400,000 -$320,000); and
·
an over of non-discount capital gains of $80,000 (that is, $200,000 - $120,000).


To reconcile this difference, the ABC Trust decides to reissue AMMA statements for the 2016-17 income year to its members. Revised statements are issued on 30 March 2018.

The XYZ Trust is an attribution MIT that is a member of the ABC Trust. The XYZ Trust receives a revised AMMA statement for the 2016-17 income year from the ABC Trust on 30 March 2018.

Therefore, in the 2017-18 income year, the XYZ Trust will have:

·
an under of discount capital gains in relation to the 2016-17 income year; and
·
an over of non-discount capital gains in relation to the 2016-17 income year.


The XYZ Trust can choose to reconcile the under and over by:

·
reissuing AMMA statements for the 2016-17 income year to its members; or
·
using the unders and overs system to adjust the trust components of discount capital gains and non-discount capital gains in the 2017-18 income year.

4.22 If the trustee of an attribution MIT reconciles the under or over in the income year in which it is discovered, then:

·
in the case of an under of a particular character - the trust component of that particular character is increased in the discovery year; and
·
in the case of an over of a particular character - the trust component of that particular character is decreased in the discovery year.

[Schedule 1, item 1, section 276-305]

Example 4.2


The ABC Trust is an attribution MIT. For the 2016-17 income year, the ABC Trust calculates that it has determined trust components of:

·
$290,000 of foreign source income; and
·
$55,000 of other ordinary or statutory income.


During the 2017-18 income year, the ABC Trust receives further information regarding the 2016-17 income year and realises that the trust components for the 2016-17 income year actually consisted of:

·
$300,000 of foreign source income; and
·
$50,000 of other ordinary or statutory income.


Therefore in the 2017-18 income year, the ABC Trust discovers, in relation to the 2016-17 income year:

·
an under of foreign source income of $10,000 (that is, $300,000 - $290,000); and
·
an over of other ordinary or statutory income of $5,000 (that is, $55,000 - $50,000).


The ABC Trust reconciles these unders and overs in the 2017-18 income year by adjusting its trust components for that income year.

For the 2017-18 income year, the ABC Trust has derived or received the following amounts:

·
foreign source income of $200,000; and
·
other ordinary or statutory income of $100,000.


Therefore, for the 2017-18 income year, the ABC Trust has trust components of:

·
foreign source income of $210,000 (that is, foreign source income ($200,000) increased by the amount of the under (10,000)); and
·
other ordinary or statutory income of $95,000 (that is, other income ($100,000) reduced by the amount of the over ($5,000)).

Trust component increased or decreased by rounding adjustment

4.23 A rounding adjustment will often arise for the trust component of a particular character because the determined trust component of that character cannot be divided evenly and in a practical way among the members of the attribution MIT. Therefore, the sum of the determined member components (as shown on the AMMA statements) may be more or less than the determined trust component.

4.24 Therefore, the amount of the trust component of a particular character needs to be:

·
increased by the rounding adjustment deficit; or
·
decreased by the rounding adjustment surplus.

4.25 This will ensure that the trustee of an attribution MIT will not be subject to shortfall taxation (as outlined in Chapter 5) in relation to the rounding adjustment deficit or surplus.

4.26 An attribution MIT will have a rounding adjustment deficit of a particular character if:

·
the sum of all determined member components of a particular character of all members of the attribution MIT for an income year falls short of the determined trust component of that character of the attribution MIT for the income year; and
·
the shortfall results wholly or partly from the trustee rounding down amounts in working out the determined member components for the previous income year.

[Schedule 1, item 1, subsection 276-310(2); Schedule 9, item 12, definition of 'rounding adjustment deficit' in subsection 995-1(1)]

4.27 The amount of the rounding adjustment deficit is equal to the amount of the shortfall, to the extent that it results from that rounding down. [Schedule 1, item 1, subsection 276-310(2)]

4.28 If an attribution MIT has a rounding adjustment deficit for a trust component of a particular character, the amount of the deficit is applied to increase the trust component of that character in the income year in which the rounding adjustment deficit arises. [Schedule 1, item 1, subsection 276-310(1)]

4.29 An attribution MIT will have a rounding adjustment surplus of a particular character if:

·
the sum of all determined member components of a particular character relating to assessable income, exempt income or non-assessable non-exempt income of all members of the attribution MIT for an income year exceeds the determined trust component of that character of the attribution MIT for the income year; and
·
the excess results wholly or partly from the trustee rounding up amounts in working out the determined member components for the previous income year.

[Schedule 1, item 1, subsections 276-315(2) and (3); Schedule 9, item 12, definition of 'rounding adjustment surplus' in subsection 995-1(1)]

4.30 If the determined member component has the character of a discount capital gain, section 276-315 of the Income Tax Assessment Act 1997 (ITAA 1997) applies so that the amount reflected in the determined member component is double the amount of the component. [Schedule 1, item 1, subsections 276-315(4) and (5)]

4.31 The amount of the rounding adjustment surplus is equal to the amount of the excess, to the extent that it results from that rounding up. [Schedule 1, item 1, subsection 276-315(2)]

4.32 If an attribution MIT has a rounding adjustment surplus for a trust component of a particular character, the amount of the surplus is applied to decrease the trust component of that character in the income year in which the rounding adjustment surplus arises. [Schedule 1, item 1, subsection 276-315(1)]

Example 4.3


The ABC Trust is an attribution MIT. For the 2016-17 income year, the trustee of ABC Trust calculates the determined trust components to be:

·
unfranked dividends of $300,000;
·
other ordinary income of $200,000;
·
foreign sourced income of $50,000; and
·
foreign income tax offsets of $5,050.


On 31 July 2017, the trustee gives AMMA statements for the 2016-17 income year to members of the ABC Trust with the following total amounts:

·
unfranked dividends of $298,965
·
other ordinary income of $201,195;
·
foreign sourced income of $49,810; and
·
foreign income tax offsets of $5,025.


The difference in the sum of the determined member component of a particular character and the amount of the trust component of that character is a result of reasonable and accepted rounding. Therefore, the ABC Trust has, in relation to the 2016-17 income year:

·
a rounding adjustment deficit for unfranked dividends of $1,035;
·
a rounding adjustment surplus for other ordinary income of $1,195;
·
a rounding adjustment deficit for foreign sourced income of $190; and
·
a rounding adjustment deficit for foreign income tax offsets of $25.


The trustee of the ABC Trust will not be subject to shortfall taxation under subsection 276-420 for the 2016-17 income year in relation to the rounding adjustment deficit or surplus. However:

·
the rounding adjustment deficits for unfranked dividends, foreign sourced income and foreign income tax offsets will be applied to increase the trust component for each of those tax characters in the 2017-18 income year; and
·
the rounding adjustment surplus for other ordinary income will be applied to reduce the trust component of that tax character in the 2017-18 income year.

Trust component of a particular character cannot be less than nil

4.33 The amount of the trust component of a particular character cannot be negative - that is, the trust component for a particular character can only be reduced to nil. The remaining amount of the over gives rise to a trust component deficit for that character for the income year. [Schedule 1, item 1, section 276-320; Schedule 9, item 12, definition of 'trust component deficit in subsection 995-1(1)]

Trust component of a particular character relating to assessable income adjusted

4.34 If the trust component of a particular character relates to assessable income, the amount of the increase or decrease in the discovery year to the trust component of the particular character may be adjusted having regard to:

·
the cross character allocation amount;
·
the carry-forward trust component deficit; and
·
the foreign income tax offset (FITO) allocation amount.

[Schedule 1, item 1, section 276-325]

Trust component of assessable income character reduced by cross-character allocation amount

4.35 If an attribution MIT has a cross-character allocation amount for a trust component of a particular character that relates to assessable income for the income year, the amount of the trust component for that particular character is reduced by the cross-character allocation amount. [Schedule 1, item 1, subsection 276-325(2)]

4.36 A cross-character allocation amount in respect of a trust component of a particular character that relates to assessable income may arise in an income year if an attribution MIT has a trust component deficit for that character in that income year.

4.37 The trustee of an attribution MIT may apply the trust component deficit for a trust component of a particular character that relates to assessable income to reduce the trust component of another character that relates to assessable income for the income year. The amount allocated is called the cross-character allocation amount. [Schedule 1, item 1, subsections 276-330(2) and (4); Schedule 9, item 4, definition of 'cross-character allocation amount' in subsection 995-1(1)]

4.38 The trustee of an attribution MIT must allocate the trust component deficit for a trust component that relates to assessable income to other trust components on a reasonable basis. However, the amount that is allocated to another trust component cannot exceed the amount of that other trust component. [Schedule 1, item 1, subsection 276-330(3)]

4.39 The trustee of an attribution MIT may choose not to apply the cross-character allocation rules. In that event, the trust component deficit for the particular character is carried forward to a later income year.

Example 4.4


For the 2017-18 income year, the ABC Trust has derived or received foreign source income of $20,000.

The ABC Trust discovers that it has an over of foreign source income for the 2016-17 income year of $25,000 and applies this over to reduce the trust component of foreign source income for the 2017-18 income year to nil.

As a result, the ABC Trust has a trust component deficit of foreign source income of $5,000.

The ABC Trust can apply this trust component deficit of foreign source income to reduce the trust component of other ordinary or statutory income in the 2017-18 income year.

Therefore, in the 2017-18 income year, the ABC trust will have the following trust components:

·
foreign source income of nil - that is, the initial trust component ($20,000) reduced by the amount of the over ($25,000), but not beyond nil; and
·
other ordinary or statutory income of $95,000 - that is, the initial trust component ($100,000) reduced by the cross character allocation amount ($5,000).

Trust component of assessable income character reduced by carry-forward trust component deficit

4.40 If an attribution MIT has a carry-forward trust component deficit for a trust component of a particular character that relates to assessable income for the income year, the amount of the trust component for that particular character is reduced by the amount of the carry-forward trust component deficit. [Schedule 1, item 1, subsection 276-325(3)]

4.41 An attribution MIT will have a carry-forward trust component deficit of a trust component of a particular character that relates to assessable income for an income year if it has a trust component deficit for that character for the income year which has not been allocated to another character as a cross-character allocation amount. The unallocated trust component deficit is carried forward and applied to reduce the trust component of the same particular character for the next income year. [Schedule 1, item 1, subsection 276-330(5); Schedule 9, item 4, definition of 'carry forward trust component deficit' in subsection 995-1(1)]

Example 4.5


Assume that the facts are the same as in Example 4.3, except that the ABC Trust decides not to apply the trust component deficit of foreign source income of $5,000 to reduce the trust component of other ordinary or statutory income.

Therefore, in the 2017-18 income year, the ABC Trust will have a carry-forward trust component deficit of foreign source income of $5,000.

The ABC Trust must apply that carry-forward trust component deficit to reduce the trust component of foreign source income in the 2018-19 income year.

Trust component of foreign source income character increased by FITO allocation amount

4.42 If an attribution MIT has a FITO allocation amount, the FITO allocation amount is applied to increase the trust component of a character relating to foreign source income. [Schedule 1, item 1, subsection 276-325(4)]

4.43 An attribution MIT will have a FITO allocation amount if the attribution MIT has both:

·
a trust component of the character that is foreign income tax paid (that counts towards a foreign income tax offset under Division 770); and
·
a trust component deficit for the income year of that character.

[Schedule 1, item 1, subsection 276-335(1); Schedule 9, item 4, definition of 'FITO allocation amount' in subsection 995-1(1)]

4.44 The amount of the FITO allocation amount is the amount worked out using the following formula:

Formula for calculating FITO allocation amount

[Schedule 1, item 1, subsection 276-335(2)]

4.45 The corporate tax gross up-rate is defined in subsection 995-1(1) to mean the amount worked out using the following formula:

Formula for calculating the corporate tax gross-up rate

4.46 The standard corporate tax rate is currently 30 per cent (definition of standard corporate tax rate in subsection 995-1(1)).

Example 4.6


The ABC Trust is an attribution MIT. In the 2016-17 income year, the ABC Trust has a trust component deficit of foreign income tax offset. The amount of the deficit is $30,000.

As a result, under section 276-350, the trust component of foreign source income is increased by the FITO allocation amount. The FITO allocation amount is:

Formula for calculating FITO allocation amount which equals $100000 for the example


In the 2016-17 income year, the ABC trust derives foreign source income of $800,000. Therefore, the trust component for foreign source income will be $900,000 - that is, the foreign source income character amount ($800,000) increased by the FITO allocation amount ($100,000).

4.47 The cross-character allocation amount in respect of a trust component of assessable income of a particular character is the amount of the trust component deficit for another character for the income year that is allocated to the particular character. [Schedule 1, item 1, subsections 276-305(1) and (3)]

Trustee taxed on trust component deficit of a tax offset character (other than a FITO allocation amount)

4.48 If an attribution MIT has a trust component deficit of a tax offset character that is not a foreign income tax offset, the trustee is liable to pay an amount of tax equal to the amount of the trust component deficit. [Schedule 1, item 1, section 276-340]

4.49 This is necessary because the excess tax offset attributed to a member will reduce that member's tax liability. Therefore, the imposition of an amount of tax equal to the amount of the trust component deficit over will ensure that the revenue is not disadvantaged as a result of the variance that causes the over to arise.

Working out the trust component for a particular character

Trust component of an assessable income character

4.50 In summary, the trustee of an attribution MIT can work out the trust component of a particular character that relates to assessable income, for an income year as follows:

Amount of the character derived or received in the income year

less

Deductions allocated to that character

plus

(Total unders less Total overs)

plus

Rounding adjustment deficit

less

Rounding adjustment surplus

less

Cross-character allocation amount

less

Carry-forward trust component deficit.

Trust component of an exempt income or non-assessable non-exempt income character

4.51 Similarly, the trust component of a particular character that relates to exempt income or non-assessable non-exempt income for an income year can be worked out as follows:

Amount of the character derived or received in the income year

plus

(Total unders less Total overs)

plus

Rounding adjustment deficit

less

Rounding adjustment surplus

less

Carry-forward trust component deficit.

Trust component of a tax offset character

4.52 Finally, the trust component of a particular character that relates to a tax offset can be worked out as follows:

Amount of the character derived or received in the income year

plus

(Total unders less Total overs)

plus

Rounding adjustment deficit.

4.53 However, the trustee of an attribution MIT can determine the precise mechanism that it uses to reconcile unders and overs.

Penalty for intentional or reckless disregard of the law

4.54 The trustee of an attribution MIT is liable to an administrative penalty if it has an under or an over for the base year which resulted from the intentional or reckless disregard of the law by the trustee. [Schedule 1, item 4, subsection 288-115(1) of Schedule 1 to the TAA 1953]

4.55 An administrative penalty does not apply in relation to an under or over to the extent that the under or over is reduced because the attribution MIT has reissued AMMA statements for the base year.

4.56 The administrative penalty applies separately to each under or over that the attribution MIT has for the base year. [Schedule 1, item 4, subsection 288-115(2) of Schedule 1 to the TAA 1953]

4.57 In the case of an under of a character relating to assessable income, exempt income, non-assessable non-exempt income, or of an over of a character relating to tax offset, the amount of the penalty is:

·
where the under or over resulted from intentional disregard of a taxation law (other than the Excise Acts) by the trustee, or by an agent of the trustee - 47 per cent of the amount of the under or over multiplied by 75 per cent; or
·
where the under or over resulted from recklessness by the trustee, or by an agent of the trustee, as to the operation of a taxation law (other than the Excise Acts) - 47 per cent of the amount of the under or over multiplied by 50 per cent.

[Schedule 1, item 4, subsections 288-115(3), (4) and (5) of Schedule 1 to the TAA 1953]

4.58 In the case of an over of a character relating to assessable income, exempt income, non-assessable non-exempt income, or of an under of a character relating to tax offset, the amount of the penalty is:

·
where the under or over resulted from intentional disregard of a taxation law (other than the Excise Acts) by the trustee, or by an agent of the trustee - the greater of:

-
47 per cent of the amount of the under or over multiplied by 30 per cent; and
-
60 penalty units; or

·
where the under or over resulted from recklessness by the trustee, or by an agent of the trustee, as to the operation of a taxation law (other than the Excise Acts) - the greater of:

-
47 per cent of the amount of the under or over multiplied by 20 per cent; and
-
40 penalty units.

[Schedule 1, item 4, subsections 288-115(3), (4) and (6) of Schedule 1 to the TAA 1953]

4.59 If both items in the table in section 288-115 apply to an under or over, item 1 (which produces the greater amount of penalty) applies to the under or over. [Schedule 1, item 4, subsection 288-115(7) of Schedule 1 to the TAA 1953]

4.60 The penalty is worked out based on a 47 per cent rate - that is, the highest marginal tax rate plus the Medicare levy. However, if the base year is an income year in which a temporary Budget repair levy applies, the amount of the penalty is worked out on the basis that the reference to 47 per cent is, instead, a reference to 49 per cent. [Schedule 1, item 4, subsection 288-115(8) of Schedule 1 to the TAA 1953]

4.61 These penalties are consistent with the administrative penalties that arise when an individual taxpayer intentionally or recklessly disregards the law in relation to their own income tax affairs.

4.62 The question of whether there has been intentional or reckless disregard of the law in a particular circumstance is determined in a manner consistent with the existing framework for administrative penalties (including remission of penalties) in Division 284 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953).

4.63 However, the trustee of an attribution MIT would not ordinarily be taken to have intentionally or recklessly disregarded the law if, in working out estimates of the trust components of particular characters that are attributed to members, the trustee, for example:

·
uses published estimates of amounts expected to be received by the attribution MIT from third party funds;
·
contacts third party fund managers to request estimates of amounts expected to be received by the attribution MIT from that third party fund and, when provided, uses those estimates; or
·
makes reasonable estimates of the distribution yield and tax components based on historical yield and tax component data.

4.64 A consequential amendment is made to section 298-30 of Schedule 1 to the TAA 1953 to allow the Commissioner of Taxation to make an assessment of the amount of an administrative penalty. [Schedule 6, items 66 and 67, section 298-30 of Schedule 1 to the TAA 1953]

Requirement to give an annual investment income report

4.65 An entity that is an investment body must give an annual investment income report to the Commissioner of Taxation for a financial year (section 393-10 of Schedule 1 to the TAA 1953). If the entity has less than 10 investments of the kind that are subject to the tax file number rules (Part VA investments), the entity may not be required to give the report to the Commissioner.

4.66 In order to support the attribution model, a managed investment trust (including an attribution MIT) must give an annual investment income report to the Commissioner for a financial year, even where the total number of Part VA investments in relation to which it was an investment body is less than 10. [Schedule 6, item 68, subsection 393-10(5A) of Schedule 1 to the TAA 1953]

4.67 Therefore, managed investment trusts will be required to give an annual investment income report to the Commissioner for a financial year for any Part VA investments in relation to which it was an investment body unless the Commissioner issues a legislative instrument which changes this requirement.

What if a trust ceases to be an attribution MIT?

4.68 If a trust that was an attribution MIT ceases to be an attribution MIT for an income year, the trust will need to continue to identify unders and overs relating to the period that the trust was an attribution MIT that are discovered in later income years (the discovery year). [Schedule 1, item 1, section 276-805]

4.69 In these circumstances, the trust will need to continue to work out unders and overs relating to a base year during which the trust was an attribution MIT. [Schedule 1, item 1, section 276-810]

4.70 However, section 276-350 will apply so that the trust does not have to reconcile unders or overs of a particular character for a base year once the amendment period for the base year has expired (that is, generally four years after the document for working out the determined trust component for the base year was created).

4.71 If the trust discovers an under or over that has the effect of increasing the amount of a particular character for the discovery year (worked out on the basis that the trust continued to be an attribution MIT), then:

·
if the relevant character relates to assessable income, the trust must treat the amount of the increase as assessable income of the trust for the discovery year - this may have the effect of increasing the net income (as defined in section 95 of the ITAA 1936) of the trust for the discovery year;
·
if the relevant character relates to exempt income, the trust must treat the amount of the increase as exempt income of the trust for the discovery year;
·
if the relevant character relates to non-assessable non-exempt income, the trust must treat the amount of the increase as non-assessable non-exempt income of the trust for the discovery year; or
·
if the relevant character relates to a tax offset character, the trust must treat the amount of the increase as a tax offset of the trust for the discovery year of a kind corresponding to that character.

[Schedule 1, item 1, subsection 276-810(2) and section 276-815]

4.72 For these purposes, if the relevant character is a discount capital gain, subsection 276-810(2) applies so that the amount of the increase is double the amount of the character. [Schedule 1, item 1, subsections 276-815(3) and (4)]

4.73 If the trust discovers an under or over that has the effect of decreasing the amount of a particular character for the discovery year (worked out on the basis that the trust continued to be an attribution MIT), then:

·
if the relevant character is a discount capital gain, the trust must treat half of the amount of the decrease as a capital loss of the trust for the discovery year;
·
if the relevant character is a non-discount capital gain, the trust must treat the amount of the decrease as a capital loss of the trust for the discovery year;
·
if the relevant character relates to assessable income and is not a capital gain, the trust must treat the amount of the decrease as a deduction of the trust for the discovery year;
·
if the relevant character relates to exempt income, the trust must treat the amount of the decrease as reducing the exempt income of the trust for the discovery year;
·
if the relevant character relates to non-assessable non-exempt income, the trust must treat the amount of the decrease as reducing the non-assessable non-exempt income of the trust for the discovery year; or
·
if the relevant character relates to a tax offset, the trust must generally treat the amount of the decrease as reducing the tax offset or offsets of the trust for the discovery year of a kind corresponding to that character.

[Schedule 1, item 1, subsection 276-810(2) and section 276-820]

4.74 If the relevant character is foreign income tax paid (that counts towards a foreign income tax offset under Division 770) which exceeds the total of the existing foreign tax offsets of the trust (before the reduction under subsection 276-820(5)), the excess is applied to increase the trust component of foreign source income by the amount worked out using the following formula:

Formula for calculating the trust component of foreign source income

[Schedule 1, item 1, paragraph 276-820(6)(b) and subsection 276-820(7)]

4.75 The corporate tax gross up-rate is defined in subsection 995-1(1) to mean the amount worked out using the following formula:

Formula for calculating the corporate tax gross-up rate

4.76 The standard corporate tax rate is currently 30 per cent (definition of standard corporate tax rate in subsection 995-1(1)).

4.77 If the relevant character relates to a tax offset that is not a foreign income tax offset which exceeds the total of the existing tax offsets of the trust (before the reduction under subsection 276-820(5)), the trustee is liable to pay tax on the amount of the excess at a rate of 100 per cent. [Schedule 1, item 1, paragraph 276-820(6)(a)]


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