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 7 - Taxation consequences for members

Outline of chapter

7.1 This Chapter explains the operation of the attribution model of taxation for members of attribution MITs. Under the attribution model of taxation:

·
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 base of their interests in the trust; and
·
the taxation treatment of tax deferred and tax free distributions made by the trust is clarified.

Context of amendments

7.2 Under the general trust provisions in Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936), beneficiaries of a managed investment trust are taxed on a share of the net income that reflects the share of trust income to which they are presently entitled.

7.3 The present entitlement model is complex and causes uncertainty for managed investment trusts and their members. Therefore, to provide greater certainty to members, the Board of Taxation recommended (Recommendation 19) the adoption of the attribution model (which results in members being taxed on amounts attributed to them by an attribution MIT).

7.4 A key objective of the attribution model is to ensure that a member who invests in an attribution MIT is taxed on the income and other amounts that are derived or received by the trust in broadly the same way that they would have been taxed if they had held the assets of the attribution MIT directly.

7.5 Currently, the cost base and reduced cost base of membership interests held by the member in a trust (including a managed investment trust) are adjusted downwards in relation to certain non-assessable distributions made by the trust. To prevent the double non-taxation of amounts received by members of the trust, this can result in:

·
a capital gain arising for a member of a trust under capital gains tax (CGT) event E4 in certain circumstances; or
·
a greater capital gain, or reduced capital loss, on the disposal of the membership interests.

7.6 The Board of Taxation recommended (Recommendation 26) that the scope of CGT event E4 be broadened for attribution MITs to allow upward adjustments of the cost base and reduced cost base of membership interests. This will overcome concerns about the potential for double taxation when a beneficiary sells an interest before receiving a distribution from an attribution MIT.

7.7 In addition, in some cases trusts make tax deferred and tax free distributions to members. These distributions are generally applied to:

·
reduce the cost bases of membership interests that are CGT assets; and
·
reduce the tax costs of membership interests that are revenue assets.

7.8 However, as the current taxation treatment of tax deferred and tax free distributions is uncertain, the amendments apply to confirm this practice for attribution MITs.

Summary of new law

7.9 Under the attribution model of taxation, amounts related to income and tax offsets of an attribution MIT, determined by the trustee to be of a particular character, are attributed to members and generally retain that character.

7.10 In addition, adjustments are made to the cost base of membership interests held by a member. The cost base of membership interests is increased to reflect amounts of determined trust components that are included in the member's assessable income. The cost base of membership interests is reduced to reflect:

·
trust distributions that the member becomes entitled to; and
·
the value of tax offsets attributed to the member.

7.11 Finally, tax deferred and tax free distributions made by an attribution MIT to a member will be applied to:

·
reduce the cost bases of membership interests that are CGT assets; and
·
reduce the tax costs of membership interests that are revenue assets.

Comparison of key features of new law and current law

New law Current law
The determined member component of a particular character flows through an attribution MIT to its members and retains its character.

The determined member component of a particular character is generally the amount recorded on the AMMA statement sent to the member by the attribution MIT.

In limited circumstances, a member can nominate a different determined member component of a particular character.

A share of the net income of a managed investment trust is included in the assessable income of beneficiaries to the extent that those beneficiaries are presently entitled to shares of the income of the trust.

Specific provisions in the income tax law ensure that certain amounts of net income of a managed investment trust that have a particular character retain that character when passed on to beneficiaries.

Tax offsets of a managed investment trust generally flow through to beneficiaries.

The cost base and reduced cost base of membership interests held by the member in an attribution MIT are adjusted downwards if the member's entitlements from the attribution MIT exceed the amounts of the determined trust components included in the member's assessable income. This can result in:

·
a capital gain arising for a member of a trust under CGT event E10 in certain circumstances; or
·
a greater capital gain, or reduced capital loss, on the disposal of the membership interests.

The cost base and reduced cost base of membership interests are adjusted upwards if the member's entitlements from the attribution MIT are less than the amounts of the determined trust components included in the member's assessable income. This can result in a reduced capital gain, or greater capital loss, on the disposal of the membership interests.

The cost base and reduced cost base of membership interests held by the member in a trust (including a managed investment trust) are adjusted downwards in relation to certain non-assessable distributions made by the trust. This can result in:

·
a capital gain arising for a member of a trust under CGT event E4 in certain circumstances; or
·
a greater capital gain, or reduced capital loss, on the disposal of the membership interests.

Tax deferred and tax free distributions made by an attribution MIT to a member will be applied to:

·
reduce the cost bases of membership interests that are CGT assets; and
·
reduce the tax costs of membership interests that are revenue assets.

The taxation treatment of tax deferred and tax free distributions made by a trust to its members is uncertain.

Detailed explanation of new law

7.12 Under the attribution model of taxation for attribution MITs:

·
amounts derived or received by the attribution MIT 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 base of their interests in the trust; and
·
the taxation treatment of tax deferred and tax free distributions made by the trust is clarified.

Member taxed on determined member component

7.13 Under the attribution model of taxation, amounts related to income and tax offsets of an attribution MIT, determined by the trustee to be of a particular character, are attributed to members and generally retain that character. [Schedule 1, item 1, section 276-75]

What is the determined member component?

7.14 The determined member component of a particular character for an income year of an entity that is a member of an attribution MIT in respect of an income year is the amount stated by the attribution MIT to be the amount of the member's member component of that character as reflected in the attribution MIT's latest AMMA statement for the member for the income year. [Schedule 1, item 1, subsection 276-205(1); Schedule 9, item 4, definition of 'determined member component' in subsection 995-1(1)]

7.15 A taxpayer is responsible for ensuring that the taxable income reported in their income tax return is correct. A taxpayer who holds investments will often rely on information provided by other parties to determine the amount to include in their assessable income. However, taxpayers must make appropriate judgements to ensure they report the correct amount of assessable income.

7.16 In some unusual circumstances a member of an attribution MIT may conclude that they cannot reasonably rely on the accuracy of the determined member component of a particular character that is stated in the AMMA statement they receive from the attribution MIT. If those unusual circumstances arise, the member can make a choice to nominate a different determined member component of a particular character for the income year. The choice can be made by a member only if the member considers that:

·
the attribution MIT has not worked out the member's member component of a particular character for an income year on a fair and reasonable basis in accordance with the constituent documents of the attribution MIT, or
·
the attribution MIT has inappropriately streamed particular character amounts to a particular member in a way that is inconsistent with the constituent documents of the attribution MIT.

[Schedule 1, item 1, subsection 276-205(3)]

7.17 If the member makes a choice to nominate a different determined member component of a particular character for the income year, the definition of member component in section 276-210 of the Income Tax Assessment Act 1997 (ITAA 1997) is modified so that, if the trust component of that character differs from the determined trust component of that character, references to the determined trust component in that section are taken to be references to the trust component. As a result, the member can work out the revised member component of a particular character having regard to amount of that character that is derived or received by the attribution MIT. [Schedule 1, item 1, subsection 276-205(4)]

7.18 The choice must be made in writing and be given to the Commissioner of Taxation within four months of the end of the member's income year. In addition, the choice must state:

·
the income year to which the choice relates;
·
what the member considers their member component of the particular character for the income year to be; and
·
the reason why the member considers the determined member component of the particular character worked out by the attribution MIT does not accord with the requirements in section 276-210 - that is, broadly, why the determined member component was not worked out by the attribution MIT on a fair and reasonable basis in accordance with its constituent documents.

[Schedule 1, item 1, subsections 276-205(2) and (5)]

7.19 The way that the member prepares their income tax return is sufficient evidence of the making of the choice. [Schedule 1, item 1, subsection 276-205(6)]

7.20 If a member makes a choice to challenge the correctness of the determined member component on the AMMA statement, the member must also notify the attribution MIT of the choice.

7.21 The notice must be made in writing and be given to the attribution MIT within four months of the end of the member's income year. The notice must contain the same information as is required to be given to the Commissioner. [Schedule 1, item 1, subsections 276-205(2) and (7)]

7.22 The information in the notice to the trustee should be consistent with the information in the choice given to the Commissioner. However, the information in the notice and the choice does not have to be identical.

7.23 The fact that a member has chosen to challenge the correctness of the determined member component of a particular character on the AMMA statement does not mean that the amount that the member contends to be the correct amount is their determined member component for that character. That will only be the case if:

·
the trustee's determination of the member's component was not done in accordance with the specified attribution principles (as discussed in Chapter 3); and
·
the amount the member contends should be their member component equals the amount that would have been the member component determined by the trustee of the attribution MIT if the attribution principles had been applied correctly.

[Schedule 1, item 1, subsections 276-205(3) and (4)]

Consequences when a determined member component is attributed to a member - the general rule

7.24 The consequences that arise when a determined member component is attributed to an entity that is a member of an attribution MIT in respect of an income year varies depending on whether:

·
the determined member component is of an assessable income, exempt income or non-assessable non-exempt income character; or
·
the determined member component is of a tax offset character.

7.25 If a determined member component of an assessable income, exempt income or non-assessable non-exempt income character is attributed to a member of an attribution MIT, the member is taken to have derived, received or made the amount in the income year:

·
in the member's own right (rather than as a member of a trust); and
·
in the same circumstances as the attribution MIT derived, received or made the amount that is reflected in the determined member component.

[Schedule 1, item 1, subsections 276-80(1) and (2)]

7.26 Examples of amounts of a particular assessable income character that may need to be identified by an attribution MIT and attributed to members include:

·
discount capital gains;
·
non-discount capital gains;
·
dividends, interest or royalties that are subject to withholding tax; and
·
foreign source income.

7.27 If a determined member component of an assessable income, exempt income or non-assessable non-exempt income character is attributed to a member by an attribution MIT, the member is taken to have derived, received or made the amount reflected in the determined member component in the income year, for the purposes of:

·
including an amount in their assessable income, exempt income or non-assessable non-exempt income;
·
determining whether they have made a capital gain from a CGT event; and
·
determining the extent to which they have utilised a net capital loss.

[Schedule 1, item 1, subsection 276-80(3)]

7.28 For example, if the determined member component is foreign source income, it is included in the member's assessable income in the same way that it would be included if the member had derived or made the foreign source income in their own right. If the member is a foreign resident, section 6-5 will operate so that the amount will not be included in the member's assessable income.

7.29 If the determined member component is a capital gain on taxable Australian property, the member is taken to have made a capital gain on taxable Australian property from a CGT event in their own right for the purposes of determining the net capital gain which is included in their assessable income.

7.30 If the determined member component of a tax offset character is attributed to an entity that is a member of an attribution MIT in respect of an income year, the member is taken to have paid or received the amount reflected in the determined member component in the income year:

·
in the member's own right (rather than as a member of a trust); and
·
in the same circumstances as the attribution MIT paid or received that amount.

[Schedule 1, item 1, subsections 276-80(4) and (5)]

7.31 As a result, if a determined member component of a tax offset character is attributed to a member by an attribution MIT, possible effects are:

·
the member may be entitled to a tax offset; or
·
the member may be entitled to a credit for an amount withheld from a withholding payment.

[Schedule 1, item 1, subsection 276-80(6)]

7.32 Therefore, for example, if an attribution MIT pays foreign tax on foreign source income, the member will be taken to have paid that foreign tax for the purposes of working out whether they are entitled to a foreign income tax offset.

7.33 The general rule in section 276-80 which applies when a determined member component is attributed to a member of an attribution MIT is modified by specific rules which apply when:

·
the determined member component is a discount capital gain; or
·
the determined member component is a franking credit gross-up amount of a franking credit.

7.34 In addition, specific rules apply to:

·
modify the general rule in section 276-80 to ensure that certain circumstances of the trustee of an attribution MIT are not attributed to members; and
·
modify the operation of the dividend imputation holding period and related payment rules.

Consequences when a determined member component is attributed to a member - discount capital gains

7.35 The operation of the general rule in section 276-80 is modified if an entity that is a member of an attribution MIT in respect of an income year has, for the income year, a determined member component that is a discount capital gain. [Schedule 1, item 1, subsection 276-85(3)]

7.36 In these circumstances, subsection 276-80(2) applies so that the amount reflected in the determined member component is double the amount of the component. [Schedule 1, item 1, subsections 276-85(1), (2) and (4)]

7.37 This ensures that the member recognises the whole of the capital gain. If the member is entitled to a discount capital gain, the member will take the amount of the discount capital gain into account when working out their net capital gain. The discount percentage for the discount capital gain will be determined based on the member's characteristics. For example:

·
if the member is an Australian resident individual, the discount percentage will be 50 per cent; or
·
if the member is a complying superannuation fund, the discount percentage will be 33 1/3 per cent.

Consequences when a determined member component is attributed to a member - franking credits

7.38 The operation of the general rule in section 276-80 is modified if an entity that is a member of an attribution MIT in respect of an income year has, for the income year a determined member component (the franking credit gross-up component) that is a franking credit gross-up amount. [Schedule 1, item 1, subsections 276-85(1), (2) and (5)]

7.39 In these circumstances, for the purposes of subsection 207-20(1), the reference in that subsection to the amount of the franking credit on the distribution is taken to be a reference to the amount of the franking credit gross-up component. [Schedule 1, item 1, subsection 276-85(6)]

7.40 Subsections 276-85(5), (6) and (7) operate to ensure that section 207-20 applies appropriately for the member in relation to a franked dividend that is attributed to the member by an attribution MIT - that is, the member will:

·
include both the dividend, and the amount of the franking credit gross-up component, in assessable income; and
·
be entitled to a tax offset equal to the amount of the franking credit gross-up component.

Circumstances of the trustee that are not attributed to members

7.41 When an amount of a particular character is attributed to an entity that is a member of an attribution MIT in respect of an income year, the operation of paragraphs 276-80(2)(b) and (6)(b) is modified so that the circumstances in which the member is taken to have derived, received, made or paid an amount of the particular character do not include:

·
the residence of the trustee of the attribution MIT; or
·
the place of central management and control of the attribution MIT.

[Schedule 1, item 1, subsection 276-85(7)]

7.42 This ensures that:

·
if the member is an Australian resident, the member will be taken to have derived, received, made or paid the amount of the particular character that is attributed to the member as an Australian resident; or
·
if the member is a foreign resident, the member will be taken to have derived, received, made or paid the amount of the particular character that is attributed to the member as a foreign resident.

Operation of the dividend imputation holding period and related payment rules

7.43 If an entity receives a franked dividend (either directly from a company or indirectly through a trust), the entity generally includes the amount of the franking credits in assessable income and receives a corresponding tax offset equal to the amount of franking credits attached to the dividend. However, these taxation outcomes differ if the entity does not satisfy the dividend imputation holding period and related payment rules - that is, if the entity is not a qualified person (paragraphs 207-145(1)(a) and 207-150(1)(a)).

7.44 If a franking credit that is received by an attribution MIT which satisfies the dividend imputation holding period and related payment rules in relation to a distribution is attributed to an entity that is a member of the attribution MIT in respect of an income year, subsections 276-80(2) and 276-80(6) operate so that the member will be taken to be a qualified person in relation to the distribution.

7.45 However, the Commissioner of Taxation can make a determination so that the member will not be taken to be a qualified person in relation to a distribution. In making a determination, the Commissioner must have regard to any of the following matters:

·
arrangements (if any) entered into by the member that directly or indirectly reduce the economic exposure of the member to changes in the value of the membership interests held by the member;
·
the lack of such arrangements;
·
the length of time the member has been a member of the attribution MIT; and
·
any other matter the Commissioner considers to be relevant.

[Schedule 1, item 1, section 276-90]

7.46 If an entity to whom a determination relates is dissatisfied with the determination, the entity may object against it in a manner set out in Part IVC of the Taxation Administration Act 1953 (TAA 1953). [Schedule 4, item 5, subsection 276-90(7)]

Relationship with the withholding rules

7.47 If a determined member component that is attributed to a member by an attribution MIT is reflected in an attribution MIT dividend, interest or royalty payment (AMIT DIR payment) or a fund payment (and therefore is subject to withholding tax), the member is not taken to have derived, received or made the amount to the extent that an amount in respect of the payment:

·
has been withheld from the payment under Subdivision 12-F or 12-H of Schedule 1 to the TAA 1953;
·
would have been withheld under Subdivision 12-F apart from an exemption to withhold an amount under Subdivision 12-F;
·
has been paid under Division 12A; or
·
would have been paid under Division 12-A apart from an exemption to withhold an amount under Subdivision 12-F.

[Schedule 1, item 1, subsection 276-95(1)]

7.48 As a consequence, subsection 276-80(2) (which operates to ensure that the member is taken to have derived, received or made an amount of a particular character when issued an AMMA statement by the trustee of an attribution MIT in which it is a member disclosing an amount (a determined member component) of that character) will not apply to these amounts.

7.49 However, if the determined member component is reflected in a fund payment, subsection 276-80(2) will apply to the extent that an amount attributable to the fund payment is not non-assessable non-exempt income under section 840-815. [Schedule 1, item 1, subsection 276-95(2); Schedule 3, items 3 and 4, subsection 840-815(2)]

7.50 Subsection 840-815(2) sets out circumstances in which fund payments made by an attribution MIT are not non-assessable non-exempt income. Under that subsection, an amount is not non-assessable non-exempt income if is derived by an Australian resident to the extent that:

·
managed investment trust withholding tax is payable on an amount because of subsection 840-805(4D); and
·
the Australian resident is entitled, directly or indirectly, to the amount.

[Schedule 3, items 3 and 4, subsection 840-815(2)]

Example 7.1


ABC Trust is an attribution MIT that makes a fund payment to a foreign resident member, Company XYZ.

Company XYZ is the trustee of the XYZ Trust. Jessica, who is an Australian resident, is a member of the XYZ Trust. An amount attributable to the fund payment is paid by Company XYZ to Jessica.

Company XYZ is liable to managed fund withholding tax because of paragraph 840-805(4D)(a). Subsection 840-815(2) ensures the amount is not non-assessable non-exempt income of Jessica. As a result, the amount is included in Jessica's assessable income. However, to the extent that it relates to her entitlement, Jessica will be entitled to a credit for the managed investment trust withholding tax that is paid by XYZ Trust.

7.51 Finally, subsection 276-80(2) does not affect the operation of Division 11A of Part III of the ITAA 1936, Subdivision 840-M of the ITAA 1997 or Division 12 of Schedule 1 to the TAA 1953. [Schedule 1, item 1, subsection 276-95(3)]

7.52 This will ensure that the withholding tax provisions will continue to operate effectively for foreign resident members of an attribution MIT.

No double counting of determined member component

7.53 Section 276-100 ensures that the determined member component of a particular character is not included in the member's assessable income under more than one provision in the income tax law.

7.54 If an amount is included in the assessable income of an entity that is a member of an attribution MIT in respect of an income year in respect of the member's interest in the attribution MIT under a provision of the income tax law other than because the member is taken to have derived, received or made the amount under section 276-80, the amount included under that other provision is reduced by the amount included because of section 276-80. [Schedule 1, item 1, subsections 276-100(1) and (2)]

7.55 However, if the amount that is attributed to a member of an attribution MIT is a gain or loss that the member makes from a financial arrangement that is taxed under the Taxation of Financial Arrangements (TOFA) provisions (Division 230), then those provisions (rather than section 276-80) will continue to apply to the gain or loss. [Schedule 1, item 1, subsections 276-100(1) and (3)]

Member issued with a revised AMMA statement

7.56 If an attribution MIT discovers a variance, the trustee can reconcile the variance using the unders and overs system or can reissue AMMA statements. Generally, the attribution MIT must reconcile variances that are discovered within four years of the base year.

7.57 If an attribution MIT reconciles a variance by reissuing AMMA statements for an income year, an entity that is a member of the attribution MIT in respect of the income year will need to seek an amendment to their income tax assessment for the income year to which the AMMA statement relates. As a result, the general limitations that restrict the period in which an income tax assessment can be amended do not apply when the amendment is made to give effect to an AMMA statement that is issued by an attribution MIT. [Schedule 6, item 15, subsection 170(10AB) of the ITAA 1936]

Consequential amendments

7.58 Subdivision 768-A of the ITAA 1997 applies when:

·
an Australian corporate tax entity receives a foreign equity distribution from a foreign company, either directly or indirectly through an interposed trust or partnership; and
·
the Australian corporate tax entity holds a participation interest of at least 10 per cent in the foreign company.

7.59 If the Subdivision applies, the distribution is non-assessable non-exempt income of the Australian corporate tax entity.

7.60 This outcome remains unchanged when an Australian corporate tax entity receives the distribution indirectly through an attribution MIT. [Schedule 6, item 24, paragraph 768(5)(b)]

Custodian interposed between an attribution MIT and a member

7.61 Investors frequently invest in managed investment trusts indirectly through another entity that is a custodian. If a custodian is interposed between an attribution MIT and a member, the amount of a particular character attributed by the attribution MIT to the custodian will flow through the custodian to the member and retain its character.

7.62 Section 276-115, which clarifies this outcome, applies if:

·
a custodian is a member of an attribution MIT in respect of an income year;
·
the custodian has, for the income year, a determined member component of a particular character for the attribution MIT;
·
the custodian is interposed between the attribution MIT and another entity (the subsequent recipient); and
·
the subsequent recipient:

-
starts to have, at a time in the income year, an entitlement to an amount that is reasonably attributable to all or part of the determined member component; or
-
would start to have, at a time in the income year, such an entitlement if the determined member component were an actual payment of that amount.

[Schedule 1, item 1, subsection 276-115(1)]

7.63 In these circumstances:

·
the custodian's determined member component is reduced by the amount of the entitlement; and
·
the subsequent recipient is taken to be a member of the attribution MIT in respect of the income year and is taken to have a determined member component for the attribution MIT that is:

-
of the same character as derived, received or made by the custodian; and
-
is equal to the amount of the entitlement.

[Schedule 1, item 1, subsections 276-115(2) and (3)]

Cost base adjustments when non-assessable distributions are made to members

7.64 An entity that is a member of an AMIT in respect of an income year will make a capital gain or capital loss when a CGT event happens to their membership interests. This could happen, for example, when the member sells their membership interests. A capital gain arises if the capital proceeds received by the member exceed the cost base of the membership interests. A capital loss arises if the capital proceeds received by the member are less than the reduced cost base of the membership interests.

7.65 Currently, the cost base and reduced cost base of membership interests held by the member in a trust (including a managed investment trust) are adjusted downwards in relation to certain non-assessable distributions made by the trust. To prevent the double non-taxation of amounts received by members of the trust, this can result in:

·
a capital gain arising for a member of a trust under CGT event E4 in certain circumstances; or
·
a greater capital gain, or reduced capital loss, on the disposal of the membership interests.

7.66 The Board of Taxation recommended (Recommendation 26) that the scope of CGT event E4 be broadened for attribution MITs to allow upward adjustments of the cost base and reduced cost base of membership interests. This will overcome concerns about the potential for double taxation when a beneficiary sells an interest before receiving a distribution from an attribution MIT.

7.67 Therefore, the cost base and reduced cost base of a member's membership interests in an attribution MIT will be adjusted by the AMIT cost base net amount for the income year. The AMIT cost base net amount for the income year is:

·
if, for an income year, the AMIT cost base reduction amount in respect of the membership interests exceeds the AMIT cost base increase amount - the amount of the excess; or
·
if, for an income year, the AMIT cost base reduction amount in respect of the membership interests falls short of the AMIT cost base increase amount - the amount of the shortfall.

[Schedule 2, item 3, sections 104-107B and 104-107C; Schedule 9, item 1, definition of 'AMIT cost base net amount' in subsection 995-1(1)]

7.68 The AMIT cost base reduction amount for the income year is, to the extent that it is reasonably attributable to the CGT asset that is the membership interests, the total of:

·
any money and the market value of any property that the member starts to have a right to receive from the attribution MIT in the income year, where that right is indefeasible or is reasonable likely not to be defeated;

-
for the purpose of working out whether the right is indefeasible, section 276-55 (which deems a member's interests in an attribution MIT to be indefeasible) is disregarded; and

·
all amounts of tax offset that the member has a right to receive from the attribution MIT in the income year.

[Schedule 2, item 3, subsection 104-107D(1); Schedule 9, item 1, definition of 'AMIT cost base reduction amount' in subsection 995-1(1)]

7.69 However, if CGT event A1, C2, E1, E2, E6 or E7 happens to a CGT asset before the end of the income year and the time of the reduction or increase is just before the time mentioned in subsection 104-107B(4), the AMIT cost base reduction amount for the income year does not include the capital proceeds from the CGT event. [Schedule 2, item 3, subsection 104-107D(2)]

7.70 The AMIT cost base increase amount for the income year is, to the extent that they are reasonably attributable to the CGT asset that is the membership interests, the sum of:

·
all amounts (disregarding the attribution MIT's net capital gain for the income year) included in the member's assessable income or non-assessable non-exempt income (either because of section 276-80 or because of another provision in the income tax law) for the income year, worked out on the assumption that the member is an Australian resident; and
·
the amount of the member's determined member components of a character relating to a capital gain that the member has for the income year in respect of the attribution MIT that is taken into account under section 276-80, worked out on the assumption that the member is an Australian resident - in the case of a discount capital gain, this amount includes the discount component of the discount capital gain.

[Schedule 2, item 3, section 104-107E; Schedule 9, item 1, definition of 'AMIT cost base increase amount' in subsection 995-1(1)]

7.71 If the AMIT cost base net amount for the income year is an excess, then the cost base and reduced cost base of the membership interests is reduced by the AMIT cost base net amount (but not beyond nil). [Schedule 2, item 3, subsection 104-107B(2)]

7.72 If the AMIT cost base net amount exceeds the cost base of the membership interests (including where the cost base is nil), the member will make a capital gain under CGT event E10 equal to the amount of the excess at the time at which the reduction occurs. [Schedule 2, item 3, section 104-107A]

7.73 However, a capital gain does not arise under CGT event E10 if the membership interest is a pre-CGT asset - that is, if the CGT asset was acquired before 20 September 1985. [Schedule 2, item 3, subsection 104-107A(4)]

7.74 If the AMIT cost base net amount for the income year is a shortfall, then the cost base and reduced cost base of the membership interests is increased by the AMIT cost base net amount. [Schedule 2, item 3, subsection 104-107B(1) and (3)]

7.75 The cost base and reduced cost base of the membership interests must be adjusted by the AMIT cost base net amount:

·
at the end of each income year; or
·
if a CGT event happens to the membership interests during an income year, just before the time of the CGT event.

[Schedule 2, item 3, subsection 104-107B(4)]

7.76 Consequential amendments ensure that:

·
CGT event E10 is listed in the table of CGT events;
·
CGT event E4 does not apply to a unit or interest in an attribution MIT;
·
section 104-107B is listed in Subdivision 112-B, which contains guide material relating to special rules affecting the cost base or reduced cost base of a CGT asset; and
·
CGT event E10 is not a realisation event as defined in section 977-5.

[Schedule 2, items 1, 2 and 4, section 104-5, subsection 104-70(1A) and section 977-5; Schedule 6, item 23, section 112-46]

Tax deferred and tax free distributions made to members

7.77 Under the current law, the tax outcomes that arise when a member receives a trust distribution or entitlement that exceeds the amounts included in assessable income of members under Division 6 of Part III of the ITAA 1936 (a tax deferred or tax free distribution or entitlement) are uncertain.

7.78 A tax deferred or tax free distribution or entitlement will arise in relation to a membership interest that is held by an entity that is a member of an attribution MIT in respect of an income year if:

·
the member starts to have a right to receive any money or any property from the trustee of an attribution MIT in the income year;
·
the right is indefeasible or is reasonably likely not to be defeated;

-
for the purpose of working out whether the right is indefeasible, section 276-55 (which deems a member's interests in an attribution MIT to be indefeasible) is disregarded;

·
the right is not remuneration or consideration for the member providing finance, services, goods or property to the trustee of the attribution MIT or to another person;
·
the right is reasonably attributable to a CGT asset that is a membership interest in the attribution MIT;
·
the CGT asset is not trading stock or a TOFA financial arrangement; and
·
as a result of the member starting to have the right, the CGT asset's AMIT cost base reduction amount for the income year is increased because of the operation of section 104-107D.

[Schedule 2, item 3, subsection 104-107F(1)]

7.79 The tax-deferred or tax free distribution or entitlement derived from the membership interest in these circumstances is not included in the member's assessable income under provisions outside of the rules for attribution MITs. In this regard, the tax liability in relation to these amounts arises because of the attribution rules in Division 276, or under the rules relating to tax deferred or tax free distributions by attribution MITs. Therefore, the following provisions (the ordinary income and deduction provisions) will not apply because the member starts to have the right:

·
section 6-5 (about ordinary income);
·
section 6-10 (about statutory income), except to the extent that the section applies in relation to section 102-5 (about net capital gains) or to sections 104-107G or 104-107H (which are the specific rules for membership interests in attribution MITs that are held on revenue account);
·
section 8-1 (about general deductions);
·
sections 15-15 and 25-40 (about profit-making undertakings or plans); or
·
sections 25A and 52 of the ITAA 1936 (about profit-making undertakings or schemes).

[Schedule 2, item 3, subsections 104-107F(2) and (3)]

Membership interests held on capital account

7.80 If a membership interest in an attribution MIT is held by the member on capital account, the cost base and reduced cost base of the membership interest will be adjusted because of the operation of section 104-107B. As a result, a higher capital gain, or reduced capital loss, will arise when a CGT event happens to the membership interest.

Membership interests held on revenue account

7.81 Sections 104-107G and 104-107H clarify the tax outcomes that arise when a tax deferred or tax free distribution or entitlement is made to an entity that is a member of an attribution MIT in respect of an income year where a membership interest is held on revenue account.

7.82 The modifications apply to reduce or increase the cost of a CGT asset, or include an amount in assessable income, if:

·
a taxpayer holds a CGT asset that is a unit or interest in an attribution MIT (and therefore is a member of the attribution MIT); and
·
the CGT asset is a revenue asset, but is not a TOFA financial arrangement.

[Schedule 2, item 3, subsection 104-107G(1)]

7.83 The time of the reduction or increase is:

·
if a CGT event happens to the CGT asset before the end of the income year - just before the time of the CGT event; or
·
otherwise - just before the end of the income year.

[Schedule 2, item 3, subsection 104-107G(5)]

7.84 Where the modifications apply, if the AMIT cost base net amount for the income year is an excess (as mentioned in paragraph 104-107C(a)), then, for the purposes of working out the amount that is included in assessable income or that is treated as a deduction under the ordinary income and deduction provisions:

·
in a case where the AMIT cost base net amount exceeds the cost of the asset - the cost of the asset is reduced to nil; or
·
otherwise - the cost of the asset is reduced by the amount of the AMIT cost base net amount.

[Schedule 2, item 3, subsections 104-107G(2) and (3)]

7.85 However, an amount will be included in the member's assessable income if the AMIT cost base net amount exceeds the cost of the asset just before the time of the reduction or increase. [Schedule 2, item 3, subsections 104-107H(1) and (2)]

7.86 In these circumstances:

·
if the cost of the CGT asset was nil just before that time - the cost reduction amount is included in assessable income; or
·
otherwise - the amount of the excess is included in assessable income.

[Schedule 2, item 3, subsection 104-107H(2)]

7.87 For the purposes of applying section 104-107H, subsection 104-107F(3) is disregarded. As a result, for the purposes of working out the amount that is included in assessable income in respect of a membership interest held on revenue account, section 6-10 (about statutory income) will apply when a taxpayer starts to have a right to receive money or property from the attribution MIT. [Schedule 2, item 3, subsection 104-107H(3)]

7.88 If the AMIT cost base net amount for the income year is a shortfall (as mentioned in paragraph 104-107C(b)), then the cost of the asset is increased by the amount of the AMIT cost base net amount. [Schedule 2, item 3, subsection 104-107G(4)]

7.89 For the purposes of applying sections 104-107G and 104-107H, in working out the AMIT cost base net amount for a CGT asset, a right that the member starts to have in the income year is disregarded if:

·
the right is for the member to receive any money or any property from the trustee of the attribution MIT; and
·
the right is for remuneration or consideration for the member providing finance, services, goods or property to the trustee of the attribution MIT or to another person.

[Schedule 2, item 3, subsection 104-107G(6)]

7.90 Section 118-20 applies to reduce capital gains made from a CGT event if, broadly, the capital gain is included in a taxpayer's assessable income or exempt income under a provision of the income tax law that is outside the Part 3-1 of the ITAA 1997 (which contains the CGT provisions). As a result, where an amount is included in assessable income as both ordinary income and as a capital gain, the ordinary income provisions prevail.

7.91 Therefore, to ensure that section 118-20 operates appropriately where section 104-107G or 104-107H applies in relation to a CGT asset that is a revenue asset, sections 104-107G and 104-107H are taken to be outside of Part 3-1 for the purposes of applying section 118-20. [Schedule 2, item 3, subsections 104-107G(7) and 104-107H(4)]

Transitional rules

7.92 Transitional rules ensure that tax deferred and tax free distributions made by a managed investment trust prior to the commencement of the new tax system will be taken into account under the CGT regime rather than being taxed as ordinary income, unless an entity has already included the distributions as ordinary assessable income. [Schedule 8, item 3, sections 276-750T and 276-755T of the Income Tax (Transitional Provisions) Act 1997]

7.93 These transitional rules are explained in more detail in Chapter 10.


View full documentView full documentBack to top