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 8 - Definition of managed investment trust

Outline of chapter

8.1 This Chapter explains:

·
changes to improve the structure of the income tax law by transferring the definition of a managed investment trust to the Income Tax Assessment Act 1997 (ITAA 1997); and
·
changes to broaden the eligibility criteria to be a managed investment trust.

Context of amendments

8.2 Currently, subsection 995-1(1) of the ITAA 1997 defines a managed investment trust to have the same meaning as in the managed investment trust withholding provisions in section 12-400 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953).

8.3 Under that section, a trust is a managed investment trust 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 carries out most of its investment management activities in relation to Australian assets 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.

8.4 Under Division 275 of the ITAA 1997, managed investment trusts (as defined in section 12-400 of Schedule 1 to the TAA 1953), together with certain other trusts that are treated as managed investment trusts, can elect to apply the capital gains tax (CGT) provisions to gains and losses made on the disposal of certain assets held as passive investments (deemed capital account treatment).

8.5 To qualify as an attribution MIT or a withholding MIT, a trust must be a managed investment trust that meets certain other requirements.

8.6 Therefore, to improve the structure of the income tax law, the definition of managed investment trust is being transferred from Schedule 1 to the TAA 1953 to the ITAA 1997. Minor changes are being made to broaden the eligibility criteria to be a managed investment trust.

Summary of new law

8.7 The definition of managed investment trust is being transferred from Schedule 1 to the TAA 1953 to the ITAA 1997. Some minor changes are being made to:

·
extend the start-up period during which trusts do not need to meet the widely-held and not closely-held requirements to qualify as a managed investment trust;
·
modify the widely-held requirements to extend the list of entities qualifying as eligible investors in a managed investment trust;
·
clarify the operation of the rule that allows a trust to be treated as a managed investment trust in some circumstances where the only members of the trust are entities that qualify as eligible investors in a managed investment trust; and
·
clarify the operation of the rule that applies to extend the definition of a managed investment trust where no fund payment is made in relation to an income year.

Comparison of key features of new law and current law

New law Current law
A managed investment trust will be defined in the ITAA 1997, with modifications to:

·
extend the start-up period during which a trust does not need to meet the widely-held and not closely-held requirements to qualify as a managed investment trust;
·
modify the widely held requirements so that an eligible investor in a managed investment trust includes:

-
a foreign life insurance company regulated under a foreign law;
-
a limited partnership, if at least 95 per cent of its membership interests are held throughout the income year, directly or indirectly, by eligible investors and the remaining membership interests are beneficially owned by a general partner that habitually exercises the management power of the limited partnership; and
-
an entity that is, directly or indirectly, a wholly owned subsidiary of an entity that is an eligible investor, or two or more entities that are eligible investors; and

·
clarify the operation of the rule that allows a trust to be treated as a managed investment trust in some circumstances where the only members of the trust are entities that qualify as eligible investors in a managed investment trust; and
·
clarify the operation of the rule that applies to extend the definition of a managed investment trust where no fund payment is made in relation to an income year.

A managed investment trust is defined in Schedule 1 to the TAA 1953.

Detailed explanation of new law

Transfer of the definition of managed investment trust to the ITAA 1997

8.8 The definition of managed investment trust is currently located in section 12-400 of Schedule 1 to the TAA 1953. That definition is central to the operation of:

·
the circumstances in which a trust is an attribution MIT (as defined in the ITAA 1997) and therefore is eligible to apply the new tax system;
·
the circumstances in which a trust is a managed investment trust that can choose deemed capital account treatment under Subdivision 275-B of the ITAA 1997; and
·
the circumstances in which a trust is a managed investment trust that is subject to the Pay As You Go (PAYG) withholding tax rules in the Division 12 of the TAA 1953.

8.9 Consequently, to improve the structure of the income tax law, the definition of managed investment trust, together with several supporting provisions, is being transferred from Schedule 1 to the TAA 1953 to the ITAA 1997.

8.10 As a result, Schedule 1 to the TAA 1953 is being amended to:

·
replace the definition of managed investment trust with a new definition of withholding MIT; and
·
repeal sections 12-400 to 12-404.

[Schedule 3, item 5, section 12-383 of Schedule 1 the TAA 1953; Schedule 4, item 6]

8.11 In addition, the definition of managed investment trust, together with several supporting provisions, is being inserted into Subdivision 275-A of the ITAA 1997. [Schedule 4, item 3, sections 275-10 to 275-40]

8.12 A range of consequential amendments are also being made to reflect the transfer of the definition of managed investment trust from Schedule 1 to the TAA 1953 to the ITAA 1997. [Schedule 4, items 1 to 4, sections 275-10, 275-45, 275-50, 275-55 and 275-200; Schedule 6, items 8, 9, 13, 18, 19, 25 to 65, and 69, subsections 100AA(7), 100AB(8), 102T(16), 255(2A) and 255(2B) of the ITAA 1936, sections 840-800, 840-805, 842-230 and 840-235 of the ITAA 1997, sections 10-5, 12-5, 12-375, 12-385, 12-390, 12-395, 12-425, 15-15, 16-153, 16-157, 16-170, 16-195, 18-10 and 45-286 of Schedule 1 to the TAA 1953, paragraph 7(2)(a) of Schedule 5 to Tax Laws Amendment (2010 Measures No. 3) Act 2010]

8.13 The transfer of provisions does not change the circumstances in which:

·
a managed investment trust can apply deemed CGT treatment; or
·
the PAYG withholding tax rules in Division 12 of Schedule 1 to the TAA 1953 apply to a managed investment trust.

Circumstances in which a trust will qualify as a managed investment trust

8.14 Changes are being made to broaden the circumstances in which a trust will qualify as a managed investment trust. These changes:

·
extend the start-up period during which trusts do not need to meet the widely-held and not closely-held requirements to qualify as a managed investment trust;
·
modify the widely-held requirements to extend the list of entities qualifying as eligible investors in a managed investment trust;
·
clarify the operation of the rule that allows a trust to be treated as a managed investment trust in some circumstances where the only members of the trust are entities that qualify as eligible investors in a managed investment trust (section 275-45); and
·
clarify the operation of the rule that applies to extend the definition of a managed investment trust where no fund payment is made in relation to an income year (section 275-50).

Extend the start-up period during which trusts do not need to meet the certain requirements to qualify as a managed investment trust

8.15 To qualify as a managed investment trust, a trust must satisfy certain widely-held and not closely-held membership requirements for an income year. Currently, if a trust is created during the period starting six months before the start of the income year and ending at the end of the income year, these requirements are taken to have been satisfied by the trust for the income year.

8.16 A modification is being made to extend the start-up period during which trusts are taken to meet the widely-held and not closely-held requirements to qualify as a managed investment trust from six months to 12 months. [Schedule 4, item 3, subsection 275-10(6)]

Extend the list of eligible investors in managed investment trusts

8.17 A registered managed investment trust can qualify as widely-held if:

·
one of the entities that is a member of the trust is a specified widely-held entity (for example, a complying superannuation fund that has at least 50 members) that holds more than 25 per cent of the interest in, control of, or rights to distributions from, the trust; and
·
no other single entity holds more than a 60 per cent equivalent interest in the trust.

[Schedule 4, item 3, subparagraphs 275-10(3)(e)(i) and (ii) and subsection 275-25(1)]

8.18 A modification is being made to the widely held requirements so that an eligible investor in a managed investment trust includes:

·
a foreign life insurance company regulated under a foreign law; and
·
a limited partnership, if, throughout the income year:

-
at least 95 per cent of its membership interests are owned, directly or indirectly, by eligible investors; and
-
the remaining membership interests are owned by a general partner that habitually exercises the management power of the limited partnership; and

·
an entity that is, directly or indirectly, a wholly owned subsidiary of an entity that is an eligible investor, or two or more entities that are eligible investors.

[Schedule 4, item 3, paragraphs 275-20(4)(b), (j) and (k)]

8.19 These changes to extend the scope of eligible investors for the purpose of the widely held requirements apply from 1 July 2014. Consequently, the widely-held requirements in the current law are being amended in the same way. [Schedule 7, items 1 to 2, subsection 12-402(3) of Schedule 1 to the TAA 1953)]

Clarify the operation of section 275-45

8.20 A trust can qualify as a managed investment trust, in relation to an income year, if it is covered by section 275-45 (paragraph 275-10(1)(b)). A trust is covered by section 275-45 if, among other things, the only members of the trust are entities that qualify as eligible investors in a managed investment trust.

8.21 Currently, section 275-45 is expressed in terms of the trust having a single member that qualifies as an eligible investor in a managed investment trust. The section has been modified to clarify that it applies if it has more than one member, where all of the members are entities that qualify as eligible investors in a managed investment trust. [Schedule 4, item 3, section 275-45]

Clarify the operation of section 275-50

8.22 A trust can qualify as a managed investment trust, in relation to an income year, if it is covered by section 275-50 in relation to an income year (paragraph 275-10(2)(a)). A trust is covered by section 275-50 if the trustee does not make a fund payment during an income year, where the trust would be a managed investment trust if the trustee has made a fund payment during the income year.

8.23 Section 275-50 is being modified to clarify that it operates appropriately where a trust has been in existence for only part of the income year. [Schedule 4, item 3, section 275-50]

Finding tables

8.24 The following finding tables help to locate which provision in the Bill corresponds to a provision in the current law that has been transferred to, or relocated in, the ITAA 1997.

8.25 References to the old law are to provisions in Schedule 1 to the TAA 1953, unless otherwise stated.

8.26 References to the new law are to provisions in the ITAA 1997.

Table 8.1 : Old law to new law

Old law New law
12-400 275-10
12-401 275-15
12-402 275-20
12-402A 275-25
12-402B 275-30
12-403 275-35
12-404 275-40
275-15 ITAA 1997 275-45
275-20 ITAA 1997 275-50
275-30 ITAA 1997 275-55
Table 8.2 : New law to old law
New law Old law
275-10 12-400
275-15 12-401
275-20 12-402
275-25 12-402A
275-30 12-402B
275-35 12-403
275-40 12-404
275-45 275-15 ITAA 1997
275-50 275-20 ITAA 1997
275-55 275-30 ITAA 1997

Legislative history of old provisions

8.27 The definition of managed investment trust in section 12-400 in Schedule 1 to the TAA 1953 was inserted by Tax Laws Amendment (Election Commitments No. 1) Act 2008 [Act No. 32 of 2008].

8.28 These Acts have amended the definition of managed investment trust.

Act title Act No. Effect of amendments
Tax Laws Amendment (2010 Measures No. 3) Act 2010 90 of 2010 Repealed the definition of managed investment trust in section 12-400 of Schedule 1 to the TAA 1953 and inserted the existing definition.

Inserted provisions relating to:

·
trusts with wholesale membership (section 12-401);
·
widely-held requirements (sections 12-402 and 12-402A);
·
closely-held restrictions (section 12-402B);
·
licensing requirements for unregistered managed investment trusts (section 12-403); and
·
managed investment trust participation interests (section 12-404).

Tax Laws Amendment (2011 Measures No. 9) Act 2012 12 of 2012 Minor amendment to clarify that paragraph 12-402(3)(e) of Schedule 1 to the TAA 1953 applies as intended. That paragraph ensures that, for the purpose of applying the widely held requirements, an eligible investor in a managed investment trust includes an entity that is recognised under a foreign law as being used for collective investment by pooling the contribution of its members, provided the entity has at least 50 members and the contributing members that have acquired rights to benefits produced by the entity do not have day-to-day control over the entity's operation.

8.29 The extended definition of managed investment trust that applies for the purposes of Division 275 of the ITAA 1997 was inserted by Tax Laws Amendment (2010 Measures No. 1) Act 2010 [Act No. 56 of 2010]. Those amendments inserted sections 275-15, 275-20 and 275-30 of the ITAA 1997.

8.30 No amendments have been made to sections 275-15, 275-20 and 275-30 of the ITAA 1997 since they were inserted.


View full documentView full documentBack to top