House of Representatives

Explanatory Memorandum

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

Chapter 10 - Application and transitional provisions

Outline of chapter

10.1 This Chapter explains application and transitional provisions for the new tax system for managed investment trusts.

Application provisions

New tax system for attribution MITs applies from 1 July 2016

10.2 The new tax system for managed investment trusts applies to assessments for an income year starting on or after 1 July 2016. [Schedule 8, subitem 1(1) and item 3, section 276-5T of the Income Tax (Transitional Provisions) Act 1997]

Option to apply the new tax system for the 2015-16 income year

10.3 The trustee of a managed investment trust will be able to make an irrevocable choice to apply the new tax system for the 2015-16 income year, but only if the trust's income year starts on or after 1 July 2015. [Schedule 8, subitems 1(1), (5) and (6) and item 3, section 276-5T of the Income Tax (Transitional Provisions) Act 1997]

Consequential amendments to the Investment Manager Regime

10.4 Items 32 to 34 of Schedule 6 make minor consequential amendments to the Investment Manager Regime. These consequential amendments apply to income year starting on or after 1 July 2016. [Schedule 8, subitem 1(3)]

Extension of widely held requirements applies from 1 July 2014

10.5 The changes in Schedule 7 to extend the list of entities qualifying as eligible investors for the purpose of the widely held requirements apply to income years starting on or after 1 July 2014. [Schedule 7, items 1 and 2, subsection 12-402(3) of Schedule 1 to the TAA 1953; Schedule 8, subitem 1(4)]

10.6 These changes are beneficial to managed investment trusts and have been actively sought by key stakeholders.

Commencement of the amendments

10.7 Schedules 1 to 6, and Schedules 8 and 9, of the Tax Laws Amendment (New Tax System for Managed Investment Trusts) Act 2015 will commence at the latest of the following times:

•

the start of the day on which the Act receives Royal Assent;

•

the day that the Income Tax (Attribution Managed Investment Trusts - Offsets) Act 2015 receives Royal Assent;

•

the day that the Income Tax Rates Amendment (Managed Investment Trusts) Act 2015 receives Royal Assent; or

•

the day that the Medicare Levy Amendment (Attribution Managed Investment Trusts) Act 2015 receives Royal Assent.

[Section 2]

10.8 Schedule 7 of the Tax Laws Amendment (New Tax System for Managed Investment Trusts) Act 2015 will commence on 1 July 2014. [Section 2]

Transitional provisions

Application of the arm's length income rule to existing arrangements

10.9 If a managed investment trust derives non-arm's length income, section 275-605 of the Income Tax Assessment Act 1997 (ITAA 1997) will apply so that the trustee is taxed on the non-arm's length income at the standard corporate tax rate (currently 30 per cent) provided that:

•

the non-arm's length income is reflected in:

-

if the trust is an attribution MIT - one of more of the attribution MIT's trust components for the income year; or

-

otherwise - the trust's net income for the income year;

•

the managed investment trust is a party to a scheme, where the parties to the scheme are not dealing with each other at arm's length (the non-arm's length scheme); and

•

at least one of the parties to the non-arm's length scheme is not a managed investment trust for the income year.

[Schedule 4, item 5, section 275-605]

10.10 A transitional rule will apply if:

•

a managed investment trust became a party to a scheme before the date that the Bill is introduced into the House of Representatives; and

•

the parties to the scheme are not dealing with each other at arm's length.

[Schedule 8, item 2, subsection 275-605T(1) of the Income Tax (Transitional Provisions) Act 1997]

10.11 In these circumstances, any income derived by the managed investment trust before the start of the 2018-19 income year will not be taxed as non-arm's length income. [Schedule 8, item 2, paragraph 275-605T(1)(c) and subsection 275-605T(2) of the Income Tax (Transitional Provisions) Act 1997]

Existing managed investment trusts that enter into the new tax system

10.12 Transitional rules will apply to existing managed investment trusts that enter into the new tax system with unders and overs relating to an earlier income year. The transitional rules apply if:

•

a trust becomes an attribution MIT for the starting income year;

•

the trust existed in an earlier income year (the base year); and

•

the trust is an attribution MIT for the income year (the discovery year) that is the starting income year or a later income year.

[Schedule 8, item 3, section 276-700T of the Income Tax (Transitional Provisions) Act 1997]

10.13 The starting income year is generally the first income year starting on or after 1 July 2017. [Schedule 8, item 3, paragraph 276-25T(a) of the Income Tax (Transitional Provisions) Act 1997]

10.14 However, if the trustee of a managed investment trust makes a choice to apply the new tax system in respect of the 2015-16 income year, the starting income year is the first income year starting on or after 1 July 2015. [Schedule 8, item 3, paragraph 276-25T(b) of the Income Tax (Transitional Provisions) Act 1997]

10.15 If the trustee of a managed investment trust makes a choice to apply the new tax system in respect of the 2016-17 income year, the starting income year is the first income year starting on or after 1 July 2016. [Schedule 8, item 3, paragraph 276-25T(c) of the Income Tax (Transitional Provisions) Act 1997]

10.16 The transitional rule applies if the attribution MIT has an under or over of a particular character in the discovery year in relation to a base year. For these purposes:

•

the trust is taken to be an attribution MIT for the base year and for every income year between the base year and the starting income year; and

•

if the trust sent distribution statements to members for an income year prior to the starting income year, the trust is taken to have sent AMMA statements to those members.

[Schedule 8, item 3, subsections 276-705T(1) and (2) of the Income Tax (Transitional Provisions) Act 1997]

10.17 If the transitional rule applies, the under or over in relation to a base year is taken to be an under or over of the same character in the discovery year. [Schedule 8, item 3, subsection 276-705T(3) of the Income Tax (Transitional Provisions) Act 1997]

10.18 A further modification applies if:

•

had the under or over been discovered before the starting income year, the existing income tax law would have operated to produce a particular effect (the pre-AMIT scheme effect) for the base year in relation to the amount or amounts reflected in the under or over; and

•

subsection 276-705T(3) of the Income Tax (Transitional Provisions) Act 1997 accounts for the pre-AMIT scheme effect.

[Schedule 8, item 3, subsection 276-705T(4) of the Income Tax (Transitional Provisions) Act 1997]

10.19 In these circumstances, the pre-AMIT scheme effect does not arise for the base year. [Schedule 8, item 3, subsection 276-705T(4) of the Income Tax (Transitional Provisions) Act 1997]

Tax deferred and tax free distributions paid before 1 July 2016

10.20 Transitional rules ensure that the amendments to clarify the taxation treatment of tax deferred and tax free distributions will apply from 1 July 2011 (as announced in the 2014-15 Mid-Year Economic and Fiscal Outlook).

10.21 The transitional rule will apply if:

•

the trustee of a trust made a payment to an entity at a time:

-

on or after 1 July 2011; and

-

before the starting income year; and

•

the trust becomes an attribution MIT for the starting income year.

[Schedule 8, item 3, subsection 276-750T(1) of the Income Tax (Transitional Provisions) Act 1997]

10.22 If the transitional rule applies, then sections 104-107F and 104-107G of the ITAA 1997, together with any other provisions of the income tax law that relate to the operation of those sections, apply for the purposes of:

•

working out whether CGT event E4 happens because of the payment; and

•

working out the amount of the entity's capital gain under CGT event E4.

[Schedule 8, item 3, subsections 276-750T(2) and (3) of the Income Tax (Transitional Provisions) Act 1997]

10.23 However, the transitional rule does not apply to the extent that the entity, in the income tax return that is lodged for the income year in which the payment was made, included the amount of its payment in its assessable income for the income year. [Schedule 8, item 3, subsection 276-750T(4) of the Income Tax (Transitional Provisions) Act 1997]

10.24 For the purposes of applying section 118-20 of the ITAA 1997 (which has the effect of reducing capital gains by amounts otherwise included in assessable income), the transitional rule is treated as though it is in the capital gains tax provisions (that is, Part 3-1 of the ITAA 1997). [Schedule 8, item 3, subsection 276-750T(5) of the Income Tax (Transitional Provisions) Act 1997]

10.25 In addition, if the trustee of a trust made a payment to an entity before 1 July 2011, the Commissioner cannot amend the entity's assessment for the income year in which the payment was made if:

•

the effect of the amendment would be to increase the entity's assessable income for that income year;

•

the Commissioner could not amend the assessment in that way if sections 104-107F, 104-107G and 104-107H of the ITAA 1997, together with any other provisions of the income tax law that relate to the operation of those sections, were in operation at the time the payment was made; and

•

the entity has not requested the Commissioner to amend the assessment in that way.

[Schedule 8, item 3, section 276-755T of the Income Tax (Transitional Provisions) Act 1997]

10.26 The effect of these transitional rules is to 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 capital gains tax regime rather than being taxed as ordinary income, unless an entity has already included the distributions as ordinary assessable income.

10.27 These transitional rules will benefit taxpayers and ensure that industry practice relating to the taxation treatment of tax deferred and tax free distributions is not disturbed.

Extension of the interim streaming provisions for managed investment trusts

10.28 Schedule 2 of the Tax Laws Amendment (2011 Measures No. 5) Act 2011 amended the ITAA 1997 and the Income Tax Assessment Act 1936 (ITAA 1936) to enable the streaming of capital gains and franked dividends to beneficiaries, subject to relevant integrity provisions.

10.29 Part 3 of Schedule 2 of the Tax Laws Amendment (2011 Measures No. 5) Act 2011 provided an exemption from the application of these amendments for managed investment trusts for the 2010-11 and 2011-12 income years. This was in recognition of the fact these types of trusts generally do not stream income to their beneficiaries. However, the trustee of a managed investment trust may make an irrevocable election to apply the amendments contained in Schedule 2 of the Tax Laws Amendment (2011 Measures No. 5) Act 2011.

10.30 The exemption was intended to operate until the new tax system for managed investment trusts regime commenced - this was originally scheduled for 1 July 2012.

10.31 However, the former government announced a deferral of the commencement of the new regime until 1 July 2014. As a result, the operation of the interim streaming rules was extended until that date (see Schedule 4 to Tax Laws Amendment (2012 Measures No. 6) Act 2013).

10.32 As part of the 2015-16 Budget, the Government announced a deferral in the start of the new tax system for managed investment trusts until 1 July 2016. The purpose of the deferral was to allow additional time for consultation with stakeholders and to provide industry with more time to change their business systems.

10.33 As a result of the need to change business systems, some attribution MITs may not be ready to make a choice to apply the new tax system until the start of the 2016-17 income year.

10.34 Therefore, the Tax Laws Amendment (2011 Measures No. 5) Act 2011 is being amended to allow the trustee of a managed investment trust that has not made an election to apply the interim trust streaming provisions in relation to the 2010-11, 2011-12, 2012-13 and 2013-14 income years to continue to disregard those provisions in the 2014-15, 2015-16 and 2016-17 income years (unless the trustee makes a choice to apply the provisions). Managed investment trusts that have previously made the election to apply the interim trust streaming provisions continue to apply those provisions for the 2014-15, 2015-16 and 2016-17 income years. [Schedule 8, items 4 and 5, subitems 51(5) and 51(7) of Schedule 2 to Tax Laws Amendment (2011 Measures No. 5) Act 2011]