Managed investment trusts: election into capital treatment

Managed investment trust capital treatment election rules, including eligibility requirements and making an election.

If you're the trustee of a managed investment trust (MIT), this information will help you work out whether you're eligible to make a capital treatment election and how to make an election.

The MIT capital treatment rules allow the trustee of an eligible MIT to choose to apply the capital gains tax (CGT) provisions for the taxation of gains and losses on disposal of certain eligible assets, rather than on revenue account. For the purposes of the MIT capital treatment rules, a disposal also includes ceasing to own, or otherwise realising, the asset.

You must make the election in the first year the trust qualifies as a MIT, and it is irrevocable as long as the MIT remains eligible. If a MIT does not make a capital treatment election in the first year, it will be taxed on revenue account under general tax law principles.

These rules apply to CGT events that happen on or after the start of the 2008–09 income year.

Eligibility for making a capital treatment election

A trust will be eligible to make a capital treatment election if it meets the definition of a MIT. The election must be made in the first year the trust is a MIT.

The definition of a MIT has changed since the start of the capital treatment rules in 2008–09. There were extensive amendments in 2010, and further amendments in 2016. You should consider the definition of a MIT at the relevant time in determining whether the MIT is eligible to make a capital treatment election in a specific year.

See also:

• Eligibility requirements

Changes under the new tax system for MITs

A new tax system for MITs came into effect in May 2016. Under the new system, a number of definitional changes affect capital treatment elections by MITs. These include relocation of the definition of a MIT to section 275-10 of the ITAA 1997.

When the eligibility of the trust changes

Capital treatment by reason of having made an election will not apply in any year in which the trust ceases to be a MIT. Disposals of eligible assets in these years are subject to tax by reference to general tax law principles.

If the trust again meets the definition of a MIT in a later income year, the capital treatment election will apply because the election, once made, is irrevocable.

Eligible CGT assets

Assets eligible for capital treatment are:

• shares in a company (including a foreign hybrid company)
• non-share equity interests in a company
• units in a unit trust
• land (including an interest in land)
• a right or option to acquire or dispose of any assets listed above.

However, an asset is not an eligible asset if it is a debt interest, or a financial arrangement to which Taxation of Financial Arrangements (TOFA) applies.

Special rules

Some assets will not be eligible for capital treatment, even where the trustee has made an election for capital treatment. Generally, these will be assets purchased and/or held as trading stock, and include:

• land, an interest in land, or a right or option to acquire or dispose of such an asset, which is held as trading stock or which was acquired before 20 September 1985 and is part of a profit-making undertaking or plan
• an asset acquired in an income year in which the capital treatment election was not in force, and the asset was treated as trading stock in the MIT's financial report and income tax return for  
  • the most recent income year ending before the income year in which the election first came into force
  • the most recent income year ending before the time of the CGT event.
   

Making a capital treatment election

The trustee of an eligible MIT can make an election for capital treatment.

Trusts that became a MIT prior to the 2009–10 income year

When must you make an election?

You must make an election on or before the latest of the following days:

• 2 September 2010
• a later date, if we allow it.

When will an election take effect?

Once you make the election, it will have effect for the 2008–09 and later income years.

How can you make an election?

The period in which a trustee can make an election for a trust that became a MIT prior to the 2009–10 income year has now expired.

However, we may allow a trustee to make the election upon request.

Next steps:

• Request for an extension of time to make an election

Trusts that became a MIT in 2009–10 or a later income year

When must you make an election?

You must make an election on or before the latest of the following days:

• the day the trust is required to lodge its income tax return for the income year in which it became a MIT
• a later date, if we allow it.

When will an election take effect?

Once you make the election, it will have effect for the income year in which the trust becomes a MIT and later income years.

How can you make an election?

If you are the trustee of a MIT, you can make an election by answering 'Yes' to the following question on the Trust tax return:

• If the trust is a managed investment trust, has the trustee made an election for capital account treatment?

If you are the trustee of an AMIT, you can make an election by answering 'Yes' to the following question on the AMIT tax return:

• Has the trustee made an election into managed investment trust capital account treatment?

You must make the election within the relevant timeframe.

If you are the trustee of a trust that became a MIT prior to the 2009–10 income year, and you have previously made an election for capital treatment, you still need to answer 'Yes' to this question for each year you are required to complete a Trust tax return or AMIT tax return.

Request for an extension of time to make a capital election

The Commissioner has discretion to grant a MIT an extension of time to make an election into capital treatment.

Who can make a request for an extension of time?

Generally, the trustee of a MIT must apply to the Commissioner to request for an extension of time to make an election into capital treatment.

How can a request be made?

The application should be in writing and include sufficient information to demonstrate why discretion would be reasonable.

The written request should:

• provide details of the circumstances giving rise to why the election was not made on time
• propose a date by which the election will be made
• give assurance future obligations will be met on time once the stated circumstances are resolved.

Note: There is no prescribed application form.

What factors will the Commissioner consider in exercising the discretion?

We follow these guidelines when making our decision:

• Where an extension is granted, it will generally be on a short-term basis to allow the trustee to overcome the problems preventing them from making the election. The extension will generally only be provided for a short period after the date the election should have been made.
• Consideration will be given to how soon steps were taken to make an election and whether a timely request was made to the Commissioner to seek an extension of time.
• Each case will be considered on its merits based on all the relevant facts and circumstances.
• The Commissioner will have regard to the subject matter, scope and purpose of subsection 275-115(3) of the ITAA 1997 which establishes a deadline for making an election into capital treatment.
• The Commissioner may consider whether the entity has acted in a manner consistent with the proposed election, based on the way it has prepared its accounts and returns.
• The Commissioner will consider whether there were circumstances beyond the control of the trustee that contributed to the delay in making the election, whether reasonable steps were taken to mitigate the effect of those circumstances, and whether the trustee will be able to make the election at a particular time in future.
• Consequences of the proposed extension of time for making the election may be considered, including any impact on distribution statements or on ATO lodgment obligations of the MIT.
• The Commissioner must ensure he does not confer an advantage on a taxpayer or group of taxpayers.
• The Commissioner will have regard to whether the request for an extension of time is for an improper purpose or in bad faith.

How will I be informed of the exercise of the Commissioner's discretion?

If the discretion is exercised following your request, you will receive written advice of a new date by which the election must be made.

If the discretion is not exercised, you will be advised in writing, and given the reasons for that decision.

Amendments to previous years

There are rules that limit the Commissioner's ability to amend an assessment for a year prior to the 2008–09 income year. This relates to amendments to treat a gain or loss from an asset as being on revenue account or on capital account.

However, these rules only apply if:

• there is a capital treatment election in force for the 2008–09 income year, and
• the gain or loss that arose in the previous income year would have been subject to capital treatment had the election been in force for that previous year.

The rules do not apply if an entity gives the Commissioner a written consent to the amendment.

Tax consequences of capital elections

Once a MIT makes an election, it is permanent and cannot be reversed.

For a MIT that makes an election for capital treatment, gains and losses on disposal of eligible assets will be assessed only under the CGT provisions for each year that the MIT is an eligible MIT.

However, the capital election will not apply where the trust does not meet the definition of a MIT for the relevant income year.

See also:

• Capital gains tax essentials

Tax consequences of not making an election

If a MIT is eligible to make an election, but does not do so by the relevant date, any gains or losses on the disposal of eligible assets will be treated on revenue account under general tax law principles.

An overview of the MIT capital treatment election rules, including eligibility requirements and how to make an election.