Under the new system for managed investment trusts (MITs), modifications have also been made to the '20% tracing rule' contained in Division 6C of the Income Tax Assessment Act 1936. Division 6C applies to a trust if it is both:
- a trading trust (broadly, a trust that carries on activities other than holding solely passive investments such as shares, property and fixed interest assets)
- a public unit trust.
If Division 6C applies to a trust, the trust will effectively be taxed as a company.
Previously, a trust could be treated as a public unit trust when one or more tax exempt entities or complying superannuation entities owned 20% or more of the beneficial interests in the trust (the 20% tracing rule).
Under the modifications to Division 6C, super funds and exempt entities – that are entitled to a refund of excess imputation credits – will now be exempt from the 20% tracing rule for public trading trusts.
As such, a trust will not be a public trading trust just because certain tax-exempt entities and complying superannuation entities hold more than 20% of interests in the trust.