Trustees of MITs can experience difficulty in obtaining final information to allow them to calculate the income and net income of the trust within a reasonable time at the end of each financial year. Therefore, they will need to make an estimate of the amounts to report to both the ATO and their members by the required reporting dates.
Revisions may be required at a later time to ensure that the correct amounts are reported. Variances can occur because:
- calculations are complex
- rounding discrepancies can arise, for example where the income amount cannot be divided between members evenly and in a practical way
- the MIT typically has incomplete or interim information at the time it needs to calculate trust components.
If a revision occurs, the amounts initially reported to members may overstate or understate the correct amount of their share of the net income of the trust. Before the error is identified to them, members may have already included the incorrect amounts in their income tax returns.
For attribution managed investment trusts (AMITs), unders and overs arise and can be dealt with in the income year in which they are discovered, called the 'discovery year, rather than the income year they relate to. The year that the under or over relates to is called the 'base year'.
See also:
Unders
An under-estimation of a particular character in an income year results in an ‘under’ of that character. This means that the trustee has understated the amount attributed to a member and will need to reconcile the amount by increasing the particular character amount in the discovery year or upwardly revising the character amount in the base year.
Overs
An over-estimation of a particular character in an income year results in an ‘over’ of that character. This means that the trustee has overstated the amount attributed to a member and will need to reconcile the amount by decreasing the particular character amount in the discovery year or downwardly revising the character amount in the base year.
Applying the unders and overs system
To apply the unders and overs system, the trustee of an AMIT must determine if there is an under or over for a base year. If there is, the trustee needs to either:
- adjust a trust component in the discovery year
- reconcile the under or over in the income year to which it relates by revising the determined trust components for the base year and reissuing AMMA statements for that base year. Members will need to use the revised AMMA statement to complete their tax return for the base year.
If the trustee chooses to reconcile the under or over in the discovery year, then:
- in the case of an under of a particular character – the trust component of that particular character is increased in the discovery year
- in the case of an over of a particular character – the trust component of that particular character is decreased in the discovery year. However, the amount of the trust component of a particular character cannot be reduced below nil.
It is up to the trustee of an AMIT to determine how it will reconcile unders and overs – that is, whether to reissue AMMA statements for the base year or use the unders and overs system to make adjustments to the trust components of particular characters in the discovery year.
Where the trustee chooses to reissue AMMA statements for a previous year, they will also need to lodge an amended Annual Investment Income Report (AIIR) to avoid discrepancies in beneficiary data.
If the under or over is the result of an intentional or reckless disregard of the law by the trustee, the trustee may be liable to pay an administrative penalty.
If a trust ceases to be an AMIT
If a trust ceases to be an AMIT for an income year, it will need to continue to identify unders and overs relating to the period that the trust was an AMIT.
The trust will need to continue to work out unders and overs relating to a base year during which the trust was an AMIT. The trust can still account for unders and overs that relate to the period it was an AMIT in later income years (the discovery year), by making appropriate adjustments for the purposes of applying the trust provisions in Division 6 of the ITAA 1936.
However, the trust does not have to reconcile unders or overs of a particular character for a base year once the amendment period for the base year has expired (that is, generally four years after the document for working out the determined trust component for the base year was created).
Treatment for the discovery year
If the trust discovers an under or over that increases the amount of a particular character for the discovery year (worked out on the basis that the trust continued to be an AMIT) then the trust must treat that amount according to its original character in the discovery year. If the relevant character relates to:
- assessable income – treat the amount of the increase as assessable income of the trust – this may have the effect of increasing the net income of the trust (for an increase in the amount of a discount capital gain, treat the trust as having double the amount of any discount capital gain)
- exempt income – treat the amount of the increase as exempt income of the trust
- non-assessable non-exempt income – treat the amount of the increase as non-assessable non-exempt income of the trust
- a tax offset character – treat the amount of the increase as a tax offset of the trust of a kind corresponding to that character.
If the trust discovers an under or over that decreases the amount of a particular character for the discovery year, then the trust must treat that amount according to its original character in the discovery year. If the relevant character is:
- a discount capital gain, the trust must treat half of the amount of the decrease as a capital loss of the trust for the discovery year
- a non-discount capital gain, the trust must treat the amount of the decrease as a capital loss of the trust for the discovery year
- assessable income other than a capital gain, the trust must treat the amount of the decrease as a deduction of the trust for the discovery year
- exempt income, the trust must treat the amount of the decrease as reducing the exempt income of the trust for the discovery year
- non-assessable non-exempt income, the trust must treat the amount of the decrease as reducing the non-assessable non-exempt income of the trust for the discovery year
- a tax offset, the trust must generally treat the amount of the decrease as reducing the tax offset or offsets of the trust for the discovery year of a kind corresponding to that character.
However, in the case of a tax offset that exceeds the total of the existing tax offsets of the trust, the trustee is liable to pay tax on the amount of the excess at a rate of 100%. For an excess tax offset amount relating to a foreign income tax offset, the trust's assessable income from foreign sources is instead increased by an amount equal to:
Excess tax offset amount + (Excess tax offset amount × 70÷30)