House of Representatives

Explanatory Memorandum

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

Glossary

The following abbreviations and acronyms are used throughout this explanatory memorandum.

General outline and financial impact

A New Tax System for Managed Investment Trusts

The Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015 and the supporting Bills amend the Income Tax Assessment Act 1997, the Taxation Administration Act 1953 and associated Acts to introduce a new tax system for managed investment trusts.

Date of effect: The new tax system for managed investment trusts applies to assessments for an income year starting on or after 1 July 2016. 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 in some circumstances.

The changes to extend the list of entities qualifying as eligible investors for the purpose of the widely held requirements apply on or after 1 July 2014.

Proposal announced: The proposal to introduce a new tax system for managed investment trusts was announced by the former government in the then Assistant Treasurer's Media Release of 7 May 2010.

The former Treasurer announced that the Commonwealth Government would proceed with this measure in the Treasurer's Media Release of 6 November 2013.

Financial impact: This measure has the following revenue implications:

Human rights implications: This Bill does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 11.

Compliance cost impact: This measure will increase certainty, reduce complexity and minimise compliance costs for managed investment trusts and their investors. Total compliance costs are expected to be reduced by $30 million per year.

Chapter 1 - Overview of the new tax system for managed investment trusts

Outline of chapter

1.1 The Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015 and the supporting Bills amend the Income Tax Assessment Act 1997 (the ITAA 1997), the Taxation Administration Act 1953 (the TAA 1953) and associated Acts to introduce a new tax system for managed investment trusts.

1.2 This chapter provides an overview of the new tax system for managed investment trusts.

1.3 All legislative references in this explanatory memorandum are to the ITAA 1997 unless otherwise indicated.

Context of amendments

1.4 The new tax system for managed investment trusts follows recommendations made by the Board of Taxation in its Report on the Review of the Tax Arrangements Applying to Managed Investment Trusts in August 2009 (the Board's Report).

1.5 In undertaking its Review, the Board concluded that the current taxation arrangements applying to trusts create a level of complexity and uncertainty for managed investment trusts that is unacceptable for an industry of its significance to the economy. This is primarily the result of the current trust taxation provisions in Division 6 of Part III of the Income Tax Assessment 1936 (ITAA 1936) being largely developed at a time before trusts were used in Australia as widely-held, commercially operated, collective investment vehicles.

1.6 This Bill implements the recommendations of the Board of Taxation to create a new tax system for certain managed investment trusts.

1.7 The new tax system for managed investment trusts will ensure that the managed funds industry is able to continue to operate through trust structures having regard to:

•

the commercial needs of the industry;

•

the needs of investors;

•

the need to ensure appropriate integrity;

•

the compliance costs of managed investment trusts and their members; and

•

the administrative costs of the Australian Taxation Office.

1.8 The new tax system will significantly improve the operation of the taxation law for managed investment trusts by increasing certainty, allowing greater flexibility and reducing compliance costs. These reforms will enhance the competitiveness of Australia's funds management industry.

1.9 The new tax system has been actively sought by the managed funds industry. Industry representatives and other key stakeholders have been extensively consulted during the development of the new tax system for managed investment trusts.

Summary of new law

1.10 This Bill will introduce a new tax system for certain managed investment trusts.

1.11 The circumstances in which the new tax system will apply to a managed investment trust are explained in Chapter 2. Broadly, the new tax system will apply to a managed investment trust only if:

•

the members of the managed investment trust have clearly defined interests in relation to the income and capital of the trust; and

•

the trustee of the managed investment trust makes a choice to apply the new tax system.

1.12 Managed investment trusts that choose to apply the new tax system are referred to as attribution managed investment trusts (attribution MITs or AMITs).

1.13 Under the new tax system, attribution MITs will have the following benefits:

•

the trust will be treated as a fixed trust for income tax purposes (see Chapter 2);

•

for income tax purposes, the trust will be able to attribute amounts of taxable income, exempt income, non-assessable non-exempt income, tax offsets and credits to members on a fair and reasonable basis in accordance with their interests as set out in the constituent documents of the trust (see Chapter 3); and

•

if a trust discovers a variance between the amounts actually attributed to members for an income year, and the amounts that should have been attributed, the trust will be able to reconcile the variance in the income year that it is discovered by using the 'unders and overs' regime (see Chapter 4).

1.14 In addition, the amendments:

•

make the trustees of attribution MITs liable to pay tax in some circumstances (see Chapter 5); and

•

ensure that the Pay As You Go (PAYG) withholding provisions and the withholding tax liability provisions apply appropriately to attribution MITs and their members, including members that are custodians (see Chapter 6).

1.15 The new tax system will provide benefits to members of an attribution MIT (as explained in Chapter 7) because:

•

a 'character flow-through' model will apply to ensure that amounts derived or received by the trust that are attributed to members retain the character they had in the hands of the trustee for income tax purposes;

•

double taxation that might otherwise arise will be reduced because members will be able to make annual upward and downward adjustments to the cost bases of their interests in the trust; and

•

the taxation treatment of tax deferred and tax free distributions made by the trust is clarified.

1.16 Finally, the amendments will:

•

transfer the definition of a managed investment trust from the TAA 1953 to the ITAA 1997 (see Chapter 8);

•

exclude superannuation funds and exempt entities that are entitled to a refund of excess imputation credits from the application of the 20 per cent tracing rule for public trading trusts in Division 6C of Part III of the ITAA 1936 (see Chapter 9);

•

repeal the corporate unit trust rules in Division 6B of Part III of the ITAA 1936 (see Chapter 9); and

•

introduce an arm's length income rule for managed investment trusts (see Chapter 9).

1.17 Associated Bills support the introduction of the new tax system for managed investment trusts. That is:

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the Income Tax Rates Amendment (Managed Investment Trusts) Bill 2015 makes consequential amendments to the Income Tax Rates Act 1986;

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the Medicare Levy Amendment (Attribution Managed Investment Trusts) Bill 2015 makes consequential amendments to the Medicare Levy Act 1986; and

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the Income Tax (Attribution Managed Investment Trusts - Offsets) Bill 2015 will impose tax on trustee of an attribution MIT in relation to amounts of a character relating to tax offsets in certain circumstances.

Application and transitional provisions

1.18 The amendments to introduce a new tax system for managed investment trusts apply to income years starting on or after 1 July 2016.

1.19 Managed investment trusts will be able to make a choice to apply the new tax system for an income year that starts on or after 1 July 2015.

1.20 Transitional rules will apply when an existing managed investment trust comes into the new tax system to recognise unders and overs that arise for an earlier income year.

1.21 Transitional rules will also ensure the amendments which clarify the taxation treatment of tax deferred and tax free distributions will apply on or after 1 July 2011.

1.22 The amendments which extend the list of entities qualifying as eligible investors for the purpose of the widely held requirements that must be satisfied for a trust to qualify as a managed investment trusts apply from 1 July 2014.

1.23 The amendments which repeal the corporate unit trust rules and modify the operation of the 20 per cent tracing rule for public trading trusts apply on or after 1 July 2016.

1.24 The application and transitional provisions are explained in detail in Chapter 10.

Chapter 2 - Eligibility to apply the managed investment trust reforms

Outline of chapter

2.1 This Chapter explains:

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the criteria that a managed investment trust must satisfy to qualify as an attribution MIT; and

•

the broad consequences that arise if a managed investment trust qualifies to be an attribution MIT.

Context of amendments

2.2 The new tax system will apply to a trust if, generally:

•

the trust is a managed investment trust for income tax purposes;

•

the members of the trust have clearly defined interests; and

•

the trustee of the managed investment trust makes a choice to apply the new tax system.

2.3 These eligibility criteria are consistent with the recommendations of the Board of Taxation. In this regard, the Board stated (at paragraph 2.28 of the Board's Report) that:

Accordingly, the Board considers that the most appropriate balance between allowing access to the attribution rules and other measures and maintaining certainty and integrity is to introduce a requirement that, in order to qualify as a Regime MIT, the beneficiaries' rights to income, including the character of income, and capital must be clearly established at all times in the trust's 'constituent documents'. The rights should only be able to be changed by a change in the trust's 'constituent documents'.

Summary of new law

2.4 The new tax system will apply to a trust if, generally:

•

the trust is a managed investment trust;

•

the members of the trust have clearly defined interests; and

•

the trustee of the managed investment trust makes a choice to apply the new tax system.

2.5 If the trustee of a trust makes a choice to apply the new tax system for an income year, the choice is irrevocable and will therefore apply for subsequent income years.

2.6 The key consequences that arise if a managed investment trust qualifies as an attribution MIT are that:

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an attribution model will apply to the managed investment trust, instead of the general trust provisions in the income tax law in Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936); and

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the managed investment trust will be treated as a fixed trust for the purposes of the income tax law.

2.7 For the purposes of working out whether a managed investment trust qualifies as an attribution MIT, and for applying the attribution model, debt-like trust instruments issued by the trust will be treated as debt interests (rather than as membership interests).

Comparison of key features of new law and current law

Detailed explanation of new law

2.8 This Chapter outlines:

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when the new tax system applies to a trust; and

•

the consequences that arise if the new tax system applies to a trust.

When does the new tax system apply to a trust?

2.9 A trust will be an attribution MIT (or AMIT) that is eligible to apply the new tax system for an income year if:

•

the trust is a managed investment trust in relation to the income year;

•

the members of the trust have clearly defined interests at all times when the trust is in existence during the income year;

•

where the trust is a managed investment trust in relation to the income year solely because of paragraph 275-10(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997), the only members of the trust are managed investment trusts in relation to the income year; and

•

any criteria specified in the regulations are satisfied in relation to the trust.

[Schedule 1, item 1, section 276-5; Schedule 6, items 1 and 3, definitions of 'AMIT' and 'attribution managed investment trust' in subsection 6(1) of the ITAA 1936; Schedule 9, items 1 and 4, definitions of 'AMIT' and 'attribution managed investment trust' in subsection 995-1(1) of the ITAA 1997]

2.10 If a managed investment trust qualifies as an attribution MIT in relation to an income year, the trustee must make a choice to apply the new tax system for that income year. The choice is irrevocable and will therefore apply for subsequent income years. [Schedule 1, item 1, section 276-10]

Trust is a managed investment trust

2.11 A trust will be a managed investment trust in relation to an income year if it satisfies the requirements in section 275-10 for the whole of the income year that it is in existence.

2.12 A trust is a managed investment trust for income tax purposes 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 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.

2.13 However, if, due to temporary circumstances that are outside the control of the trustee, the trust fails the requirements that must be satisfied in order for it to qualify as a managed investment trust, the trust will continue to be treated as being a managed investment trust in relation to the income year if it is fair and reasonable to do so (based on the criteria specified in paragraph 275-55(d)). [Schedule 4, item 3, paragraph 275-10(2)(b) and section 275-55]

2.14 Paragraph 275-10(1)(b) allows a trust to be a managed investment trust for certain purposes if, among other things:

•

the only members of the trust are specified widely-held entities (with some exceptions); or

•

the only members of the trust are managed investment trusts.

[Schedule 4, item 3, section 275-45]

2.15 If a trust is a managed investment trust in relation to an income year solely because of paragraph 275-10(1)(b), the trust will qualify as an attribution MIT provided that the only members of the trust are managed investment trusts in relation to the income year. [Schedule 1, item 1, paragraph 276-10(1)(c)]

2.16 Therefore, a trust will not qualify as an attribution MIT if:

•

the trust is a managed investment trust in relation to an income year solely because of paragraph 275-10(1)(b); and

•

one or more members of the trust are entities that are not managed investment trusts.

Clearly defined interests

2.17 To qualify as an attribution MIT, the rights to income and capital arising from each of the membership interests in the trust must be clearly defined at all times when the trust is in existence in the income year. [Schedule 1, item 1, paragraph 276-10(1)(b)]

2.18 An entity is a member of a managed investment trust if they are a beneficiary, unitholder or object of the trust (section 960-130). A membership interest of a member is defined in section 960-135 to be:

•

each interest, or set of interests, in the trust by virtue of which the entity is a member of the trust; or

•

each right; or set of rights, in relation to the trust by virtue of which the entity is a member of the trust.

2.19 The clearly defined interests test is an integrity measure to ensure that:

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there is an objective benchmark for the attribution of the tax consequences of the activities of the trust to its members; and

•

trusts in which the trustee has significant discretionary powers do not receive the benefits available to attribution MITs - such as deemed fixed trust treatment.

2.20 The question as to whether the rights to income and capital arising from the membership interests in a trust are clearly defined is one of fact that will be determined having regard to the constituent documents of the trust. The constituent documents include the trust constitution and any supporting documentation (such as a product disclosure statement or other document that sets out the terms of the members' interests).

2.21 Legislative safe harbours apply to provide certainty for common arrangements where the rights to income and capital arising from the membership interests in a managed investment trust would be expected to be clearly defined. Under these safe harbours, the rights to income and capital arising from the membership interests in a trust will be taken to be clearly defined at a particular time if:

•

the trust is a managed investment scheme that is registered under the Corporations Act 2001; or

•

the rights to income and capital arising from each of the membership interests in the trust are the same.

[Schedule 1, item 1, subsection 276-15(1)]

2.22 For the purposes of working out whether the rights to income or capital arising from each of the units or interests in the trust are the same, the trustee should disregard:

•

fees or charges imposed by the trustee on the members of the trust;

•

issue and redemption prices of the membership interests in the trust; and

•

exposure of the membership interests in the trust to foreign exchange gains and losses.

[Schedule 1, item 1, subsection 276-15(2)]

2.23 If a trust does not come within one of the safe harbour tests, factors that will be taken into account in determining whether the rights to income and capital arising from the membership interests in a trust will be taken to be clearly defined at a particular time include:

•

whether the constituent documents of the trust provide an objective benchmark for the trustee to attribute amounts to members annually;

•

whether, assuming that the trust is an attribution MIT for the income year in which the time occurs, the amount of each member component for the income year of each member of the trust can be worked out on a fair and reasonable basis in accordance with the constituent documents of the trust;

•

whether the right of each member of the trust to the income and capital of the trust can be materially diminished or expanded through the exercise of a power or right;

•

whether the trustee has an obligation to treat members who hold membership interests in the same class equally and members who hold membership interests in different classes fairly; and

•

whether the trustee can easily modify the rights of those membership interests to the income and capital of the trust by changing the constituent documents of the trust.

2.24 In this regard, if a trustee of a trust has the discretion to determine the entitlement to the income and capital of the trust of a particular member of the trust, or to determine the character of income distributed to a member, then, with some limited exceptions, the rights to income and capital arising from the membership interests in the trust will not be clearly defined.

Example 2.1

ABC Trust is an unlisted managed investment trust with a single class of units. The ABC Trust is not registered under the Corporations Act 2001.

The constituent documents for the ABC Trust specify that members of the trust have an entitlement to a share of the income and capital of the trust based on the number of units that they hold in the trust.

The trustee is unable to differentiate between members when making distributions of income and capital except where a member that holds a large number of units redeems their unit holding and the trustee is required to dispose of assets to fund the redemption.

As the ABC Trust has a single class of units and the rights to income or capital arising from each of those units is the same, the rights to income and capital arising from the membership interests in the ABC Trust are clearly defined.

Therefore, if the trustee of the ABC Trust makes a choice to be an attribution MIT, the new tax system will apply to the ABC Trust.

Example 2.2

DEF Trust is an unlisted managed investment trust with two classes of units - Class A units and Class B units. The DEF Trust is not registered under the Corporations Act 2001.

The constituent documents for the DEF Trust specify that:

•

members of the trust that hold Class A units have an entitlement to a share of all of the income of the trust based on the number of Class A units that they hold in the trust; and

•

members of the trust that hold Class B units have an entitlement to a share of all of the capital of the trust based on the number of Class B units that they hold in the trust.

The rights to income and capital arising from the membership interests in the DEF Trust are clearly defined.

Therefore, if the trustee of the DEF Trust makes a choice to be an attribution MIT, the new tax system will apply to the DEF Trust

Example 2.3

XYZ Trust is a discretionary hybrid managed investment trust with two classes of members - Class A members and Class B members. The XYZ Trust is not registered under the Corporations Act 2001.

At the end of each income year, the trustee is able to determine how much income and capital is allocated to Class A members. The trustee is also able to determine the character of the income that is allocated to Class A members. Any remaining income and capital is allocated to Class B members.

The rights to income and capital arising from the membership interests in the XYZ Trust are not clearly defined.

Therefore, the trustee of the XYZ Trust will not be able to make a choice to apply the new tax system to the XYZ Trust.

Criteria specified in the regulations

2.25 Additional criteria that must be satisfied for a trust to be eligible to be an attribution MIT may be specified in the regulations. [Schedule 1, item 1, paragraph 276-10(1)(d)]

Trustee must choose to apply the new tax system

2.26 The new tax system will apply to an eligible managed investment trust only if:

•

the trustee of the trust makes a choice to apply the new tax system for an income year; or

•

the trust was an attribution MIT for an earlier income year.

[Schedule 1, item 1, paragraph 276-10(1)(e)]

2.27 If a trustee of a managed investment trust makes a choice to be an attribution MIT, the choice cannot be revoked. [Schedule 1, item 1, subsection 276-10(2)]

2.28 If the trustee of a managed investment trust that meets the requirements to be an attribution MIT does not make a choice to apply the new tax system, the general trust provisions in Division 6 of Part III of the ITAA 1936 will continue to apply to that managed investment trust and its members.

Attribution MIT with multiple classes of members

2.29 If the membership interests of an attribution MIT are divided into classes, the attribution MIT will be able to apply the attribution regime separately to each class of membership interests if:

•

the rights arising from each of the membership interests in a particular class are the same as the rights arising from every other of those membership interests in that class;

•

each of those membership interests in a particular class is distinct from each of those membership interests in another class; and

•

the trustee of the attribution MIT has made a choice to apply the attribution regime separately to each class of membership interests.

[Schedule 1, item 1, subsections 276-20(1) and (2)]

2.30 The question as to whether an attribution MIT has more than one class of membership interests is one of fact. In this regard, the membership interests in a trust will form a class if they have the same, or substantially the same, rights.

2.31 An attribution MIT may have more than one class of membership interests if, for example, different members have exposure to different groups of assets of the attribution MIT. As a result, the tax attributes of a particular class of assets can effectively be ring-fenced to a particular class of membership interests. In this regard, it is possible for a class to have just one member.

2.32 The ability for an attribution MIT to apply the attribution regime separately to each class of membership interests can result in significant compliance cost savings. For example, a master trust will not need to set up separate trusts in order to take advantage of the attribution regime.

2.33 The choice by an attribution MIT to apply the attribution regime separately to each class of membership interests applies for the income year in which the choice is made and to every subsequent income year and is irrevocable. [Schedule 1, item 1, subsections 276-20(4) and (5)]

2.34 If the trustee of an attribution MIT makes a choice to apply the attribution regime separately to each class of membership interests, the attribution regime will apply separately to each class of membership interests of the attribution MIT. However, for the purpose of determining whether a managed investment trust qualifies as an attribution MIT (Subdivision 276-A), an attribution MIT with multiple classes will continue to be treated as a single entity. [Schedule 1, item 1, subsection 276-20(2)]

2.35 If the trustee of an attribution MIT makes a choice to apply the attribution regime separately to each class of membership interests, each class will effectively be treated as a separate trust with separate trust property. Therefore, the trustee will effectively need to work out the taxable income for an income year separately for each class.

2.36 To facilitate this, the assessable income, exempt income, non-assessable non-exempt income, tax losses, net capital losses and other similar amounts of the attribution MIT for an income year must be allocated between each class on a fair and reasonable basis. [Schedule 1, item 1, subsection 276-20(3)]

2.37 In this regard, to the extent that assets and expenditure relate solely to a particular class of membership interests, the assessable income and deductions and other trust attributes relating to that class will need to be identified by reference to the assets supporting that class. In addition, transactions and events involving those assets (including intra-entity dealings within the actual attribution MIT involving the deemed separate attribution MITs) will need to be recognised for tax purposes as though the class was in fact a separate entity.

2.38 To the extent that assets and expenditure relate to more than one class of membership interests, the related assessable income and deductions must be allocated to each class on a fair and reasonable basis.

Debt-like trust instruments

2.39 A debt-like trust instrument in an attribution MIT is treated as a debt interest in the attribution MIT. A distribution in relation to the instrument is treated as interest for the purposes of the interest withholding tax provisions. The distribution may also be treated as a deduction in working out the trust components of an attribution MIT. [Schedule 1, item 1, section 276-500]

2.40 The objective of treating a debt-like trust instrument in an attribution MIT as a debt interest in the attribution MIT is to ensure that:

•

the criteria to qualify as an attribution MIT operate appropriately for managed investment trusts with debt-like interests (as holders of debt-like trust instruments will not be members of the trust);

•

the attribution rules do not apply to the holders of debt-like trust instruments;

•

an attribution MIT can deduct distributions paid to holders of debt-like trust instruments in appropriate circumstances; and

•

debt-like trust instruments are treated as debt for the purposes of applying other provisions in the income tax law (such as the thin capitalisation provisions).

2.41 An instrument that gives rise to an interest in an attribution MIT is a debt-like trust instrument in relation to the attribution MIT if it has all of the following features:

•

any distribution relating to the interest is fixed, at the time the interest was created, by reference to the amount subscribed for the interest;

•

any distribution relating to the interest is made solely at the discretion of the trustee of the attribution MIT;

•

the interest, and any other interest in the attribution MIT that is in the same class as the interest, would rank above all other membership interests (other than other debt-like trust instruments) in the trust in the event that:

-

the trust ceases to exist; or

-

where the attribution MIT is a managed investment scheme, the scheme is under administration or is being wound up; and

•

if, in relation to a particular period, the trustee of the attribution MIT does not make a distribution relating to the interest, then the constituent documents of the attribution MIT prohibit:

-

the making of a distribution relating to any other membership interest in the attribution MIT in relation to that period; and

-

the making of a distribution relating to a membership interest in another entity in relation to that period if the interest is stapled together with a membership interest in the attribution MIT.

[Schedule 1, item 1, section 276-505; Schedule 9, item 4, definition of 'debt-like trust instrument' in subsection 995-1(1)]

2.42 For the purposes of the income tax law:

•

a debt-like trust instrument in relation to an attribution MIT is treated as a debt interest in the attribution MIT; and

•

a distribution on a debt-like trust instrument in relation to an attribution MIT is treated as a cost incurred by the attribution MIT in relation to a debt interest issued by the attribution MIT.

[Schedule 1, item 1, subsection 276-510(1)]

2.43 However, a debt-like trust instrument in relation to an attribution MIT is not treated as a membership interest for the purposes of working out whether a trust qualifies as a managed investment trust or as an attribution MIT. As a result, the holder of a debt-like trust instrument is not a member of the trust for the purpose of:

•

the widely-held and not closely-held tests for determining if the trust is a managed investment trust;

•

the clearly defined interests test for determining if the trust is an attribution MIT; and

•

the attribution model (including the unders and overs regime) that applies to an attribution MIT.

2.44 In addition, for the purposes of applying the tests to determine whether a trust is a managed investment trust, debt-like trust instruments are not taken to be membership interests.

2.45 For the purpose of applying the dividend, interest and royalty withholding tax provisions in the income tax law, a distribution to an entity that is the holder of a debt-like trust instrument is treated as having the character of interest. [Schedule 1, item 1, subsection 276-510(3)]

2.46 In addition, if the trustee of an attribution MIT makes a distribution to an entity that is the holder of a debt-like trust instrument, the amount of the distribution is treated as a return that the attribution MIT pays or provides on a debt interest for the purpose of working out the trust component of an assessable income character under the attribution model, except to the extent that the distribution is attributable to exempt income or non-assessable non-exempt income. [Schedule 1, item 1, section 276-515]

2.47 As a result, section 25-85 will apply to allow the attribution MIT to deduct the amount of the return in most circumstances.

Changes to constituent documents to qualify as an attribution MIT

2.48 Trustees of existing managed investment trusts will need to embark on due diligence activities to determine whether changes are required to be made to trust deeds, other constituent documents, product disclosures and other investor material in order to qualify for the new tax system.

2.49 Concerns have been raised that income tax consequences may arise if the constituent documents of a trust are changed in order to qualify for the new tax system.

2.50 In this regard, the Australian Taxation Office has issued a Taxation Determination stating that, if the terms of a trust are changed pursuant to a valid exercise of a power contained in the trust's constituent documents, no capital gains tax consequences arise as a result of the change (see Taxation Determination TD 2012/21).

2.51 Trustees will need to consider whether other taxation consequences (such as stamp duty implications) arise as a consequence of changing trust deeds on a case-by-case basis.

What are the consequences of being an attribution MIT?

2.52 If a managed investment trust is an attribution MIT in relation to an income year, then:

•

the attribution MIT is treated in the same way as a fixed trust throughout the income year;

•

amounts related to the income and tax offsets of the attribution MIT, determined by the trustee to be of a particular character, are attributed to members, generally retaining that character; and

•

underestimates and overestimates of amounts at the trust level are carried forward and dealt with in later years on a character-by-character basis.

[Schedule 1, item 1, section 276-1]

An attribution MIT is taken to be a fixed trust

2.53 A managed investment trust that is an attribution MIT is taken to be a fixed trust for income tax purposes. In addition, each entity that is a member of the attribution MIT in respect of an income year is taken to have a vested and indefeasible interest in a share of the income and capital of the attribution MIT throughout that income year. [Schedule 1, item 1, sections 276-50 and 276-55]

Attribution MIT taken to be a widely held unit trust

2.54 A managed investment trust that is an attribution MIT is taken to be a widely held unit trust for the purposes of applying the trust losses rules in Schedule 2F to the ITAA 1936. [Schedule 6, item 20, subsection 272-105(1) of Schedule 2F to the ITAA 1936]

2.55 In the case of an attribution MIT with multiple classes of members where the trustee has made an election under section 276-20 to treat each class as an attribution MIT, each class is taken to be a widely-held unit trust for the purposes of the trust losses rules in Schedule 2F to the ITAA 1936.

Division 6 of Part III of the ITAA 1936 does not apply

2.56 The new tax system in Division 276 of the ITAA 1997 will apply to an attribution MIT and its members. As a result, the provisions in Division 6 of Part III of the ITAA 1936 that generally apply to trusts and their beneficiaries will not apply to an attribution MIT and its members. [Schedule 6, item 4, section 95AAD of the ITAA 1936]

Chapter 3 - The attribution model for managed investment trusts

Outline of chapter

3.1 This Chapter explains the operation of the attribution model of taxation for attribution MITs. Under the attribution model, an attribution MIT must:

•

determine the overall amounts of particular characters for the trust for an income year; and

•

attribute amounts with particular characters for that income year to members on a fair and reasonable basis in accordance with the constituent documents of the trust.

Context of amendments

3.2 Trusts, including managed investment trusts, are currently taxed under the general trust provisions in Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936). The principles underlying the general trust provisions are, broadly, that:

•

a beneficiary's taxable income for a year includes a proportionate share of the net income of the trust where the beneficiary is presently entitled to a share of the income of the trust; and

•

the trustee of the trust is taxed on any net income of the trust which has not been included in the assessable income of a presently entitled beneficiary.

3.3 The Board of Taxation identified a range of practical difficulties in applying the rules in Division 6 to managed investment trusts.

3.4 The attribution model for attribution MITs will provide greater certainty for trustees and beneficiaries by aligning the commercial and tax consequences of the activities of a managed investment trust and providing flow-through of amounts with specific tax characters.

3.5 The attribution model has been developed in consultation with key stakeholders and is consistent with the current commercial practices of managed investments trusts.

Summary of new law

3.6 This Chapter explains the attribution model of taxation for attribution MITs. Under the attribution model, an attribution MIT must:

•

determine the overall amounts of particular characters for the trust; and

•

attribute amounts with particular characters to entities that are members of the trust in respect of that income year in accordance with specified attribution principles.

Trust components of particular characters

3.7 Under the attribution model of taxation, a trustee of an attribution MIT must first calculate the total of the amounts associated with the various activities of the trust that attract different tax consequences - that is, the trust component of each particular character.

3.8 The trustee must then determine the amount of the trust components of particular characters and create a document recording those amounts - that is, the determined trust components.

Attributing amounts to members

3.9 Once the various trust components of particular characters for an income year are calculated, the trustee of an attribution MIT must attribute a share of the determined trust components to each entity that is a member of the attribution MIT in respect of the income year on a fair and reasonable basis in accordance with the constituent documents of the trust.

3.10 The amount of a trust component of a particular character attributed to a member (the member component of a particular character) is based on the member's clearly defined interests in the attribution MIT.

3.11 The trustee must then determine the amount of the member component of particular characters that is attributed to each member (the determined member component) and issue an AMIT member annual statement (AMMA statement) to the member that records those amounts.

3.12 The amount that is recognised by a member for their income tax purposes in relation to their investment in an attribution MIT is the determined member component, which is generally the amount shown on the AMMA statement issued by the attribution MIT.

Comparison of key features of new law and current law

Detailed explanation of new law

3.13 This Chapter explains the attribution model of taxation for attribution MITs. Under the attribution model, an attribution MIT must:

•

determine the overall amounts (the determined trust components) of particular characters for the trust; and

•

attribute the determined trust components of particular characters to entities that are members of the trust in respect of that income year in accordance with attribution principles.

Determine trust components of particular characters

3.14 To work out the amount that is to be attributed to each member for an income year, an attribution MIT must:

•

work out the amount (the trust component) of each character for the income year; and

•

determine the amount of the trust component (the determined trust component) of each character that it uses as the basis for attributing amounts to members.

[Schedule 1, item 1, section 276-250]

3.15 Amounts (including tax offsets) derived or received by, or otherwise accruing to, an attribution MIT have particular characters. An amount of a particular character will be attributed to members of the attribution MIT on a fair and reasonable basis and retain its character in the hands of the members.

3.16 As a result, for income tax purposes, members of the attribution MIT will broadly recognise the amounts attributed to them in the same way that the amounts were recognised by the attribution MIT.

What is an amount of a particular character?

3.17 An amount has a particular character for income tax purposes if the income tax law treats the amount in a way that is distinct to the way that it treats another kind of amount.

3.18 The character of a particular amount will depend on the activities of the attribution MIT that gave rise to the amount and the source of the amount.

3.19 Amounts of a particular character fall broadly into four main categories:

•

assessable income;

•

exempt income;

•

non-assessable non-exempt income; and

•

tax offsets.

3.20 Examples of amounts of assessable income that are of a particular character which typically need to be identified by an attribution MIT include:

•

discount capital gains;

•

non-discount capital gains;

•

dividends, interest or royalties that are subject to withholding tax; and

•

foreign source income.

What is the trust component of a particular character?

3.21 To work out how much of an amount of a particular character is attributed to each member for an income year, an attribution MIT must first work out the trust component for the income year under section 276-260 of the Income Tax Assessment Act 1997 (ITAA 1997).

3.22 The object of section 276-260 is to ensure that the attribution MIT's assessable income, exempt income, non-assessable non-exempt income and tax offsets for the income year are allocated, according to their character, into separate components. [Schedule 1, item 1, subsection 276-260(1)]

3.23 An attribution MIT must work out the trust component for an income year:

•

of a character relating to assessable income;

•

of a character relating to exempt income;

•

of a character relating to non-assessable non-exempt income; and

•

of a character relating to a tax offset.

[Schedule 1, item 1, section 276-260(2)]

3.24 The trust component of a particular character for an income year is the total amount of that character worked out by the attribution MIT for the income year in accordance with the rules specified in sections 276-265 and 276-270. [Schedule 1, item 1, subsections 276-260(2) and (4); Schedule 9, item 12, definition of 'trust component' in subsection 995-1(1)]

3.25 However, the amount of the trust component worked out for an income year may be adjusted to deal with the effect of unders and overs (see Chapter 4). [Schedule 1, item 1, subsection 276-260(3)]

3.26 Section 276-265 specifies two general rules that must be applied by an attribution MIT to work out the trust component of a particular character for an income year.

3.27 First, the trust component of each particular character must be calculated as if the trustee:

•

was liable to pay tax; and

•

was an Australian resident taxpayer.

[Schedule 1, item 1, subsection 276-265(1)]

3.28 The purpose of this rule is to ensure that the trustee of an attribution MIT works out the trust components of each particular character as if the trustee were an Australian resident taxpayer in respect of the attribution MIT's assessable income (net of deductions), tax offsets, exempt income and non-assessable non-exempt income. Therefore, for example, the amount of the trust component of a character relating to a tax offset for the income year is the amount of the attribution MIT's tax offset of that character for the income year, making these assumptions.

3.29 Second, the sum of all of the trust components of a character relating to assessable income of the attribution MIT for the income year must equal:

•

the total assessable income of the attribution MIT for the income year

less

•

all deductions of the attribution MIT for the income year.

[Schedule 1, item 1, subsection 276-265(2)]

3.30 For the purposes of working out the total assessable income of the attribution MIT for the income year, and deductions of the attribution MIT for the income year, the rules in subsection 276-265(1) apply. [Schedule 1, item 1, subsection 276-265(2)]

3.31 However, if an attribution MIT makes a tax loss (because its deductions exceed its assessable income), the amount of each trust component of a character relating to assessable income of the attribution MIT for the income year is nil. [Schedule 1, item 1, subsection 276-265(3)]

3.32 Section 276-270 specifies additional rules relating to the allocation of deductions that must be applied by an attribution MIT to work out the trust components of a character relating to assessable income of the attribution MIT for an income year. [Schedule 1, item 1, section 276-270]

3.33 Under these deduction allocation rules:

•

deductions that relate directly to an amount that is a character of assessable income must initially be applied only to reduce that character of assessable income;

•

deductions that relate to two or more amounts that are characters of assessable income must be apportioned between those amounts and applied to reduce those characters of assessable income on a reasonable basis; and

•

any remaining deductions (after applying the first two rules) must be apportioned between the remaining amounts that are characters of assessable income on a reasonable basis.

[Schedule 1, item 1, subsections 276-270(1) and (2)]

3.34 For these purposes, the attribution MIT must determine whether a deduction is directly related to a particular character of assessable income on a reasonable basis. [Schedule 1, item 1, subsection 276-270(3)]

3.35 Factors that are relevant in determining whether the allocation of a deduction is reasonable include:

•

whether the deduction was incurred in the course of deriving a particular amount of assessable income;

•

whether the deduction is factored into the financial risk management of the assets from which the particular amount of assessable income arises;

•

whether the deduction more directly relates to other amounts of assessable income; and

•

whether the trustee uses a consistent methodology for allocating deductions to amounts of assessable income.

Example 3.1

The ABC Trust is an attribution MIT that invests in Australian equities and derives dividends, interest and capital gains. The ABC Trust incurs a number of general expenses relating to the day to day operation of the trust (such as management fees and accounting expenses). These general expenses relate to the derivation by the Trust of assessable income of all characters.

The trustee of the ABC Trust has consistently maintained a policy of allocating non-capital expenses against assessable income that has a character other than capital gains. If excess non-capital expenses remain after they are applied against assessable income that has a character other than capital gains, the trustee allocates the excess against net capital gains.

The allocation of deductions on this basis is considered to be reasonable because this approach is consistent with established practice of the ABC Trust.

3.36 The ordinary rules affecting when losses or outgoings are deductible for trusts, such as those governing the recoupment of carry-forward of trust losses and the requirement to apply losses against net exempt income, apply for the purposes of calculating the trust components of an attribution MIT.

Example 3.2

The ABC Trust is an attribution MIT. In the 2017-18 income year, the ABC Trust:

•

derived interest income of $50,000 and other Australian income of $50,000 - as a result, the ABC trust's total assessable income year for the 2017-18 income year is $100,000; and

•

incurred deductible expenses of $90,000.

In addition, the ABC Trust had:

•

nil exempt income in the 2017-18 income year; and

•

tax losses from earlier income years of $30,000.

The ABC Trust allocates its deductions evenly against its interest income and other Australian income. This includes the ABC Trust's tax losses from earlier years (which are deductible in accordance with the rules in subsection 36-15(2)).

Applying the rules in sections 276-260 and 276-270, having identified the types of income derived, allocated deductions, and applied carried forward losses, the ABC Trust calculates its trust components of interest income and other Australian source income to be nil. The ABC Trust has unrecouped losses of $20,000 that are carried forward.

The ABC Trust also has an under (see Chapter 4) of $20,000 of interest income relating to the 2016-17 income year that it discovered in the 2017-18 year.

The ABC Trust's trust component of interest income is increased by the amount of the under (subsection 276-305(2)).Therefore, the ABC Trust's trust component of interest income for the 2017-18 income year is $20,000.

In this regard, the tax losses carried forward by the ABC Trust into the 2017-18 income year cannot be applied to reduce the amount of an under which relates to a previous income year.

3.37 If an attribution MIT makes a capital loss, the capital loss must be applied to reduce capital gains. The trustee can choose the order in which to apply capital losses against capital gains (consistent with the current treatment of capital losses). The attribution MIT will make a net capital gain if its capital gains for an income year exceed its capital losses.

3.38 However, if an attribution MIT has more than one class of members and has not made an election under section 276-20 to treat each class as a separate attribution MIT, capital losses related to assets that one class of members has an interest in should not offset capital gains that a different class of members has an interest in as this would be inconsistent with the principle that losses should be applied on reasonable basis.

What is the determined trust component of a particular character?

3.39 An attribution MIT must create a document that records, and expressly states, the amount of the trust component for each particular character for an income year. The document can be in electronic form or in writing. [Schedule 1, item 1, subsections 276-255(1) and (2)]

3.40 The attribution MIT must, at a time after the document is created, send AMMA statements for the income year to entities that were members of the attribution MIT in the income year. The amount of the trust component stated in the document must reflect the total of the determined member components reflected in those AMMA statements. [Schedule 1, item 1, paragraphs 276-255(2)(c) and (d)]

3.41 The amounts recorded in this document are used as the basis for attributing amounts to an entity that is a member of the attribution MIT in respect of the income year. The amount stated to be the trust component of a particular character for an income year in this document is the determined trust component of that particular character for the income year. [Schedule 1, item 1, sections 276-250 and 276-255; Schedule 9, item 4, definition of 'determined trust component' in subsection 995-1(1)]

3.42 An attribution MIT can revise the trust component for a particular character for an income year. In that event, the attribution MIT must create a revised document that records the amount of the trust component for each character for the income year. This revised document is then used to work out determined trust component of a particular character for the income year and forms the basis of attribution by the attribution MIT. [Schedule 1, item 1, subsection 276-255(3)]

Example 3.3

The ABC Trust is an attribution MIT that has an income year which ends on 30 June 2017. On 1 July 2017, the trustee creates a document stating the amount of the trust component for each character for the 2016-17 income year. The trustee sends AMMA statements to its members on 10 July 2017.

On 1 September 2017, the trustee creates another document stating a different amount as the trust component for each character for the 2016-17 income year. It sends revised AMMA statements reflecting the revised amount to its members on 10 September 2017.

The document created on 1 September 2017 is the only document that meets the requirements in section 276-255 in respect of the amount for the 2016-17 income year.

Attribute amounts of particular characters to members

3.43 An attribution MIT must attribute the determined trust component of each particular character for an income year to its members. This is to ensure that an amount of a particular character that is derived or received by an attribution MIT for income tax purposes flows through the attribution MIT to its members for income tax purposes and retains that character.

3.44 As a result, members will recognise the amount of a particular character in broadly the same way as it would have been recognised if the member had derived or received an amount of that character directly (see Chapter 7).

3.45 To attribute the determined trust component of each particular character for an income year to its members, an attribution MIT must:

•

work out the member component of each particular character for the income year; and

•

attribute the amount of the member component (the determined member component) of each particular character for the income year to each member.

[Schedule 1, item 1, section 276-200]

What is the member component of a particular character?

3.46 The member component of a particular character for an entity that was a member of the attribution MIT in respect of an income year is so much of the determined trust component of that character that is attributable to the membership interests held in the attribution MIT by the member in respect of that income year. [Schedule 1, item 1, section 276-210; Schedule 9, item 9, definition of 'member component' in subsection 995-1(1)]

3.47 The member component for each member of an attribution MIT must be worked out applying the attribution principles - that is:

•

the attribution must be worked out on a fair and reasonable basis in accordance with the constituent documents of the attribution MIT; and

•

no part of the determined trust component of a particular character can be attributed to a particular member because of the tax characteristics of the member - that is, the attribution must not involve streaming of amounts of a particular tax character to a particular member.

[Schedule 1, item 1, subsections 276-210(3) and (4)]

Example 3.4

The ABC Trust is an attribution MIT that has a single class of members. All of the members have the same rights to the income and capital of the trust.

Thirty per cent of the members of the ABC Trust are foreign residents.

The ABC Trust derives foreign source income. Under the attribution principles, the trustee of the ABC Trust must attribute the foreign source income to both its Australian resident and foreign resident members.

If the trustee of the ABC Trust attributes the foreign source income solely to foreign resident members, the attribution would be invalid as the attribution principles would be breached because the trustee streamed the income due to the tax characteristics of particular members.

Example 3.5

The XYZ Trust is an attribution MIT that receives a franked dividend of $70, with an attached $30 franking credit.

The XYZ Trust attributes the dividend of $70 to Member A in accordance with their clearly defined rights under the Trust's constituent documents.

The XYZ Trust purports to separately attribute the $30 franking credit and tax offset entitlement associated with the franking credit to Member B.

The attribution of the franking credit amount and tax offset entitlement on a different basis to the attribution of the dividend to which the franking credit is attached breaches the attribution principles because the trustee streamed amounts due to the tax characteristics of particular members.

3.48 Holders of debt-like trust instruments are not treated as members of an attribution MIT. Therefore, if the only interest that an entity holds in an attribution MIT is a debt-like trust instrument, the trustee of the attribution MIT cannot attribute a trust component to the entity. [Schedule 1, item 1, section 276-510]

3.49 An amount attributed to members will satisfy the attribution principles if the attribution is consistent with the clearly defined interests of the members. Therefore, for example, if the defined interests of members in a particular class specifically relate to the performance of particular underlying assets, the anti-streaming attribution principle would not be breached if tax attributes (such as source or franking status) are matched with the assets giving rise to those tax attributes.

3.50 Legislative safe harbour rules apply to provide certainty for common arrangements where the members of an attribution MIT are attributed certain amounts. These legislative safe harbours do not limit the scope of the general attribution principles in subsections 276-210(3) and (4).

3.51 The first safe harbour rule applies if, in accordance with its constituent documents, an attribution MIT streams the proceeds from the sale of assets to finance a large redemption.

3.52 That is, an amount that is attributed to a member of an attribution MIT is taken to have been worked out on a fair and reasonable basis, and does not involve streaming of character amounts, if the amount reflects the fact that the trustee has exercised a power in the constituent documents of the attribution MIT that allows the trustee to direct an amount from the sale of an asset to a particular member if:

•

the member redeems one or more membership interests in the attribution MIT; and

•

the amount is made to fund the redemption.

[Schedule 1, item 1, subsection 276-210(5)]

Example 3.6

The ABC Trust is an attribution MIT. Under the constituent documents of the ABC Trust, the trustee has the power to stream an amount arising from the sale of an asset to a particular member where:

•

a member redeems one or more membership interests; and

•

the streaming is made to fund the redemption.

Lee-Anne is a member of the ABC Trust. Lee-Anne redeems a significant number of units that she holds in the ABC Trust. The trustee of the ABC Trust needs to sell assets to fund the redemption. As a result, the ABC Trust makes a capital gain. The trustee exercises the power in the constituent documents to stream the capital gain arising from the sale of the assets to Lee-Anne.

The attribution of the capital gain to Lee-Anne in these circumstances is consistent with the attribution principles. The attribution principle that prohibits streaming is not breached because the streaming of the capital gain does not arise due to the tax characteristics of Lee-Anne. Rather, the streaming arises because, to prevent on-going members from being disadvantaged, the ABC Trust must sell assets to fund the redemption of Lee-Anne's units.

3.53 The second safe harbour rule applies where an amount that is attributed to a member in a particular income year reflects unders and overs for prior income years (see Chapter 4).

3.54 That is, an amount that is attributed to a member of an attribution MIT is taken to have been worked out on a fair and reasonable basis, and does not involve streaming of character amounts, if the amount reflects the fact that:

•

either:

-

an amount of an under relating to a base year increases the trust component for an attribution MIT for a later income year under section 276-305; or

-

an amount of an over relating to a base year decreases the trust component for an attribution MIT for a later income year under section 276-305; and

•

an entity is a member of the attribution MIT at a time in relation to the later income year, but was not a member of the attribution MIT in respect of the base year.

[Schedule 1, item 1, subsection 276-210(6)]

Example 3.7

The ABC Trust is an attribution MIT that has a single class of members. All of the members have the same rights to the income and capital of the trust.

In the 2017-18 income year:

•

the ABC Trust disposes of assets and makes a net capital gain of $230,000; and

•

discovers an under (see Chapter 4) that is a capital gain in relation to the 2016-17 base year of $20,000.

Under the constituent documents of the ABC Trust, the amount of an under or over for a base year is recognised in the discovery year and is allocated to members who hold units at the time that the trustee attributes the income or other amounts of the trust for the discovery year (based on the number of units that they hold at that time).

As a result, in the 2017-18 income year, the ABC Trust attributes capital gains of $250,000 to its members based on the number of units that they hold at that particular time.

Chai became a member of the ABC Trust on 1 February 2018. The ABC trust attributes amounts to members who hold units on 30 June 2018. Therefore, a part of the capital gain of $250,000 is attributed to Chai, even though some of that capital gain is attributable to the under in relation to the 2016-17 base year.

The attribution of the capital gain to Chai in these circumstances is consistent with the attribution principles (even though Chai was not a member of the ABC Trust in the 2016-17 income year). In this regard:

•

the attribution was worked out on a fair and reasonable basis in accordance with the constituent documents of the ABC Trust; and

•

the attribution does not, to any extent, involve streaming of character amounts.

This ensures that the unders and overs system, which essentially allows for a variance to be reconciled in the income year in which the variance is discovered, can operate effectively.

3.55 The third safe harbour rule applies where an attribution MIT makes a capital gain or capital loss in an income year, where that capital gain or capital loss is reflected in an amount attributed to an entity that was not a member of the attribution MIT at the time it was made.

3.56 That is, an amount that is attributed to a member of an attribution MIT is taken to have been worked out on a fair and reasonable basis, and does not involve streaming of character amounts, if the amount reflects the fact that:

•

the attribution MIT made a capital gain or capital loss in an income year for the purpose of working out the trust component of the attribution MIT for an income year in accordance with the rules in section 276-265; and

•

an entity was a member of the attribution MIT in respect of the income year, but was not a member at the time the capital gain or capital loss was made.

[Schedule 1, item 1, subsection 276-210(7)]

Example 3.8

The ABC Trust is an attribution MIT that has a single class of members. All of the members have the same rights to the income and capital of the trust.

Under the constituent documents of the ABC Trust, members who hold units at the time that the trustee attributes the income of the trust are entitled to a share of that income (based on the number of units that they hold at that time).

The ABC Trust sold an asset on 1 February 2017 and made a capital gain at that time.

Amy became a member of the ABC Trust on 1 March 2017 - that is, part way through the ABC Trust's income year.

At the end of the ABC Trust's income year, the trustee attributes amounts to its members. As a result part of the capital gain that the ABC Trust made on 1 February 2017 is attributed to Amy.

The attribution of the capital gain to Amy in these circumstances is consistent with the attribution principles (even though Amy was not a member of the ABC Trust at the time the capital gain was made). In this regard:

•

the attribution was worked out on a fair and reasonable basis in accordance with the constituent documents of the ABC Trust; and

•

the attribution does not, to any extent, involve streaming of character amounts.

What is the determined member component of a particular character?

3.57 The determined member component of a particular character that is attributed to an entity that is a member of an attribution MIT in respect of an income year is the amount that is recognised and taken into account by the member for their income tax purposes.

3.58 The determined member component of a particular character for an income year is generally the amount of a particular member's member component of that character stated by the attribution MIT in the latest AMMA statement that is given to the member for the income year. [Schedule 1, item 1, subsection 276-205(1); Schedule 9, item 4, definition of 'determined member component' in subsection 995-1(1)]

3.59 In some circumstances, the member of an attribution MIT can nominate a different determined member component (see Chapter 7).

What is an AMMA statement?

3.60 The trustee of an attribution MIT must give an AMMA statement for an income year to each entity that was a member of the attribution MIT in respect of that income year. [Schedule 1, item 1, section 276-450 and subsection 276-455(1)]

3.61 The AMMA statement that is given to an entity that is a member of an attribution MIT in respect of an income year sets out the member's determined member components for that income year. The objective of the AMMA statement is to ensure that the information provided by the trustee of an attribution MIT to a member is sufficient for that member to complete their income tax return.

3.62 An entity will be a member of an attribution MIT in respect of an income year if, under the constituent documents of the trust, the entity has rights to trust income derived during income year and is attributed amounts for that income year.

Example 3.9

ACR Co becomes a member of an attribution MIT, the ABC Trust, on 15 July 2018. The constituent documents of the ABC Trust specify that an entity which becomes a member of the trust at any time before the trust makes a final distribution for an income year is entitled to a share of that final distribution.

The ABC Trust makes a final distribution (and issues AMMA statements) for the 2017-18 income year on 31 August 2018.

Therefore, ACR Co will be a member of the ABC Trust in respect of the 2017-18 income year. Consequently, ABC Trust is required to give an AMMA statement to ACR Co for that income year.

As a consequence, ACR Co will need to take into account amounts that flow through the ABC Trust (as shown on the AMMA statement) when preparing its income tax return for the 2017-18 income year.

3.63 The AMMA statement must:

•

include information that reflects the amount and character of each determined member component of the member; and

•

state the amount of the AMIT cost base net amount for the income year in respect of the CGT asset that is the member's unit or interest in the attribution MIT (see Chapter 7).

[Schedule 1, item 1, section 276-460]

3.64 The AMMA statement for an income year must be given to the member of the attribution MIT no later than three months after the end of the income year. [Schedule 1, item 1, subsection 276-455(2)]

3.65 However, the trustee of an attribution MIT is not required to give an AMMA statement to a member if:

•

all of the member's determined member components for the income year are nil; and

•

all of the member's membership interests in the attribution MIT have an AMIT cost base net amount for the income year of nil (see Chapter 7).

[Schedule 1, item 1, subsection 276-455(3)]

3.66 If the trustee of an attribution MIT fails to give AMMA statements to its members by required time, the trustee may be liable to an administrative penalty under Subdivision 286-C of Schedule 1 to the TAA 1953. [Schedule 1, items 2 and 3, subsection 286-75(2AB) and paragraph 286-80(2)(a) of Schedule 1 to the TAA 1953]

3.67 Subdivision 286-C of Schedule 1 to the TAA 1953 operates to impose an administrative penalty where documents are not lodged on time. The amount of the penalty depends on circumstances and is set out in section 276-80.

3.68 An attribution MIT can reconcile variances between amounts actually attributed to members for an income year and amounts that should have been attributed by reissuing AMMA statements to members for the income year (instead of using the unders and overs system to reconcile those variances (see Chapter 4)).

3.69 If the trustee of an attribution MIT issues revised AMMA statements to members, those revised AMMA statements effectively replace the original AMMA statements. [Schedule 1, item 1, subsection 276-455(4)]

3.70 However, a revised AMMA statement must be given to the member to whom it is addressed no later than four years after the end of the income year to which the AMMA statement relates. If a revised statement is given after the end of the four year period, it will not be an effective AMMA statement. [Schedule 1, item 1, subsection 276-460(3)]

Chapter 4 - Reconciling variances in calculating trust components of particular characters

Outline of chapter

4.1 This Chapter explains how an attribution MIT can reconcile variances between the amounts actually attributed to members for an income year, and the amounts that should have been attributed, by:

•

reissuing AMMA statements to members for the income year to which the variance relates; or

•

applying the unders and overs system in the income year in which the variance is discovered.

Context of amendments

4.2 Trusts, including managed investment trusts, are currently taxed under the general trust provisions in Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936).

4.3 The Board of Taxation identified a range of practical difficulties that arise for managed investment trusts in complying with the rules in Division 6. In this regard, the Board concluded that:

'As a result of complexity and time constraints, trustees of managed investment trusts can experience difficulty in obtaining final information to allow them to calculate, within a reasonable time at the end of each financial year, the income and net income of the trust. Revisions may be required at a later time to ensure that the correct amounts are reported to the ATO and beneficiaries.' (Paragraph 4.32 of the Board's October 2008 Discussion Paper on the Review of the Taxation Arrangements Applying to Managed Investment Trusts)

'If a revision occurs, the amounts initially reported to beneficiaries may overstate or understate the correct amount of their share of the net income of the trust. Before the error is identified to them, beneficiaries may have already included the incorrect amounts in their income tax returns.' (Paragraph 4.34 of the Board's October 2008 Discussion Paper)

4.4 Trustees of attribution MITs are likely to continue to make revisions to the trust components of particular characters because:

•

the calculations are complex;

•

rounding discrepancies arise because, for example, the taxable income of an attribution MIT cannot be divided between members in proportion to the number of units held in a way that gives rise to practical distribution numbers; and

•

an attribution MIT typically has incomplete or interim information at the time it needs to do these calculations and needs to rely on external estimates.

4.5 In this regard, for example, an attribution MIT will often have incomplete or interim information at the time it needs to work out the trust components of particular characters for an income year where it holds units in other attribution MITs and has not received AMMA statements from those other attribution MITs for that income year. In these circumstances, the trustee has no alternative but to work out trust components of particular characters based on estimated amounts of those components.

4.6 Under the new tax system, attribution MITs will be able to reconcile a variance in calculating trust components of particular characters for an income tax year in the income year that the variance is discovered.

4.7 The unders and overs system that applies to reconcile variances has been developed in consultation with key stakeholders and is broadly consistent with the current approach used by managed investments trusts to reconcile variances in reporting amounts to their members.

Summary of new law

4.8 Under the new tax system for attribution MITs, an under or over will arise if a variance in a trust component is discovered.

•

If a variance results in the amount of a trust component of a particular character being less than the amount it was previously calculated to be, the attribution MIT generally has an under of that character.

•

If a variance results in the amount of a trust component of a particular character being more than the amount it was previously calculated to be, the attribution MIT generally has an over of that character.

4.9 When a trustee of an attribution MIT discovers an under or over of a particular character for an income year, the trustee can:

•

reissue AMMA statements for the base year to members of the attribution MIT in respect of that base year, which has the effect of reconciling a variance in the income year to which the under or over relates; or

•

attribute the under or over to members in the discovery year by adjusting the trust component of the relevant character in that discovery year, which has the effect of reconciling a variance in the income year in which the variance is discovered.

4.10 If a trust that was an attribution MIT ceases to be an attribution MIT for an income year, the trust will need to continue to identify unders and overs relating to the income years for which the trust was an attribution MIT that are discovered in later income years.

Comparison of key features of new law and current law

Detailed explanation of new law

4.11 The unders and overs system applies to a trust that is an attribution MIT for an income year. Key features of the unders and overs system are that:

•

an underestimate in an income year of a particular character results in an under of that character;

•

an overestimate results in an over of that character; and

•

unders and overs arise, and are generally dealt with, in the income year in which they are discovered (rather than the income year to which they relate).

[Schedule 1, item 1, section 276-300]

4.12 To apply the unders and overs system, the trustee of an attribution MIT must:

•

determine if there is an under or over for an income year (the base year); and

•

adjust a trust component in the income year in which the under or over is discovered (the discovery year).

4.13 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. [Schedule 1, item 4, section 288-115 of Schedule 1 to the TAA 1953]

What is an under or over?

4.14 To work out the amount of an under or over of a particular character for a base year, the attribution MIT must compare:

•

the trust component for that character for the base year worked out based on the trustee's knowledge at the discovery time - that is, the discovery year amount; and

•

the amount of base year running balance - that is:

-

if the discovery year is the first income year after the base year - the attribution MIT's determined trust component of the particular character for the base year; or

-

otherwise - the discovery year amount worked out under a previous operation of this section for the most recent income year before the discovery year.

[Schedule 1, item 1, subsections 276-345(1) and (3)]

4.15 The amount of an under or over must be worked out at the discovery time. The discovery time for a discovery year is just before the determined trust component of a particular character is worked out for the discovery year. This will allow the under or over to be included in the determined trust component for that discovery year. [Schedule 1, item 1, subsection 276-345(2)]

4.16 To the extent that the base year running balance falls short of the discovery year amount, the amount of the shortfall is an under of that particular character for the base year that the attribution MIT has (and accounts for) in the discovery year. [Schedule 1, item 1, subsection 276-345(4); Schedule 9, item 12, definition of 'under' in subsection 995-1(1)]

4.17 To the extent the base year running balance exceeds the discovery year amount, the amount of the excess is an over of that particular character for the base year that the attribution MIT has (and accounts for) in the discovery year. [Schedule 1, item 1, subsection 276-345(5); Schedule 9, item 12, definition of 'over' in subsection 995-1(1)]

4.18 The base year running balance ensures that, where variances relating to a particular trust component emerge over more than one year, an attribution MIT that has reconciled variances in a particular discovery year does not have to adjust its trust components for under and overs relating to the same variance in a later discovery year.

4.19 A trustee 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). [Schedule 1, item 1, section 276-350]

How is an under or over reconciled?

4.20 If the trustee of an attribution MIT discovers an under or over for a trust component of a particular character in relation to a base year, the trustee can:

•

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 to members of the attribution MIT in respect of that base year; or

•

reconcile the under or over in the income year in which it is discovered by adjusting the trust component of the relevant character in the discovery year.

4.21 It is up to the trustee of an attribution MIT 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.

Example 4.1

The ABC Trust is an attribution MIT. For the 2016-17 income year, the ABC Trust calculates that it has determined trust components of:

•

$320,000 of discount capital gains;

•

$200,000 of non-discount capital gains; and

•

$50,000 of other ordinary or statutory income.

During the 2017-18 income year, the ABC Trust receives further information regarding the 2016-17 income year. Therefore, it realises that the trust components for the 2016-17 income year actually consisted of:

•

$400,000 of discount capital gains;

•

$120,000 of non-discount capital gains; and

•

$50,000 of other ordinary or statutory income.

Therefore in the 2017-18 income year, the ABC Trust has, in relation to the 2016-17 income year:

•

an under of discount capital gains of $80,000 (that is, $400,000 -$320,000); and

•

an over of non-discount capital gains of $80,000 (that is, $200,000 - $120,000).

To reconcile this difference, the ABC Trust decides to reissue AMMA statements for the 2016-17 income year to its members. Revised statements are issued on 30 March 2018.

The XYZ Trust is an attribution MIT that is a member of the ABC Trust. The XYZ Trust receives a revised AMMA statement for the 2016-17 income year from the ABC Trust on 30 March 2018.

Therefore, in the 2017-18 income year, the XYZ Trust will have:

•

an under of discount capital gains in relation to the 2016-17 income year; and

•

an over of non-discount capital gains in relation to the 2016-17 income year.

The XYZ Trust can choose to reconcile the under and over by:

•

reissuing AMMA statements for the 2016-17 income year to its members; or

•

using the unders and overs system to adjust the trust components of discount capital gains and non-discount capital gains in the 2017-18 income year.

4.22 If the trustee of an attribution MIT reconciles the under or over in the income year in which it is discovered, then:

•

in the case of an under of a particular character - the trust component of that particular character is increased in the discovery year; and

•

in the case of an over of a particular character - the trust component of that particular character is decreased in the discovery year.

[Schedule 1, item 1, section 276-305]

Example 4.2

The ABC Trust is an attribution MIT. For the 2016-17 income year, the ABC Trust calculates that it has determined trust components of:

•

$290,000 of foreign source income; and

•

$55,000 of other ordinary or statutory income.

During the 2017-18 income year, the ABC Trust receives further information regarding the 2016-17 income year and realises that the trust components for the 2016-17 income year actually consisted of:

•

$300,000 of foreign source income; and

•

$50,000 of other ordinary or statutory income.

Therefore in the 2017-18 income year, the ABC Trust discovers, in relation to the 2016-17 income year:

•

an under of foreign source income of $10,000 (that is, $300,000 - $290,000); and

•

an over of other ordinary or statutory income of $5,000 (that is, $55,000 - $50,000).

The ABC Trust reconciles these unders and overs in the 2017-18 income year by adjusting its trust components for that income year.

For the 2017-18 income year, the ABC Trust has derived or received the following amounts:

•

foreign source income of $200,000; and

•

other ordinary or statutory income of $100,000.

Therefore, for the 2017-18 income year, the ABC Trust has trust components of:

•

foreign source income of $210,000 (that is, foreign source income ($200,000) increased by the amount of the under (10,000)); and

•

other ordinary or statutory income of $95,000 (that is, other income ($100,000) reduced by the amount of the over ($5,000)).

Trust component increased or decreased by rounding adjustment

4.23 A rounding adjustment will often arise for the trust component of a particular character because the determined trust component of that character cannot be divided evenly and in a practical way among the members of the attribution MIT. Therefore, the sum of the determined member components (as shown on the AMMA statements) may be more or less than the determined trust component.

4.24 Therefore, the amount of the trust component of a particular character needs to be:

•

increased by the rounding adjustment deficit; or

•

decreased by the rounding adjustment surplus.

4.25 This will ensure that the trustee of an attribution MIT will not be subject to shortfall taxation (as outlined in Chapter 5) in relation to the rounding adjustment deficit or surplus.

4.26 An attribution MIT will have a rounding adjustment deficit of a particular character if:

•

the sum of all determined member components of a particular character of all members of the attribution MIT for an income year falls short of the determined trust component of that character of the attribution MIT for the income year; and

•

the shortfall results wholly or partly from the trustee rounding down amounts in working out the determined member components for the previous income year.

[Schedule 1, item 1, subsection 276-310(2); Schedule 9, item 12, definition of 'rounding adjustment deficit' in subsection 995-1(1)]

4.27 The amount of the rounding adjustment deficit is equal to the amount of the shortfall, to the extent that it results from that rounding down. [Schedule 1, item 1, subsection 276-310(2)]

4.28 If an attribution MIT has a rounding adjustment deficit for a trust component of a particular character, the amount of the deficit is applied to increase the trust component of that character in the income year in which the rounding adjustment deficit arises. [Schedule 1, item 1, subsection 276-310(1)]

4.29 An attribution MIT will have a rounding adjustment surplus of a particular character if:

•

the sum of all determined member components of a particular character relating to assessable income, exempt income or non-assessable non-exempt income of all members of the attribution MIT for an income year exceeds the determined trust component of that character of the attribution MIT for the income year; and

•

the excess results wholly or partly from the trustee rounding up amounts in working out the determined member components for the previous income year.

[Schedule 1, item 1, subsections 276-315(2) and (3); Schedule 9, item 12, definition of 'rounding adjustment surplus' in subsection 995-1(1)]

4.30 If the determined member component has the character of a discount capital gain, section 276-315 of the Income Tax Assessment Act 1997 (ITAA 1997) applies so that the amount reflected in the determined member component is double the amount of the component. [Schedule 1, item 1, subsections 276-315(4) and (5)]

4.31 The amount of the rounding adjustment surplus is equal to the amount of the excess, to the extent that it results from that rounding up. [Schedule 1, item 1, subsection 276-315(2)]

4.32 If an attribution MIT has a rounding adjustment surplus for a trust component of a particular character, the amount of the surplus is applied to decrease the trust component of that character in the income year in which the rounding adjustment surplus arises. [Schedule 1, item 1, subsection 276-315(1)]

Example 4.3

The ABC Trust is an attribution MIT. For the 2016-17 income year, the trustee of ABC Trust calculates the determined trust components to be:

•

unfranked dividends of $300,000;

•

other ordinary income of $200,000;

•

foreign sourced income of $50,000; and

•

foreign income tax offsets of $5,050.

On 31 July 2017, the trustee gives AMMA statements for the 2016-17 income year to members of the ABC Trust with the following total amounts:

•

unfranked dividends of $298,965

•

other ordinary income of $201,195;

•

foreign sourced income of $49,810; and

•

foreign income tax offsets of $5,025.

The difference in the sum of the determined member component of a particular character and the amount of the trust component of that character is a result of reasonable and accepted rounding. Therefore, the ABC Trust has, in relation to the 2016-17 income year:

•

a rounding adjustment deficit for unfranked dividends of $1,035;

•

a rounding adjustment surplus for other ordinary income of $1,195;

•

a rounding adjustment deficit for foreign sourced income of $190; and

•

a rounding adjustment deficit for foreign income tax offsets of $25.

The trustee of the ABC Trust will not be subject to shortfall taxation under subsection 276-420 for the 2016-17 income year in relation to the rounding adjustment deficit or surplus. However:

•

the rounding adjustment deficits for unfranked dividends, foreign sourced income and foreign income tax offsets will be applied to increase the trust component for each of those tax characters in the 2017-18 income year; and

•

the rounding adjustment surplus for other ordinary income will be applied to reduce the trust component of that tax character in the 2017-18 income year.

Trust component of a particular character cannot be less than nil

4.33 The amount of the trust component of a particular character cannot be negative - that is, the trust component for a particular character can only be reduced to nil. The remaining amount of the over gives rise to a trust component deficit for that character for the income year. [Schedule 1, item 1, section 276-320; Schedule 9, item 12, definition of 'trust component deficit in subsection 995-1(1)]

Trust component of a particular character relating to assessable income adjusted

4.34 If the trust component of a particular character relates to assessable income, the amount of the increase or decrease in the discovery year to the trust component of the particular character may be adjusted having regard to:

•

the cross character allocation amount;

•

the carry-forward trust component deficit; and

•

the foreign income tax offset (FITO) allocation amount.

[Schedule 1, item 1, section 276-325]

Trust component of assessable income character reduced by cross-character allocation amount

4.35 If an attribution MIT has a cross-character allocation amount for a trust component of a particular character that relates to assessable income for the income year, the amount of the trust component for that particular character is reduced by the cross-character allocation amount. [Schedule 1, item 1, subsection 276-325(2)]

4.36 A cross-character allocation amount in respect of a trust component of a particular character that relates to assessable income may arise in an income year if an attribution MIT has a trust component deficit for that character in that income year.

4.37 The trustee of an attribution MIT may apply the trust component deficit for a trust component of a particular character that relates to assessable income to reduce the trust component of another character that relates to assessable income for the income year. The amount allocated is called the cross-character allocation amount. [Schedule 1, item 1, subsections 276-330(2) and (4); Schedule 9, item 4, definition of 'cross-character allocation amount' in subsection 995-1(1)]

4.38 The trustee of an attribution MIT must allocate the trust component deficit for a trust component that relates to assessable income to other trust components on a reasonable basis. However, the amount that is allocated to another trust component cannot exceed the amount of that other trust component. [Schedule 1, item 1, subsection 276-330(3)]

4.39 The trustee of an attribution MIT may choose not to apply the cross-character allocation rules. In that event, the trust component deficit for the particular character is carried forward to a later income year.

Example 4.4

For the 2017-18 income year, the ABC Trust has derived or received foreign source income of $20,000.

The ABC Trust discovers that it has an over of foreign source income for the 2016-17 income year of $25,000 and applies this over to reduce the trust component of foreign source income for the 2017-18 income year to nil.

As a result, the ABC Trust has a trust component deficit of foreign source income of $5,000.

The ABC Trust can apply this trust component deficit of foreign source income to reduce the trust component of other ordinary or statutory income in the 2017-18 income year.

Therefore, in the 2017-18 income year, the ABC trust will have the following trust components:

•

foreign source income of nil - that is, the initial trust component ($20,000) reduced by the amount of the over ($25,000), but not beyond nil; and

•

other ordinary or statutory income of $95,000 - that is, the initial trust component ($100,000) reduced by the cross character allocation amount ($5,000).

Trust component of assessable income character reduced by carry-forward trust component deficit

4.40 If an attribution MIT has a carry-forward trust component deficit for a trust component of a particular character that relates to assessable income for the income year, the amount of the trust component for that particular character is reduced by the amount of the carry-forward trust component deficit. [Schedule 1, item 1, subsection 276-325(3)]

4.41 An attribution MIT will have a carry-forward trust component deficit of a trust component of a particular character that relates to assessable income for an income year if it has a trust component deficit for that character for the income year which has not been allocated to another character as a cross-character allocation amount. The unallocated trust component deficit is carried forward and applied to reduce the trust component of the same particular character for the next income year. [Schedule 1, item 1, subsection 276-330(5); Schedule 9, item 4, definition of 'carry forward trust component deficit' in subsection 995-1(1)]

Example 4.5

Assume that the facts are the same as in Example 4.3, except that the ABC Trust decides not to apply the trust component deficit of foreign source income of $5,000 to reduce the trust component of other ordinary or statutory income.

Therefore, in the 2017-18 income year, the ABC Trust will have a carry-forward trust component deficit of foreign source income of $5,000.

The ABC Trust must apply that carry-forward trust component deficit to reduce the trust component of foreign source income in the 2018-19 income year.

Trust component of foreign source income character increased by FITO allocation amount

4.42 If an attribution MIT has a FITO allocation amount, the FITO allocation amount is applied to increase the trust component of a character relating to foreign source income. [Schedule 1, item 1, subsection 276-325(4)]

4.43 An attribution MIT will have a FITO allocation amount if the attribution MIT has both:

•

a trust component of the character that is foreign income tax paid (that counts towards a foreign income tax offset under Division 770); and

•

a trust component deficit for the income year of that character.

[Schedule 1, item 1, subsection 276-335(1); Schedule 9, item 4, definition of 'FITO allocation amount' in subsection 995-1(1)]

4.44 The amount of the FITO allocation amount is the amount worked out using the following formula:

[Schedule 1, item 1, subsection 276-335(2)]

4.45 The corporate tax gross up-rate is defined in subsection 995-1(1) to mean the amount worked out using the following formula:

4.46 The standard corporate tax rate is currently 30 per cent (definition of standard corporate tax rate in subsection 995-1(1)).

Example 4.6

The ABC Trust is an attribution MIT. In the 2016-17 income year, the ABC Trust has a trust component deficit of foreign income tax offset. The amount of the deficit is $30,000.

As a result, under section 276-350, the trust component of foreign source income is increased by the FITO allocation amount. The FITO allocation amount is:

In the 2016-17 income year, the ABC trust derives foreign source income of $800,000. Therefore, the trust component for foreign source income will be $900,000 - that is, the foreign source income character amount ($800,000) increased by the FITO allocation amount ($100,000).

4.47 The cross-character allocation amount in respect of a trust component of assessable income of a particular character is the amount of the trust component deficit for another character for the income year that is allocated to the particular character. [Schedule 1, item 1, subsections 276-305(1) and (3)]

Trustee taxed on trust component deficit of a tax offset character (other than a FITO allocation amount)

4.48 If an attribution MIT has a trust component deficit of a tax offset character that is not a foreign income tax offset, the trustee is liable to pay an amount of tax equal to the amount of the trust component deficit. [Schedule 1, item 1, section 276-340]

4.49 This is necessary because the excess tax offset attributed to a member will reduce that member's tax liability. Therefore, the imposition of an amount of tax equal to the amount of the trust component deficit over will ensure that the revenue is not disadvantaged as a result of the variance that causes the over to arise.

Working out the trust component for a particular character

Trust component of an assessable income character

4.50 In summary, the trustee of an attribution MIT can work out the trust component of a particular character that relates to assessable income, for an income year as follows:

Amount of the character derived or received in the income year

less

Deductions allocated to that character

plus

(Total unders less Total overs)

plus

Rounding adjustment deficit

less

Rounding adjustment surplus

less

Cross-character allocation amount

less

Carry-forward trust component deficit.

Trust component of an exempt income or non-assessable non-exempt income character

4.51 Similarly, the trust component of a particular character that relates to exempt income or non-assessable non-exempt income for an income year can be worked out as follows:

Amount of the character derived or received in the income year

plus

(Total unders less Total overs)

plus

Rounding adjustment deficit

less

Rounding adjustment surplus

less

Carry-forward trust component deficit.

Trust component of a tax offset character

4.52 Finally, the trust component of a particular character that relates to a tax offset can be worked out as follows:

Amount of the character derived or received in the income year

plus

(Total unders less Total overs)

plus

Rounding adjustment deficit.

4.53 However, the trustee of an attribution MIT can determine the precise mechanism that it uses to reconcile unders and overs.

Penalty for intentional or reckless disregard of the law

4.54 The trustee of an attribution MIT is liable to an administrative penalty if it has an under or an over for the base year which resulted from the intentional or reckless disregard of the law by the trustee. [Schedule 1, item 4, subsection 288-115(1) of Schedule 1 to the TAA 1953]

4.55 An administrative penalty does not apply in relation to an under or over to the extent that the under or over is reduced because the attribution MIT has reissued AMMA statements for the base year.

4.56 The administrative penalty applies separately to each under or over that the attribution MIT has for the base year. [Schedule 1, item 4, subsection 288-115(2) of Schedule 1 to the TAA 1953]

4.57 In the case of an under of a character relating to assessable income, exempt income, non-assessable non-exempt income, or of an over of a character relating to tax offset, the amount of the penalty is:

•

where the under or over resulted from intentional disregard of a taxation law (other than the Excise Acts) by the trustee, or by an agent of the trustee - 47 per cent of the amount of the under or over multiplied by 75 per cent; or

•

where the under or over resulted from recklessness by the trustee, or by an agent of the trustee, as to the operation of a taxation law (other than the Excise Acts) - 47 per cent of the amount of the under or over multiplied by 50 per cent.

[Schedule 1, item 4, subsections 288-115(3), (4) and (5) of Schedule 1 to the TAA 1953]

4.58 In the case of an over of a character relating to assessable income, exempt income, non-assessable non-exempt income, or of an under of a character relating to tax offset, the amount of the penalty is:

•

where the under or over resulted from intentional disregard of a taxation law (other than the Excise Acts) by the trustee, or by an agent of the trustee - the greater of:

-

47 per cent of the amount of the under or over multiplied by 30 per cent; and

-

60 penalty units; or

•

where the under or over resulted from recklessness by the trustee, or by an agent of the trustee, as to the operation of a taxation law (other than the Excise Acts) - the greater of:

-

47 per cent of the amount of the under or over multiplied by 20 per cent; and

-

40 penalty units.

[Schedule 1, item 4, subsections 288-115(3), (4) and (6) of Schedule 1 to the TAA 1953]

4.59 If both items in the table in section 288-115 apply to an under or over, item 1 (which produces the greater amount of penalty) applies to the under or over. [Schedule 1, item 4, subsection 288-115(7) of Schedule 1 to the TAA 1953]

4.60 The penalty is worked out based on a 47 per cent rate - that is, the highest marginal tax rate plus the Medicare levy. However, if the base year is an income year in which a temporary Budget repair levy applies, the amount of the penalty is worked out on the basis that the reference to 47 per cent is, instead, a reference to 49 per cent. [Schedule 1, item 4, subsection 288-115(8) of Schedule 1 to the TAA 1953]

4.61 These penalties are consistent with the administrative penalties that arise when an individual taxpayer intentionally or recklessly disregards the law in relation to their own income tax affairs.

4.62 The question of whether there has been intentional or reckless disregard of the law in a particular circumstance is determined in a manner consistent with the existing framework for administrative penalties (including remission of penalties) in Division 284 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953).

4.63 However, the trustee of an attribution MIT would not ordinarily be taken to have intentionally or recklessly disregarded the law if, in working out estimates of the trust components of particular characters that are attributed to members, the trustee, for example:

•

uses published estimates of amounts expected to be received by the attribution MIT from third party funds;

•

contacts third party fund managers to request estimates of amounts expected to be received by the attribution MIT from that third party fund and, when provided, uses those estimates; or

•

makes reasonable estimates of the distribution yield and tax components based on historical yield and tax component data.

4.64 A consequential amendment is made to section 298-30 of Schedule 1 to the TAA 1953 to allow the Commissioner of Taxation to make an assessment of the amount of an administrative penalty. [Schedule 6, items 66 and 67, section 298-30 of Schedule 1 to the TAA 1953]

Requirement to give an annual investment income report

4.65 An entity that is an investment body must give an annual investment income report to the Commissioner of Taxation for a financial year (section 393-10 of Schedule 1 to the TAA 1953). If the entity has less than 10 investments of the kind that are subject to the tax file number rules (Part VA investments), the entity may not be required to give the report to the Commissioner.

4.66 In order to support the attribution model, a managed investment trust (including an attribution MIT) must give an annual investment income report to the Commissioner for a financial year, even where the total number of Part VA investments in relation to which it was an investment body is less than 10. [Schedule 6, item 68, subsection 393-10(5A) of Schedule 1 to the TAA 1953]

4.67 Therefore, managed investment trusts will be required to give an annual investment income report to the Commissioner for a financial year for any Part VA investments in relation to which it was an investment body unless the Commissioner issues a legislative instrument which changes this requirement.

What if a trust ceases to be an attribution MIT?

4.68 If a trust that was an attribution MIT ceases to be an attribution MIT for an income year, the trust will need to continue to identify unders and overs relating to the period that the trust was an attribution MIT that are discovered in later income years (the discovery year). [Schedule 1, item 1, section 276-805]

4.69 In these circumstances, the trust will need to continue to work out unders and overs relating to a base year during which the trust was an attribution MIT. [Schedule 1, item 1, section 276-810]

4.70 However, section 276-350 will apply so that 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).

4.71 If the trust discovers an under or over that has the effect of increasing the amount of a particular character for the discovery year (worked out on the basis that the trust continued to be an attribution MIT), then:

•

if the relevant character relates to assessable income, the trust must treat the amount of the increase as assessable income of the trust for the discovery year - this may have the effect of increasing the net income (as defined in section 95 of the ITAA 1936) of the trust for the discovery year;

•

if the relevant character relates to exempt income, the trust must treat the amount of the increase as exempt income of the trust for the discovery year;

•

if the relevant character relates to non-assessable non-exempt income, the trust must treat the amount of the increase as non-assessable non-exempt income of the trust for the discovery year; or

•

if the relevant character relates to a tax offset character, the trust must treat the amount of the increase as a tax offset of the trust for the discovery year of a kind corresponding to that character.

[Schedule 1, item 1, subsection 276-810(2) and section 276-815]

4.72 For these purposes, if the relevant character is a discount capital gain, subsection 276-810(2) applies so that the amount of the increase is double the amount of the character. [Schedule 1, item 1, subsections 276-815(3) and (4)]

4.73 If the trust discovers an under or over that has the effect of decreasing the amount of a particular character for the discovery year (worked out on the basis that the trust continued to be an attribution MIT), then:

•

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;

•

if the relevant character is 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;

•

if the relevant character relates to assessable income and is not a capital gain, the trust must treat the amount of the decrease as a deduction of the trust for the discovery year;

•

if the relevant character relates to exempt income, the trust must treat the amount of the decrease as reducing the exempt income of the trust for the discovery year;

•

if the relevant character relates to 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; or

•

if the relevant character relates to 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.

[Schedule 1, item 1, subsection 276-810(2) and section 276-820]

4.74 If the relevant character is foreign income tax paid (that counts towards a foreign income tax offset under Division 770) which exceeds the total of the existing foreign tax offsets of the trust (before the reduction under subsection 276-820(5)), the excess is applied to increase the trust component of foreign source income by the amount worked out using the following formula:

[Schedule 1, item 1, paragraph 276-820(6)(b) and subsection 276-820(7)]

4.75 The corporate tax gross up-rate is defined in subsection 995-1(1) to mean the amount worked out using the following formula:

4.76 The standard corporate tax rate is currently 30 per cent (definition of standard corporate tax rate in subsection 995-1(1)).

4.77 If the relevant character relates to a tax offset that is not a foreign income tax offset which exceeds the total of the existing tax offsets of the trust (before the reduction under subsection 276-820(5)), the trustee is liable to pay tax on the amount of the excess at a rate of 100 per cent. [Schedule 1, item 1, paragraph 276-820(6)(a)]

Chapter 5 - Trustee liable to pay tax

Outline of chapter

5.1 This Chapter explains circumstances in which the trustee of an attribution MIT is liable to pay tax.

Context of amendments

5.2 Trusts, including managed investment trusts, are currently taxed under the general trust provisions in Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936).

5.3 Where a trust has net income to which no beneficiary is presently entitled, the trustee is liable to pay tax in relation to that amount.

5.4 If a variance occurs that results in a shortfall in the amount of net income assessed to a beneficiary who is presently entitled, the beneficiary may need to seek an amendment to their income tax return.

5.5 In addition, under Division 6, the trustee of a managed investment trust is liable to pay tax on amounts of net income referable to income of the trust to which a foreign resident beneficiary is presently entitled in some circumstances.

5.6 Under the new tax system for attribution MITs, the trustee of an attribution MIT will be liable to pay tax if a discrepancy occurs in attributing amounts of determined trust components to members in some circumstances. This will occur where, as a result of that discrepancy, the taxable income of the attribution MIT for an income year is not fully attributed to members or where amounts are attributed in a way that is inconsistent with the attribution principles.

5.7 It is appropriate to tax the trustee of an attribution MIT in these circumstances so that taxable income derived by the attribution MIT for an income year does not escape taxation - that is, where the income is not attributed to members and taxed at the member level, it should be taxed at the trust level.

5.8 In addition, the trustee of an attribution MIT will continue to be liable to pay tax on amounts attributed to a foreign resident member in some circumstances.

5.9 Finally, the Board of Taxation recommended the introduction of an arm's length income rule for managed investment trusts (including attribution MITs) to protect the integrity of the corporate tax base (Recommendation 10). Under this rule, the trustee of a managed investment trust will be liable to pay tax on non-arm's length income. The amendments to introduce an arm's length income rule for managed investment trusts are explained in Chapter 9.

Summary of new law

5.10 The trustee of an attribution MIT will be liable to pay tax where:

•

the amount of the determined member component of a particular character that relates to assessable income falls short of the member component of that character;

•

the amount of the determined member component of a particular character that relates to a tax offset exceeds the member component of that character;

•

the sum of the determined member components of a particular character that relate to assessable income attributed to members is less than the determined trust component of that character;

•

unders of a particular character that relate to assessable income are not properly carried forward; or

•

overs of a particular character that relate to a tax offset are not properly carried forward.

5.11 The trustee of an attribution MIT will also be liable to pay tax on a determined member component that has been attributed to a foreign resident member in some circumstances.

Comparison of key features of new law and current law

Detailed explanation of new law

5.12 The trustee of an attribution MIT will be liable to pay income tax on certain amounts reflecting under-attribution of income or over-attribution of tax offsets. [Schedule 1, item 1, section 276-400]

5.13 That is, the trustee may be liable to income tax where:

•

a shortfall arises in determined member component of a particular character that relates to assessable income;

•

an excess arises in determined member component of a particular character that relates to a tax offset;

•

the determined member components of a particular character that relate to assessable income is less than the determined trust component;

•

unders of a particular character that relate to assessable income are not properly carried forward;

•

overs of a particular character that relate to a tax offset are not properly carried forward; and

•

determined member components are attributed to foreign residents in some circumstances.

Shortfall in determined member component of assessable income

5.14 The trustee of the attribution MIT is liable to pay tax if the determined member component of a particular character that relates to assessable income falls short of the member component of that character. [Schedule 1, item 1, subsection 276-405(1)]

5.15 In these circumstances, the trustee is liable to pay tax on the amount of the shortfall at the top marginal tax rate (including the Medicare levy and any temporary Budget repair levies). [Schedule 1, item 1, subsection 276-405(2)]

5.16 The Income Tax Act 1986 imposes tax on the shortfall. The Income Tax Rates Act 1986 and the Medicare Levy Act 1986 specifies the rate of the shortfall tax to be the top marginal tax rate (including the Medicare levy and any temporary Budget repair levies. [Schedule 6, item 17, paragraph 251S(1)(d) of the ITAA 1936; Income Tax Rates Amendment (Managed Investment Trusts) Bill 2015, Schedule 1, items 11 and 13, subsections 12(11) and 35(1) of the Income Tax Rates Act 1986; Medicare Levy Amendment (Attribution Managed Investment Trusts) Bill 2015, Schedule 1, item 2, subsection 6(4) of the Medicare Levy Act 1986]

5.17 If there is a shortfall in the amount of assessable income attributed to a member, the amount of the shortfall will not be included in the member's assessable income. Therefore, to ensure that it is appropriately subject to tax, the trustee is liable to pay tax on the assessable income.

Excess in determined member component of a tax offset

5.18 The trustee of an attribution MIT is liable to pay tax if the determined member component of a particular character that relates to a tax offset exceeds the member component of that character. [Schedule 1, item 1, section 276-410]

5.19 In these circumstances, the trustee is liable to pay tax on the amount of the excess at a rate of 100 per cent. [Schedule 1, item 1, subsection 276-405(2)]

5.20 The Income Tax (Attribution Managed Investment Trusts - Offsets) Act 2015:

•

imposes tax on the excess; and

•

specifies the rate of the excess tax to be 100 per cent.

[Income Tax (Attribution Managed Investment Trusts - Offsets) Bill 2015, sections 3 and 4]

5.21 It is appropriate to tax the trustee on the amount of the excess at a rate of 100 per cent in these circumstances so that the revenue is not disadvantaged because the trustee of an attribution MIT attributes excess tax offsets to members. This is because tax offsets are applied to reduce the tax payable by a member, and are refundable in some circumstances. In this regard, the outcome is consistent with that which arises if a company passes out excess franking credits to shareholders and is liable to pay franking deficit tax.

5.22 If an excess amount of a tax offset is attributed to a member, the amount of the excess tax offset will be applied by the member to reduce the amount of tax that they must pay (and may give rise to a refundable tax offset). Therefore, to ensure that the revenue is not disadvantaged, the trustee is liable to pay tax amount of the excess in these circumstances.

Determined member components of assessable income less than the determined trust component

5.23 If the sum of all determined member components of a particular character that relate to assessable income of all members of an attribution MIT for an income year falls short of the determined trust component of that character of the attribution MIT for the income year, the trustee of the attribution MIT is liable to pay tax on the amount of the shortfall. [Schedule 1, item 1, subsection 276-415(1)]

5.24 In these circumstances, the trustee is liable to pay tax on the amount of the shortfall, reduced by:

•

the amount of the rounding adjustment deficit; and

•

the amount of the shortfall, if any, that is reflected in a shortfall in determined member component of assessable income which is taxed under section 276-405 of the Income Tax Assessment Act 1997 (ITAA 1997).

[Schedule 1, item 1, subsection 276-415(2)]

5.25 If shortfall tax is payable by the trustee, the rate of tax is the top marginal tax rate (including the Medicare levy and any temporary Budget repair levies). [Schedule 1, item 1, subsection 276-415(2)]

5.26 The Income Tax Act 1986 imposes tax on the shortfall. The Income Tax Rates Act 1986 and the Medicare Levy Act 1986 specifies the rate of the shortfall tax to be the top marginal tax rate (including the Medicare levy and any temporary Budget repair levies). [Schedule 6, item 17, paragraph 251S(1)(e) of the ITAA 1936; Income Tax Rates Amendment (Managed Investment Trusts) Bill 2015, Schedule 1, items 11 and 13, subsections 12(12) and 35(1) of the Income Tax Rates Act 1986; Medicare Levy Amendment (Attribution Managed Investment Trusts) Bill 2015, Schedule 1, item 2, subsection 6(5) of the Medicare Levy Act 1986]

5.27 The determined member component of assessable income gives rise to an amount that is assessable income of a member. Therefore, if, for all members of an attribution MIT, the determined member components of assessable income of a particular character for an income year fall short of the determined trust component for that income year, the trustee is liable to pay tax on the amount of the shortfall.

5.28 It is necessary to impose tax on the trustee in these circumstances because the amount of the shortfall reflects assessable income derived by the attribution MIT which has not been attributed to members and therefore would not otherwise be subject to tax.

5.29 If the member component or the determined member component is of a character that is a discount capital gain, then, for the purposes of working out the amount that the trustee is liable to pay income tax on, the amount of the component is doubled. This ensures that the trustee is liable to pay income tax on the component as though it were not a discount capital gain. [Schedule 1, item 1, subsections 276-415(3) and (4)]

Unders of assessable income not properly carried forward

5.30 The trustee of an attribution MIT is liable to pay tax if the attribution MIT has, for an income year, an under of a particular character that relates to assessable income in the income year for an earlier income year (the base year), worked out on the basis of the trustee's knowledge at the discovery time, which falls short of the amount of that under if it had been worked out on the basis of what the trustee should have known at that time. [Schedule 1, item 1, subsections 276-420(1) and (2)]

5.31 In this regard:

•

the base year is the income year to which the under actually relates;

•

the discovery year is a later income year in which the variance in relation to the base year is discovered; and

•

the correct under (based on what the trustee should have known), and the resulting shortfall (that is, the extent to which the under calculated by the trustee falls short of the correct under), arise in the discovery year.

5.32 The amount of the shortfall is reduced to the extent that the under for the base year is taken into account in a later income year. [Schedule 1, item 1, subsections 276-420(4) and (5)]

5.33 If an attribution MIT has a shortfall under section 276-420, the trustee is liable to pay tax on the amount of the shortfall at the top marginal tax rate (including the Medicare levy and any temporary Budget repair levies). [Schedule 1, item 1, subsection 276-420(2)]

5.34 The Income Tax Act 1986 imposes tax on the shortfall. The Income Tax Rates Act 1986 and the Medicare Levy Act 1986 specifies the rate of the shortfall tax to be the top marginal tax rate (including the Medicare levy and any temporary Budget repair levies). [Schedule 6, item 17, paragraph 251S(1)(f) of the ITAA 1936; Income Tax Rates Amendment (Managed Investment Trusts) Bill 2015, Schedule 1, items 11 and 13, subsections 12(13) and 35(1) of the Income Tax Rates Act 1986; Medicare Levy Amendment (Attribution Managed Investment Trusts) Bill 2015, Schedule 1, item 2, subsection 6(6) of the Medicare Levy Act 1986]

5.35 If there is a shortfall under section 276-420, the base year running balance for the determined trust component is adjusted by the amount of the shortfall. [Schedule 1, item 1, subsection 276-420(3)]

5.36 In this regard, the base year running balance keeps track of the amount of unders and overs for a particular base year over the four year period for which unders and overs must be recognised.

5.37 It is necessary to impose tax on the trustee in these circumstances because the amount of the shortfall reflects assessable income derived by the attribution MIT which has not be attributed to members and therefore would not otherwise be subject to tax.

5.38 The trustee of an attribution MIT could be assessed on an under of assessable income of a particular character that is not properly carried forward because, for example, the trustee and the Commissioner of Taxation disagree on the interpretation of a provision in the income tax law. If the trustee of an attribution MIT disagrees with the assessment, they may object to the assessment in the manner set out in Part IVC of the TAA 1953.

Example 5.1

The ABC Trust is an attribution MIT. In the 2017-18 income year, the ABC Trust discovers an amount of $1,000 that relates to the 2016-17 income year. The trustee considers that the discovered amount consists of:

•

ordinary income of $800; and

•

non-assessable non-exempt income of $200.

Therefore, in the 2017-18 income year, the ABC Trust recognises:

•

a $800 under of ordinary assessable income; and

•

a $200 under of non-assessable non-exempt income.

In the 2018-19 income year, the Commissioner of Taxation undertakes a compliance review and concludes that the whole of the discovered amount is ordinary income. As a result, $1,000 (rather than $800) should have been recognised as an under of ordinary assessable income in the 2017-18 income year.

If the trustee of the ABC Trust accepts the Commissioner's view, the trustee could adjust for the variance by recognising in the 2018-19 income year, in relation to the 2016-17 base income year:

•

an additional $200 under of ordinary assessable income; and

•

a $200 over of non-assessable non-exempt income.

Alternatively, the trustee can choose to reissue AMMA statements to members for the 2017-18 income year.

However, if the trustee does not accept the Commissioner's view by recognising the under of $200, the Commissioner may make an assessment under section 276-420 for the 2018-19 income year, being the discovery year in which the trustee should have recognised the under.

Overs of a tax offset not properly carried forward

5.39 The trustee of the attribution MIT is liable to pay tax if the attribution MIT has, for an income year, an over of a particular character that relates to a tax offset for an earlier income year (the base year), worked out on the basis of the trustee's knowledge at the discovery time, which falls short of the amount of that over if it had been worked out on the basis of what the trustee should have known at that time. [Schedule 1, item 1, subsections 276-425(1) and (2)]

5.40 The amount of the shortfall is reduced to the extent that the over for the base year is taken into account in a later income year. [Schedule 1, item 1, subsections 276-425(4) and (5)]

5.41 If an attribution MIT has a shortfall under section 276-425, the trustee is liable to pay tax on the amount of the excess at a rate of 100 per cent. [Schedule 1, item 1, subsection 276-425(2)]

5.42 The Income Tax (Attribution Managed Investment Trusts - Offsets) Act 2015:

•

imposes tax on the shortfall; and

•

specifies the rate of the excess tax to be 100 per cent.

[Income Tax (Attribution Managed Investment Trusts - Offsets) Bill 2015, sections 3 and 4]

5.43 In this regard, as an over of a tax offset results in a member's tax liability being reduced by an equivalent amount, or potentially a refund on any excess tax offset, the amount of tax that the trustee is liable to pay is equal to the amount of the over of the tax offset. This is consistent with the outcome that arises, for example, when a company pays excess franking credits to its members and therefore becomes liable to franking deficit tax.

5.44 If there is a shortfall under section 276-425, the base year running balance is decreased by the amount of the shortfall. [Schedule 1, item 1, subsection 276-425(3)]

Commissioner may remit shortfall taxation

5.45 The Commissioner of Taxation may remit the whole or any part of income tax for which a liability arises under Subdivision 276-G (that is, for shortfall or excess taxation) if the Commissioner is satisfied that the remission would not result in a detriment to the revenue. [Schedule 1, item 1, section 276-430]

5.46 For example, if a liability to tax arises under section 276-425 because there is an excess over of a non-refundable tax offset that is passed on to a tax exempt entity, no tax advantage arises. In these circumstances, the Commissioner may conclude that the excess over does not result in a detriment to the revenue and therefore apply section 276-430 to remit the tax payable.

Determined member components attributed to foreign residents

5.47 Under the attribution model of taxation, amounts related to income and tax offsets of an attribution MIT, determined by the trustee to be of a particular character, are attributed to members and generally retain that character. The amount that is attributed by an attribution MIT to members and generally retains its character is called the determined member component of a particular character.

5.48 The determined member component of a particular character for an income year of a member of an attribution MIT is generally the amount of that character for the income year as shown on the AMMA statement. [Schedule 1, item 1, subsection 276-205(1); Schedule 9, item 4, definition of 'determined member component' in subsection 995-1(1)]

5.49 Currently, the trustee of a managed investment trust is liable to pay income tax on amounts to which a foreign resident beneficiary is presently entitled in some circumstances (section 98 of the ITAA 1936). The effect of section 98 is replicated for foreign resident members of attribution MITs that are not withholding MITs.

Attribution MITs that are not withholding MITs

5.50 Sections 276-105 to 276-115 effectively replicate the effect of section 98 for attribution MITs that are not withholding MITs.

5.51 Therefore, consistent with the outcomes that arise for a managed investment trust under subsections 98(3) and (4) of the ITAA 1936, the trustee of an attribution MIT that is not a withholding MIT is liable to pay income tax if an entity that is a member of the attribution MIT in respect of an income year is a foreign resident at the end of the income year has, for the income year, a determined member component of a particular character that relates to assessable income in respect of the attribution MIT. [Schedule 1, item 1, subsection 276-105(1)]

5.52 If the member is not a beneficiary in the capacity of a trustee of another trust, the attribution MIT is liable to pay income tax on the determined member component to the extent that the component is:

•

attributable to a period when the member is an Australian resident; or

•

attributable to a period when the member is a foreign resident and is attributable to an Australian source.

[Schedule 1, item 1, paragraph 276-105(1)(a), subparagraph 276-105(1)(b)(i), paragraphs 276-105(2)(a) and (b), and subsection 276-105(3)]

5.53 In these circumstances, the rate of tax payable by the trustee on the relevant determined member component is:

•

if the member is not a company, the marginal tax rates (including any temporary Budget repair levies) that apply to a foreign resident individual; or

•

if the member is a company, the standard corporate tax rate (which is currently 30 per cent).

[Schedule 1, item 1, paragraphs 276-105(2)(a) and (b)]

5.54 If the member is a beneficiary in the capacity of a trustee of another trust, the attribution MIT is liable to pay income tax on the determined member component to the extent that the component is attributable to sources in Australia. [Schedule 1, item 1, paragraph 276-105(1)(a), subparagraph 276-105(1)(b)(ii), paragraph 276-105(2)(c) and subsection 276-105(4)]

5.55 In this regard, for these purposes, a determined member component that has the character of a capital gain from a CGT asset that is not taxable Australian property is taken to not be attributable to sources in Australia. [Schedule 1, item 1, subsection 276-105(5)]

5.56 In these circumstances, the rate of tax payable by the trustee on the relevant determined member component is the maximum marginal tax rate (including any temporary Budget repair levies) that applies to a foreign resident individual. [Schedule 1, item 1, paragraph 276-105(2)(c)]

5.57 However, the trustee is not liable to pay income tax under section 276-105 to the extent that the determined member component is reflected in an attribution MIT dividends, interest or royalties payment (an AMIT DIR payment) or a fund payment, and an amount in respect of that payment has been withheld or paid by the trustee under the withholding provisions - that is, an amount:

•

has been withheld from the payment under Subdivision 12-F or 12-H of Schedule 1 to the TAA 1953;

•

would be so withheld apart from an exemption from a requirement to withhold under Subdivision 12-F in that Schedule;

•

has been paid under Subdivision 12A of Schedule 1 to the TAA 1953; or

•

would be so paid apart from an exemption from a requirement to withhold under Subdivision 12-F in that Schedule.

[Schedule 1, item 1, subsection 276-105(6)]

5.58 An AMIT DIR payment is, broadly:

•

an AMIT dividend payment - that is, a dividend that is subject to withholding tax;

•

an AMIT interest payment - that is, interest that is subject to withholding tax; or

•

an AMIT royalty payment - that is, a royalty that is subject to withholding tax.

5.59 If the determined member component is a discount capital gain, then, for the purposes of working out the amount that the trustee is liable to pay income tax on, the amount of the component is doubled. This ensures that the trustee is liable to pay income tax on the component as though it were not a discount capital gain. [Schedule 1, item 1, subsections 276-105(7) and (8)]

5.60 If the trustee is liable to pay tax on the determined member component attributed to a foreign resident member under section 276-105, the member is entitled to a refundable tax offset (under section 67-23) equal to the amount of tax paid by the trustee. [Schedule 1, item 1, section 276-110; Schedule 6, items 5 to 7, 21 and 22, paragraph 98B(2)(c) and subsection 98B(3) of the ITAA 1936, sections 13-1 and 67-23 of the ITAA 1997]

5.61 The Income Tax Act 1986 imposes tax that a trustee must pay under section 276-105. The Income Tax Rates Act 1986 specifies the rate of the tax to be:

•

if tax is payable by the trustee under paragraph 276-105(2)(a) - the rate of tax that would be payable if the trustee were a single foreign resident individual (including any temporary Budget repair levies);

•

if tax is payable by the trustee under paragraph 276-105(2)(b) - the standard corporate tax rate (which is currently 30 per cent); or

•

if tax is payable by the trustee under paragraph 276-105(2)(c) - the highest marginal rate of tax that applies to a foreign resident individual (including any temporary Budget repair levies).

[Income Tax Rates Amendment (Managed Investment Trusts) Bill 2015, Schedule 1, items 2 to 10, 12, 14 and 15, paragraphs 5(a) and (b), subsection 12(6A), section 28A, paragraph 35(2)(aa) and Schedule 10A of the Income Tax Rates Act 1986]

Attribution MITs that are withholding MITs

5.62 To improve certainty for attribution MITs, section 276-105 does not apply to the trustee of an attribution MIT that is a withholding MIT. Instead, the majority of payments made to entities that are foreign resident members of the attribution MIT in respect of an income year (other than in respect of the Australian permanent establishment of a member) will be dealt with under the Pay As You Go withholding provisions in Division 12 of Schedule 1 to the TAA 1953.

5.63 The fund payment withholding provisions apply when a withholding MIT makes a fund payment to another entity that has a place of payment or address outside Australia. In some circumstances, an amount referable to the fund payment will ultimately be derived by an Australian resident. Consequential amendments ensure that where an Australian resident receives such an amount, they will remain subject to general taxation in respect of the amount.

5.64 To ensure that most payments to foreign residents made by a withholding MIT that is an attribution MIT (or interposed custodian or other entity) are subject to the withholding provisions in Division 12 of Schedule 1 to the TAA 1953, the amendments ensure that a liability to managed investment trust withholding tax arises under section 840-805 of the ITAA 1997 in respect of a fund payment made to a foreign resident by an attribution MIT (regardless of whether the foreign resident is acting in the capacity of trustee of another trust) - that is, the operation of paragraphs 840-805(2)(c), (3)(c) and (4)(c)) are modified to give this outcome. [Schedule 3, item 2, subsection 840-805(4D)]

5.65 A foreign beneficiary of a trust who is presently entitled to a share of the income or capital of the trust that is reasonably attributable to a fund payment (the fund payment part) may have a managed investment withholding tax liability in relation to some or all of the payment under subsection 840-805(4).

5.66 If the trustee of the trust is also liable to pay tax in respect of a fund payment part (a taxed part), that is reasonably attributable to the same fund payment, because of the operation of subsection 840-805(4D), the beneficiary can disregard the taxed part for the purposes of determining any liability to managed investment withholding tax that arises under subsection 840-805(4). [Schedule 3, item 2, subsection 840-805(4E)]

5.67 To the extent managed investment trust withholding tax is payable on an amount because of subsection 840-805(4D), the amount is not non-assessable non-exempt income of an Australian resident who, directly or indirectly, receives the payment. As a result, the member will include the amount in their assessable income. [Schedule 3, items 3 and 4, subsection 840-815(2)]

5.68 If the resident receives such amounts from a custodian that is interposed between the attribution MIT and the resident, the resident will include the amount in their assessable income because of subsection 276-80(2) (which operates to ensure that the member is taken to have derived, received or made an amount of a particular character). [Schedule 1, item 1, subsection 276-95(1)]

Consequential amendments

Definition of assessment

5.69 The definition of assessment in subsection 6(1) of the ITAA 1936 is being amended so that it covers the ascertainment of the amount payable (or that no amount is payable) by the trustee of an attribution MIT. [Schedule 6, item 2, definition of 'assessment' in section 6(1) of the ITAA 1936]

5.70 The Commissioner of Taxation's assessment power is in section 169 of the ITAA 1936. That power provides for assessments other than on the basis of taxable income.

5.71 The Commissioner can raise multiple liabilities for similar shortfalls in one assessment. For example, if there are multiple assessable income character shortfall amounts for a particular income year because of variations relating to more than one member, the Commissioner may ascertain the trustee's liability to pay tax on the sum of those assessable income character shortfall amounts.

5.72 In addition, the Commissioner can include multiple liabilities arising under different provisions of the tax assessable income character shortfall amounts in one assessment. For example, an assessment of the tax payable on the sum of the trustee's assessable income character shortfall amounts may also include the trustee's liability to pay tax on foreign resident member's components.

5.73 If the trustee was liable to pay tax on more than one foreign resident member's determined member component of a character relating to assessable, the tax payable would be calculated separately, with the sum of the tax payable included in the assessment.

5.74 Similarly, the Commissioner can raise multiple similar liabilities in one assessment. These liabilities could arise separately because, for example, the attribution MIT has classes of interests and made a choice for each class to be treated as a separate attribution MIT for the purposes of Division 276. The Commissioner may ascertain the trustee's liability to pay tax on the sum of similar liabilities.

Definition of income tax law

5.75 The definition of income tax law in subsection 995-1(1) of the ITAA 1997 is being amended so that it covers tax payable in accordance with subsection 276-340(2), 276-410(2), 276-425(2) or 276-820(6). [Schedule 9, item 7, definition of 'income tax law' in section 995-1(1)]

5.76 Subsections 276-340(2), 276-410(2), 276-425(2) and 276-820(6) make a trustee of an attribution MIT liable to pay tax where an excess character relating to a tax offset is attributed to a member. The tax is imposed by the Income Tax (Attribution Managed Investment Trusts - Offsets) Act 2015.

Chapter 6 - Operation of the withholding tax provisions

Outline of chapter

6.1 This Chapter explains how the Pay As You Go (PAYG) withholding provisions and the withholding tax liability provisions apply to attribution MITs and their members.

Context of amendments

6.2 Under the dividend, interest and royalty withholding provisions (sections 128AF and 128B of the Income Tax Assessment Act 1936 (ITAA 1936), and sections 12-215, 12-250 and 12-285 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)), if a managed investment trust receives an amount of dividends, interest or royalties which flows through the trust and is paid to a foreign resident, the foreign resident is liable to withholding tax. The managed investment trust has a PAYG withholding obligation in relation to the dividends, interest or royalties that it pays to the foreign resident.

6.3 Under the managed investment trust withholding provisions (Subdivision 12-H of Schedule 1 to the TAA 1953), a managed investment trust is required to withhold an amount from a payment of its Australian sourced net income (other than dividends, interest and royalties) if the payment is made to an entity whose address, or place for payment, is outside Australia. If the payment is made to another Australian resident entity, the managed investment trust is required to give a notice or make information available to the recipient outlining certain details in relation to the payment.

6.4 Investors frequently invest in managed investment trusts indirectly through another entity that is a custodian. An entity is a custodian if it is carrying on a business that consists predominantly of providing a custodial or depository service in accordance with an Australian financial services licence.

6.5 The dividend, interest and royalty withholding provisions apply if a payment received by a foreign resident through an interposed entity is attributable to an amount of dividends, interest or royalties paid by an Australian resident. Therefore, if a custodian receives an amount from a managed investment trust that is attributable to dividends, interest or royalties on behalf of a foreign resident, the custodian has a dividend, interest or royalty withholding obligation.

6.6 If a custodian receives a payment that is covered by information made available by a managed investment trust under the managed investment trust withholding provisions, the custodian is required to withhold an amount from any related later payment to an entity whose address, or place for payment, is outside Australia. If the later payment is made to another resident entity, the custodian is required to give a notice or make information available to the recipient outlining certain details in relation to that later payment.

6.7 If an entity that is not a custodian or a managed investment trust receives a payment that is covered by information made available by a managed investment trust under the managed investment trust withholding provisions, that entity is required to withhold an amount from that payment if a foreign resident becomes entitled to that payment. If an Australian resident becomes entitled to the payment, the entity must make information available in relation to that payment.

6.8 The amount on which a managed investment trust withholding obligation arises is called a fund payment. An amount is a fund payment only if it is made by a managed investment trust. A custodian or other entity that receives a payment that is attributable to a fund payment may be required to withhold from a subsequent on-payment of an amount to a foreign resident entity.

6.9 A foreign resident beneficiary of a managed investment trust, custodian or other entity is liable to pay withholding tax on a fund payment (as defined in the managed investment trust withholding provisions), or a payment attributable to a fund payment, made by the managed investment trust, custodian or other entity (Subdivision 840-M of the Income Tax Assessment Act 1997 (ITAA 1997)). An amount on which withholding tax is payable is non-assessable non-exempt income of the foreign resident beneficiary.

6.10 In this Chapter:

•

a reference to an attribution MIT means an attribution MIT that is a withholding MIT as defined in new section 12-383 of Schedule 1 to the TAA 1953; and

•

legislative references are to Schedule 1 of the TAA 1953 unless otherwise indicated.

6.11 The amendments modify the dividend, interest and royalty withholding provisions, and the managed investment trust withholding provisions, to ensure that the withholding provisions apply appropriately to determined member components of an attribution MIT that are, directly or indirectly, attributed to a foreign resident.

Summary of new law

6.12 The amendments modify the operation of the dividend, interest and royalty withholding provisions so that:

•

the provisions apply to a deemed attribution MIT dividends, interest or royalties payment (AMIT DIR payment) made by an attribution MIT - that is, broadly, the total of the determined member components of dividends, interest or royalties that is attributed to members as shown on an AMMA statement to the extent that it exceeds the total amount of any pre-AMMA actual payments made to those members; and

•

if an attribution MIT or a custodian makes an AMIT DIR payment to an entity that is an Australian resident, the trustee of the attribution MIT or the custodian must give a notice or make information available in relation to the AMIT DIR payment.

6.13 The amendments also modify the operation of the managed investment trust withholding provisions so they apply to a deemed fund payment made by an attribution MIT. A deemed fund payment is, broadly, the total relevant determined member components that are attributed to members as shown on AMMA statements to the extent that it exceeds the total amount of any pre-AMMA actual payments made to those members.

6.14 If an attribution MIT makes a deemed AMIT DIR payment or a deemed fund payment, the attribution MIT must pay the Commissioner of Taxation an amount that is equal to the amount that the trustee would have to withhold if the deemed payment was an actual payment.

Comparison of key features of new law and current law

Detailed explanation of new law

6.15 The amendments modify the dividend, interest and royalty withholding provisions, and the managed investment trust withholding provisions, to ensure that the withholding provisions apply appropriately to determined member components of an attribution MIT that are, directly or indirectly, attributed to a foreign resident.

Withholding provisions apply to withholding MITs

6.16 The withholding provisions apply to a managed investment trust that is a withholding MIT. A managed investment trust will be a withholding MIT in relation to an income year if:

•

the trust is:

-

a managed investment trust that is covered by paragraph 275-10(1)(a) of the ITAA 1997 - that is, the trust meets the requirements in subsection 275-10(3); or

-

a managed investment trust that is covered by paragraph 275-10(2)(b) of the ITAA 1997 - that is, the trust would be a managed investment trust in relation to the income year except for temporary circumstances outside of its control; and

•

a substantial proportion of the investment management activities carried out in relation to the trust in respect of the following assets of the trust are carried out in Australia throughout the income year:

-

assets that are situated in Australia at any time in the income year;

-

assets that are taxable Australian property at any time in the income year; and

-

assets that are shares, units or interests listed for quotation in the official list of an approved stock exchange in Australia at any time in the income year.

[Schedule 3, item 5, section 12-383 of Schedule 1 to the TAA 1953; Schedule 9, item 12, definition of 'withholding MIT' in subsection 995-1(1)]

6.17 A trust will meet the requirements in subsection 275-10(3) of the ITAA 1997 for the income year if, broadly:

•

at the time the trust makes the first fund payment in relation to the income year, the trustee is an Australian resident or has its central management and control in Australia;

•

the trust is not a trading trust, or does not control, or have the ability to control, another person in respect of a trading business;

•

at the time the payment is made, the trust is a managed investment scheme;

•

at the time the payment is made, the trust has wholesale membership and satisfies certain licensing requirements or is registered under section 601EB of the Corporations Act 2001; and

•

the trust satisfies certain widely-held requirements and closely-held restrictions.

6.18 These amendments do not change the circumstances in which a managed investment trust has a PAYG withholding obligation. The amendments are necessary as a result of the amendments to improve the structure of the income tax law by transferring the definition of managed investment trust from the TAA 1953 to the ITAA 1997 (see Chapter 8).

Definition of a custodian

6.19 Investors frequently invest in managed investment trusts indirectly through another entity that is a custodian.

6.20 Licenced custodians are regulated entities whose business consists of administering and holding assets on behalf of their investor clients. When custodial services are provided, the legal title to the investments is commonly held by a nominee company which the custodian uses to keep the assets in its care under custodial agreements separate from its other assets.

6.21 The definition of a custodian is being modified to clarify that an entity such as a nominee company which holds assets on behalf of a custodian is also taken to be a custodian. That is, an entity is a custodian if:

•

the entity is carrying on a business that consists predominantly of providing a custodial or depository service (as defined in section 766E of the Corporations Act 2001) pursuant to an Australian financial services licence; or

•

the entity is acting on behalf of an entity carrying on such a business pursuant to an Australian financial services licence.

[Schedule 6, item 47, subsection 12-390(9) of Schedule 1 to the TAA 1953]

6.22 An Investor Directed Portfolio Service is not a custodian within the scope of this definition. This is because, while the Investor Directed Portfolio Service may act on behalf of the holder of an Australian financial services licence, subsection 12-390(9) requires the nominee to be acting on behalf of the custodian in respect of investments in a withholding MIT.

Amount attributed taken to be a deemed payment

6.23 When a withholding MIT that is an attribution MIT gives a member an AMMA statement, the trustee is deemed to have made a payment to the member. The deemed payment can flow through one or more custodians giving rise to subsequent deemed payments. [Schedule 3, item 11, section 12A-1 of Schedule 1 to the TAA 1953]

6.24 The operation of the dividend, interest and royalty withholding provisions, and the managed investment trust withholding provisions, are modified so that the withholding regime operates appropriately for deemed payments.

6.25 Therefore, the current dividend, interest and royalty withholding provisions, and the managed investment trust withholding provisions, will continue to apply to impose a PAYG withholding obligation on relevant cash payments and present entitlements made by an attribution MIT to a foreign resident prior to the time that a deemed payment is made.

Deemed payments by attribution MITs (first deemed payments)

6.26 When a withholding MIT that is an attribution MIT gives a member an AMMA statement, the trustee is deemed to have made a payment to the member. The payment is generally the sum of the determined member components reflected in the statement that are of a character relating to assessable income, reduced by any previous actual payments related to those components. The deemed payment can flow through one or more custodians, giving rise to subsequent deemed payments. [Schedule 3, item 11, section 12A-200 of Schedule 1 to the TAA 1953]

6.27 If an attribution MIT gives an AMMA statement to an entity that is a member in respect of an income year (the first recipient), the amount attributed to the member for the income year (as shown on the AMMA statement) may give rise to a deemed payment. In these circumstances, the trustee of the attribution MIT may be taken to have made a payment (the first deemed payment) of an amount to the first recipient at the time that the AMMA statement was given to the first recipient. [Schedule 3, item 11, subsection 12A-205(1) and paragraph 12-205(2)(a) of Schedule 1 to the TAA 1953]

6.28 To work out the amount of the first deemed payment that is made to the first recipient, an attribution MIT must work out the total of all deemed payments to all members - that is:

•

the total of all determined member components of the attribution MIT of a character relating to assessable income for the income year;

less

•

the total amount of any AMIT DIR payments or fund payments that arose from any pre-AMMA actual payments.

[Schedule 3, item 11, subparagraphs 12A-205(2)(b)(i) to (iv) of Schedule 1 to the TAA 1953]

6.29 The first deemed payment that is made to the first recipient is the amount of the total deemed payment that is referable to the first recipient. [Schedule 3, item 11, subparagraph 12A-205(2)(b)(v) of Schedule 1 to the TAA 1953]

6.30 It is necessary to work out this amount so that, for example, where the first recipient is a custodian, the attribution MIT can notify the custodian of the amount of the deemed payment.

6.31 For the purposes of applying the dividend, interest and royalty withholding provisions in Division 11A of Part III of the ITAA 1936, the first recipient is taken to have derived the deemed payment just before the end of the income year to which the AMMA statement relates. [Schedule 3, item 11, subsection 12A-205(3) of Schedule 1 to the TAA 1953]

6.32 A withholding obligation under the new dividend, interest and royalty withholding provisions, and the managed investment trust withholding provisions, will arise in respect of a deemed payment only to the extent that the amount of the deemed payment exceeds the amount of any earlier cash payments.

6.33 Consequently, if an attribution MIT makes actual cash payments or present entitlements to members during an income year, the existing dividend, interest and royalty withholding provisions, and the managed investment trust withholding provisions, will continue to apply to those cash payments except that:

•

the amount of the AMIT DIR payment will be worked out using the method statement in new section 12A-30; and

•

the amount of the fund payment will be worked out using the method statement in new section 12A-110.

Deemed payments by custodians (subsequent deemed payments)

6.34 If the first recipient of a deemed payment made by an attribution MIT is a custodian, the custodian may be taken to have made a payment (a subsequent deemed payment) to another entity (a subsequent recipient) if:

•

the subsequent recipient starts to have an entitlement to an amount that is reasonably attributable to all or part of the first deemed payment; or

•

the subsequent recipient would start to have such an entitlement if the first deemed payment were an actual payment of an amount.

[Schedule 3, item 11, subsection 12A-205(4) and paragraph 12-205(5)(a) of Schedule 1 to the TAA 1953]

6.35 The amount of the subsequent deemed payment is the amount of the entitlement and is taken to be attributable to the first deemed payment. [Schedule 3, item 11, paragraphs 12-205(5)(b) and (c) of Schedule 1 to the TAA 1953]

6.36 For the purposes of applying the dividend, interest and royalty withholding provisions in Division 11A of Part III of the ITAA 1936, the subsequent recipient is taken to have derived the subsequent deemed payment at the time when the subsequent recipient starts to have an entitlement to the first deemed payment. [Schedule 3, item 11, subsection 12A-205(6) of Schedule 1 to the TAA 1953]

6.37 If an entity that is a custodian (the first custodian) makes a subsequent deemed payment to another custodian (the second custodian), the second custodian is effectively taken to be the first recipient for the purposes of applying subsections 12A-205(4) and (5), and therefore may also be taken to have made subsequent deemed payments. [Schedule 3, item 11, subsection 12A-205(7) of Schedule 1 to the TAA 1953]

6.38 If the first custodian passes on the first deemed payment to foreign residents, the custodian will have a withholding obligation in respect of the deemed payment.

6.39 However, if the first custodian passes on the deemed payment to a second custodian that is an Australian resident, the first custodian will need to work out how much of the first deemed payment that it has received from the attribution MIT has been passed on to that second custodian and notify the second custodian of this amount.

What is a post-AMMA actual payment and a pre-AMMA actual payment in respect of a deemed payment?

6.40 It is likely that an attribution MIT will make actual cash payments or present entitlements in respect of a deemed payment to its members in respect of an income year. These actual cash payments or present entitlements can be made either before or after the attribution MIT gives AMMA statements to members for the income year.

6.41 The deemed payment (as reflected in the AMMA statements that are given to members) is likely to be greater than or equal to the actual cash payments or present entitlements made to members for the income year.

6.42 An actual payment or present entitlement by an attribution MIT will be a post-AMMA actual payment in respect of a deemed payment if:

•

the actual payment and the deemed payment are both attributable to the same member component for the attribution MIT; and

•

the actual payment is made at the same time as, or after, the time that the deemed payment is made - that is, at the same time as, or after, the AMMA statement is given to the member.

[Schedule 3, item 12, subsection 12A-210(2) of Schedule 1 to the TAA 1953; Schedule 9, item 11, definition of 'post-AMMA actual payment' in subsection 995-1(1)]

6.43 If an attribution MIT makes a post-AMMA actual payment, the dividend, interest and royalty withholding provisions, and the managed investment trust withholding provisions, will not to apply to that payment. This is because the payment will be covered by:

•

the deemed payment dividend, interest and royalty withholding provisions; and

•

the deemed payment managed investment trust withholding provisions.

6.44 An actual payment or present entitlement by an attribution MIT will be a pre-AMMA actual payment in respect of a deemed payment if:

•

the actual payment and the deemed payment are both attributable to the same member component for the attribution MIT; and

•

the actual payment is made before the time that the deemed payment is made - that is, before the AMMA statement is given to the member.

[Schedule 3, item 12, subsection 12A-210(2) of Schedule 1 to the TAA 1953; Schedule 9, item 12, definition of 'pre-AMMA actual payment' in subsection 995-1(1)]

Dividend, interest and royalty withholding on deemed payments

6.45 The amendments modify the dividend, interest and royalty withholding provisions so that they operate effectively for deemed payments made by an attribution MIT. Withholding liabilities under Subdivision 12-F do not apply in relation to deemed payments arising under Subdivision 12A-C relating to dividends, interest and royalties (although analogous liabilities may arise under Subdivision 12A-C). Attribution MIT trustees, custodians and other entities may be required to give notices to recipients of such deemed payments. [Schedule 3, items 1 and 11, subsection 128AF(1) of the ITAA 1936, section 12A-5 of Schedule 1 to the TAA 1953]

6.46 If an attribution MIT makes a pre-AMMA actual payment, the existing dividend, interest and royalty withholding provisions will continue to apply to that payment except that the amount of the AMIT DIR payment will be worked out using the method statement in new section 12A-30.

Deemed payments made by an attribution MIT

6.47 Currently, a managed investment trust that is a withholding MIT which receives a payment of dividends, interest or royalties from another entity to which a foreign resident becomes entitled has a withholding obligation under subsection 12-215(1), 12-250(1) or 12-285(1) in respect of that payment. This withholding obligation will not arise under those subsections if:

•

the withholding MIT is an attribution MIT; and

•

the receipt of the payment of dividends, interest and royalties gives rise to a deemed payment by an attribution MIT.

[Schedule 3, item 11, subsection 12A-10(1) of Schedule 1 to the TAA 1953]

6.48 However, the trustee of the attribution MIT may have a withholding obligation in respect of the deemed payment under Subdivision 12A-C if the deemed payment is an AMIT DIR payment.

What is an AMIT DIR payment?

6.49 An AMIT DIR payment is:

•

an AMIT dividend payment;

•

an AMIT interest payment; or

•

an AMIT royalty payment.

[Schedule 3, item 11, section 12A-25 of Schedule 1 to the TAA 1953; Schedule 9, item 1, definition of 'AMIT DIR payment' in subsection 995-1(1) of the ITAA 1997]

What is an AMIT dividend payment?

6.50 An AMIT dividend payment is defined in section 12A-30. The object of section 12A-30 is to ensure that the total of AMIT dividend payments that an attribution MIT makes in relation to an income year equals, as nearly as practicable, the total of its determined member components for the income year that are dividends on which withholding tax would be payable under Subdivision 12-F. [Schedule 3, item 11, subsections 12A-30(1), (2) and (3) of Schedule 1 to the TAA 1953; Schedule 9, item 1, definition of 'AMIT dividend payment' in subsection 995-1(1) of the ITAA 1997]

6.51 The amount of an AMIT dividend payment for an attribution MIT is worked out by applying the method statement in subsection 12A-30(4). The AMIT dividend payment may be an actual payment or a deemed payment that the trustee makes in relation to an income year. The amount of the AMIT dividend payment may be:

•

the amount of the actual payment or deemed payment; or

•

the amount of the actual payment or deemed payment, increased or reduced as a result of the method statement.

[Schedule 3, item 11, subsection 12A-30(4) of Schedule 1 to the TAA 1953]

6.52 Under step 1 of the method statement, the trustee must work out what it is reasonable to expect will be the total determined member components of an assessable income character that are dividends on which withholding tax would be payable if they are derived by a foreign resident. [Schedule 3, item 11, step 1 of the method statement in subsection 12A-30(4) of Schedule 1 to the TAA 1953]

6.53 Under step 2 of the method statement, the amount of the AMIT dividend payment is so much of the step 1 amount that is reasonable having regard to:

•

the object of the AMIT dividend payment provision (as mentioned in subsection 12A-30(2));

•

the amounts of any earlier AMIT dividend payments made by the attribution MIT in relation to the income year - that is, the amount of any pre-AMMA actual payments made to members during the income year; and

•

the expected amounts of any later AMIT dividend payments the attribution MIT expects to make in relation to the income year - that is, for example, the expected amount of any deemed payments to be made to members during the income year.

[Schedule 3, item 11, step 2 of the method statement in subsection 12A-30(4) of Schedule 1 to the TAA 1953]

6.54 In the case of an actual payment, the amounts of the total determined member components of dividends on which withholding tax would be payable if they were derived by a foreign resident for the attribution MIT for the income year are worked out based on the trustee's knowledge at the time when the payment is made. [Schedule 3, item 11, subsection 12A-30(5) of Schedule 1 to the TAA 1953]

6.55 However, in the case of a deemed payment, the amount is worked out based on the AMMA statement. [Schedule 3, item 11, subsection 12A-30(6) of Schedule 1 to the TAA 1953]

6.56 The amount of an AMIT dividend payment can take into account the expected amounts of any later AMIT dividend payments an attribution MIT expects to make in relation to the income year. Therefore, when an attribution MIT makes a pre-AMMA actual payment to a member, the trustee can take into account any expected later deemed payment in working out the amount of the AMIT dividend payment. As a result, the amount of the AMIT dividend payment can exceed the amount of the actual payment.

6.57 A payment is not an AMIT dividend payment in relation to an income year if:

•

the payment is a post-AMMA actual payment in respect of another payment that is made on or after the time that the deemed payment is taken to be made; and

•

the other payment is an AMIT dividend payment.

[Schedule 3, item 11, subsections 12A-30(7) of Schedule 1 to the TAA 1953]

What is an AMIT interest payment?

6.58 An AMIT interest payment is defined in section 12A-35. The object of section 12A-35 is to ensure that the total of AMIT interest payments that an attribution MIT makes in relation to an income year equals, as nearly as practicable, the total of its determined member components for the income year that is interest on which withholding tax would be payable under Subdivision 12-F. [Schedule 3, item 11, subsections 12A-35(1), (2) and (3) of Schedule 1 to the TAA 1953; Schedule 9, item 1, definition of 'AMIT interest payment' in subsection 995-1(1) of the ITAA 1997]

6.59 The amount of an AMIT interest payment for an attribution MIT is worked out by applying the method statement in subsection 12A-30(4), and subsections 12A-30(5) to (7), as if:

•

references in those subsections to AMIT dividend payments are references to AMIT interest payments; and

•

the reference in subsection 12A-30(4) to 'the amount mentioned in subsection 12A-30(3)' is a reference to 'the amount mentioned in subsection 12A-35(3)'.

[Schedule 3, item 11, subsection 12A-35(4) of Schedule 1 to the TAA 1953]

6.60 Therefore, similar to AMIT dividend payments, an AMIT interest payment may be an actual payment or a deemed payment that the trustee makes in relation to an income year. The amount of the AMIT interest payment may be:

•

the amount of the actual payment or deemed payment; or

•

the amount of the actual payment or deemed payment, increased or reduced as a result of the method statement.

6.61 To work out the amount of an AMIT interest payment, an attribution MIT must apply the method statement in subsection 12A-30(4), as modified by subsection 12A-35(4).

6.62 Under step 1 of the method statement, the trustee must work out what it is reasonable to expect will be the total determined member components of an assessable income character that is interest on which withholding tax would be payable if it was derived by a foreign resident.

6.63 Under step 2 of the method statement, the amount of the AMIT interest payment is so much of the step 1 amount that is reasonable having regard to:

•

the object of the AMIT interest payment provision (as mentioned in subsection 12A-35(2));

•

the amount of any pre-AMMA actual payments made to members during the income year; and

•

the expected amounts of any later AMIT interest payments the attribution MIT expects to make in relation to the income year.

6.64 In the case of an actual payment, the amounts of the total determined member components of an assessable income character that is interest on which withholding tax would be payable if they were derived by a foreign resident for the attribution MIT for the income year are worked out based on the trustee's knowledge at the time when the payment is made.

6.65 However, in the case of a deemed payment, the amount is worked out based on the AMMA statement.

6.66 A payment is not an AMIT interest payment in relation to an income year if:

•

the payment is a post-AMMA actual payment in respect of another payment that is made on or after the time that the deemed payment is taken to be made; and

•

the other payment is an AMIT interest payment.

What is an AMIT royalty payment?

6.67 An AMIT royalty payment is defined in section 12A-40. The object of section 12A-40 is to ensure that the total of AMIT royalty payments that an attribution MIT makes in relation to an income year equals, as nearly as practicable, the total of its determined member components for the income year that are royalties on which withholding tax would be payable under Subdivision 12-F. [Schedule 3, item 11, subsections 12A-40(1), (2) and (3) of Schedule 1 to the TAA 1953; Schedule 9, item 1, definition of 'AMIT royalty payment' in subsection 995-1(1) of the ITAA 1997]

6.68 The amount of an AMIT royalty payment for an attribution MIT is worked out by applying the method statement in subsection 12A-30(4), and subsections 12A-30(5) to (7), as if:

•

references in those subsections to AMIT dividend payments are references to AMIT royalty payments; and

•

the reference in subsection 12A-30(4) to 'the amount mentioned in subsection 12A-30(3)' is a reference to 'the amount mentioned in subsection 12A-40(3)'.

[Schedule 3, item 11, subsection 12A-40(4) of Schedule 1 to the TAA 1953]

6.69 Therefore, similar to AMIT dividend payments, an AMIT royalty payment may be an actual payment or a deemed payment that the trustee makes in relation to an income year. The amount of the AMIT royalty payment may be:

•

the amount of the actual payment or deemed payment; or

•

the amount of the actual payment or deemed payment, increased or reduced as a result of the method statement.

6.70 To work out the amount of an AMIT royalty payment, an attribution MIT must apply the method statement in subsection 12A-30(4), as modified by subsection 12A-40(4).

6.71 Under step 1 of the method statement, the trustee must work out what is reasonable to expect will be the total determined member components of an assessable income character that are royalties on which withholding tax would be payable if it was derived by a foreign resident.

6.72 Under step 2 of the method statement, the amount of the AMIT royalty payment is so much of the step 1 amount that is reasonable having regard to:

•

the object of the AMIT royalty payment provision (as mentioned in subsection 12A-40(2));

•

the amount of any pre-AMMA actual payments made to members during the income year; and

•

the expected amounts of any later AMIT royalty payments the attribution MIT expects to make in relation to the income year.

6.73 In the case of an actual payment, the amounts of the total determined member components of an assessable income character that are royalties on which withholding tax would be payable if they were derived by a foreign resident for the attribution MIT for the income year are worked out based on the trustee's knowledge at the time when the payment is made.

6.74 However, in the case of a deemed payment, the amount is worked out based on the AMMA statement.

6.75 A payment is not an AMIT royalty payment in relation to an income year if:

•

the payment is a post-AMMA actual payment in respect of another payment that is made on or after the time that the deemed payment is taken to be made; and

•

the other payment is an AMIT royalty payment.

Deemed payments made by a custodian

6.76 An entity is a custodian if:

•

the entity is carrying on a business that consists predominantly of providing a custodial or depository service (as defined in section 766E of the Corporations Act 2001) pursuant to an Australian financial services licence; or

•

the entity is acting on behalf of an entity that is carrying on such a business pursuant to such a licence.

[Schedule 6, item 47, subsection 12-390(9) of Schedule 1 to the TAA 1953]

6.77 Currently, a custodian which receives a payment of dividends, interest or royalties from another entity to which a foreign resident becomes entitled has a withholding obligation under subsection 12-215(1), 12-250(1) or 12-285(1) in respect of that payment. This withholding obligation will not arise under those subsections if the custodian receives the payment from an attribution MIT and:

•

the receipt of the payment of dividends, interest or royalties arises because of a deemed payment; or

•

the payment is a post-AMMA actual payment in respect of a deemed payment.

[Schedule 3, item 11, subsections 12A-10(2) and (3) of Schedule 1 to the TAA 1953]

6.78 However, the custodian may have a withholding obligation in respect of the deemed payment under Subdivision 12A-C if the deemed payment is an AMIT DIR payment.

Requirement to give a notice or make information available in respect of a deemed AMIT DIR payment

6.79 Currently, if an attribution MIT makes a fund payment (or a custodian makes a subsequent on-payment), the trustee of the attribution MIT or the custodian must give a notice or make information available in relation to the fund payment (section 12-395).

6.80 These requirements are being extended so that they will also apply when an attribution MIT or a custodian makes an AMIT DIR payment. The new requirements are consistent with the notice and information requirements that apply to fund payments and are necessary to ensure compliance with the dividend, interest and royalty withholding obligations for deemed payments.

6.81 The requirement to give a notice or make information available in relation to an AMIT DIR payment will apply if:

•

an attribution MIT or a custodian makes a payment to another entity (the recipient) from which an amount would have been required to be withheld under Subdivision 12 if:

-

the attribution MIT or custodian were a company;

-

the payment had been made to a foreign resident; and

-

the conditions that must be satisfied for a withholding obligation to arise in relation to dividend, interest or royalty payment were satisfied - that is, in the case of a dividend payment, the condition in either or both paragraphs 12-210(a) or (b) were satisfied; in the case of an interest payment, the condition in either or both paragraphs 12-245(a) or (b) were satisfied; or, in the case of a royalty payment, the condition in either or both paragraphs 12-280(a) or (b) were satisfied;

•

an amount is not required to be withheld from the payment because:

-

the recipient is an Australian resident; or

-

the recipient is a foreign resident carrying on business in Australia at or through a permanent establishment (within the meaning of subsection 128B(3F) of the ITAA 1936) of the recipient in Australia, and the payment is attributable to the permanent establishment; and

•

the payment is a deemed payment or a pre-AMMA actual payment in respect of a deemed payment.

[Schedule 3, item 11, subsection 12A-15(1) of Schedule 1 to the TAA 1953]

6.82 In these circumstances, the attribution MIT or custodian must, before or at the time that the payment is made:

•

give a written notice to the recipient specifying the part of the payment from which an amount would have been so required to be withheld and the income year of the attribution MIT to which that part relates; or

•

make those details available on a website in a way that the details are readily accessible to the recipient for not less than five continuous years.

[Schedule 3, item 11, subsections 12A-15(2) and (3) of Schedule 1 to the TAA 1953]

6.83 Similarly, currently, if an entity that is not an attribution MIT or a custodian receives an amount that is attributable to a fund payment to which an Australian resident becomes entitled, the other entity must give a notice or make information available in relation to the payment (subsections 12-395(4) to (6)). These requirements are being extended so that they will also apply when the other entity receives an AMIT DIR payment.

6.84 The requirement to give a notice or make information available in relation to an AMIT DIR payment will apply if:

•

an entity that is not an attribution MIT or a custodian receives the payment;

•

another entity (the subsequent recipient) becomes, broadly, entitled to receive (directly or indirectly) or otherwise deal with an amount attributable to the payment;

•

the entity would have been required to withhold an amount from the payment under subsection 12-215(1), 12-250(1) or 12-285(1) if the subsequent recipient had been a foreign resident;

•

an amount is not required to be withheld from the payment because:

-

the subsequent recipient is an Australian resident; or

-

the subsequent recipient is a foreign resident carrying on business in Australia at or through a permanent establishment (within the meaning of subsection 128B(3F) of the ITAA 1936) of the recipient in Australia, and the payment is attributable to the permanent establishment; and

•

the payment arises because it is a deemed payment or a pre-AMMA actual payment in respect of a deemed payment.

[Schedule 3, item 11, subsection 12A-15(4) of Schedule 1 to the TAA 1953]

6.85 In these circumstances, the other entity must, before or at the time that the payment is, broadly, made or credited to the subsequent recipient, or is otherwise dealt with on the subsequent recipient's behalf or as they direct:

•

give a written notice to the recipient specifying the part of the payment from which an amount would have been so required to be withheld and the income year of the attribution MIT to which that part relates; or

•

make those details available on a website in a way that the details are readily accessible to the recipient for not less than five continuous years.

[Schedule 3, item 11, subsections 12A-15(5) and (6) of Schedule 1 to the TAA 1953]

Managed investment trust withholding on deemed payments

6.86 The amendments modify the managed investment trust withholding provisions so that they operate effectively for deemed payments made by an attribution MIT.

6.87 Withholding liabilities under Subdivision 12-H do not apply in relation to deemed payments arising under Subdivision 12A-C analogous to fund payments under Subdivision 12-H (although analogous liabilities may arise under Subdivision 12A-C). Attribution MIT trustees, custodians and other entities may be required to give notices to recipients of such deemed payments. [Schedule 3, item 11, section 12A-100 of Schedule 1 to the TAA 1953]

6.88 If an attribution MIT makes a pre-AMMA actual payment, the existing managed investment trust withholding provisions will continue to apply to that payment except that the amount of the fund payment will be worked out using the method statement in new section 12A-110.

6.89 The amendments modify the managed investment trust withholding provisions which require a withholding MIT to withhold an amount from a payment of its Australian sourced net income (other than dividends, interest and royalties) that is made to an entity whose address, or place for payment, is outside Australia.

6.90 A withholding MIT has an obligation to withhold amounts in respect of a fund payment it makes to an entity that has an address outside Australia or to a fund payment that is authorised to be made to a place outside Australia. [Schedule 6, item 42, subsection 12-385(1) of Schedule 1 to the TAA 1953]

6.91 The rate of withholding on fund payments that are made by a withholding MIT are set out in section 12-385.

6.92 The objective of the modifications is to ensure that attribution MITs have an obligation to pay an amount on a deemed fund payment. A deemed fund payment is, broadly, the total relevant determined member components that are attributed to members as shown on an AMMA statement to the extent that it exceeds the total amount of any pre-AMMA actual payments made to those members.

6.93 If an attribution MIT makes a deemed fund payment, the attribution MIT must pay the Commissioner of Taxation an amount that is equal to the amount that the trustee would have to withhold if the deemed payment was an actual payment.

6.94 In particular, the modifications:

•

modify the definition of fund payment - that is, attribution MITs will apply the new definition in section 12A-110 (instead of section 12-405); and

•

revise the circumstances in which an attribution MIT, custodian or other entity has a PAYG withholding obligation so that:

-

the payment obligation for an attribution MIT in relation to a deemed payment that is a fund payment will arise under section 12A-215 (instead of subsection 12-385(1)); and

-

the payment obligation for a custodian that is a member of an attribution MIT in respect to a deemed payment that is a fund payment from the attribution MIT will arise under section 12A-220 (instead of subsection 12-390(1)).

6.95 However, key elements of the managed investment trust withholding provisions in Schedule 12-H will continue to apply to attribution MITs. For example:

•

sections 12-385 and 12-390 will continue to apply to require an attribution MIT, custodian or other entity to withhold an amount from a payment that is a pre-AMMA actual payment;

•

sections 12-385 and 12-390 will continue to apply to specify the rate of withholding on fund payments (including deemed payments) made by an attribution MIT, custodian or other entity;

•

the requirements in section 12-395 for managed investment trusts, custodians and other entities to give certain notices or make information available in relation to fund payments will continue to apply to an attribution MIT, custodian or other entity; and

•

section 12-410, which specifies recipients of fund payments in respect of whom a PAYG withholding amount must be withheld, will continue to apply to an attribution MIT or custodian.

Deemed payments by an attribution MIT

6.96 If a trustee of an attribution MIT makes a fund payment that is a deemed payment, the attribution MIT does not have a withholding obligation under subsection 12-385(1) in respect of the deemed payment. [Schedule 3, item 11, subsection 12A-105(1) of Schedule 1 to the TAA 1953]

6.97 However, the trustee may need to withhold an amount in respect of the deemed payment under Subdivision 12A-C.

Deemed payments by a custodian

6.98 If a payment that is attributable to a fund payment is made by a custodian, the custodian does not have a withholding obligation under subsection 12-390(1) in respect of the payment if the payment arises because it is:

•

a deemed payment; or

•

a post-AMMA actual payment in respect of a deemed payment.

[Schedule 3, item 11, subsection 12A-105(2) of Schedule 1 to the TAA 1953]

6.99 However, the custodian may need to withhold an amount in respect of the deemed payment under Subdivision 12A-C.

Deemed payments by another entity

6.100 If a payment that is attributable to a fund payment is made by an entity (other than an attribution MIT or a custodian), the entity does not have a withholding obligation under subsection 12-390(4) in respect of the payment if the payment arises because it is:

•

a deemed payment; or

•

a post-AMMA actual payment in respect of a deemed payment.

[Schedule 3, item 11, subsection 12A-105(3) of Schedule 1 to the TAA 1953]

6.101 However, the other entity may need to withhold an amount in respect of the deemed payment under Subdivision 12A-C.

Requirement to give a notice or make information available in respect of a deemed payment

6.102 The current requirements in section 12-395 for managed investment trusts, custodians and other entities to give certain notices or make information available in relation to fund payments will continue to apply to an attribution MIT, custodian or other entity and will be extended so that they also apply to deemed payments. [Schedule 3, item 11, subsection 12A-105(4) of Schedule 1 to the TAA 1953]

Fund payment for an attribution MIT

6.103 A fund payment is defined in section 12-405 to mean, broadly, a component of an actual payment made to a beneficiary by a managed investment trust that represents a distribution of the Australian source net income (other than dividends, interest and royalties) of the trust.

6.104 Therefore, a key modification to the managed investment trust withholding provisions is to switch off the section 12-405 definition of fund payment for attribution MITs. [Schedule 3, items 9 and 10, subsection 12-405(1A) of Schedule 1 to the TAA 1953]

6.105 A new definition of fund payment will apply to a managed investment trust that is an attribution MIT. [Schedule 3, item 11, section 12A-110 of Schedule 1 to the TAA 1953; Schedule 9, item 6, definition of 'fund payment' in subsection 995-1(1) of the ITAA 1997]

6.106 The object of section 12A-110 is to ensure that the total of fund payments that an attribution MIT makes in relation to an income year equals, as nearly as practicable, the total of its determined member components for the income year that are of an assessable income character disregarding excluded components. [Schedule 3, item 11, subsections 12A-110(2) and (3) of Schedule 1 to the TAA 1953]

6.107 An amount is an excluded component if it is a determined member component of a character relating to assessable income that is:

•

discount capital gains from a CGT asset that is not taxable Australian property;

•

non-discount capital gains from a CGT asset that is not taxable Australian property;

•

dividends, interest and royalties that are subject to, or exempted from, a requirement to withhold under Subdivision 12-F;

•

foreign source income; or

•

specified by the Commissioner of Taxation for these purposes in a legislative instrument.

[Schedule 3, item 11, paragraph 12A-110(3)(a) and subsection 12A-110(4) of Schedule 1 to the TAA 1953]

6.108 An amount is also an excluded component if it is a capital loss from a CGT event that happened in the income year to a CGT asset that is not taxable Australian property. [Schedule 3, item 11, paragraph 12A-110(3)(b) of Schedule 1 to the TAA 1953]

6.109 The amount of a fund payment for an attribution MIT is worked out by applying the method statement in subsection 12A-110(5). The fund payment may be an actual payment or a deemed payment that the trustee makes in relation to an income year. The amount of the fund payment may be:

•

the amount of the actual payment or deemed payment; or

•

the amount of the actual payment or deemed payment, increased or reduced as a result of the method statement.

[Schedule 3, item 11, subsection 12A-110(5) of Schedule 1 to the TAA 1953]

6.110 Under step 1 of the method statement, the actual payment or deemed payment must be reduced by the amount that is attributable to the excluded components. [Schedule 3, item 11, step 1 of the method statement in subsection 12A-110(5) of Schedule 1 to the TAA 1953]

6.111 Under step 2 of the method statement, the trustee must work out what is reasonable to expect will be the total determined member components of an assessable income character for the attribution MIT in relation to the income year, disregarding the excluded components (the step 2 amount). In working out the step 2 amount, a capital gain from taxable Australian property of the trust that was or would be reduced under step 3 of the method statement in subsection 102-5 of the ITAA 1997 (that is, a discount capital gain) is taken to be double the amount it actually is. [Schedule 3, item 11, step 2 of the method statement in subsection 12A-110(5) of Schedule 1 to the TAA 1953]

6.112 Under step 3 of the method statement, the amount of the fund payment is so much of the step 2 amount that is reasonable having regard to:

•

the object of the fund payment provision (as mentioned in subsection 12A-110(2));

•

the step 1 amount;

•

the amounts of any earlier fund payments made by the attribution MIT in relation to the income year - that is, the amount of any pre-AMMA actual payments made to members during the income year; and

•

the expected amounts of any later fund payments the attribution MIT expects to make in relation to the income year - that is, for example, the expected amount of any deemed payments to be made to members in relation to the income year.

[Schedule 3, item 11, step 3 of the method statement in subsection 12A-110(5) of Schedule 1 to the TAA 1953]

6.113 The amount of the total determined member components of an assessable income character for the attribution MIT for the income year (including the amount of any excluded components), and the expected amount of any later fund payments, is worked out based on the trustee's knowledge at the time when the actual payment is made. However, in the case of a deemed payment, the amount is worked out based on the AMMA statements given to members. [Schedule 3, item 11, subsections 12A-110(6) and (7) of Schedule 1 to the TAA 1953]

6.114 The amount of a fund payment can take into account the expected amounts of any later fund payments an attribution MIT expects to make in relation to the income year. Therefore, when an attribution MIT makes an actual payment to a member, the trustee can take into account an expected later deemed payment in working out the amount of the fund payment in relation to the actual payment. As a result, the amount of the fund payment can exceed the amount of the actual payment.

6.115 A payment is not a fund payment in relation to an income year if:

•

the payment is a post-AMMA actual payment in respect of another payment; and

•

the other payment is a fund payment.

[Schedule 3, item 11, subsection 12A-110(8) of Schedule 1 to the TAA 1953]

6.116 In addition, an amount is not a fund payment in relation to an income year unless it is paid:

•

during the income year;

•

within 3 months after the end of the income year; or

•

within a longer period allowed by the Commissioner of Taxation.

[Schedule 3, item 11, subsection 12A-110(9) of Schedule 1 to the TAA 1953]

6.117 The Commissioner may allow a longer period for an amount to be a fund payment if the Commissioner is of the opinion that:

•

if the payment arises at a time because it is a deemed payment - the attribution MIT complied with the requirement in subsection 276-455(1) of the ITAA 1997 to give AMMA statements to members within three months of the end of the income year; or

•

otherwise - the trustee of the attribution MIT was unable to make the payment during the income year, or within three months after the end of the income year, because of circumstances beyond the influence or control of the trustee.

[Schedule 3, item 11, subsection 12A-110(10) of Schedule 1 to the TAA 1953]

6.118 In addition, a payment is not a fund payment in relation to an income year if it is an AMIT DIR payment in relation to that year. [Schedule 3, item 11, subsection 12A-110(11) of Schedule 1 to the TAA 1953]

Example 6.1

An attribution MIT (the ABC Trust) has 100 members holding equal interests in the trust. The ABC Trust makes four cash distributions of an assessable income character to each member in relation to the 2016-17 income year:

•

an interim cash distribution of $10,000 on 31 October 2016;

•

an interim cash distribution of $10,000 on 31 January 2017;

•

an interim cash distribution of $10,000 on 30 April 2017; and

•

a final cash distribution of $8,000 on 31 August 2017.

The ABC Trust gives AMMA statements for the 2016-17 income year to the members on 31 August 2017 (at the same time that it makes the final cash distribution). The total determined member component of an assessable income character for the income year for each member recorded on the AMMA statements is $45,000.

Neither the actual distributions nor the determined member component contain any excluded components.

Applying the method statement in subsection 12A-110(5), the ABC Trust will have made a fund payment to each member in respect of each cash distribution.

In addition, the ABC Trust will have made a fund payment to each member in respect of a deemed payment that arises at the time that the AMMA statements are given to members. The amount of the deemed payment for each member is $15,000 - that is, the total amount on the AMMA statement ($45,000) reduced by the total amount of the pre-AMMA actual payments ($30,000).

The final cash distribution of $8,000 that was made at the same time that AMMA statements were given to members is a post-AMMA actual payment, and therefore is not a deemed payment that gives rise to a fund payment.

Applying the method statement in section 12A-110, the fund payment in respect of the deemed payment will be $15,000.

Therefore, the ABC Trust would have made the following fund payments in respect of the 2016-17 income year:

•

an actual cash payment of $10,000 on 31 October 2016;

•

an actual cash payment of $10,000 on 31 January 2017;

•

an actual cash payment of $10,000 on 30 April 2017; and

•

a deemed payment of $15,000 on 31 August 2017.

Example 6.2

An attribution MIT (the XYZ Trust) has 100 members holding equal interests in the trust. The XYZ Trust makes four cash distributions of an assessable income character to members in relation to the 2016-17 income year. The total amount distributed to all members is:

•

an interim cash distribution of $10,000 on 31 October 2016;

•

an interim cash distribution of $10,000 on 31 January 2017;

•

an interim cash distribution of $10,000 on 30 April 2017; and

•

a final cash distribution of $10,000 on 31 August 2017.

On 30 September 2017, the XYZ Trust gives AMMA statements for the 2016-17 income year to its members. The total determined member components of an assessable income character for the income year for all members recorded on the AMMA statements is $46,000.

Neither the actual payments nor the determined member component contain excluded components.

Applying the method statement in subsection 12A-110, the XYZ Trust will have made a fund payment to each member in respect of each cash distribution.

As all the cash distributions were made before the AMMA statements were given to members, these distributions are pre-AMMA actual payments.

The trustee of the XYZ Trust expected to have a total fund payment amount of $46,000 for the 2016-17 income year. The trustee also expected to pay four equal distributions during the income year. Therefore, at each distribution date, the trustee determined to allocate the full year fund payment amount equally to each cash distribution of $10,000.

Accordingly, the trustee worked out the fund payment amount for each distribution as follows:

•

in respect of the actual cash payment of $10,000 on 31 October 2016, the trustee worked out a fund payment amount of $11,500;

•

in respect of the actual cash payment of $10,000 on 31 January 2017, the trustee worked out a fund payment amount of $11,500;

•

in respect of the actual cash payment of $10,000 on 30 April 2017, the trustee worked out a fund payment amount of $11,500; and

•

in respect of the actual cash payment of $10,000 on 31 August 2017, the trustee worked out a fund payment amount of $11,500.

Under section 12A-205, the issue of AMMA statements may give rise to a deemed payment. However, the deemed payment from the XYZ Trust is nil because the total of the determined member components ($46,000) is equal to the total amount of the funds payments attributable to the pre-AMMA actual payments ($46,000).

Attribution MITs must withhold amounts in relation to deemed payments

Deemed payments that are dividends, interest or royalties

6.119 If the trustee of an attribution MIT receives a payment of dividend, interest or royalties from another entity, the trustee will have a dividends, interest or royalties withholding obligation in respect of a deemed payment, to the extent that the deemed payment is an AMIT DIR payment, that it makes to an entity (the recipient) that is a foreign resident. [Schedule 3, item 11, subsection 12A-215(1) of Schedule 1 to the TAA 1953]

6.120 The amount that the attribution MIT must pay to the Commissioner of Taxation is the amount that it would have to withhold under section 12-210, 12-245 or 12-280 in respect of the AMIT DIR payment on the assumptions that the deemed payment was an actual payment and that:

•

if the deemed payment corresponds to a dividend that is subject to a requirement to withhold under Subdivision 12-F - the trust had been a company and had paid the deemed payment as a dividend;

•

if the deemed payment corresponds to interest that is subject to a requirement to withhold under Subdivision 12-F - the trust had paid the deemed payment as interest; or

•

if the deemed payment corresponds to a royalty that is subject to a requirement to withhold under Subdivision 12-F - the trust had paid the deemed payment as a royalty.

[Schedule 3, item 11, subsections 12A-215(2) and (3) of Schedule 1 to the TAA 1953]

6.121 The attribution MIT must pay the amount to the Commissioner at the same time that it has to withhold or pay other amounts to the Commissioner under Division 16. That is:

•

if an entity must pay an amount to the Commissioner under Subdivision 12A-C, for the purposes of Division 16 the entity is treated as being obliged to withhold the amount under Division 12 (including Subdivisions 12-F and 12-H); and

•

if an entity has paid an amount to the Commissioner under Subdivision 12A-C, for the purposes of Division 16 the entity is treated as having withheld the amount under Division 12 (including Subdivisions 12-F and 12-H).

[Schedule 3, item 13, section 16-7 of Schedule 1 to the TAA 1953]

Deemed payments that are fund payments

6.122 The trustee of an attribution MIT will have a managed investment trust withholding obligation in respect of a deemed payment, to the extent that the deemed payment is a fund payment it makes to an entity (the recipient) that has an address outside Australia or to a fund payment that is authorised to be made to a place outside Australia payment. [Schedule 3, item 11, subsection 12A-215(1) of Schedule 1 to the TAA 1953]

6.123 The amount that the attribution MIT must pay to the Commissioner is the amount that it would have to withhold under section 12-385 in respect of the fund payment on the assumption that the deemed payment was an actual payment. [Schedule 3, item 11, subsections 12A-215(2) and (3) of Schedule 1 to the TAA 1953]

6.124 The attribution MIT must pay the amount to the Commissioner at the same time that it has to withhold or pay other amounts to the Commissioner under Division 16. [Schedule 3, item 13, section 16-7 of Schedule 1 to the TAA 1953]

6.125 If an attribution MIT makes an actual payment that is a fund payment, the attribution MIT will continue to have an obligation to withhold an amount from the actual payment under subsection 12-385(1).

Trustee can recover amounts from the foreign resident recipient

6.126 The trustee can recover from the foreign resident recipient as a debt an amount that the trustee has paid to the Commissioner under subsection 12A-215(1) in relation to a deemed DIR payment or a deemed fund payment. The trustee can recover the debt from the recipient against debts due by the trustee to the recipient. [Schedule 3, item 11, subsections 12A-215(4) and (5) of Schedule 1 to the TAA 1953]

6.127 Therefore, if the deemed payment made by the trustee to a foreign resident recipient is not accompanied by an actual cash payment, or if the cash payment is less than the amount of the withholding obligation, the trustee can recover the amount of any excess withholding obligation paid to the Commissioner as a debt from the foreign resident recipient. The trustee can recover that debt from future cash payments that it makes to the foreign resident recipient.

Custodian that is a member of an attribution MIT must withhold amounts in relation to subsequent deemed payments

Subsequent deemed payments that are dividends, interest or royalties

6.128 If a custodian receives a deemed payment from an attribution MIT, the custodian will have a dividend, interest or royalties withholding obligation in respect of a subsequent deemed payment where:

•

the subsequent deemed payment, or a part of that payment, (the covered part) is an AMIT DIR payment that was covered by a notice or information under section 12A-15; and

•

the subsequent deemed payment is made to an entity (the recipient) that is a foreign resident.

[Schedule 3, item 11, subsection 12A-220(1) of Schedule 1 to the TAA 1953]

6.129 The amount that the custodian must pay to the Commissioner is the amount that it would have to withhold under section 12-210, 12-245 or 12-280 in respect of the AMIT DIR payment on the assumptions that the subsequent deemed payment was an actual payment and that:

•

if the deemed payment from the attribution MIT corresponds to a dividend that is subject to a requirement to withhold under Subdivision 12-F - the custodian had been a company and had paid the subsequent deemed payment as a dividend;

•

if the deemed payment from the attribution MIT corresponds to interest that is subject to a requirement to withhold under Subdivision 12-F - the custodian had paid the subsequent deemed payment as interest; or

•

if the deemed payment corresponds to a royalty that is subject to a requirement to withhold under Subdivision 12-F - the custodian had paid the subsequent deemed payment as a royalty.

[Schedule 3, item 11, subsections 12A-220(2) and (3) of Schedule 1 to the TAA 1953]

6.130 The custodian must pay the amount to the Commissioner at the same time that it has to withhold or pay other amounts to the Commissioner under Division 16. [Schedule 3, item 13, section 16-7 of Schedule 1 to the TAA 1953]

Subsequent deemed payments that are fund payments

6.131 If a custodian receives a deemed payment from an attribution MIT, the custodian will have a managed investment trust withholding obligation in respect of a subsequent deemed payment to the extent that:

•

all or some of the subsequent deemed payment is reasonably attributable to the part of an earlier payment received by the custodian that was a fund payment and is covered by a notice or information under section 12-395; and

•

the subsequent deemed payment is made to an entity (the recipient) that is a foreign resident.

[Schedule 3, item 11, subsection 12A-220(1) of Schedule 1 to the TAA 1953]

6.132 The amount that the custodian must pay to the Commissioner is the amount that it would have to withhold under subsection 12-390(1) in respect of the fund payment on the assumption that the subsequent deemed payment was an actual payment. [Schedule 3, item 11, subsections 12A-220(2) and (3) of Schedule 1 to the TAA 1953]

6.133 The custodian must pay the amount to the Commissioner at the same time that it has to withhold or pay other amounts to the Commissioner under Division 16. [Schedule 3, item 13, section 16-7 of Schedule 1 to the TAA 1953]

6.134 If a custodian makes a subsequent on-payment of an amount attributable to a fund payment, the custodian will continue to have an obligation to withhold an amount from the subsequent on-payment under subsection 12-390(1).

Custodian can recover amounts from the foreign resident recipient

6.135 The custodian can recover from the foreign resident recipient as a debt an amount that the custodian has paid to the Commissioner under subsection 12A-220(1) in relation to a deemed DIR payment or a deemed fund payment. The custodian can recover the debt from the recipient against debts due by the custodian to the recipient. [Schedule 3, item 11, subsections 12A-220(4) and (5) of Schedule 1 to the TAA 1953]

6.136 Therefore, if the deemed payment made by the custodian to a foreign resident recipient is not accompanied by an actual cash payment, or if the cash payment is less than the amount of the withholding obligation, the custodian can recover the amount of any excess withholding obligation paid to the Commissioner as a debt from the foreign resident recipient. The custodian can recover that debt from future cash payments that it makes to the foreign resident recipient.

Entity (other than a managed investment trust or a custodian) that is a member of an attribution MIT must withhold amounts

6.137 An entity (other than a managed investment trust or a custodian) that is a member of an attribution MIT may receive a deemed payment from an attribution MIT or a custodian.

6.138 In that event, the entity will include the deemed payment in its assessable income or net income (because of section 276-80 of the ITAA 1997).

6.139 If a foreign resident becomes entitled to the deemed payment, the existing income tax law will apply to determine the entity's withholding obligations. That is, broadly:

•

if the entity is attributed an amount of dividends, interest or royalties from an attribution MIT, the entity is required to withhold an amount from any subsequent payment attributable to the dividends, interest or royalties that a foreign resident becomes entitled to; or

•

if the entity is attributed a fund payment from an attribution MIT:

-

the entity is required to withhold an amount from any subsequent payment attributable to the fund payment that a foreign resident becomes entitled to; and

-

the entity must make information available in relation to the amount when another entity that is an Australian resident becomes entitled to the amount.

Consequential amendments

6.140 A range of consequential amendments are made to support the new PAYG withholding regime for attribution MITs.

6.141 First, consequential amendments are made to relevant definitions in subsection 995-1(1) of the ITAA 1997. [Schedule 9, items 2 and 3, definitions of 'amount required to be withheld' and 'amount withheld' in subsection 995-1(1) of the ITAA 1997]

6.142 Second, numerous consequential amendments of a technical nature are made to Division 16 of Part 2-5 to support the new regime. [Schedule 3, items 12, 14 to 19, sections 16-1, 16-20, 16-25, 16-30 and 16-140 of Schedule 1 to the TAA 1953]

6.143 Finally, consequential amendments are made to Division 18 of Part 2-5 to ensure that, broadly:

•

entities that receive AMIT DIR payments or fund payments on which an amount has been withheld are entitled to a credit for the amount withheld; and

•

if an entity paid an amount to the Commissioner of Taxation purportedly under Subdivision 12A-C (that is, in relation to a deemed payment), the entity is treated as having withheld an amount under Division 12.

[Schedule 3, items 20 to 23, subsections 18-30(1), 18-32(1), 18-65(1A) and 18-70(1A) of Schedule 1 to the TAA 1953]

Operation of the TFN withholding provisions

6.144 If a managed investment trust is required to withhold an amount under the dividend, interest and royalty withholding rules in Subdivision 12-F, or under the fund payment withholding rules in Subdivision 12-H, in relation to an amount that it pays to an investor that is a foreign resident, the foreign resident is taken to have quoted a tax file number (TFN) in relation to the investment (section 202EE of the ITAA 1936).

6.145 This outcome will also arise in respect of deemed payments that are made to a foreign resident. That is, where an attribution MIT is required to withhold an amount under Subdivision 12A-C in respect of an AMIT DIR payment or a fund payment that is a deemed payment that it makes to an investor that is a foreign resident, the foreign resident is also taken to have quoted a TFN in relation to the investment. [Schedule 6, item 16, section 202EE of the ITAA 1936]

6.146 If a managed investment trust makes a payment to an investor that is an Australian resident who has not quoted a TFN, the managed investment trust is required to withhold an amount in respect of the payment under the TFN withholding provisions in Subdivision 12-E. The TFN withholding provisions will continue to apply to the total amount of any actual payments (except to the extent that the payment represents a return of capital) made to an Australian resident who has not quoted a TFN.

6.147 Therefore, if a deemed payment is made to an investor that is an Australian resident who has not quoted a TFN, the attribution MIT will not be required to withhold an amount under Subdivision 12-E in respect of any subsequent actual payment that relates to the deemed payment at the time the payment is made.

Chapter 7 - Taxation consequences for members

Outline of chapter

7.1 This Chapter explains the operation of the attribution model of taxation for members of attribution MITs. Under the attribution model of taxation:

•

a 'character flow-through' model will apply to ensure that amounts derived or received by the trust that are attributed to members retain the character they had in the hands of the trustee for income tax purposes;

•

double taxation that might otherwise arise will be reduced because members will be able to make annual upward and downward adjustments to the cost base of their interests in the trust; and

•

the taxation treatment of tax deferred and tax free distributions made by the trust is clarified.

Context of amendments

7.2 Under the general trust provisions in Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936), beneficiaries of a managed investment trust are taxed on a share of the net income that reflects the share of trust income to which they are presently entitled.

7.3 The present entitlement model is complex and causes uncertainty for managed investment trusts and their members. Therefore, to provide greater certainty to members, the Board of Taxation recommended (Recommendation 19) the adoption of the attribution model (which results in members being taxed on amounts attributed to them by an attribution MIT).

7.4 A key objective of the attribution model is to ensure that a member who invests in an attribution MIT is taxed on the income and other amounts that are derived or received by the trust in broadly the same way that they would have been taxed if they had held the assets of the attribution MIT directly.

7.5 Currently, the cost base and reduced cost base of membership interests held by the member in a trust (including a managed investment trust) are adjusted downwards in relation to certain non-assessable distributions made by the trust. To prevent the double non-taxation of amounts received by members of the trust, this can result in:

•

a capital gain arising for a member of a trust under capital gains tax (CGT) event E4 in certain circumstances; or

•

a greater capital gain, or reduced capital loss, on the disposal of the membership interests.

7.6 The Board of Taxation recommended (Recommendation 26) that the scope of CGT event E4 be broadened for attribution MITs to allow upward adjustments of the cost base and reduced cost base of membership interests. This will overcome concerns about the potential for double taxation when a beneficiary sells an interest before receiving a distribution from an attribution MIT.

7.7 In addition, in some cases trusts make tax deferred and tax free distributions to members. These distributions are generally applied to:

•

reduce the cost bases of membership interests that are CGT assets; and

•

reduce the tax costs of membership interests that are revenue assets.

7.8 However, as the current taxation treatment of tax deferred and tax free distributions is uncertain, the amendments apply to confirm this practice for attribution MITs.

Summary of new law

7.9 Under the attribution model of taxation, amounts related to income and tax offsets of an attribution MIT, determined by the trustee to be of a particular character, are attributed to members and generally retain that character.

7.10 In addition, adjustments are made to the cost base of membership interests held by a member. The cost base of membership interests is increased to reflect amounts of determined trust components that are included in the member's assessable income. The cost base of membership interests is reduced to reflect:

•

trust distributions that the member becomes entitled to; and

•

the value of tax offsets attributed to the member.

7.11 Finally, tax deferred and tax free distributions made by an attribution MIT to a member will be applied to:

•

reduce the cost bases of membership interests that are CGT assets; and

•

reduce the tax costs of membership interests that are revenue assets.

Comparison of key features of new law and current law

Detailed explanation of new law

7.12 Under the attribution model of taxation for attribution MITs:

•

amounts derived or received by the attribution MIT that are attributed to members retain the character they had in the hands of the trustee for income tax purposes;

•

double taxation that might otherwise arise will be reduced because members will be able to make annual upward and downward adjustments to the cost base of their interests in the trust; and

•

the taxation treatment of tax deferred and tax free distributions made by the trust is clarified.

Member taxed on determined member component

7.13 Under the attribution model of taxation, amounts related to income and tax offsets of an attribution MIT, determined by the trustee to be of a particular character, are attributed to members and generally retain that character. [Schedule 1, item 1, section 276-75]

What is the determined member component?

7.14 The determined member component of a particular character for an income year of an entity that is a member of an attribution MIT in respect of an income year is the amount stated by the attribution MIT to be the amount of the member's member component of that character as reflected in the attribution MIT's latest AMMA statement for the member for the income year. [Schedule 1, item 1, subsection 276-205(1); Schedule 9, item 4, definition of 'determined member component' in subsection 995-1(1)]

7.15 A taxpayer is responsible for ensuring that the taxable income reported in their income tax return is correct. A taxpayer who holds investments will often rely on information provided by other parties to determine the amount to include in their assessable income. However, taxpayers must make appropriate judgements to ensure they report the correct amount of assessable income.

7.16 In some unusual circumstances a member of an attribution MIT may conclude that they cannot reasonably rely on the accuracy of the determined member component of a particular character that is stated in the AMMA statement they receive from the attribution MIT. If those unusual circumstances arise, the member can make a choice to nominate a different determined member component of a particular character for the income year. The choice can be made by a member only if the member considers that:

•

the attribution MIT has not worked out the member's member component of a particular character for an income year on a fair and reasonable basis in accordance with the constituent documents of the attribution MIT, or

•

the attribution MIT has inappropriately streamed particular character amounts to a particular member in a way that is inconsistent with the constituent documents of the attribution MIT.

[Schedule 1, item 1, subsection 276-205(3)]

7.17 If the member makes a choice to nominate a different determined member component of a particular character for the income year, the definition of member component in section 276-210 of the Income Tax Assessment Act 1997 (ITAA 1997) is modified so that, if the trust component of that character differs from the determined trust component of that character, references to the determined trust component in that section are taken to be references to the trust component. As a result, the member can work out the revised member component of a particular character having regard to amount of that character that is derived or received by the attribution MIT. [Schedule 1, item 1, subsection 276-205(4)]

7.18 The choice must be made in writing and be given to the Commissioner of Taxation within four months of the end of the member's income year. In addition, the choice must state:

•

the income year to which the choice relates;

•

what the member considers their member component of the particular character for the income year to be; and

•

the reason why the member considers the determined member component of the particular character worked out by the attribution MIT does not accord with the requirements in section 276-210 - that is, broadly, why the determined member component was not worked out by the attribution MIT on a fair and reasonable basis in accordance with its constituent documents.

[Schedule 1, item 1, subsections 276-205(2) and (5)]

7.19 The way that the member prepares their income tax return is sufficient evidence of the making of the choice. [Schedule 1, item 1, subsection 276-205(6)]

7.20 If a member makes a choice to challenge the correctness of the determined member component on the AMMA statement, the member must also notify the attribution MIT of the choice.

7.21 The notice must be made in writing and be given to the attribution MIT within four months of the end of the member's income year. The notice must contain the same information as is required to be given to the Commissioner. [Schedule 1, item 1, subsections 276-205(2) and (7)]

7.22 The information in the notice to the trustee should be consistent with the information in the choice given to the Commissioner. However, the information in the notice and the choice does not have to be identical.

7.23 The fact that a member has chosen to challenge the correctness of the determined member component of a particular character on the AMMA statement does not mean that the amount that the member contends to be the correct amount is their determined member component for that character. That will only be the case if:

•

the trustee's determination of the member's component was not done in accordance with the specified attribution principles (as discussed in Chapter 3); and

•

the amount the member contends should be their member component equals the amount that would have been the member component determined by the trustee of the attribution MIT if the attribution principles had been applied correctly.

[Schedule 1, item 1, subsections 276-205(3) and (4)]

Consequences when a determined member component is attributed to a member - the general rule

7.24 The consequences that arise when a determined member component is attributed to an entity that is a member of an attribution MIT in respect of an income year varies depending on whether:

•

the determined member component is of an assessable income, exempt income or non-assessable non-exempt income character; or

•

the determined member component is of a tax offset character.

7.25 If a determined member component of an assessable income, exempt income or non-assessable non-exempt income character is attributed to a member of an attribution MIT, the member is taken to have derived, received or made the amount in the income year:

•

in the member's own right (rather than as a member of a trust); and

•

in the same circumstances as the attribution MIT derived, received or made the amount that is reflected in the determined member component.

[Schedule 1, item 1, subsections 276-80(1) and (2)]

7.26 Examples of amounts of a particular assessable income character that may need to be identified by an attribution MIT and attributed to members include:

•

discount capital gains;

•

non-discount capital gains;

•

dividends, interest or royalties that are subject to withholding tax; and

•

foreign source income.

7.27 If a determined member component of an assessable income, exempt income or non-assessable non-exempt income character is attributed to a member by an attribution MIT, the member is taken to have derived, received or made the amount reflected in the determined member component in the income year, for the purposes of:

•

including an amount in their assessable income, exempt income or non-assessable non-exempt income;

•

determining whether they have made a capital gain from a CGT event; and

•

determining the extent to which they have utilised a net capital loss.

[Schedule 1, item 1, subsection 276-80(3)]

7.28 For example, if the determined member component is foreign source income, it is included in the member's assessable income in the same way that it would be included if the member had derived or made the foreign source income in their own right. If the member is a foreign resident, section 6-5 will operate so that the amount will not be included in the member's assessable income.

7.29 If the determined member component is a capital gain on taxable Australian property, the member is taken to have made a capital gain on taxable Australian property from a CGT event in their own right for the purposes of determining the net capital gain which is included in their assessable income.

7.30 If the determined member component of a tax offset character is attributed to an entity that is a member of an attribution MIT in respect of an income year, the member is taken to have paid or received the amount reflected in the determined member component in the income year:

•

in the member's own right (rather than as a member of a trust); and

•

in the same circumstances as the attribution MIT paid or received that amount.

[Schedule 1, item 1, subsections 276-80(4) and (5)]

7.31 As a result, if a determined member component of a tax offset character is attributed to a member by an attribution MIT, possible effects are:

•

the member may be entitled to a tax offset; or

•

the member may be entitled to a credit for an amount withheld from a withholding payment.

[Schedule 1, item 1, subsection 276-80(6)]

7.32 Therefore, for example, if an attribution MIT pays foreign tax on foreign source income, the member will be taken to have paid that foreign tax for the purposes of working out whether they are entitled to a foreign income tax offset.

7.33 The general rule in section 276-80 which applies when a determined member component is attributed to a member of an attribution MIT is modified by specific rules which apply when:

•

the determined member component is a discount capital gain; or

•

the determined member component is a franking credit gross-up amount of a franking credit.

7.34 In addition, specific rules apply to:

•

modify the general rule in section 276-80 to ensure that certain circumstances of the trustee of an attribution MIT are not attributed to members; and

•

modify the operation of the dividend imputation holding period and related payment rules.

Consequences when a determined member component is attributed to a member - discount capital gains

7.35 The operation of the general rule in section 276-80 is modified if an entity that is a member of an attribution MIT in respect of an income year has, for the income year, a determined member component that is a discount capital gain. [Schedule 1, item 1, subsection 276-85(3)]

7.36 In these circumstances, subsection 276-80(2) applies so that the amount reflected in the determined member component is double the amount of the component. [Schedule 1, item 1, subsections 276-85(1), (2) and (4)]

7.37 This ensures that the member recognises the whole of the capital gain. If the member is entitled to a discount capital gain, the member will take the amount of the discount capital gain into account when working out their net capital gain. The discount percentage for the discount capital gain will be determined based on the member's characteristics. For example:

•

if the member is an Australian resident individual, the discount percentage will be 50 per cent; or

•

if the member is a complying superannuation fund, the discount percentage will be 33 1/3 per cent.

Consequences when a determined member component is attributed to a member - franking credits

7.38 The operation of the general rule in section 276-80 is modified if an entity that is a member of an attribution MIT in respect of an income year has, for the income year a determined member component (the franking credit gross-up component) that is a franking credit gross-up amount. [Schedule 1, item 1, subsections 276-85(1), (2) and (5)]

7.39 In these circumstances, for the purposes of subsection 207-20(1), the reference in that subsection to the amount of the franking credit on the distribution is taken to be a reference to the amount of the franking credit gross-up component. [Schedule 1, item 1, subsection 276-85(6)]

7.40 Subsections 276-85(5), (6) and (7) operate to ensure that section 207-20 applies appropriately for the member in relation to a franked dividend that is attributed to the member by an attribution MIT - that is, the member will:

•

include both the dividend, and the amount of the franking credit gross-up component, in assessable income; and

•

be entitled to a tax offset equal to the amount of the franking credit gross-up component.

Circumstances of the trustee that are not attributed to members

7.41 When an amount of a particular character is attributed to an entity that is a member of an attribution MIT in respect of an income year, the operation of paragraphs 276-80(2)(b) and (6)(b) is modified so that the circumstances in which the member is taken to have derived, received, made or paid an amount of the particular character do not include:

•

the residence of the trustee of the attribution MIT; or

•

the place of central management and control of the attribution MIT.

[Schedule 1, item 1, subsection 276-85(7)]

7.42 This ensures that:

•

if the member is an Australian resident, the member will be taken to have derived, received, made or paid the amount of the particular character that is attributed to the member as an Australian resident; or

•

if the member is a foreign resident, the member will be taken to have derived, received, made or paid the amount of the particular character that is attributed to the member as a foreign resident.

Operation of the dividend imputation holding period and related payment rules

7.43 If an entity receives a franked dividend (either directly from a company or indirectly through a trust), the entity generally includes the amount of the franking credits in assessable income and receives a corresponding tax offset equal to the amount of franking credits attached to the dividend. However, these taxation outcomes differ if the entity does not satisfy the dividend imputation holding period and related payment rules - that is, if the entity is not a qualified person (paragraphs 207-145(1)(a) and 207-150(1)(a)).

7.44 If a franking credit that is received by an attribution MIT which satisfies the dividend imputation holding period and related payment rules in relation to a distribution is attributed to an entity that is a member of the attribution MIT in respect of an income year, subsections 276-80(2) and 276-80(6) operate so that the member will be taken to be a qualified person in relation to the distribution.

7.45 However, the Commissioner of Taxation can make a determination so that the member will not be taken to be a qualified person in relation to a distribution. In making a determination, the Commissioner must have regard to any of the following matters:

•

arrangements (if any) entered into by the member that directly or indirectly reduce the economic exposure of the member to changes in the value of the membership interests held by the member;

•

the lack of such arrangements;

•

the length of time the member has been a member of the attribution MIT; and

•

any other matter the Commissioner considers to be relevant.

[Schedule 1, item 1, section 276-90]

7.46 If an entity to whom a determination relates is dissatisfied with the determination, the entity may object against it in a manner set out in Part IVC of the Taxation Administration Act 1953 (TAA 1953). [Schedule 4, item 5, subsection 276-90(7)]

Relationship with the withholding rules

7.47 If a determined member component that is attributed to a member by an attribution MIT is reflected in an attribution MIT dividend, interest or royalty payment (AMIT DIR payment) or a fund payment (and therefore is subject to withholding tax), the member is not taken to have derived, received or made the amount to the extent that an amount in respect of the payment:

•

has been withheld from the payment under Subdivision 12-F or 12-H of Schedule 1 to the TAA 1953;

•

would have been withheld under Subdivision 12-F apart from an exemption to withhold an amount under Subdivision 12-F;

•

has been paid under Division 12A; or

•

would have been paid under Division 12-A apart from an exemption to withhold an amount under Subdivision 12-F.

[Schedule 1, item 1, subsection 276-95(1)]

7.48 As a consequence, subsection 276-80(2) (which operates to ensure that the member is taken to have derived, received or made an amount of a particular character when issued an AMMA statement by the trustee of an attribution MIT in which it is a member disclosing an amount (a determined member component) of that character) will not apply to these amounts.

7.49 However, if the determined member component is reflected in a fund payment, subsection 276-80(2) will apply to the extent that an amount attributable to the fund payment is not non-assessable non-exempt income under section 840-815. [Schedule 1, item 1, subsection 276-95(2); Schedule 3, items 3 and 4, subsection 840-815(2)]

7.50 Subsection 840-815(2) sets out circumstances in which fund payments made by an attribution MIT are not non-assessable non-exempt income. Under that subsection, an amount is not non-assessable non-exempt income if is derived by an Australian resident to the extent that:

•

managed investment trust withholding tax is payable on an amount because of subsection 840-805(4D); and

•

the Australian resident is entitled, directly or indirectly, to the amount.

[Schedule 3, items 3 and 4, subsection 840-815(2)]

Example 7.1

ABC Trust is an attribution MIT that makes a fund payment to a foreign resident member, Company XYZ.

Company XYZ is the trustee of the XYZ Trust. Jessica, who is an Australian resident, is a member of the XYZ Trust. An amount attributable to the fund payment is paid by Company XYZ to Jessica.

Company XYZ is liable to managed fund withholding tax because of paragraph 840-805(4D)(a). Subsection 840-815(2) ensures the amount is not non-assessable non-exempt income of Jessica. As a result, the amount is included in Jessica's assessable income. However, to the extent that it relates to her entitlement, Jessica will be entitled to a credit for the managed investment trust withholding tax that is paid by XYZ Trust.

7.51 Finally, subsection 276-80(2) does not affect the operation of Division 11A of Part III of the ITAA 1936, Subdivision 840-M of the ITAA 1997 or Division 12 of Schedule 1 to the TAA 1953. [Schedule 1, item 1, subsection 276-95(3)]

7.52 This will ensure that the withholding tax provisions will continue to operate effectively for foreign resident members of an attribution MIT.

No double counting of determined member component

7.53 Section 276-100 ensures that the determined member component of a particular character is not included in the member's assessable income under more than one provision in the income tax law.

7.54 If an amount is included in the assessable income of an entity that is a member of an attribution MIT in respect of an income year in respect of the member's interest in the attribution MIT under a provision of the income tax law other than because the member is taken to have derived, received or made the amount under section 276-80, the amount included under that other provision is reduced by the amount included because of section 276-80. [Schedule 1, item 1, subsections 276-100(1) and (2)]

7.55 However, if the amount that is attributed to a member of an attribution MIT is a gain or loss that the member makes from a financial arrangement that is taxed under the Taxation of Financial Arrangements (TOFA) provisions (Division 230), then those provisions (rather than section 276-80) will continue to apply to the gain or loss. [Schedule 1, item 1, subsections 276-100(1) and (3)]

Member issued with a revised AMMA statement

7.56 If an attribution MIT discovers a variance, the trustee can reconcile the variance using the unders and overs system or can reissue AMMA statements. Generally, the attribution MIT must reconcile variances that are discovered within four years of the base year.

7.57 If an attribution MIT reconciles a variance by reissuing AMMA statements for an income year, an entity that is a member of the attribution MIT in respect of the income year will need to seek an amendment to their income tax assessment for the income year to which the AMMA statement relates. As a result, the general limitations that restrict the period in which an income tax assessment can be amended do not apply when the amendment is made to give effect to an AMMA statement that is issued by an attribution MIT. [Schedule 6, item 15, subsection 170(10AB) of the ITAA 1936]

Consequential amendments

7.58 Subdivision 768-A of the ITAA 1997 applies when:

•

an Australian corporate tax entity receives a foreign equity distribution from a foreign company, either directly or indirectly through an interposed trust or partnership; and

•

the Australian corporate tax entity holds a participation interest of at least 10 per cent in the foreign company.

7.59 If the Subdivision applies, the distribution is non-assessable non-exempt income of the Australian corporate tax entity.

7.60 This outcome remains unchanged when an Australian corporate tax entity receives the distribution indirectly through an attribution MIT. [Schedule 6, item 24, paragraph 768(5)(b)]

Custodian interposed between an attribution MIT and a member

7.61 Investors frequently invest in managed investment trusts indirectly through another entity that is a custodian. If a custodian is interposed between an attribution MIT and a member, the amount of a particular character attributed by the attribution MIT to the custodian will flow through the custodian to the member and retain its character.

7.62 Section 276-115, which clarifies this outcome, applies if:

•

a custodian is a member of an attribution MIT in respect of an income year;

•

the custodian has, for the income year, a determined member component of a particular character for the attribution MIT;

•

the custodian is interposed between the attribution MIT and another entity (the subsequent recipient); and

•

the subsequent recipient:

-

starts to have, at a time in the income year, an entitlement to an amount that is reasonably attributable to all or part of the determined member component; or

-

would start to have, at a time in the income year, such an entitlement if the determined member component were an actual payment of that amount.

[Schedule 1, item 1, subsection 276-115(1)]

7.63 In these circumstances:

•

the custodian's determined member component is reduced by the amount of the entitlement; and

•

the subsequent recipient is taken to be a member of the attribution MIT in respect of the income year and is taken to have a determined member component for the attribution MIT that is:

-

of the same character as derived, received or made by the custodian; and

-

is equal to the amount of the entitlement.

[Schedule 1, item 1, subsections 276-115(2) and (3)]

Cost base adjustments when non-assessable distributions are made to members

7.64 An entity that is a member of an AMIT in respect of an income year will make a capital gain or capital loss when a CGT event happens to their membership interests. This could happen, for example, when the member sells their membership interests. A capital gain arises if the capital proceeds received by the member exceed the cost base of the membership interests. A capital loss arises if the capital proceeds received by the member are less than the reduced cost base of the membership interests.

7.65 Currently, the cost base and reduced cost base of membership interests held by the member in a trust (including a managed investment trust) are adjusted downwards in relation to certain non-assessable distributions made by the trust. To prevent the double non-taxation of amounts received by members of the trust, this can result in:

•

a capital gain arising for a member of a trust under CGT event E4 in certain circumstances; or

•

a greater capital gain, or reduced capital loss, on the disposal of the membership interests.

7.66 The Board of Taxation recommended (Recommendation 26) that the scope of CGT event E4 be broadened for attribution MITs to allow upward adjustments of the cost base and reduced cost base of membership interests. This will overcome concerns about the potential for double taxation when a beneficiary sells an interest before receiving a distribution from an attribution MIT.

7.67 Therefore, the cost base and reduced cost base of a member's membership interests in an attribution MIT will be adjusted by the AMIT cost base net amount for the income year. The AMIT cost base net amount for the income year is:

•

if, for an income year, the AMIT cost base reduction amount in respect of the membership interests exceeds the AMIT cost base increase amount - the amount of the excess; or

•

if, for an income year, the AMIT cost base reduction amount in respect of the membership interests falls short of the AMIT cost base increase amount - the amount of the shortfall.

[Schedule 2, item 3, sections 104-107B and 104-107C; Schedule 9, item 1, definition of 'AMIT cost base net amount' in subsection 995-1(1)]

7.68 The AMIT cost base reduction amount for the income year is, to the extent that it is reasonably attributable to the CGT asset that is the membership interests, the total of:

•

any money and the market value of any property that the member starts to have a right to receive from the attribution MIT in the income year, where that right is indefeasible or is reasonable likely not to be defeated;

-

for the purpose of working out whether the right is indefeasible, section 276-55 (which deems a member's interests in an attribution MIT to be indefeasible) is disregarded; and

•

all amounts of tax offset that the member has a right to receive from the attribution MIT in the income year.

[Schedule 2, item 3, subsection 104-107D(1); Schedule 9, item 1, definition of 'AMIT cost base reduction amount' in subsection 995-1(1)]

7.69 However, if CGT event A1, C2, E1, E2, E6 or E7 happens to a CGT asset before the end of the income year and the time of the reduction or increase is just before the time mentioned in subsection 104-107B(4), the AMIT cost base reduction amount for the income year does not include the capital proceeds from the CGT event. [Schedule 2, item 3, subsection 104-107D(2)]

7.70 The AMIT cost base increase amount for the income year is, to the extent that they are reasonably attributable to the CGT asset that is the membership interests, the sum of:

•

all amounts (disregarding the attribution MIT's net capital gain for the income year) included in the member's assessable income or non-assessable non-exempt income (either because of section 276-80 or because of another provision in the income tax law) for the income year, worked out on the assumption that the member is an Australian resident; and

•

the amount of the member's determined member components of a character relating to a capital gain that the member has for the income year in respect of the attribution MIT that is taken into account under section 276-80, worked out on the assumption that the member is an Australian resident - in the case of a discount capital gain, this amount includes the discount component of the discount capital gain.

[Schedule 2, item 3, section 104-107E; Schedule 9, item 1, definition of 'AMIT cost base increase amount' in subsection 995-1(1)]

7.71 If the AMIT cost base net amount for the income year is an excess, then the cost base and reduced cost base of the membership interests is reduced by the AMIT cost base net amount (but not beyond nil). [Schedule 2, item 3, subsection 104-107B(2)]

7.72 If the AMIT cost base net amount exceeds the cost base of the membership interests (including where the cost base is nil), the member will make a capital gain under CGT event E10 equal to the amount of the excess at the time at which the reduction occurs. [Schedule 2, item 3, section 104-107A]

7.73 However, a capital gain does not arise under CGT event E10 if the membership interest is a pre-CGT asset - that is, if the CGT asset was acquired before 20 September 1985. [Schedule 2, item 3, subsection 104-107A(4)]

7.74 If the AMIT cost base net amount for the income year is a shortfall, then the cost base and reduced cost base of the membership interests is increased by the AMIT cost base net amount. [Schedule 2, item 3, subsection 104-107B(1) and (3)]

7.75 The cost base and reduced cost base of the membership interests must be adjusted by the AMIT cost base net amount:

•

at the end of each income year; or

•

if a CGT event happens to the membership interests during an income year, just before the time of the CGT event.

[Schedule 2, item 3, subsection 104-107B(4)]

7.76 Consequential amendments ensure that:

•

CGT event E10 is listed in the table of CGT events;

•

CGT event E4 does not apply to a unit or interest in an attribution MIT;

•

section 104-107B is listed in Subdivision 112-B, which contains guide material relating to special rules affecting the cost base or reduced cost base of a CGT asset; and

•

CGT event E10 is not a realisation event as defined in section 977-5.

[Schedule 2, items 1, 2 and 4, section 104-5, subsection 104-70(1A) and section 977-5; Schedule 6, item 23, section 112-46]

Tax deferred and tax free distributions made to members

7.77 Under the current law, the tax outcomes that arise when a member receives a trust distribution or entitlement that exceeds the amounts included in assessable income of members under Division 6 of Part III of the ITAA 1936 (a tax deferred or tax free distribution or entitlement) are uncertain.

7.78 A tax deferred or tax free distribution or entitlement will arise in relation to a membership interest that is held by an entity that is a member of an attribution MIT in respect of an income year if:

•

the member starts to have a right to receive any money or any property from the trustee of an attribution MIT in the income year;

•

the right is indefeasible or is reasonably likely not to be defeated;

-

for the purpose of working out whether the right is indefeasible, section 276-55 (which deems a member's interests in an attribution MIT to be indefeasible) is disregarded;

•

the right is not remuneration or consideration for the member providing finance, services, goods or property to the trustee of the attribution MIT or to another person;

•

the right is reasonably attributable to a CGT asset that is a membership interest in the attribution MIT;

•

the CGT asset is not trading stock or a TOFA financial arrangement; and

•

as a result of the member starting to have the right, the CGT asset's AMIT cost base reduction amount for the income year is increased because of the operation of section 104-107D.

[Schedule 2, item 3, subsection 104-107F(1)]

7.79 The tax-deferred or tax free distribution or entitlement derived from the membership interest in these circumstances is not included in the member's assessable income under provisions outside of the rules for attribution MITs. In this regard, the tax liability in relation to these amounts arises because of the attribution rules in Division 276, or under the rules relating to tax deferred or tax free distributions by attribution MITs. Therefore, the following provisions (the ordinary income and deduction provisions) will not apply because the member starts to have the right:

•

section 6-5 (about ordinary income);

•

section 6-10 (about statutory income), except to the extent that the section applies in relation to section 102-5 (about net capital gains) or to sections 104-107G or 104-107H (which are the specific rules for membership interests in attribution MITs that are held on revenue account);

•

section 8-1 (about general deductions);

•

sections 15-15 and 25-40 (about profit-making undertakings or plans); or

•

sections 25A and 52 of the ITAA 1936 (about profit-making undertakings or schemes).

[Schedule 2, item 3, subsections 104-107F(2) and (3)]

Membership interests held on capital account

7.80 If a membership interest in an attribution MIT is held by the member on capital account, the cost base and reduced cost base of the membership interest will be adjusted because of the operation of section 104-107B. As a result, a higher capital gain, or reduced capital loss, will arise when a CGT event happens to the membership interest.

Membership interests held on revenue account

7.81 Sections 104-107G and 104-107H clarify the tax outcomes that arise when a tax deferred or tax free distribution or entitlement is made to an entity that is a member of an attribution MIT in respect of an income year where a membership interest is held on revenue account.

7.82 The modifications apply to reduce or increase the cost of a CGT asset, or include an amount in assessable income, if:

•

a taxpayer holds a CGT asset that is a unit or interest in an attribution MIT (and therefore is a member of the attribution MIT); and

•

the CGT asset is a revenue asset, but is not a TOFA financial arrangement.

[Schedule 2, item 3, subsection 104-107G(1)]

7.83 The time of the reduction or increase is:

•

if a CGT event happens to the CGT asset before the end of the income year - just before the time of the CGT event; or

•

otherwise - just before the end of the income year.

[Schedule 2, item 3, subsection 104-107G(5)]

7.84 Where the modifications apply, if the AMIT cost base net amount for the income year is an excess (as mentioned in paragraph 104-107C(a)), then, for the purposes of working out the amount that is included in assessable income or that is treated as a deduction under the ordinary income and deduction provisions:

•

in a case where the AMIT cost base net amount exceeds the cost of the asset - the cost of the asset is reduced to nil; or

•

otherwise - the cost of the asset is reduced by the amount of the AMIT cost base net amount.

[Schedule 2, item 3, subsections 104-107G(2) and (3)]

7.85 However, an amount will be included in the member's assessable income if the AMIT cost base net amount exceeds the cost of the asset just before the time of the reduction or increase. [Schedule 2, item 3, subsections 104-107H(1) and (2)]

7.86 In these circumstances:

•

if the cost of the CGT asset was nil just before that time - the cost reduction amount is included in assessable income; or

•

otherwise - the amount of the excess is included in assessable income.

[Schedule 2, item 3, subsection 104-107H(2)]

7.87 For the purposes of applying section 104-107H, subsection 104-107F(3) is disregarded. As a result, for the purposes of working out the amount that is included in assessable income in respect of a membership interest held on revenue account, section 6-10 (about statutory income) will apply when a taxpayer starts to have a right to receive money or property from the attribution MIT. [Schedule 2, item 3, subsection 104-107H(3)]

7.88 If the AMIT cost base net amount for the income year is a shortfall (as mentioned in paragraph 104-107C(b)), then the cost of the asset is increased by the amount of the AMIT cost base net amount. [Schedule 2, item 3, subsection 104-107G(4)]

7.89 For the purposes of applying sections 104-107G and 104-107H, in working out the AMIT cost base net amount for a CGT asset, a right that the member starts to have in the income year is disregarded if:

•

the right is for the member to receive any money or any property from the trustee of the attribution MIT; and

•

the right is for remuneration or consideration for the member providing finance, services, goods or property to the trustee of the attribution MIT or to another person.

[Schedule 2, item 3, subsection 104-107G(6)]

7.90 Section 118-20 applies to reduce capital gains made from a CGT event if, broadly, the capital gain is included in a taxpayer's assessable income or exempt income under a provision of the income tax law that is outside the Part 3-1 of the ITAA 1997 (which contains the CGT provisions). As a result, where an amount is included in assessable income as both ordinary income and as a capital gain, the ordinary income provisions prevail.

7.91 Therefore, to ensure that section 118-20 operates appropriately where section 104-107G or 104-107H applies in relation to a CGT asset that is a revenue asset, sections 104-107G and 104-107H are taken to be outside of Part 3-1 for the purposes of applying section 118-20. [Schedule 2, item 3, subsections 104-107G(7) and 104-107H(4)]

Transitional rules

7.92 Transitional rules 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 CGT regime rather than being taxed as ordinary income, unless an entity has already included the distributions as ordinary assessable income. [Schedule 8, item 3, sections 276-750T and 276-755T of the Income Tax (Transitional Provisions) Act 1997]

7.93 These transitional rules are explained in more detail in Chapter 10.

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

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

Table 8.2 : New law to old law

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.

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.

Chapter 9 - Miscellaneous amendments

Outline of chapter

9.1 This Chapter explains miscellaneous amendments to:

•

exclude superannuation funds and exempt entities that are entitled to a refund of excess imputation credits from the application of the 20 per cent tracing rule for public trading trusts in Division 6C of Part III of the Income Tax Assessment Act 1936 (ITAA 1936);

•

repeal the corporate unit trust rules in Division 6B of Part III of the ITAA 1936; and

•

introduce an arm's length income rule for managed investment trusts.

Context of amendments

Modification to Division 6C

9.2 Division 6C of Part III of the ITAA 1936 operates to tax trusts like companies. Division 6C applies if a trust is both:

•

a trading trust (that is, broadly, a trust that carries on activities other than eligible investment business, such as an active business that does not merely involve passive investment); and

•

a public unit trust.

9.3 Division 6C currently has a look through provision that results in certain non-widely-held trusts becoming public unit trusts that must comply with the eligible investment business rules or be taxed like companies. This occurs when one or more tax exempt entities or complying superannuation entities own 20 per cent or more of the beneficial interests in the trust (the 20 per cent tracing rule).

9.4 The Board of Taxation recommended that membership interests held in a trust by tax exempt entities and complying superannuation entities which are entitled to a refund of franking credits should be disregarded for the purposes of applying the 20 per cent tracing rule.

Repeal of Division 6B

9.5 Division 6B of Part III of the ITAA 1936 applies to certain public unit trusts. If Division 6B applies to a public unit trust, the trust is taxed as a corporate unit trust.

9.6 Division 6B was introduced in 1981 to discourage the reorganisation of companies involving the transfer of assets or businesses into a resident public unit trust in which the shareholders would take equity to avoid continued company tax and shareholder taxation treatment and to attract trust tax treatment instead. The Division was introduced when the then classical system of company taxation applied. Since 1981, the company imputation system and capital gains tax have been introduced.

9.7 The Board of Taxation recommended (Recommendation 42) that Division 6B should be abolished, provided that an arm's length income rules is introduced for managed investment trusts.

Arm's length income rule for managed investment trusts

9.8 In the context of its recommendation to repeal Division 6B, the Board of Taxation recommended the introduction of an arm's length income rule for managed investment trusts (including attribution MITs) to protect the integrity of the corporate tax base (Recommendation 10). Under this rule, the trustee of a managed investment trust will be liable to pay tax on non-arm's length income.

9.9 The arm's length income rule removes the incentive for an attribution MIT to shift profits from an active business of a related party to the attribution MIT by engaging in non-arm's length activity.

Summary of new law

9.10 The amendments will:

•

modify Division 6C of Part III of the ITAA 1936 so that membership interests held in a trust by tax exempt entities and complying superannuation entities which are entitled to a refund of franking credits will be disregarded for the purposes of applying the 20 per cent tracing rule that applies to determine whether a trust is a public trading trust;

•

repeal the corporate unit trust rules in Division 6B of Part III of the ITAA 1936; and

•

introduce an arm's length income rule for managed investment trusts.

Comparison of key features of new law and current law

Detailed explanation of new law

Modification to Division 6C

9.11 Membership interests held in a trust by tax exempt entities and complying superannuation entities which are entitled to a refund of franking credits will be disregarded for the purposes of applying the 20 per cent tracing rule that applies to determine whether a trust is a public unit trust. [Schedule 5, item 1, section 102MD of the ITAA 1936]

9.12 An entity is entitled to a refund of franking credits if:

•

the entity is an exempt institution that is eligible for a refund (as defined in the Income Tax Assessment Act 1997 (ITAA 1997)); or

•

the entity is treated as an exempt institution that is eligible for a refund - in this regard, section 84B of the Future Fund Act 2006 specifies that the Future Fund Board is treated as an exempt institution that is eligible for a refund for the purposes of the ITAA 1997.

[Schedule 5, item 1, section 102MD of the ITAA 1936]

9.13 As a result, a trust will not be a public trading trust that is taxed like a company merely because such an entity holds more than 20 per cent of interests in a trust.

9.14 Consequential amendments are made to:

•

preserve the current effect of provisions that include superannuation contributions and other payments in the assessable income of a complying superannuation entity; and

•

ensure that subsection 102P(10) of the ITAA 1936, which deems units in a unit trust that are held by the trustee of another trust to be held by the beneficiaries of that other trust in certain circumstances, does not apply to a trustee of a complying superannuation entity.

[Schedule 5, item 2, section 295-173; Schedule 6, item 12, subsection 102P(10A) of the ITAA 1936]

Repeal of Division 6B

9.15 The corporate unit trust rules in Division 6B of Part III of the ITAA 1936 are repealed. [Schedule 5, item 3]

9.16 Numerous consequential amendments are made to:

•

remove references in the income tax law to Division 6B of Part III of the ITAA 1936; and

•

ensure that the operation of other provisions in the income tax law that refer to the definition of public unit trust in Division 6B, or to a trust that is taxed under Division 6B, remain effective following the repeal of Division 6B.

[Schedule 5, items 4 to 74; Schedule 6, items 10, 11 and 14, subsection 102AAF(2) and 102NA(2) and the definition of 'public unit trust' in subsection 128FA(8) of the ITAA 1936]

Transitional rules for trusts that cease to be corporate unit trusts or public trading trusts

9.17 If Division 6B or Division 6C applies to a trust, the trust is effectively taxed as a corporate tax entity. As a result, the trust is required to keep a franking account and can distribute franking credits to its members.

9.18 As a result of the amendments to repeal Division 6B and modify Division 6C, some trusts will cease to be taxed as corporate tax entities. If a trust that ceases to be taxed as a corporate tax entity has a surplus in its franking account, a significant disadvantage may arise as the trust will no longer be able to pass franking credits on to its members.

9.19 To overcome this problem transitional rules will apply if, as a result of these amendments:

•

a trust ceases to be taxed as a corporate unit trust - that is section 102K of the ITAA 1936 ceases to apply to the trust; or

•

a trust ceases to be taxed as a public trading trust - that is section 102S of the ITAA 1936 ceases to apply to the trust.

[Schedule 5, subitem 75(1)]

9.20 The first transitional rule applies if:

•

an event happens in respect of the trust that causes a franking credit or franking debit to arise in the trust's franking account between the cessation time and 1 July 2018; and

•

the event is:

-

the trust paying income tax for an income year starting before 1 July 2016;

-

the trust paying a PAYG instalment in respect of income tax for an income year starting before 1 July 2016;

-

the trust receiving a refund of income tax for an income year starting before 1 July 2016; or

-

the trust franking a distribution.

[Schedule 5, subitem 75(2)]

9.21 In these circumstances, for the purposes of determining whether a franking credit or franking debit arise in the trust's franking account in respect of the event:

•

the trust is taken to be a corporate tax entity at the time the event happens; and

•

the trust is taken to have satisfied the residency requirement in section 202-25 for the income year in which the event happens.

[Schedule 5, subitem 75(3)]

9.22 The second transitional rule applies if:

•

the trust makes a distribution on or after the time it ceases to be taxed as a corporate unit trust or public trading trust and before 1 July 2018; and

•

the trust's franking account is in surplus just before it makes the distribution.

[Schedule 5, subitem 75(4)]

9.23 In these circumstances, for the purposes of determining whether the trust franks the distribution as a result of the event:

•

the trust will be taken to be a corporate tax entity at the time it makes the distribution; and

•

the trust will be taken to have satisfied the residency requirement in section 202-20 at the time it makes the distribution.

[Schedule 5, subitem 75(5)]

9.24 Therefore, as a result of these transitional rules, a trust that ceases to be taxed as a corporate tax entity as a result of these amendments will have until 30 June 2018 to utilise any surplus in its franking account provided that the trust meets the requirements in Part 3-6 of the ITAA 1997 and any other imputation system integrity rules. For these purposes, a franking credit will arise in the trust's franking account for any tax paid before 1 July 2018 in respect of an income year starting before 1 July 2016.

Arm's length income rule for managed investment trusts

9.25 The Board of Taxation recommended the introduction of an arm's length income rule for managed investment trusts (including attribution MITs) to protect the integrity of the corporate tax base (Recommendation 10). The arm's length income rule removes the incentive for an attribution MIT to shift profits from an active business of a related party by engaging in non-arm's length activities.

What is non-arm's length income?

9.26 An amount of ordinary income or statutory income is non-arm's length income of a managed investment trust if:

•

the amount is derived from the non-arm's length scheme; and

•

the amount is more than the amount that the managed investment trust might have been expected to receive if those parties had been dealing with each other at arm's length in relation to the scheme.

[Schedule 4, item 5, paragraphs 275-610(1)(a) and (b); Schedule 9, item 11, definition of 'non-arm's length income' in subsection 995-1(1)]

9.27 However, certain amounts that are derived by a managed investment trust are specifically excluded from being non-arm's length income.

9.28 First, a distribution to a managed investment trust from a corporate tax entity is not non-arm's length income of the trust. [Schedule 4, item 5, subparagraph 275-610(1)(c)(i)]

9.29 Second, a distribution to a managed investment trust from a trust that is not a party to the non-arm's length scheme is not non-arm's length income of the managed investment trust. [Schedule 4, item 5, subparagraph 275-610(1)(c)(ii)]

9.30 Third, a return to a managed investment trust that an entity pays or provides on a debt interest is not non-arm's length income of the trust if the rate (expressed on an annual basis) of the return does not exceed the greater of:

•

the benchmark rate of return for the debt interest (as defined in section 974-145); and

•

the base interest rate for the day on which the return is paid or provided, plus three percentage points - that is, a rate of return equal to the rate of the shortfall interest charge.

[Schedule 4, item 5, subparagraph 275-610(1)(c)(iii) and subsection 275-610(2)]

9.31 If an interest in a managed investment trust is a debt interest, the non-arm's length income rule focuses on the return from that debt interest rather than, for example, the principal of the loan. In this regard, as a safe harbour rule, the return on a debt interest is not non-arm's length income if the rate (expressed on an annual basis) of the return does not exceed the benchmark rate of return for the debt interest or the rate of the shortfall interest charge.

9.32 The benchmark rate of return for an interest (the test interest) in an entity is defined in section 974-145 to mean, broadly, the annually compounded internal rate of return on an ordinary debt interest that:

•

is issued, immediately before the test interest, by the entity, or an equivalent entity, to an entity that is not a connected entity;

•

has a comparable maturity date;

•

is in the same currency;

•

is issued in the same market;

•

has the same credit status; and

•

has the same degree of subordination to debts owed to the ordinary creditors of the issuer.

9.33 The fact that the return on a debt interest exceeds the safe harbour rate of return is not conclusive evidence that the return is non-arm's length income - rather this will be determined based on the circumstances of each particular case.

9.34 Fourth, if a managed investment trust receives a distribution from, or is entitled to a share of the net income of, another trust (the underlying trust) that is a party to the non-arm's length scheme, the distribution will be non-arm's length income of the managed investment trust only to the extent that it would be non-arm's length income of the underlying trust (on the assumption that the underlying trust were a managed investment trust). [Schedule 4, item 5, subsections 275-610(3) and (4)]

9.35 This will ensure that a distribution to a managed investment trust from the underlying trust is not non-arm's length income unless it reflects non-arm's length income of that underlying trust.

9.36 Finally, if a managed investment trust receives a distribution from another trust, some or all of the distribution will be not be non-arm's length income of the managed investment trust. This exception applies where:

•

an amount (the first amount) of ordinary income or statutory income of the managed investment trust that would be non-arm's length income (disregarding subsection 275-610(6)) is a distribution from, or a share of the net income of, a trust (the first trust) that is a party to the non-arm's length scheme;

•

another amount (the second amount) of ordinary income or statutory income of the managed investment trust is a distribution from, or a share of the net income of, another trust (the second trust), whether or not that second trust is a party to the non-arm's length scheme); and

•

it is reasonable to conclude that the second amount would have been higher but for the first amount.

[Schedule 4, item 5, subsection 275-610(5)]

9.37 In these circumstances, the first amount is not non-arm's length income of the managed investment trust to the extent that the second amount would have been higher. [Schedule 4, item 5, subsections 275-610(6)]

9.38 Subsections 275-610(5) and (6) can apply where the second amount (referred to in paragraph 275-610(5)(b)) is nil in circumstances where the second trust has no net income or has a tax loss because of the transactions with the first trust.

Example 9.1

MIT Trust is a managed investment trust that holds investments in both Trust 1 and Trust 2.

MIT Trust, Trust 1 and Trust 2 are all parties to a non-arm's length scheme.

Trust 1 derives $500 in an income year and makes a distribution to Trust 2 of $100. If Trust 2 was a managed investment trust, that distribution would be non-arm's length income.

Trust 2 distributes the whole amount to MIT Trust. Under subsections 275-610(3) and (4), this distribution is taken to be non-arm's length income of MIT Trust.

Trust 1 distributes the whole of its income ($400) to MIT Trust. However, this distribution would have been higher if Trust 1 had not made the distribution to Trust 2 - that is, the distribution by Trust 1 to MIT Trust would have been $500.

As a result, subsections 275-610(5) and (6) apply to reduce the non-arm's length income of MIT Trust by $100.

As a result, MIT Trust has no non arm's length income.

Commissioner may make a determination to apply the arm's length income rule

9.39 The arm's length income rule is an integrity rule that will apply only if the Commissioner of Taxation makes a determination under section 275-615 that specifies an amount of non-arm's length income in relation to a managed investment trust in relation to a specified income year. [Schedule 4, item 5, subsection 275-605(1)]

9.40 The Commissioner can make a determination in writing that specifies an amount of non-arm's length income in relation to a managed investment trust in relation to a specified income year if the Commissioner is satisfied that:

•

the amount of non-arm's length income for the managed investment trust 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 (which is defined in subsection 995-1(1) to mean, any arrangement, scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise), 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, subsection 275-615(1)]

9.41 The determination does not form part of an assessment. [Schedule 4, item 5, subsection 275-615(2)]

9.42 If the Commissioner makes a determination, the Commissioner must give a copy of the determination to the managed investment trust concerned. The notice may be included in a notice of assessment. [Schedule 4, item 5, subsection 275-615(3)]

9.43 The production of a notice of a determination, or a document signed by the Commissioner, a Second Commissioner or a Deputy Commissioner purporting to be a copy of a notice of a determination, is:

•

conclusive evidence of the due making of the determination; and

•

conclusive evidence that the determination is correct (except in proceedings under Part IVC of the Taxation Administration Act 1953 (TAA 1953) on an appeal or review of the determination).

[Schedule 4, item 5, subsection 275-615(4)]

9.44 If a taxpayer to whom a determination relates is dissatisfied with the determination, the taxpayer may object against it in a manner set out in Part IVC of the TAA 1953. [Schedule 4, item 5, subsection 275-615(5)]

Consequences of a determination

9.45 If the Commissioner makes a determination in relation to a managed investment trust, the trustee is liable to tax on the amount of non-arm's length income to the extent that it exceeds the amount of deductions that:

•

are reflected in:

-

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

-

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

•

are attributable only to the amount of the non-arm's length income.

[Schedule 4, item 5, subsections 275-605(2) and (5)]

9.46 The rate of tax that is payable in relation to the non-arm's length income is the standard corporate tax rate of 30 per cent. [Schedule 4, item 5, subsection 275-605(2)]

9.47 The Income Tax Act 1986 imposes tax that a trustee must pay under subsection 275-605(2). The Income Tax Rates Act 1986 specifies the rate of the tax to be 30 per cent. [Income Tax Rates Amendment (Managed Investment Trusts) Bill 2015, Schedule 1, item 11, subsection 12(10) of the Income Tax Rates Act 1986]

9.48 To prevent double taxation, the trustee of a managed investment trust that is an attribution MIT is liable to pay tax on an amount of non-arm's length income in relation to a specified income year:

•

if the attribution MIT does not have an over for the specified income year in the income year in which the determination is made - the attribution MIT is taken to have an over (with a character relating to ordinary income or statutory income from an Australian source) in the income year in which the determination is made for the specified income year equal to the amount that is subject to trustee taxation; and

•

if the attribution MIT does have an over with the character of ordinary income or statutory income from an Australian source for the specified income year in the income year in which the determination is made - the amount of that over is increased by the amount that is subject to trustee taxation.

[Schedule 4, item 5, subsection 275-605(3)]

9.49 If the trustee of a managed investment trust that is not an attribution MIT is liable to pay tax on an amount of non-arm's length income in relation to a specified income year the trust's net income for the income year is reduced by the amount that is subject to trustee taxation. [Schedule 4, item 5, subsection 275-605(4)]

9.50 The fact that the Commissioner has made a determination that part of the income of a managed investment trust does not of itself lead to the conclusion that the trust is engaged in a business that does not consist wholly of eligible investment business for the purposes Division 6C of Part III of the ITAA 1936. Therefore, the making of the determination trust does not of itself lead to the conclusion that the trust is a trading trust within the meaning of that Division.

Trustee can be subject to an administrative penalty

9.51 Subdivision 284-C of Schedule 1 to the TAA 1953 operates to impose an administrative penalty on taxpayers who enter into a scheme to reduce their tax liabilities. The amendments extend the scope of Subdivision 284-C so that it also applies when the trustee of a managed investment trust enters into a scheme to derive non-arm's length income.

9.52 Therefore, the trustee of a managed investment trust will be liable to an administrative penalty if:

•

to give effect to the non-arm's length income rules in Subdivision 275-L of the ITAA 1997 (the adjustment provision) in relation to a scheme, the Commissioner amends an assessment issued to the trustee for the income year; and

•

as a result, the trustee is liable to pay an additional amount of income tax.

[Schedule 4, item 7, subsection 284-145(2C) of Schedule 1 to the TAA 1953]

9.53 If the trustee of a managed investment trust is liable to an administrative penalty, then the base penalty amount is generally:

•

50 per cent of the scheme shortfall amount; or

•

25 per cent of the scheme shortfall amount if it is reasonably arguable that the adjustment provision does not apply.

[Schedule 4, item 9, subsection 284-160(1) of Schedule 1 to the TAA 1953]

9.54 The scheme shortfall amount for a scheme to which subsection 284-145(2C) applies is the total additional income tax that the attribution MIT is liable to pay because the Commissioner has made a determination that the managed investment trust has an amount of non-arm's length income. [Schedule 4, item 8, subsection 284-150(6) of Schedule 1 to the TAA 1953]

9.55 However, if subsection 284-145(1) applies to a scheme, the scheme shortfall amount for that scheme is disregarded to the extent that it is attributable to additional tax that is, or is part of, a scheme shortfall amount for a scheme to which subsection 284-145(2C) applies. [Schedule 4, item 8, subsection 284-150(7) of Schedule 1 to the TAA 1953]

9.56 In some circumstances, the amount of the penalty will be reduced due to the operation of section 284-224.

Transitional rules

9.57 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]

9.58 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]

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]

Chapter 11 - Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

A New Tax System for Managed Investment Trusts

11.1 The Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015 and the supporting Bills are compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

11.2 The Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015 and the supporting Bills amend the Income Tax Assessment Act 1997, the Taxation Administration Act 1953 and associated Acts to introduce a new tax system for managed investment trusts.

Human rights implications

11.3 This Bill does not engage any of the applicable rights or freedoms.

Conclusion

11.4 This Bill is compatible with human rights as it does not raise any human rights issues.

Index

Schedule 1: Attribution managed investment trusts

Schedule 2: Annual cost base adjustment for member's unit or interest in AMIT

Schedule 3: Withholding MITs and fund payments

Schedule 4: Managed investment trusts

Schedule 5: 20 per cent tracing rule and repeal of Division 6B

Schedule 6: Consequential amendments

Schedule 7: Widely-held requirements

Schedule 8: Application and transitional provisions

Schedule 9: Definitions