House of Representatives

Explanatory Memorandum

(Circulated by authority of the Assistant Treasurer, the Hon Stuart Robert MP)

Chapter 1 AMIT technical amendments

Outline of chapter

1.1 Schedule 1 to this Bill amends the TAA 1953, ITAA 1997, ITAA 1936, TLAA 2016 and the IT(TP)A 1997 to make a number of technical refinements to the income tax law so that the new tax system for MITS operates as intended.

1.2 All legislative references in this Chapter are to the ITAA 1997 unless otherwise indicated.

Context of amendments

1.3 In 2016, the new tax system for AMITs (the AMIT regime) was enacted following recommendations made by the Board of Taxation in its Report on the Review of the Tax Arrangements Applying to Managed Investment Trusts. The new tax system was designed to increase certainty, allow greater flexibility and reduce compliance costs for MITs and enhance the competitiveness of Australia's funds management industry.

1.4 The AMIT regime applies to certain MITs if the members of the MIT have clearly defined interests in relation to the income and capital of the trust and the trustee of the MIT makes a choice to apply the new tax system. MITs that choose to apply the new tax system are referred to as AMITs.

1.5 The AMIT regime has a number of benefits which include:

•

fixed trust treatment for income tax purposes;

•

an attribution regime which allows the AMIT to attribute amounts of assessable income, exempt income, non-assessable non-exempt income and tax offsets to members on a fair and reasonable basis for income tax purposes; and

•

an 'unders and overs' regime which allows the AMIT to reconcile variances between the amounts actually attributed to members for an income year, and the amounts that should have been attributed, in the income year that it is discovered.

1.6 In addition, the AMIT regime:

•

allows for annual upward and downward adjustments to the CGT cost bases of membership interests in an AMIT; and

•

ensures a withholding tax obligation arises when an AMIT attributes a fund payment or DIR payment to a member who is a foreign resident (rather than only when an amount is paid).

1.7 Some practical issues have been identified with the operation of the AMIT regime since its enactment in 2016.

1.8 Consequently on 19 July 2017, the then Minister for Revenue and Financial Services announced this package of technical amendments. Most of these changes have been sought by the funds management industry and are consistent with current industry practice.

Summary of new law

1.9 Schedule 1 to this Bill amends the TAA 1953, ITAA 1997, ITAA 1936, TLAA 2016 and the IT(TP)A 1997 to make a number of technical refinements to the income tax law so that the new tax system for managed investment trusts operates as intended.

1.10 These amendments clarify the operation of the income tax law applying to MITs and AMITs and make a number of modifications which are broadly in four parts.

1.11 Part 1 makes modifications to the MIT and AMIT rules to:

•

allow a MIT with a single unitholder that is a specified widely-held entity to access the AMIT regime;

•

extend the list of eligible investors in MITs to include the Future Fund Board of Guardians and its wholly owned entities;

•

ensure that, in calculating rounding adjustments and trustee shortfall tax under the AMIT regime, discount capital gains are treated appropriately; and

•

clarify that, in relation to an amount that is a discount capital gain that is not attributed to members, the trustee of an AMIT is liable to pay income tax on the amount as though it were not a discount capital gain.

1.12 Part 2 makes modifications to the MIT and AMIT CGT rules to:

•

clarify that the amount of the capital gain under CGT event E10 will be the cost base net amount where the cost base of the asset is nil at the start of the income year; and

•

align the CGT outcomes for MITs with AMITs.

1.13 Part 3 makes modifications to the withholding tax rules for MITs and AMITs to:

•

clarify that withholding tax liabilities arise on amounts of actual or deemed fund payments and DIR payments to foreign members by an AMIT or a custodian;

•

ensure that fund payments made by MITs and AMITs include capital losses from non-taxable Australian property that have been applied against capital gains from taxable Australian property;

•

clarify that AMITs which only make deemed payments to members can be withholding MITs; and

•

clarify how the TFN withholding rules apply to AMITs that make deemed payments to members.

1.14 Part 4 makes modifications to the operation of the AMIT transitional rules to:

•

ensure that former public trading trusts and corporate unit trusts can continue to use accumulated franking credits until 30 June 2019; and

•

ensure early balancing trusts can elect into the AMIT regime from the 2016-17 income year.

Comparison of key features of new law and current law

Detailed explanation of new law

1.15 Schedule 1 to this Bill makes a number of technical refinements to the income tax law affecting MITs and AMITs. The refinements are broadly categorised into the following parts:

•

Part 1 makes modifications to the primary AMIT rules;

•

Part 2 makes modifications to the MIT and AMIT CGT rules;

•

Part 3 makes modifications to the withholding tax rules for AMITs; and

•

Part 4 makes modifications to the operation of the AMIT transitional rules.

Part 1 - Modifications to the primary AMIT rules

1.16 Amendments to the primary MIT and AMIT rules will:

•

allow a MIT with a single unitholder that is a specified widely-held entity to access the AMIT regime;

•

extend the list of eligible investors in MITs to include the Future Fund Board of Guardians and its wholly owned entities;

•

ensure that, in calculating rounding adjustments and trustee shortfall tax under the AMIT regime, discount capital gains are treated appropriately; and

•

clarify that, in relation to an amount that is a discount capital gain that is not attributed to members, the trustee of an AMIT is liable to pay income tax on the amount as though it were not a discount capital gain.

Single unit holder MITs can elect into the AMIT regime

1.17 A trust will qualify as a MIT if, among other things, it is widely-held. For these purposes, a trust will be taken to be widely-held if one or more of its members is a specified widely-held entity (such as a life insurance company or another MIT).

1.18 To qualify as an AMIT, a MIT must satisfy some additional conditions (section 276-10). Currently, if a trust is a MIT because one of its members is a specified widely-held entity, the MIT can be an AMIT only if that member is another MIT (paragraph 276-10(1)(c)). This requirement is unnecessarily restrictive and was unintended. Therefore, paragraph 276-10(1)(c) is being removed. [Schedule 1, item 9]

1.19 This ensures that, provided that other requirements are satisfied, a MIT that has a single unitholder that is any one of the specified widely-held entities in section 275-45 can access the AMIT regime.

Extending the list of eligible investors in MITs

1.20 The amendments extend the list of specified widely-held entities to include the Future Fund Board of Guardians (as established by section 34 of the Future Fund Act 2006) and its wholly owned entities. Any financial assets held by the Board, for the purposes of its wholly owned entities, will be taken to be held by the Board in its own right. [Schedule 1, items 7, 8 and 17, paragraph 275-20(4)(ia), subsection 275-20(4A) and the definition of 'Future Fund Board' in subsection 995-1(1)]

Discount capital gains treated appropriately

Rounding adjustments

1.21 Under the AMIT 'unders' and 'overs' regime, the trust component of a particular character is decreased by the amount of a rounding adjustment surplus where the sum of all the determined member components exceeds the determined trust components of that character for the income year (section 276-315).

1.22 Currently, where the relevant character is a discount capital gain, the amounts are doubled for the purposes of the determined member component. However, the amounts are not doubled for the purposes of the determined trust component.

1.23 The amendments ensure that, where the relevant character is a discount capital gain, the amount of the determined member component will not be doubled and remain as the discounted amount.

1.24 This provides a 'like for like' comparison under subsection 276-315(3) to ensure equal treatment of discount capital gain amounts in relation to the determined member component and determined trust component under the rounding adjustment rules. [Schedule 1, item 10]

Trustee shortfall tax

1.25 Under the AMIT regime, the trustee of an AMIT is subject to trustee shortfall taxation if, broadly, there is an under-attribution of income. This occurs because the sum of the determined member components of a particular character fall short of the determined trust component of that character (section 276-415).

1.26 Currently, where the relevant character is a discount capital gain, the amounts are doubled for the purposes of the determined member component. However, the amounts are not doubled for the purposes of the determined trust component.

1.27 The amendments ensure that, where the relevant character is a discount capital gain, the amount of the determined member component will not be doubled and remain the discounted amount. [Schedule 1, item 11, subsection 276-415(4)]

1.28 This provides a 'like for like' comparison under subsection 276-415(1) and ensures equal treatment of discount capital gain amounts in relation to both the determined member component and determined trust component when working out whether a shortfall has occurred.

1.29 In addition, the amendments ensure that where the relevant character is a discount capital gain, the trustee will be liable to pay income tax on double the amount of the shortfall. That is, the amount on which the trustee is liable to pay tax is double the amount that it would otherwise be under subsection 276-415(2). [Schedule 1, item 11, subsection 276-415(4)]

1.30 This ensures that the trustee is liable to pay income tax on the under-attributed component as though it were not a discount capital gain.

Part 2 - Modifications to the MIT and AMIT CGT rules

1.31 Amendments to the MIT and AMIT CGT rules will:

•

clarify that the amount of the capital gain under CGT event E10 will be the cost base net amount where the cost base of the asset is nil at the start of the income year; and

•

align the CGT outcomes for MITs with AMITs.

CGT event E10 can occur where the cost base is nil

1.32 Broadly, where a member of an AMIT (who holds a CGT asset that is their membership interest in the AMIT) receives non-assessable distributions from the AMIT, adjustments are made to the cost base and reduced cost base of the membership interest. Where the net amount of those adjustments are greater than the asset's cost base:

•

the asset's cost base is reduced to nil; and

•

any remaining excess gives rise to a capital gain under CGT event E10 (section 104-107A).

1.33 The amendments clarify that where the cost base of an asset cannot be reduced for an income year (because the cost base of that asset was nil at the start of the income year), the amount of the capital gain under CGT event E10 will be the asset's AMIT cost base net amount. [Schedule 1, items 3 and 5, paragraphs 104-107A(1)(b), (c) and (d) and subsection 104-107A(3)]

1.34 Further, where the asset's cost base is nil at the start of the income year, the CGT event occurs at the time at which the cost base would have been reduced under subsection 104-107B(2) during the income year if the cost base had been greater than nil at the start of the income year. [Schedule 1, item 4, subsection 104-107A(2)]

Aligning the CGT outcomes of MITs with AMITs

1.35 Broadly, a capital gain arises under CGT event E4 for MITs (section 104-70(4)), and under CGT event E10 for AMITs (section 104-107A), if the sum of the amounts of non-assessable payments is more than the cost base of the units in the MIT or AMIT.

1.36 Stakeholders have raised concerns that there is some uncertainty as to whether CGT event E4 operates to exclude certain amounts (such as capital gains that have been applied against capital losses) from the amount of non-assessable payments. If such amounts were excluded, those amounts would not reduce the cost base of the units in the MIT. In contrast, those same amounts are not excluded under CGT event E10 and therefore reduce the cost base of the units in an AMIT.

1.37 The amendments clarify the operation of CGT event E4 by removing any doubt that, if an entity receives a payment from a trust that is a MIT, a capital loss reflected in the payment is not excluded from the non-assessable part of the payment - that is, item 7 of the table in subsection 104-71(4) will not apply to the payment. [Schedule 1, item 2, subsection 104-71(6)]

1.38 This clarifies that the outcomes for the members of MITs under CGT event E4 are consistent with the outcomes for members of AMITs under CGT event E10.

Example 1.1

Lorilee holds units in a MIT. The total cost base of the units is $300. During the income year, the MIT receives a discount capital gain of $200 (attributable to Lorilee's units) from its investment in XYZ trust. It also has a capital loss of $200 (attributable to Lorilee's units). As a result, the value of Lorilee's investment in the MIT ($300) does not change.

Before the end of the income year, the MIT makes a payment of $200 to Lorilee. The MIT advises Lorilee that the payment relates to the capital gain which has been reduced to nil for income tax purposes due to the application of the capital loss in the MIT.

At the end of the income year, the MIT would need to classify this as a non-assessable amount as no part of the capital gain can be disregarded under item 7 of the table in subsection 104-71(4), even if the tracing requirements of that subsection are met.

Lorilee must reduce the cost base of the units to $100. Lorilee would make no capital gain or loss if she then sold the units for their market value of $100.

If the MIT was an AMIT, Lorilee would have a cost base net amount of $200 as an excess under section 104-107C and would need to reduce the cost base of her units to $100 under 104-107B (CGT event E10).

If Lorilee then sold her units in the AMIT for their market value of $100 she would make no capital gain or loss.

Part 3 - Modifications to the withholding tax rules for MITs and AMITs

1.39 Amendments to the withholding tax rules for MITs and AMITs will:

•

clarify that withholding tax liabilities arise on amounts of actual or deemed fund payments and DIR payments to foreign members by an AMIT or a custodian;

•

ensure that fund payments made by MITs and AMITs include capital losses from non-taxable Australian property that have been applied against capital gains from taxable Australian property;

•

clarify that AMITs which only make deemed payments to members can be withholding MITs; and

•

clarify how the TFN withholding rules apply to AMITs that make deemed payments to members.

MIT withholding provisions apply to attributed amounts

Fund payments

1.40 Under the AMIT regime, when a MIT or an AMIT makes a fund payment to a foreign resident member, the foreign resident has a liability to withholding tax in relation to the fund payment (Subdivision 840-M).

1.41 The amendments insert notes into subsections 840-805(2) and (3) to clarify that deemed payments made by an AMIT may be treated as having been paid to the member by a withholding MIT or a custodian for the purposes of determining the withholding tax liability on the fund payment. [Schedule 1, items 12 to 15, subsections 840-805(2) and (3)]

1.42 This clarifies that the withholding tax rules apply to the amounts of the fund payment that are attributed to foreign resident members by an AMIT, in addition to amounts which are actually paid.

1.43 Further, a note has been inserted into subsection 840-805(2) to clarify that, for the purposes of determining the liability for withholding tax in respect to AMITs, the amount of a particular fund payment may not reflect the actual amount paid. This outcome can arise because, under the method statement in subsection 12A-110(5) in Schedule 1 to the TAA 1953, the amount of a fund payment can be adjusted to account for earlier fund payments and expected later fund payments. [Schedule 1, item 13, note 1 to subsection 840-805(2)]

1.44 However, it is generally expected that the sum of fund payments made by an AMIT in respect of a particular income year will equal the sum of actual payments and deemed payments made by the AMIT in respect of that income year.

DIR payments

1.45 Generally, if an Australian resident makes a DIR payment to a foreign resident, the foreign resident is liable to withholding tax on the amount paid (section 128B of the ITAA 1936).

1.46 A note has been inserted into subsection 128B(1A) of the ITAA 1936 to clarify that deemed payments made by an AMIT are treated as having been paid to the member by a withholding MIT or a custodian for the purposes of determining the withholding tax liability on the DIR payments. [Schedule 1, item 1, note to subsection 128B(1A) of the ITAA 1936)]

1.47 This clarifies that the withholding tax rules apply to the amounts of DIR payments that are attributed to foreign resident members by an AMIT, in addition to amounts which are actually paid.

1.48 Amendments have also been made to subsection 12A-215(1) to ensure that all AMITs (whether or not they are a withholding MIT) will have a withholding obligation in respect of any deemed DIR payments made in relation to the income year. [Schedule 1, items 31 to 33, paragraph 12A-215(1)(a) and subparagraphs 12A-215(1)(c)(i) and (ii) in Schedule 1 to the TAA 1953]

AMIT and MIT fund payments calculated only on taxable Australian property gains

1.49 Broadly, fund payments are amounts of assessable income derived by a MIT or an AMIT that are paid or attributed to members.

1.50 For a MIT, the total of the fund payments in relation to an income year equals, as nearly as practicable, the net income of the trust for the income year, disregarding any excluded components (section 12-405 in Schedule 1 to the TAA 1953).

1.51 For an AMIT, the total of the fund payments in relation to an income year equals, as nearly as practicable, the total of the determined member components for the income year that are of an assessable income character, disregarding any excluded components (section 12A-110 in Schedule 1 to the TAA 1953).

1.52 For a MIT, the method statement for working out the amount of a fund payment in relation to an income year is modified to ensure that, in calculating the fund payments, a capital loss or a carry-forward capital loss from non-taxable Australian property which has been applied against a capital gain from taxable Australian property in that income year (under subsections 12-405(2A) and (2B)) is added back.

1.53 To achieve this, step 1 of the method statement is modified to increase the amount of the actual payment by amounts to which subsection 12-405(2A) or (2B) applies for the income year, except to the extent that the capital gain against which those amounts are applied are included in the actual payment made in relation to that income year. [Schedule 1, items 25 to 28, subsections 12-405(2), (2A), (2B) in Schedule 1 to the TAA 1953]

1.54 In addition, the net income of the trust will be increased by the amounts to which subsections 12-405(2A) or (2B) applies for the income year under step 2 of the method statement. As the amounts to which subsections 12-405(2A) and (2B) apply are expressly considered in step 2 of the method statement under paragraph (aa), they will not be considered under paragraph (a). [Schedule 1, items 26 and 27, paragraphs (aa) and (a) of step 2 of the method statement in subsection 12-405(2) in Schedule 1 to the TAA 1953]

1.55 For an AMIT, similar modifications are made to the total of the fund payments (subsection 12A-110(3)) to achieve a consistent result. [Schedule 1, items 29 and 30, paragraphs 12A-110(3)(b) and (c) and subsection 12A-110(3A) in Schedule 1 to the TAA 1953]

1.56 This ensures that, where a fund payment is made to a foreign resident member, the amount of withholding tax payable by the MIT or AMIT is calculated on taxable Australian property net capital gains.

Example 1.2

During the 2019-20 income year, the trustee of the LTV MIT made $5 million capital gain from CGT event happening in relation to a CGT asset that was taxable Australian property.

The LTV MIT also had $7 million carried forward net capital loss in relation to a CGT asset that was not taxable Australian property, which fully offset the capital gain.

During the income year, the LTV MIT made a payment of $5 million to its members. The net income of the LTV MIT for the year is nil.

The LTV MIT must apply the method statement in subsection 12-405(2) to work out how much of the actual payment of $5 million is a fund payment in relation to the income year.

Under step 1 of the method statement, the actual payment of $5 million does not need to be adjusted as the $5 million capital gain from a taxable Australian property is included in the actual payment.

Under step 2, to work out the 'net income of the trust', the LTV MIT must add back $5 million of the net capital loss from the non-taxable Australian property which was offset against the capital gain from taxable Australian property. Therefore, the net income of the trust for the purposes of step 2 is $5 million.

Therefore, for the 2019-20 income year, the amount of the fund payment made by LTV MIT is $5 million.

Withholding MIT provisions apply to deemed payments

1.57 Generally, where a deemed payment arises, an AMIT may have an obligation to pay an amount to the Commissioner if, among other things, it is a withholding MIT (section 12-383 in Schedule 1 to the TAA 1953). The obligation applies to a withholding MIT that makes a fund payment to foreign members.

1.58 The amendment clarifies that an AMIT which only makes a deemed payment to a foreign resident can be a withholding MIT. [Schedule 1, item 24, subsection 12-383(2) in Schedule 1 to the TAA 1953]

1.59 This ensures that an AMIT which only makes deemed payments for an income year (and does not make actual cash distributions) will be a withholding MIT, provided that other requirements are satisfied.

1.60 Further, the definition of a withholding MIT has been expanded to include MITs which make no fund payments in relation to an income year. [Schedule 1, item 23, paragraph 12-383(1)(a) in Schedule 1 to the TAA 1953]

TFN withholding provisions apply appropriately to AMITs

Deemed payments to be treated as amounts paid

1.61 The amendments clarify that deemed payments made by an AMIT are treated as having been paid to the investor for the purposes of determining whether amounts are required to be withheld from a payment made by the AMIT. [Schedule 1, item 19, note to subsection 12-140(1) in Schedule 1 to the TAA 1953]

Trustee can recover amounts from an investor

1.62 If an AMIT pays an amount of TFN withholding to the Commissioner in respect of a deemed payment it makes to a member because the member has not quoted its TFN, the AMIT can recover the amount withheld from the member as a debt that is owed to the AMIT. The AMIT can recover the amount by setting it off against debts due by the AMIT to the member. [Schedule 1, item 20, subsections 12-140(3) and (4) in Schedule 1 to the TAA 1953]

Ensuring amounts are subject to appropriate TFN withholding

1.63 The amendments limit the application of the TFN withholding rules under section 12-140 in Schedule 1 to the TAA 1953 to ensure that they do not apply to amounts which have already been subject to TFN withholding. These amounts include:

•

the pre-AMMA actual payment portion of a deemed payment, to the extent that TFN withholding has already been applied to the pre-AMMA actual payment amount; and

•

the pre-AMMA actual payment or deemed payment portion of a post-AMMA actual payment, to the extent that TFN withholding has already been applied to the pre-AMMA actual payment or deemed payment amounts.

[Schedule 1, item 21, subsection 12-152 in Schedule 1 to the TAA 1953]

Part 4 - Modifications to the operation of the AMIT transitional rules

1.64 Amendments to the AMIT transitional rules will:

•

ensure that former public trading trusts and corporate unit trusts can continue to use accumulated franking credits until 30 June 2019; and

•

ensure early balancing trusts can elect into the AMIT regime from the 2016-17 income year.

Transitional rules regarding franked distributions

1.65 As part of the AMIT reforms, transitional rules (item 75 of Schedule 5 to the TLAA 2016) applied so that trusts which ceased to be corporate unit trusts or public trading trusts (and therefore were no longer a corporate tax entity) could continue to treat distributions as frankable distributions and utilise accumulated franking credits until 30 June 2018.

1.66 The amendments improve the operation of the transitional rules by ensuring that:

•

franking credits of former corporate unit trusts and public trading trusts are retained by varying the application of the franking debit rules (section 205-30) from the time the trust ceased to be a franking entity to 1 July 2019;

•

distributions made by these trusts to beneficiaries retain the character of a dividend, paid from a corporate tax entity, during the transitional period (that is on or after the cessation time but before 1 July 2019); and

•

when an entity ceases to be a franking entity and the entity's franking account is in surplus immediately before ceasing to be a franking entity, the trust is treated as a corporate tax entity.

[Schedule 1, items 35 to 42, subitems 75(2), (2A), (3A), (4) and (6) of Schedule 5 to the TLAA 2016]

1.67 Further, for the purposes of determining whether the trust can frank a distribution, the amendments ensure that the distribution must not be made out of income derived in relation to the 2016-17 income year or a later income year. As a result, trusts with substituted accounting periods are able to distribute franking credits arising from tax paid on income derived during the entire income year in which they were treated as a corporate unit trust or public trading trust. [Schedule 1, item 41, paragraph 75(4)(c) of Schedule 5 to the TLAA 2016]

1.68 Therefore, trusts that ceased to be corporate unit trusts or public trading trusts under the AMIT reforms will be able to pass on franking credits to members until 30 June 2019 provided that the other requirements of the transitional rules are satisfied.

MITs with substituted accounting periods can elect into the AMIT regime for the 2016-17 and later income years

1.69 Under the application provisions of the AMIT regime (paragraph 1(1)(a) of Schedule 8 to the TLAA 2016), a trust can elect into the AMIT regime for income years starting on or after 1 July 2016.

1.70 The amendments provide additional flexibility to the application provisions by allowing trusts to elect into the AMIT regime for the 2016-17 and later income years, regardless of when those income years start. This ensures that eligible MITs with substituted accounting periods (for example, starting before 1 July) can elect into the AMIT regime for the 2016-17 and later income years. [Schedule 1, items 18 and 43 to 45, subitem 1(1) of Schedule 8 of the TLAA 2016 and the definition of 'starting income year' in section 276-25 of the IT(TP)A 1997]

Example 1.3

SLI is an early balancing trust with a substituted accounting period commencing on 1 April each year. SLI will be able to elect into the AMIT regime for the 2016-17 income year.

Minor and consequential amendments

1.71 Schedule 1 to this Bill also makes minor consequential amendments to the income tax law to update various provisions to take into account the AMIT technical amendments and repeal provisions that are no longer necessary. [Schedule 1, items 6, 16, 22, 34 and 39]

Application provisions

1.72 The amendments made in relation to aligning the CGT outcomes of MITs with AMITs applies to distributions made in relation to the 2017-18 income year and to later income years. [Schedule 1, subitem 46(1)]

1.73 The amendment made in relation to allowing single unit holder MITs to elect into the AMIT regime apply in relation to the 2017-18 income year and to later income years. [Schedule 1, subitem 46(2)]

1.74 The amendments made in relation to allowing MITs with substituted accounting periods to elect into the AMIT regime apply in relation to the 2016-17 income year and to later income years. [Schedule 1, subitem 46(3)]

1.75 All other amendments made in this Bill apply in relation to the 2018-19 income year and to later income years. [Schedule 1, subitem 46(4)]

1.76 Therefore, the amendments generally apply to 2018-19 income year and to later income years. The amendments which apply to income years prior to the 2018-19 income year have been actively sought by stakeholders and will ensure that the AMIT regime operates as intended and applies in a way that is consistent with current industry practice. No taxpayer will be disadvantaged by these amendments.