Important changes have recently been made to the tax laws for managed investment trusts (MITs). The new laws will significantly improve the operation of the taxation law for MITs by increasing certainty, allowing greater flexibility and reducing compliance costs.
Under the new regime, a trustee may make an irrevocable choice for a qualifying trust to operate as an attribution managed investment trust (AMIT) in respect of an income year (and all following years) where the members of the trust have ‘clearly defined interests’.
Generally, some of the key changes that will apply to AMITs under the regime include:
- An AMIT will apply the new attribution rules rather than the requirements of Division 6;
- Amounts related to income and tax offsets of an AMIT of a particular tax character will be attributed to members and will generally retain that tax character;
- A statutory regime has been introduced to deal with variances (unders and overs);
- An AMIT for an income year will be treated as a fixed trust;
- The trustee of an AMIT will be liable to pay income tax on certain amounts reflecting under-attribution of income or over-attribution of tax offsets;
- The cost base and reduced cost base of membership interests held by a member of an AMIT will become adjustable in both directions; and
- In certain circumstances, a trustee may be liable to pay income tax in respect of certain excess non arm’s length income at the standard corporate tax rate of 30 per cent.
Separate class rule
One of the more interesting changes as a result of the AMIT regime allows the trustee of a multi class AMIT to elect to treat each class as a separate AMIT for that income year. This separation allows the tax attributes of particular class to be ‘ring fenced’ to that class, rather than being ‘spread’ over the AMIT as a whole. It also facilitates the attribution of tax amounts according to a member’s interest in each AMIT.
In general, it is expected that this ability to establish separate AMIT classes will result in significant compliance cost savings and additional flexibility as the trustee will not need to set up separate trusts in order to take advantage of the benefits of the AMIT regime.
As an example, the separate class rule could facilitate trusts that wish to offer interests in multiple foreign currencies, allowing fund managers to pursue emerging investment opportunities in the Asia region.
The new rules will apply to income years starting on or after 1 July 2016. However, a trustee can choose to apply the rules for an income year that starts on or after 1 July 2015.
We expect that you will need to assess the impact of these changes and whether your business would benefit from implementing the AMIT regime. In this regard, we can help you consider:
- Whether your members have ‘clearly defined rights’ for the purposes of qualifying as an AMIT for an income year, having regard to the trust deed and other relevant documents;
- To what extent different classes within your trust may be eligible for treatment as separate AMITs, having regard to the trust deed and other disclosure documents;
- How best to take advantage of the benefits of the regime (for example, the flexibility afforded by separate class treatment may facilitate new product opportunities in foreign currencies that were previously unworkable);
- What risks might arise as a result of implementing the regime and how your business and unitholders may be protected from those risks (for example, the trust may be resettled as a result of amending the entitlements of members under the trust deed, or different rules may apply if the trust ceases to be an AMIT);
- The extent to which the trust deed would need to be amended to operate the trust as an AMIT, and the authority of the trustee make those amendments. In this regard, we are developing a range of precedents to facilitate a streamlined implementation of the necessary changes;
- Whether other relevant documents would need to be amended (for example disclosure documents and marketing materials may need to be updated);
- Whether any system changes would be necessary to meet the requirements of the AMIT regime (for example, to issue the necessary AMIT member annual statement or AMMA statements, or to implement the new statutory regime for unders and overs);
- How best to communicate the implications of the AMIT regime to your members; and
- What steps would need to be taken if a decision is made not to adopt the AMIT regime.
This article was written by James Lonie, Partner.