Alert

Who does this affect?

All Trustees and Managers of Managed Investment Trusts as well as Australian and foreign investors in those trusts.

What do you need to do?

Review the issues and suggested proposals for reform noted by the Board of Taxation and if impacted, seek to make a submission to the Board prior to 19 December 2008.

Author
Richard Snowden  
Partner

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Richard Snowden  
Partner
T +61 2 9296 2193

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Sydney
Betsy-Ann Howe  
Richard Snowden  
Karen Rooke  

Melbourne
Andrew Clements  

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The Board of Taxation has today released its long awaited “Review of the Tax Arrangements Applying to Managed Investment Trusts” discussion paper which reviews the current regime applying to trusts as collective investment vehicles and assesses possible alternative taxation models.

In February 2008 the Government requested the Board of Taxation to undertake a review of the taxation arrangements applying to Managed Investment Trusts (MITS) and report by the middle of 2009. The terms of the review required the Board to consider “revenue neutral” options for introducing a specific tax regime for MITS to reduce complexity and minimise compliance costs while seeking to continue their “flow through” nature.

The 131 page Discussion Paper notes a number of areas of concern that have developed with the current regime including:

1. Determination of tax liabilities

• There is no clear definition of “trust income” in the legislation.

• There are difficulties in determining a beneficiary’s “share” of trust income.

• The concept of “present entitlement” is not defined and creates practical difficulties in the allocation of gains on underlying assets to beneficiaries.

• Due to the complexity involved in calculating “net income” errors may arise causing MITS to inadvertently under or overstate net income. This in turn has a flow on effect for unitholders who must adjust their tax position.

2. International issues

• Australia is fairly narrow in its treatment of collective investment vehicles - particularly those that take a corporate form and so consideration of a wider class of vehicle rather than a traditional trust structure may be sensible.

• There are also problems in the extent to which trusts are covered by Double Tax Treaties and so reform of this area may be required.

3. Flow Through Vehicle Issues

• There are a number of distortions that can occur in trusts seeking to flow income to beneficiaries which in the worst case scenario may result in double taxation.

• Issues arise where distributions are more or less than the trust net income.

• Tax deferred amounts add to complexity particularly where cost base adjustments are required.

• Div 6 is not necessarily a code for taxation of trusts, leaving some doubt about how income is to be taxed.

4. Capital vs Revenue

• There is uncertainty in how MITS should be treated in terms of their assets being on revenue or capital account.

• Various considerations such as a deemed capital treatment are noted in the Paper.

5. Fixed Trusts

• The requirement for a fixed interest in a trust is used to determine a number of other provisions such as losses and franking. Uncertainty regarding what constitutes a fixed interest therefore can cause significant issues for MITS.

6. Div 6C and 6B

• While the Government has already done an intermediate change in the definition of eligible investments for the purpose of dvision 6C, questions remain as to the scope of the provisions.

• There are also questions regarding the control tests and whether they are still relevant given international comparisons.

• Consideration may also be given to whether a separate REIT scheme should be put in place for real estate MITS (such as is the case overseas).

• There is a question whether Div 6B (which discourages company reorganisations to put assets into trusts) is still relevant or whether it should be abolished.

7. Other Issues

• A number of other issues are also noted in the Paper - such as absolute entitlement issues and trust amendments causing resettlements (with CGT implications).

The Discussion Paper outlines some solutions to the above issues but is seeking input from the public on suggestions for alternatives. The Board is seeking submissions by 19 December 2008.

The full report can be accessed here.