Funds managers and trustees.
What do you need to do?Assess the investment profile of the fund to ensure compliance with the new rules.
Partner
T +61 2 9296 2193
Ken Lord
Partner
T +61 2 9296 2149
Sydney
Betsy-Ann Howe
Ken Lord
Richard Snowden
Melbourne
Andrew Clements
Michael Clough
Author
Richard Snowden
The Government has introduced into Parliament changes to the rules which govern the types of eligible investment business (eg. investing in land and securities) with which certain ‘public unit trusts’ need to comply in order to maintain their “flow through” character and prevent being taxed as companies (i.e. as public trading trusts - Division 6C).
Previously a public unit trust was a public trading trust if at any time during an income year it operated, or controlled operations of an entity that carried on an activity that was not wholly an eligible investment business. An eligible investment business was defined to include investing in land (including the acquisition and development of land) for the purpose or primarily for the purpose of deriving rent, and investing or trading in various financial instruments.
The Government had noted in February 2008 that the existing rules were largely out of date and were inhibiting the development of the funds management industry and so flagged a review of the eligible investment rules to broaden their scope. This was pending a more comprehensive review that would be undertaken as part of the Board of Taxation’s review of a specific tax regime for managed funds. The proposed changes are therefore the interim step to streamline the provisions.
The proposed changes affect:
- Investing in Land - The meaning of investing in land for the purpose of deriving rent is varied to include investing in fixtures and moveable property which is customarily supplied, incidental and relevant to the renting of the land and ancillary to the ownership and use of the land.
- 25 per cent safe harbour for other income from land - A 25% safe harbour allowance for non-rental, non-trading income from investments in land has been introduced. That is, a safe harbour will exist where only 75% of the gross revenue is rent and none of the (25%) balance of gross income is from excluded rent (rent worked out by reference to profits under an arrangement designed to result in a shift of substantially all of the profits to another party) or from the carrying on of a business that is not incidental and relevant to the renting of the land. An issue for investors will be working out whether a business is incidental or not. The explanatory memorandum notes a car park for customers of a shopping centre where fees are charged for long stays (to discourage long stays) would be regarded as incidental. However fees for a car park as part of a commercial building that is opened to the public (and not primarily for the tenants) would not be regarded as incidental (and so would fail the test).
- Range of Financial Instruments - The range of financial instruments that a managed fund may invest in or trade is to be expanded to include the broader class as defined in the Income Tax Assessment Act 1997. Certain “excepted arrangements” will not qualify as financial arrangements (these include various arrangements such as certain luxury car leases and licences and general insurance policies.).
- 2 Per cent safe harbour at whole of trust level for non-trading income - A 2 per cent safe harbour allowance at the whole of trust level for non-trading income will be introduced. That is, up to 2 % of the gross revenue of the trust can be from non-complying investments provided that none of that income is not from the carrying on of a business that is incidental and relevant to the eligible investment business. The types of income contemplated in the Explanatory Memorandum that do qualify for the 2% concession include directors’ fees, and certain option or guarantee fees earned by a trust. As such income from other trading activities (that is not incidental) will prevent the 2% concession being applied.
The amendments generally apply from the income year of Royal Assent though there are election provisions designed to cover where the new rules would convert what is currently a trading trust into a ordinary trust (and the trust wishes to remain a trading trust).