Who does this affect?

All fund managers and persons who invest in managed investment trusts, particularly those involving real estate.

What do you need to do?

Consider the impact of possible changes on your existing and proposed funds as well as the changes necessary to our tax system to make your business more competitive regionally. Consider making a submission to the Board of Taxation.

Author
Andrew Clements  
Partner

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Andrew Clements  
Partner
T +61 3 9643 4089

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Melbourne
Andrew Clements  
Consider the impact of possible changes on your existing and proposed funds as well as the changes necessary to our tax system to make your business more competitive regionally. Consider making a submission to the Board of Taxation.

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On 22 February 2008, the Assistant Treasurer announced that he had requested the Board of Taxation to review the taxation arrangements that apply to managed funds (Review).

The Review will comprise two parts:

• suggested interim changes to the rules relating to conducting an “eligible investment business” to streamline and simplify the operation of those rules, as discussed in the consultation paper; and
• a more general review of the taxation arrangements of managed investment trusts, under the terms of reference issued by the Assistant Treasurer.

Suggested interim changes to Division 6C

The consultation paper outlines some suggested interim changes to the rules relating to the taxation of managed investment trusts, in particular, the meaning of an “eligible investment business” in Division 6C.

The suggested interim changes discussed in the consultation paper include changes to:

• expand the range of income a REIT may derive – by implementing a 25% “safe harbour test” which allows 25% of the gross income of a REIT from a land investment to be income other than rent,
• exclude particular forms of rent – by redefining “rent” as passive investment returns for the right to use land, to exclude certain real estate related arrangements where REITs receive payments described as “rent” but which depend on the economic performance of an enterprise, and
• extend the range of permissible investment – by updating the list of in the definition of an “eligible investment business” to reflect today’s financial markets (e.g. hedging and guarantee arrangements).

The Board of Taxation (the Board) is seeking public comment on these possible interim changes by 17 March 2008.

It is not clear from the consultation paper when any of these proposed changes, if implemented, will take effect.

Terms of reference of the Review

In addition to these possible interim changes to the meaning of “eligible investment business” in Division 6C, the Review will consider whether any broader changes to the taxation of managed investment trusts would be necessary or desirable going forward.

The focus of this Review will not only be on the meaning of an “eligible investment business”. The Board is also seeking to “reduce complexity, increase certainty and minimise compliance costs” for the rules relating to the taxation of managed investments. The aim would be to position Australia as the leading financial “hub” in Asia.

The Board of Taxation’s examination will focus on:

• Developing options for introducing a specific tax regime for managed investment trusts. This is aimed as an alternative to the existing rules relating to the taxation of trusts based on “present entitlement” concepts, but which achieve broadly similar flow through taxation outcomes.
• Defining the scope of “eligible investment business” in relation to REITs and managed investments trusts.
• Considering the merits of a separate taxing regime for REITs as well as the associated costs and benefits of such a regime.

The Board of Taxation will engage in a public consultation process, but the precise timing of this consultation process is unknown. The Assistant Treasurer has indicated however that the Board of Taxation is due to report on its final findings and recommendations by mid-2009.