The Turnbull Government is committed to ensuring our policy settings promote Australia as a regional financial centre and to improving the ability of the financial sector to grow and export their services.
Industry has identified, however, some technical issues with the practical operation of the Investment Manager Regime (IMR) and the new tax system for managed investment trusts (MITs). The Government has actively engaged with the industry on these issues and is now responding to their concerns to clarify the operation of some aspects of the law. The Government welcomes this collaboration with industry.
Investment Manager Regime
The Government is clarifying that when a foreign investor invests in Australia through a foreign fund or an independent Australian fund manager it will be in the same tax position as if it had invested directly. This outcome was intended when the Government implemented the final element of the IMR in 2015.
The IMR reforms attract foreign investment to Australia and promote the use of Australian fund managers by removing tax impediments to investing in Australia.
Subject to meeting the appropriate tests, foreign funds that invest via an Australian fund manager are eligible to access IMR concessions in relation to disposal gains and losses, and can disregard certain Australian income tax consequences.
The Government is committed to implementing an effective IMR whilst maintaining the integrity of our residency rules. The Government will therefore consult on whether a legislative amendment is required to ensure that the engagement of an Australian independent fund manager will not cause a fund that is legitimately established and controlled offshore to be an Australian resident. Any legislative amendment would be retrospective to apply from the start of the IMR regime in 2015.
Attribution Managed Investment Trust technical amendments
The Government is taking action to ensure that the new tax system for MITs, which was enacted in 2016, operates as intended. The new tax system was designed to increase certainty, allow greater flexibility and reduce compliance costs for MITs and to enhance the competitiveness of Australia’s funds management industry.
These clarifications will remove some barriers to entities seeking to opt into the regime and will clarify the operation of the law. Most of these changes are technical in nature and seek to clarify current industry practice (see Attachment).
Greater alignment between Capital Gains Tax (CGT) outcomes for Managed Investment Trusts (MITs) and Attribution MITs (AMITs)
Industry has identified that potential differences in the CGT outcomes for investors in MITs and AMITs may unnecessarily be preventing some MITs from opting in and becoming AMITs.
The Government will amend CGT event E4 for MITs to bring greater alignment in the tax outcomes of MITs and AMITs and provide certainty for MITs that opt into the AMIT regime. As part of this alignment, the Government will clarify that investors in MITs will be required to adjust the cost base of their units in the MIT when it distributes an amount claimed to be non-assessable (the CGT concession amount) under section 104-71(4) table item 7. This will mean that investors in MITs will no longer be able to exclude the distributions they receive in relation to these non-assessable amounts in recalculating their cost base, and CGT event E4 gains.
This change will apply for distributions made in relation to the 2017-18 income year and future income years.
MITs with substituted accounting periods are eligible to opt into the AMIT regime
Not all trusts operate with the same income year. Currently, a trust can elect into the AMIT regime for income years starting on or after 1 July 2016, or if the trustee chooses early adoption, 1 July 2015. However, the current rules do not operate as intended for early balancers.
For example, trusts with an income year starting on 1 January 2016 may need to wait until the year commencing 1 January 2017 to opt in to the AMIT regime.
The Government will ensure a MIT with an income year starting on a date other than 1 July can opt into the AMIT regime from its first full income year starting on or after 1 July 2015, subject to meeting the appropriate eligibility criteria.
Redefining the meaning of fund payment to ensure tax neutral outcomes
When an AMIT that is a withholding MIT makes a fund payment to a unit holder, the AMIT must pay withholding tax on the amount of the payment.
The Government will amend the meaning of fund payment to clarify that the fund payment for both MITs and AMITs should be calculated on taxable Australian property (TAP) net capital gains only.
- This will mean that in determining the fund payment amount, non-TAP capital losses cannot be applied against TAP capital gains in working out the determined member components of TAP capital gains.
- Where non-TAP capital losses are offset against non-TAP capital gains, or to the extent there are carried forward non-TAP capital losses, these losses should not be added back to increase the fund payment amount.
- Carried forward non-TAP capital losses applied in later years against TAP capital gains should be included in the fund payment amount in the later year.
- Carried forward non-TAP capital losses applied in later years against non-TAP capital gains should not be added back to increase the fund payment amount in the later year.
Non-resident investors typically disregard non-TAP capital gains, while for residents there is no distinction between TAP or non-TAP capital gains. This change will increase neutrality and broadly align the tax outcomes of investing via a MIT with direct investment.
Withholding tax – fund payment greater than cash
The Government will amend the MIT withholding provisions to clarify that they apply to the amount of the fund payment that is attributed to the taxpayer by an AMIT. This will ensure that the non-assessable non-exempt amount is calculated correctly for ultimate beneficiaries. Additionally, the Government will amend the definition of dividends, interest and royalties to refer to AMIT dividends, interest and royalty payments.
MIT withholding provisions
The MIT and AMIT withholding tax rules are designed to apply to payments attributed to members or to which members are presently entitled.
The Government will clarify that a deemed payment can arise in circumstances where no fund payment is made for the income year. This will ensure that the withholding MIT provisions apply appropriately to deemed payments. This includes clarifying the application of the tax file number (TFN) withholding to AMITs to ensure the amount of the payment (including deemed payments) is calculated appropriately for TFN withholding purposes.
Special purpose MITs eligible to access the AMIT regime – single unit holder definition
The Government will amend the meaning of an AMIT so that single unitholder widely held entities can access the AMIT regime. For example, a MIT that has a complying superannuation fund, life company or other genuine widely held investor holding 100 per cent of the units in a trust will be eligible to access the AMIT regime. This change will allow a broader range of MITs to access the AMIT regime. This change will not extend to allowing single unitholder MITs to be a withholding MIT.
While this amendment will not extend to including platforms, wraps or master trusts (commonly referred to as Investor Directed Portfolio Services) in the list of deemed widely-held entities, the Government will consult with industry on broadening the eligibility for these widely held entities to access the concessional tracing rules as part of the Corporate Collective Investment Vehicle public consultation process.
Transitional rules regarding franked distributions
As part of the AMIT reforms in 2016, some trusts ceased to be public trading trusts or corporate unit trusts. Transitional rules apply so these trusts continue to treat distributions from pre 1 July 2016 income as frankable distributions so that they can use accumulated franking credits.
The Government will clarify the transitional rules that allow certain distributions from trusts that ceased to be public trading trusts or corporate unit trusts as a consequence of the AMIT reforms to be treated as franked distributions. This will mean that:
- franking credits of the trust are not cancelled when it ceases to be a corporate unit trust or public trading trust;
- franking credits cannot be attached to distributions of post‑30 June 2016 income; and
- in the case of a trust that ceases to be a corporate unit trust, the distribution will retain the character of a unit trust dividend when it is paid to a unit holder.
Doubling of discount CGT amounts
The Government will amend the rounding adjustment and trustee shortfall tax provisions in the income tax law to ensure that the discount capital gains are properly taken into account under the AMIT unders and overs regime. Essentially, the unders and overs regime allows for a variance to be reconciled in the income year in which the variance is discovered. This amendment will address the uncertainty that exists with respect to current calculation methods.
CGT event E10 where starting base is nil
The Government will clarify that CGT event E10 can happen without the need for a cost base reduction in an income year where the cost base of the asset is nil at the start of that income year. This amendment will address an interpretive issue that has arisen suggesting that CGT event E10 cannot happen in this scenario.