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What is MITs
Under the existing regime, broadly speaking, a MIT is a managed investment scheme (“MIS”), as defined in the Corporations Act 2001 (Cth), which also satisfies certain other criteria, including:
1. that MIS must have Australian central management and control;
2. hold Australian assets; and
3. not carrying on an active trading business.
However, the new regime will broaden the circumstances in which a trust qualifies as an MIT. As such, the new definition of MITs will be an amalgam of two existing definitions from the income tax provisions and the deemed CGT treatment provisions.
Background
The new regime is implemented in response to the Board of Taxation’s review, and will create a new standalone tax regime to apply to MITs. As such, MITs that meet the qualifying criteria and opt into the new regime will not be subject to the existing present entitlement rules in Division 6 of the Income Tax Assessment Act 1936 (Cth) (“ITAA 36”), instead, they will be subject to their own specific MIT rules. Those trusts and MITs that do not qualify will continue to be taxed under the existing trust tax provisions in Division 6 of the ITAA 36.
Key features of the new regime
WThe new regime will apply to trusts that are Attribution Managed Investment Trusts (“AMITs”), which are broadly MITs under the existing definition in the tax law with minor modifications.
There are two principal eligibility requirements for the new tax system:
1. The trust is a MIT under the amended definition; and
2. The members of the MIT all have interests that are clearly defined.
The test requires that the entitlement of each member to the income of the MIT can be worked out on a fair and reasonable basis having regard to the trust deed of the MIT, and the rights of each member to the income and capital of the trust cannot be materially diminished through the exercise of a power or right in the trust deed.
Further this relevant test must be met for each year and there are provisions exist to handle MITs which fail to qualify as an AMIT in later years.
In addition, the new regime will amend the 20% tracing rule for public unit trusts so it does not apply to superannuation funds and exempt entities that are entitled to a refund of excess imputation credits.
AMITs
AMITs are in which members have a ‘clearly defined interest’. This means that only MITs which are sufficiently non-discretionary will receive the benefit of the attribution MIT status.
Where MITs meets the AMIT eligibility conditions, it will be subjected to the rules below:
1. The income attribution mechanism, which includes amounts in the assessable income of the unitholders based on their entitlements.
2. A formal system to allow errors in calculating taxable income to be rectified by making adjustments in the year they are discovered.
3. Cost base adjustment rules to avoid double taxation, which will increase as well as decrease the cost base of units for CGT purposes.
4. Certain types of units issued by the entity will be treated as debt, both for trust and the unitholder.
5. The ability to make an irrevocable election to treat income and assets attributable to a class of units as a separate AMIT.
6. A special arm’s length rule which can result in a marginal tax rate of tax payable by the trustee on nonarm’s length income earned.
7. The trust is deemed to be a fixed trust, which has important consequences for the trust loss and franking provisions.
Accordingly, MITs that may be subject to the new regime will need to review its existing trust deed to determine whether they should be amended to allow trustees and responsible entities to comply with some or all of the requirements of the new regime.
However, in doing so, the MITs will need to be aware whether such amendments can be effected without triggering other tax or duty consequences.
Regardless, the implementation of the new MITs tax regime will be welcomed by the industry, which has been awaiting changes for some years.
