On 5 August 2013, the Assistant Treasurer, David Bradbury, announced further changes to the Managed Investment Trust (MIT) tax regime, in response to specific issues raised during the Government’s on-going consultation with the managed funds industry.
The proposed changes include:
- Dealing with Under or Over attribution; and
- Application of the arm’s length rule.
Each of these is considered below:
Unders or Overs Attribution
Under the previously announced MIT measures, a trustee had the ability to carry forward an under or over attribution of net income to a later income year without interest or penalty (subject to a de minimis threshold). Where an under exceeded the de minimis, the trustee would be assessed on the amount of tax shortfall at the top marginal tax rate if the trustee did not re-issue distribution or attribution statements to its beneficiaries. Where an over exceeded the de minimis, the trustee was required to re-issue distribution or attribution statements to its beneficiaries.
The Government has now announced that it intends to allow an under or over attribution of net income in excess of the de minimis that is not intentionally caused by the trustee to be carried forward. This change will however be subject to certain integrity measures.
In the case of an ‘under’ that is in excess of the de minimis, where the trustee did not cause the under intentionally, the trustee may either issue revised distribution statements to beneficiaries or carry forward the ‘under’ into the next year. However, the ‘under’ will be uplifted at the general interest charge rate. The trustee may face an administrative penalty where the trustee causes the ‘under’ carelessly (up to 25 per cent of the ‘under’) or recklessly (up to 50 per cent of the ‘under’).
In the case of an ‘over’ that is in excess of the de minimis, where the trustee does not cause the ‘over’ intentionally, the trustee may either issue revised distribution statements to beneficiaries or carry the ‘over’ into the next year. The trustee may face an administrative penalty where the trustee causes the ‘over’ carelessly (up to the greater of 20 penalty units or 10 per cent of the ‘over’) or recklessly (up to the greater of 40 penalty units and 20 per cent of the ‘over’).
Where the trustee intentionally causes an ‘under’ or ‘over’ in excess of the de minimis, the trustee must issue revised distribution statements to beneficiaries. An administrative penalty may also apply to the trustee (up to 75 per cent of the ‘under’; or up to the greater of 60 penalty units and 30 per cent of the ‘over’).
A penalty unit is currently $170 per unit.
MITs must report any under or over for an income year to the Commissioner of Taxation (Commissioner) in their trust returns. This will ensure transparency and will allow the Commissioner to identify any anomalies more easily.
The proposed changes are a step closer to legitimising the current industry practice for the treatment of under or overs attribution.
Arm’s Length Rule Changes
Under the previously announced measures, MIT’s were subject to an Arm’s Length rule in relation to all transactions between common interests or related interests of a MIT. This rule ensured that entities could not circumvent the eligible investment business (EIB) rules.
The Assistant Treasurer has now announced that two types of services provided to a MIT by an associated entity will be carved out from the Arm’s Length rule where they have been provided between at cost and market value. These excepted services relate to:
- Services provided by a related entity to a MIT that the MIT could perform itself without breaching the EIB rules; and
- Services provided by the responsible entity of a MIT to the MIT that it could perform itself without breaching the EIB rules but cannot perform due to requirements in the Corporations Act 2001.
The Assistant Treasure has also restated the Government’s commitment to on-going industry consultation in relation to improving the MIT tax regime and ensuring that the regime provides certainty and maintains integrity having regard to industry practice.
Further detail on the announced changes can be found in the Assistant Treasurer’s media release. The changes are expected to be reflected in the exposure draft legislation.
The role of the fund administrator
Fund administrators and fund accountants play an important role in the calculation of trust net income and in accurately recording and allocating the income into the various tax components. This information needs to be matched accurately to corporate actions and should be co-ordinated by the fund administrator.