This article was written by Andrew Clements, Kai-Chen Lamb and Doug Porteous.
The Australian Government today introduced the Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015 to Parliament. A number of supplementary bills were also released.
The ATO has, concurrently with the release of the Bill, issued draft guidance regarding some of the key aspects of the AMIT Regime as set out in the Bill. A link to the ATO draft guidance is available here. The ATO is calling for submissions on this draft guidance from industry by 15 January 2016.
The legislation creates a new regime for Attribution Managed Investment Trusts (AMIT Regime), which will provide qualifying managed investment trusts (MITs) with improved flexibility and greater certainty in respect of their tax treatment.
The AMIT Regime was first announced by the Government more than five years ago. Accordingly, the introduction of the Bill into Parliament has been a very long awaited and highly anticipated tax development for the Australian funds management industry.
The AMIT Regime represents the single most significant change to the tax treatment of managed funds in Australia in recent history. It is likely that any Australian fund managers or investors that manage or invest in trusts that are caught by the regime will need to address the following issues:
- compliance issues – undertake a detailed assessment of the impact of complying with the AMIT Regime on the relevant trusts, including whether or not the trusts are eligible to apply the AMIT Regime and able to comply with the AMIT Regime. This may require significant updates to the systems used to administer the relevant trusts;
- product opportunities – identify what opportunities and additional flexibilities are provided under the AMIT Regime, and which of those opportunities and flexibility should seek to be implemented (e.g. new product ideas); and
- deed amendment projects – assess what changes to the trust deeds and Constitutions for the relevant trusts should be made, in order to allow the relevant trusts to be able to utilise and comply with the new regime, and capitalise on the opportunities and flexibilities presented by the new regime.
Most Australian fund managers and institutional investors in trusts have been closely monitoring these developments for some time. The release of the Bill in a final form is likely to provide those managers and investors with the certainty necessary in order to move forward with their AMIT projects, and seek to develop the systems necessary to comply with and capitalise on the new regime.
This is particularly important given that the AMIT Regime will generally commence on 1 July 2016, with the “attribution regime” aspect of the amendments applying on an elective basis from that time. There is also an ability to elect into the AMIT Regime early from the commencement of the 2015/2016 income year, provided that your year of income commences on or after 1 July 2015.
Accordingly, one of the key decision points for Australian fund managers and investors will be whether or not they would like to apply the AMIT Regime and the date from which they would like to apply the AMIT Regime.
Although the general features of the AMIT Regime as contained in the Bill are broadly similar to the Exposure Draft that was issued earlier this year (a link to our Alert regarding that Exposure Draft is available here), there are some key changes in the Bill that can generally be regarded as positive.
- elective basis – the attribution regime element of the AMIT Regime will no longer be mandatory for qualifying trusts. The trustee of the relevant trusts will have a choice regarding whether or not the AMIT Regime will apply;
- simplification of gateway for registered schemes – certain types of trusts, including registered managed investment schemes, will be deemed to have “clearly defined rights” and be eligible to apply the AMIT Regime;
- removal of custodial liability transfer – we understand that it was previously proposed as a part of the AMIT Regime that custodian unitholders that held units in qualifying MITs on behalf of non-residents have the ability to transfer the tax liability attaching to those units to the MIT itself. This is not contained in the Bill; and
- statutory right of indemnity – qualifying MITs that attribute taxable income to non-resident unitholders, or custodians that receive attributions of taxable income from qualifying MITs on behalf of an ultimate non-resident unitholders, will, under the AMIT Regime, be required to pay tax on the relevant amounts of taxable income on behalf of the ultimate non-resident unitholder. Those qualifying MITs and custodians will, under the Bill, be provided with a statutory right of indemnity against the ultimate non-resident unitholder for any such tax.
The AMIT Regime and the Bill that seeks to implement is highly detailed and complex. We have set out below a very high level summary of some of the key features of the AMIT Regime as provided for under the Bill.
The AMIT Regime is available for MITs (as defined under the existing law) whose members have “clearly defined interests” at all times. Under the Bill, in order for a trust to have “clearly defined interests”, there is a distinction between registered and unregistered schemes.
In order for a trust to have “clearly defined rights”, the Bill provides that the relevant MIT must either:
- be a registered managed investment scheme under section 601EB of the Corporations Act 2001 (Cth); or
- the rights to income and capital arising from each of the membership interests in the trust are the same.
This represents a significant simplification of the ability for MITs to establish that they have “clearly defined rights”.
In particular, registered schemes are provided with a “safe harbour” under which they are deemed to have “clearly defined rights” by virtue of their regulatory status under the Corporations Act.
Further, unregistered schemes are provided with “safe harbours” where they fall within particular categories.
The Bill provides that in assessing whether the rights to income and capital arising from each of the membership interests in the trust are the same, the following matters are to be disregarded:
- fees and charges imposed by the trustee on the numbers of the trust;
- the issue and redemption prices of membership interests in the trust; and
- exposure of the membership interests in the trust to foreign exchange gains and losses.
An important change to the AMIT Regime in the Bill as against the Exposure Draft is that the attribution regime aspects of the AMIT Regime will be on an elective basis. That is, a MIT will only be able to apply the attribution regime where it elects to do so, and a MIT will not be required to do so.
This is likely to provide trustees of trusts with greater flexibility. We expect that most eligible MITs will elect to apply the AMIT Regime because of its benefits, including the ability for such trusts to be deemed to be “fixed trusts” for tax purposes.
Attribution regime for “flow through” of taxable income
At the core of the proposed new AMIT Regime is the ability of qualifying MITs to “flow through” taxable income to their unitholders on an “attribution basis”, and for that taxable income to retain its character for tax purposes as it flows through the trusts. Very simply, this allows MITs to attribute or determine the amount and character of the taxable income of the trust that each unitholder is assessed on, and for that attribution to be given effect to by the issue of a statement (AMMA Statement) to the relevant unitholder.
This is likely to significantly simplify the taxation of qualifying MITs. In particular, the ability of such trusts to “flow through” taxable income to the unitholders will no longer be dependent on traditional trust concepts such as “income of the trust estate” and “present entitlement”. This also provides such trusts with the opportunity to “de-link” the amount of income or other amounts actually distributed or paid out to unitholders, with the quantum and character of the taxable income they are attributed.
The AMIT Regime does contain some integrity provisions that may limit this flexibility available. The “attribution” of taxable income that is undertaken by the trustee of the relevant trust must be “fair and reasonable” having regard to the constituent documents of the relevant MIT.
The reliance on a test based on “reasonableness” does generate potential uncertainty regarding the extent to which the attribution models adopted by qualifying MITs are permitted to deviate from the actual amounts paid out or otherwise distributed to unitholders.
In particular, although the Bill does provide certain statutory “safe harbours” regarding whether particular forms of “attribution” will be treated as being “fair and reasonable”, these statutory “safe harbours” are fairly limited and are unlikely to capture many of the models which fund managers currently utilise, or were hoping could be utilised under the AMIT Regime.
For example, the Bill provides a “safe harbour” for certain redemption income entitlements, but only where the constituent documents expressly provide for such redemption income entitlements, and the redemption income entitlements only seek to allocate amounts that arise on the sale of particular assets to fund the redemption. Although this may capture some of the existing and proposed redemption income entitlement models, this is a fairly narrow approach which may not accord with the models which particular managers have been or are seeking to adopt.
Accordingly, we expect that the uncertainty with respect to what constitutes a “fair and reasonable basis” may, at least initially, limit the flexibility that would otherwise be provided under the AMIT Regime. This is likely to be the case at least until further ATO guidance is provided or market practice is established.
New cost base regime – allows for upward adjustments in “cost base”
The AMIT Regime creates a new system for making adjustments to the “cost base” of interests in qualifying MITs where there are differences between the taxable income “attributed” to unitholders and the amounts distributed to unitholders.
The new system works similarly to the existing system where the amount distributed exceeds the taxable income attributed (e.g. tax deferred amounts are distributed) – there is a downward adjustment in cost base.
One of the beneficial features is that the new system allows for upward adjustments in cost base where the amount distributed is less than the taxable income attributed.
This is likely to significantly simplify the administration of trusts that adopt such a model, as such trusts will no longer be required to administer reinvestments of distributions where trusts are not paying out all of their taxable income as distributions. It is also likely to provide qualifying trusts with greater flexibility with respect to the need to distribute amounts going forward.
Ability to elect for different classes treated as separate trusts – significant product opportunities
Another key feature of the AMIT Regime is the ability of trusts which have different classes based on different portfolios of assets to elect to treat those classes as separate trusts for tax purposes.
This is likely to provide managers of qualifying MITs with significant flexibility regarding future product design. In particular, it will allow managers of qualifying MITs to run multiple portfolios of assets within the same trusts without any risk that activities within one portfolio will impact on the tax treatment of other portfolios. That is, the different portfolios of assets are “quarantined” for tax purposes.
This flexibility is likely to be particularly beneficial for those managers of qualifying MITs seeking to introduce different foreign currency or hedging classes within their trusts. The potential for the activities in one class “tainting” the activities of another class has, historically, been one of the barriers against creating multiple class trusts.
Deemed fixed trust treatment
Another key benefit of the AMIT Regime is the ability of qualifying AMITs to be deemed to be fixed trusts.
This alleviates the considerable uncertainty that resulted from the Federal Court’s 2010 decision in Colonial First State, and ensures the AMIT will be able to access certain additional tax concessions. This includes, for example, the ability to pass on franking credits to unitholders (particularly important where any unitholders are “complying superannuation funds) and easier utilisation of tax losses.
Unders / overs
The AMIT Regime allows for under-estimations and over-estimations of amounts at the trust level to be carried forward and dealt with in the year in which they are discovered.
This simplifies the process of correcting estimations, for example, by removing the need to file amended distribution statements and amendments to beneficiary tax returns.
Arm’s length rules – strict integrity measure for stapled structures
One of the most significant potentially adverse aspects of the new AMIT Regime is the new rules for arm’s length income for qualifying MITs. Importantly, this feature of the AMIT Regime will apply to all qualifying MITs irrespective of whether they elect to apply the attribution regime or other aspects of the AMIT Regime.
Under this rule, any excess non-arm’s length income generated by a qualifying MIT will be taxed at the corporate tax rate of 30%. Accordingly, all qualifying MITs – and especially those trusts that form part of a stapled structure – should review all arrangements with related parties or parties with the same ownership to assess whether or not the income generated from those arrangements is “arm’s length”.
The AMIT Regime provides some guidance regarding what constitutes “arm’s length” income in relation to certain arrangements, including loans from a qualifying MIT to another entity. However, there is likely to be considerable uncertainty regarding what constitutes “arm’s length” income for arrangements that do not fall within these categories.
The ATO’s draft guidelines with respect to this issue provide some guidance regarding what the ATO may regard as being “arm’s length income”. This guidance therefore provides a de facto “safe harbour” for managed investment trusts which, if complied with, may prevent the ATO from seeking to apply the new “arm’s length income” rules to the relevant arrangements.
This is likely to be important for managed investment trusts that are party to arrangements with related or commonly owned parties, such as the arrangements typical in stapled infrastructure holding structures. Managers of trusts within stapled structures should therefore carefully review this guidance and assess how it will impact on their current arrangements, and what changes to these arrangements are necessary or desirable.
The AMIT Regime also contain certain other reforms that have previously been announced or which are incidental to the measures described above.
This includes, for example:
- the repeal of Division 6B, the corporate unit trust provisions that prevented companies from restructuring as trusts;
- amendments to the rules relating to “public trading trusts”, that prevent trusts from constitutes “public unit trusts” for the purposes of those provisions by virtue of “complying superannuation funds” holding 20% or more of the units in the trust; and
- certain refinements to the existing “widely held” requirements in order for trusts to constitute MITs.
Next steps – ASIC relief
The AMIT regime is intended to take effect by 1 July 2016, with an ability to elect in early from 1 July 2015.
Fund managers should consider whether the AMIT Regime and its associated tax concessions can be of benefit to them. We expect that there will be a significant number of changes required to constitutions of trusts seeking to take advantage of the regime and properly protect the interests of unitholders and ensure appropriate risk management procedures.
Trusts will need to consider whether these amendments can be made by reliance upon the trustee’s amendment power alone, or whether a unitholder meeting will be required.
We understand that there is potential for ASIC to issue relief with respect to the need to hold unitholder meetings for amendments with respect to the AMIT Regime, and that ASIC is currently working through these issues. A critical issue, however, will be the scope of any such relief provided. In particular, whether the relief provided only allows managers to make those changes required in order to comply with the AMIT Regime, or whether it allows managers to make the changes necessary in order to fully take advantage of the AMIT Regime and facilitate the efficient and effective administration of the relevant trusts under the AMIT Regime.
Managers of trusts likely to be affected by the AMIT Regime should monitor these developments closely.