12 May, 2016
Introduction
The Australian Senate recently passed legislation that creates a new breed of Australian fund, the Attribution Managed Investment Trust (AMIT). The legislation in question has been under development by Treasury for more than five years, and provides Australian fund managers with more flexibility in allocating tax consequences to various beneficiaries.
The legislation is contained in Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015 (Cth)
(the Bill), which amends the Income Tax Assessment Act 1997 (Cth) and other ancillary pieces of legislation.
The Bill establishes a 1 July 2016 start date for the regime. However, there is an ability for trustees to elect into the AMIT rules retrospectively under the new Bill from as early as 1 July 2015.
Advantages of the AMIT
The AMIT structure permits multi-class funds (for tax purposes) to sit within a larger umbrella fund.
The AMIT achieves this by treating each unit class within it as a separate, tax-paying trust — quarantining taxable income and losses to investors in the relevant class.
Qualifying as an AMIT
Very broadly, in order to qualify as an AMIT under the Bill:
- a fund must satisfy the existing requirements to be a managed investment trust (MIT);
- the interests of the members of the trust must be "clearly defined" at all times during which the fund is in existence in the income year; and
- the fund's trustee must make an irrevocable election to treat the trust as an AMIT.
Without limiting the circumstances where the second requirement above is satisfied, the legislation specifically provides that clearly defined rights will be deemed to exist, for example, if the trust is registered under section 601EB of the
Corporations Act 2001 (Cth).
Tax benefits of the AMIT
Qualifying as an AMIT has three key tax benefits:
1) The members of the trust will be deemed to have a vested and indefeasible interest in a share of the income and capital of the trust during the income year (meaning that the existing concepts of "present entitlement" and "trust income" contained in Division 6 of the Income Tax Assessment Act 1936 (Cth) will not be relevant in determining the tax liability of unitholders).
2) Where the trustee determines that amounts of income are of a particular character, such amounts retain that character upon being attributed to members.
3) The AMIT is able to carry forward its "unders" and "overs" to the year in which they are discovered. While this is in line with prevailing industry practice, the Bill will be the first occasion under which it has been accommodated by existing tax rules in Australia.
Trusts and MITs that do not qualify as an AMIT will continue to be taxed under the existing trust tax provisions in Division
6 of the Income Tax Assessment Act 1936 (Cth).
Seven rules that apply to the AMIT
More specifically, where a trust meets the AMIT eligibility conditions, it will become subject to seven sets of rules under the Bill as follows:
- An income attribution mechanism, which includes amounts in the assessable income of unitholders based on their entitlements as shown in a distribution statement provided by the trust and generally retains its tax character as it flows through the trust.
- A system to allow errors of amount at the trust level (referred to as "unders" and "overs") to be dealt with in the income year in which they are discovered, on a character by character basis.
Cost base adjustment rules to increase (or decrease, as applicable) the cost base of units for CGT purposes to reflect the difference between the amounts received by the unitholder and the amounts reflected in the distribution statements from the trust during an income year.
Certain debt-like trust units issued by the trust will be treated as debt, both for the trust and the unitholder, that is distributions in relation to those debt -like interest will be treated as interest for the purpose of interest withholding tax and may be treated as a deduction in working out the assessable income of the trust.
The ability of the trustee of an AMIT to make an irrevocable election to apply the AMIT rules on a class by class basis as
though each class of units were a separate AMIT and allocate tax attributes between classes on a fair and reasonable basis (thus allowing tax attributes of assets to be allocated to a class and ring-fenced to those interests, rather than requiring a master fund to set up separate trusts).
A special arm's length rule which can result in a 49% tax rate of tax payable by the trustee on non- arm's length income earned by a MIT (which by definition includes an AMIT).
The trust is deemed to be a fixed trust, which has implications for the trust loss and franking provisions.
Conclusion and next steps
The Bill creating the AMIT was passed by the Australian Senate on 4 May 2016 and now awaits Royal Assent .
If you have a question about the AMIT or would otherwise like to contact us, please do not hesitate to get in touch with a member of our team.
Supplementary information
Click here to read the Bill.
Click here to read the Explanatory Memorandum.
Click here to read our previous alert on Proposed new MIT tax rules.
For further information, please contact:
Astrid Raetze, Partner, Baker & McKenzie
astrid.raetze@bakermckenzie.com
