The Assistant Treasurer, Minister for Competition Policy and Consumer Affairs, the Hon Chris Bowen MP, today announced that the Government has asked the Board of Taxation to review the taxation arrangements that apply to managed funds.
The Minister also released a consultation paper on interim changes to trading trust rules which apply to real estate investment trusts.
"Directing the Board of Taxation to undertake a review of the income tax arrangements applying to managed investment trusts is a key part of the Government's commitment to make Australia the financial services hub of Asia," Mr Bowen said.
This honours another election commitment by the Rudd Labor Government.
"The review will provide options for introducing a specific tax regime for managed investment trusts to reduce complexity, increase certainty and minimise compliance costs.
"This will allow the Government to implement reforms to enhance the international competitiveness of Australian managed funds to help ensure the future prosperity of the Australian economy."
In conducting the review, the Assistant Treasurer has asked the Board, within the broad policy framework for the taxation of trusts as outlined in the Terms of Reference, to consider:
- international developments especially those in the US, UK and Canada.
- alternatives to the use of present entitlement to determine the income tax liability of beneficiaries and trustees, but which also provide broadly similar taxation outcomes for beneficiaries, having regard to the costs and benefits of those options;
- the international competitiveness of Australia's real estate investment trusts; and
- the desirability of extending relevant aspects of the recommended changes to the tax arrangements for other trusts.
Included in the review will be options to reform the trading trust rules in Division 6C of the Income Tax Assessment Act 1936 which particularly affect real estate investment trusts.
"Pending the release of the Board's report, I have released a consultation paper on the interim measures to remove the more burdensome elements of Division 6C," Mr Bowen said.
The consultation paper covers:
- Ways to clarify the scope and meaning of investment in land for the purpose of deriving rent.
- A 25 per cent allowance for non-rental income from an investment in land could be created to clarify the meaning of ‘primarily' in the context of investing in land for the purpose, or primarily the purpose, of deriving rent.
- An expansion of the range of financial instruments that a trustee could trade or invest in without triggering company taxation.
"The consultation paper is available on the Treasury website at www.treasury.gov.au and I encourage interested stakeholders to get involved in the consultation process," Mr Bowen said.
The Board will conduct consultations and make recommendations on the appropriate tax treatment of managed funds in accordance with the attached Terms of Reference. It will provide a final report around the middle of 2009.
22 February 2008
Media Contact: James Cullen - 0409 719 879
Terms of reference for the Board of Taxation
Review of the tax arrangements applying to managed investment trusts
- The Board of Taxation is requested to review the current income tax arrangements applying to managed funds that operate as managed investment trusts (MITs). That is, managed funds that are widely held collective investment vehicles undertaking primarily passive investments.
- The broad policy framework for the taxation of trusts is to tax the beneficiary on their share of the net income of the trust, so that the trustee is only taxed on income that is not taxable in the hands of beneficiaries. Within this framework, the Board should ideally develop options for reform with taxation outcomes that are broadly consistent with five key policy principles:
- the tax treatment for trust beneficiaries who derive income from the trust should largely replicate the tax treatment for taxpayers as if they had derived the income directly;
- in recognition of the tax advantages available to trusts that are not available to companies deriving business income, flow through taxation of income from widely held trusts, such as managed investment trusts, should be limited to trusts undertaking activity that is primarily passive investment;
- beneficiaries should be assessable on their share of the net income of a trust whether it is paid or applied for their benefit, or they have a present right to call for immediate payment;
- the trustee should be liable to tax on the net income of the trust that is not assessable to beneficiaries in a particular income year; and
- trust losses should generally be trapped in the trust subject to limited special rules for their utilisation.
- The objective of the review is to provide advice on options for introducing a specific tax regime for MITs which would reduce complexity, increase certainty and minimise compliance costs. The Board is to have regard to the policy framework and principles outlined above, as well as the following:
- the current taxation treatment for trusts relies on the use of present entitlement to determine the income tax liability as between beneficiaries and trustees. The Board should explore alternatives that provide broadly similar taxation outcomes for beneficiaries, having regard to the costs and benefits of those options; and
- international developments in this area, especially those in the US, UK and Canada.
- The Board should also examine potential reforms to the eligible investment business rules in Division 6C of the Income Tax Assessment Act 1936 that, while not compromising the integrity of the corporate revenue tax base, would enhance:
- the international competitiveness of Australia's real estate investment trusts (REITs); and
- the capacity of Australia's managed funds industry to attract funds under management from other countries.
- The Board should also examine:
- whether there is a continuing need for the tax integrity rules in Division 6B of the Income Tax Assessment Act 1936, in light of the operation of the capital gains tax regime, dividend imputation and Division 6C;
- the costs and benefits of establishing a separate taxing regime for REITs; and
- the desirability of extending relevant aspects of the recommended changes to the tax arrangements for other trusts.
- The Board should complete its review by the middle of 2009.