Assistant Treasurer David Bradbury today announced two further changes to the proposed new tax system for managed investment trusts (MITs) in response to issues raised by the MIT industry in the course of consultation.
"These changes will further reduce compliance costs under the new regime and provide certainty to taxpayers," said Mr Bradbury.
The changes relate to the under or over attribution of net income that is in excess of the de minimis threshold as well as the application of the proposed arm's length rule, which is aimed at preventing the circumvention of the eligible investment business (EIB) rules and protecting the corporate tax base.
The changes address concerns that the proposed tax treatment of the under or over attribution of net income may be unreasonable under certain circumstances when compared to the tax profile of many MIT investors as well as concerns that the proposed arm's length rule unnecessarily applies to certain services provided to a MIT by a related entity. To address these issues, the Government will:
- allow an under or over attribution of net income in excess of the de minimis that is not caused intentionally by the trustee to be carried forward, subject to certain integrity measures; and
- carve out certain services from the application of the proposed arm's length rule between a MIT and an associate of the MIT.
Further detail on the changes can be found in the Attachment. These changes will be reflected in the exposure draft legislation.
Ongoing consultation in relation to the application of the MIT Withholding Tax Regime
Following the Government's earlier announcement of changes to the MIT Withholding Tax Regime as it applies to foreign pension funds, the Government also confirmed that it would continue to consult with industry following the election to ensure that the MIT Withholding Tax Regime operates as intended in a way that provides certainty and maintains the integrity of the Regime and having regard to current industry practice. This includes in relation to circumstances where a non‑resident's share of net income exceeds the distribution amount.
The Government intends to consult on and finalise these issues as part of the continued consultation on the new tax system for MITs.
Attachment — Details of the adjustments to the new tax system for managed invesment trusts
On 7 May 2010, the Government announced that it would introduce reforms to the tax arrangements for managed investment trusts (MITs). The new tax system for MITs included the following features:
- An 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); and
- Where an under exceeds the de minimis, the trustee will be assessed on the amount of tax shortfall at the top marginal tax rate if the trustee does not re-issue distribution or attribution statements to its beneficiaries.
- Where an over exceeds the de minimis, the trustee must re-issue distribution or attribution statements to its beneficiaries.
- An arm's length rule that would apply to all transactions between common interests or related interests of a MIT, to ensure that entities could not circumvent the eligible investment business (EIB) rules.
Changes to the treatment of an under or over attribution of net income
Unintentional under in excess of the de minimis
In the case of an under in excess of the de minimis where the trustee did not cause the under intentionally, the trustee may either issue revised distribution or attribution statements to beneficiaries or carry forward the amount of the under into the income year following identification.
The under will be uplifted at the general interest charge rate and included in the net income of the MIT in the income year following identification. If the MIT does not have net income in that year, the under is uplifted and carried forward into the earliest year in which the MIT has net income.
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).
Unintentional over in excess of the de minimis
In the case of an over in excess of the de minimis where the trustee did not cause the over intentionally, the trustee may either issue revised distribution or attribution statements to beneficiaries or carry forward the over into the income year following identification.
The trustee may face an administrative penalty where the trustee causes the over carelessly (up to the greater of 20 penalty units and 10 per cent of the over) or recklessly (up to the greater of 40 penalty units and 20 per cent of the over).
Intentional under or over in excess of the de minimis
Where the trustee intentionally causes an under or over in excess of the de minimis, the trustee must issue revised distribution or attribution statements to beneficiaries. In addition, an administrative penalty may 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).
Reporting requirements
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.
Changes to the application of the arm's length rule
Consistent with the policy rationale for introducing the arm's length rule and the overarching policy objective of the new tax system for MITs, two types of services provided to a MIT by an associate entity of the MIT will be carved out from the application of the arm's length rule where they have been provided between at cost and market value. These are:
- 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 the requirements in the Corporations Act 2001.