The Government announced last year that it had decided to amend the income tax law to provide capital gains tax (CGT) rollover relief for managed investment funds that are required to restructure under the terms of the recently enacted Managed Investments Act 1998 (the MIA).
Following extensive consultation with industry, the Government has now decided to provide additional broad relief, for both funds and their members, from the income tax consequences of actions taken to comply with the MIA. The relief being provided relates only to MIA transitional arrangements. Broader trust and capital gains tax issues are being examined in the context of tax reform.
Some of the actions required by the MIA have the effect of extinguishing the existing trust and creating a new trust. The taxation consequences for the scheme could include, for example, (in addition to triggering CGT consequences) extinguishment of carry forward losses and administrative requirements such as lodgment of additional income tax returns. Scheme members could also be adversely affected by the realisation of their interests, resulting in a capital gain or loss, or the loss of any pre – CGT status.
Relief will be granted to funds which are unit trusts and which were in existence at 1 July 1998 (and to their members) from the taxation consequences of complying with the MIA.
Under the terms of the MIA, a single responsible entity (SRE) must be appointed instead of the previous two tier structure, comprising a management company and an independent trustee. The changes to be made to comply with the MIA require the combining of the roles of trustee and manager, and the replacement or substantial amendment of the trust deed of a scheme. Each of these acts can have the effect of creating a new trust and relief will be granted from the tax consequence of that creation so long as:
- the scheme is administered as a unit trust both before and after making the changes;
- the changes are made during the transitional period created by the MIA (between 1 July 1998 and 30 June 2000);
- the scheme is required to restructure as a result of the MIA, and does so in accordance with that Act.
Relief will also be granted in respect of changes to a trust deed not strictly required by the MIA with a view to improving the overall operation of the fund, so long as:
- the above criteria are met; and
- comparing the situation before and immediately after the change -
- the changes made by a scheme do not create shifts in value between members, or classes of members;
- the market value of members' rights is not reduced; and
- there has been no change in the membership of the scheme.
Concern has also been expressed about two other issues – the CGT treatment of a retiring trustee or manager, and the CGT consequences of a transfer of scheme property to an agent of the SRE. In both cases, however, the Government believes that the existing tax law applies appropriately. The Australian Taxation Office has undertaken to address these issues in a tax determination.
CANBERRA
12 March 1999
Contact Officers:
Matthew Guy
Assistant Treasurer’s Office
(03) 9650 7274
David Walker
Australian Taxation Office
(02) 6216 2221