Taxation of certain unit trusts - 'attribution' model to replace 'present entitlement'

In brief

Written by Managing Associate Thomas McAuliffe

You may be forgiven for having lost track of the proposed reforms to the taxation of managed investment trusts (or MITs) given that this initiative has been 'announced' by successive Federal governments since 2010. After several deferrals of the expected commencement date for the new regime, it is time to refocus on these changes as we are expecting an exposure draft of the new legislation to be released before Christmas.

An ambitious timeline?

At this stage the Government seems to be aiming for a commencement date of 1 July 2015, although that seems overly ambitious to us (at least in respect of existing trusts) given the revolutionary nature of the proposed changes.

A third regime for MITs

We already have two special regimes for MITs: one which provides concessional withholding tax rates for distributions by MITs of certain types of income to foreign investors, and another which allows for gains realised by a MIT from disposing of certain types of assets to be taxed on capital account rather than revenue account (which is important for enabling unitholders to access the CGT discount and also for clarifying the basis on which non-resident unitholders are subject to Australian tax in respect of such gains). It is now proposed that there will be a third special regime for MITs which is intended to provide greater certainty as to the tax transparency (or flow through treatment) of qualifying MITs. Instead of trustees and their advisers having to grapple with the troublesome concepts of 'present entitlement' and 'trust income' (as opposed to 'taxable income'), each unitholder's share of the taxable income of the trust will be attributed to them on a basis to be determined by the trustee which, unsurprisingly, must be fair and reasonable and consistent with the members' rights under the trust's constituent documents. Trustees will also be able to take advantage of certain measures intended to smooth over some of the practical difficulties of administering a unit trust from a tax perspective.

'Clearly defined rights' requirement

However, these new measures will not apply to all trusts nor even to all MITs. They will only apply to MITs in respect of which the unitholders have 'clearly defined rights'. The extent to which the constituent documents of existing trusts will need to be amended in order for them to be regarded as conferring 'clearly defined rights' on the members of the trust, and any consequential issues (such as the risk of triggering a resettlement by making such amendments), will be a key area of focus for us.

Other implications

There will be other implications in relation to the compliance and reporting requirements for affected trusts, as well as how the new rules should be explained to prospective investors in offering documents. We will be providing further updates once the exposure draft has been released. In the meantime, some more detail is contained in an excellent article published by Katrina Parkyn earlier this year – Focus: Managed investment trusts – the new regime.