Managed Investment Trusts Tax Review

Chair : Jane Michie

MIT Review: Design

Professor Richard Vann

Topics to be covered

• Policy principles and terms of reference• Options and relationships• Public element• International element and tax treaties

Policy principles

• Same tax treatment as direct investment• Limited to primarily passive investment• Unitholders assessable if paid or right to receive• Trustee taxed on income not taxed to unitholders• Trust losses trapped in trust• Efficiency, equity, simplicity and trade-offs

Terms of reference

• Options for specific MIT regime• Alternatives to present entitlement• International developments• Reform Div 6C or separate REIT regime• Possible removal of Div 6B• Possible extension of new regime to trusts generally

Options

1. Distribution deduction

2. Beneficiary assessment, trustee exempt

3. Beneficiary assessment, trustee exempt if distribution condition (90%) met

4. Current approach with fixes• Issues

– Cash flow: why?– Issues largely remain the same

Relationships

• Div 6 repaired and MIT (with or without separate REIT regime)

• Div 6 and Div 6C both repaired• Div 6 replaced with new trust general regime plus

new Div 6C for trust/company border• Div 6B seems to be gone

– no argument in paper for retention

Public element

• Only necessary for trust/company border– If separate MIT regime based on public test, how

to deal with wholesale trusts– No intention to change current position of

discretionary trusts

International elements

• Competitiveness– Analysis of separate regimes– Danger of misuse

• Capital revenue• One class of units• Public• Turnover related rents• Business

Separate REIT regime?

• Common attributes overseas – ‘generally’:

– deductible distributions or transparency

– predominant focus on real estate – min. 70-90% rent

– income or assets test or both

• ‘A number’ of countries:

– expressly exclude profits based rents & payments for non-ancillary/non-customary services

• ‘Some’ countries:

– de minimis rules for:

• non-real estate income• income from ‘residual’ non-passive activity

– taxed like companies but exempt on eligible income distributed

– allowed minimal income retention

Separate MIT regime?

• Common attributes overseas – ‘similarities’:

– emphasis on passive activity eg investing in shares & securities

– widely held or listed

– minimum distribution requirement

– effective exemption for distributed income

– character retention for capital gains

• Others:

– UK taxes eligible income at a lower rate

– both corporate and trust entities (‘some countries’)

Tax treaties

• Company versus trust approach– single stream of income– treaty benefits at MIT level– how to deal with pension funds– how to deal with existing treaties (UK etc)

• OECD work– solutions for both company and trust vehicles– qualified intermediary approach

International considerations

• What issues are currently experienced under Australian

domestic law and treaties with the operation of international

rules for MITs

• Would there be advantages in having a deemed corporate flow-

through CIV regime for international reasons

Question 5.1

MIT Review: classifying and clarifying

Andrew Mills

Topics

• A new Div 6C?– control test– active/passive

• Capital/Revenue– disposals of trust assets– disposals by investors

• Fixed Trust definition/widely held trust

Control Test

• Already allowed by Div 6C

49%

MIT

BHP-B Equities

Control

• Already allowed, subject to Div 6B

51% 49%

MIT

BHP-BSub Equities

BHP-B

Control Test

• Already allowed by ‘top-hat’ changes

100%

MIT Sub

US REIT

Staple Co

MIT

Taxable REIT Sub

100%

Active business

100%

Active Business

Control test

• Already allowed - escapes Div 6C

100%

Interest & rent

MIT

Active business

Staple Co

100% common owners

Control Test

• not allowed under 6C

Super funds

MIT

trading business

other investors

20%+

Div 6C

• Penalty for non-compliance

Day 1 Failure to comply (ongoing)

Year 3 Identification & disclosure of failure

Also correct error

Year 4 ATO assessment of fund

Amendment of investor assessments

= too late to frank years 1 & 2

Active/passive divide

• Not currently allowed – royalties

Bank Equities Building

MIT

Medical processMining licence

Brand nameother IP

Interest RoyaltiesRentDividends

Eligible business - Div 6C

• How to change the eligible investment rules to reduce

compliance costs & enhance international

competitiveness

• Abolish control test or replace it with:

– max. % investment in trading entities; or

– arm’s length terms requirement

• Should non-compliance result in tax on only the

‘tainted’ income and how

• Costs and benefits of a separate REIT regime

• Whether 20% complying super fund rule still

appropriate

Questions 9.1-3

Capital/Revenue

• Policy?– replicating direct investors– discount capital gains?

• Implications – domestic and international investors• Treatment of Units• Statutory Rules

15% / 30%tax

Discount / exemption

Capital/revenue

• Structural bias

Non-resident

Super fund

MIT Equities

Equities

Non-resident witholdingDistribution Withholding rate

Interest paid to non-resident 10%

Franked dividend paid to non-resident Nil

Unfranked dividend paid to treaty country resident 15%

Unfranked dividend paid to non-treaty country resident 30%

Rent income paid to information exchange country 22.5% non-final,15%-7.5% final

Rent income gain paid to non-info. exchange country 30%

Royalty paid to a resident of a treaty country 10%

Royalty paid to a resident of a non-treaty country 30%

Australian source capital gain paid to non-resident Nil

Australian source revenue gain paid to a non-resident 30%

Capital/revenue

(a) How capital/revenue principles applied & whether consistently across different industry sectors …

(c) What considerations support a statutory rule putting gains & losses on “certain investment assets (shares, units in unit trusts and real property)” on capital account

(d) Whether an irrevocable election for this treatment…

(g) Whether a statutory rule for gains distributed to complying super funds to be on capital account

(h) Should different considerations apply to Private Equity funds

Question 7.1

Fixed Trust definition

• current interpretation – vested & indefeasible• risk areas – allocation of gains for exiting unitholders;

buy/sell margins?• implications

– losses– franking credits– scrip for scrip

• relevance to Review – fixing perceived issues; to be used as basis for definition of MIT?

Defining the scope

• How to define ‘widely held’ for the purpose of any new

regime

• Allow different classes on interests?

• Allow an irrevocable election into the MIT regime?

• Carve out IDPSs (where investors have absolute entitlement to specific assets) or provide special rules for them?

• Whether any options for change for MITs should be extended to other trusts Question 12.1

Questions 11.1&2