Review of the Tax Arrangements Applying to Managed Investment Trusts (Interim and Final reports)

Background

On 22 February 2008 the then Assistant Treasurer announced that he had asked the Board of Taxation to undertake a review of the tax arrangements applying to managed funds that operate as managed investment trusts. The Terms of Reference were completed via and interim and final report as detailed below.

Terms of Reference

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 the 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 was to provide advice on options for introducing a specific tax regime for managed investment trusts which would reduce complexity, increase certainty and minimise compliance costs.

Working Group, Discussion paper and Consultation

The Board appointed a working group of its members comprising John Emerson AM (Chairman), Keith James, Chris Jordan AO and Dick Warburton AO to oversee the Board’s review of the tax arrangements applying to managed investment trusts.

On 29 October 2008, the Board of Taxation released its discussion paper on the Review of the tax arrangements applying to managed investment trusts. The Chairman of the Board of Taxation announced the release of the discussion paper via a press release. The Board developed this discussion paper to facilitate stakeholder consultation. In developing the discussion paper the Board conducted targeted consultations with key stakeholders.

To assist in the Review process, the Board conducted consultation meetings in November 2008. Consultation meetings were held on 12 November 2008 in Melbourne and 13 November 2008 in Sydney. The consultation meetings were attended by representatives from taxation professional bodies, major law and accounting firms, various major corporations and business associations.

Interim Report

Following further targeted consultations with stakeholders between October and December 2008, the Board provided its interim advice to the Government in December 2008. The  interim advice recommended that the capital gains tax (CGT) regime be the primary code for calculating the gains and losses made on the disposal of investment assets held by MITs, subject to appropriate integrity rules.

On 12 May 2009, the then Assistant Treasurer announced that the Government would implement the Board of Taxation’s interim advice on the taxation of managed funds to provide deemed capital account treatment for gains and losses made on disposal of investment assets by managed investment trusts (MITs), subject to appropriate integrity rules.

This will provide greater certainty for MITs on the tax treatment of the disposal of assets. It will apply where an Australian MIT makes an irrevocable election to apply the capital gains tax (CGT) regime to disposals of eligible assets. Resident investors will be entitled to the CGT discount on eligible taxable gains distributed by MITs and non‑resident investors will be exempt from Australian tax on distributions of gains on disposal of eligible MIT assets unless the assets are taxable Australian property.

Final Board Report

The Board completed its review of the taxation arrangements applying to managed investment trusts and provided its report to the Assistant Treasurer in August 2009. In preparing its report the Board took into account the various submissions to the review, discussions with stakeholders and the consultants’ evaluations.

On 7 May 2010, the then Assistant Treasurer announced the release of the Board of Taxation’s report on its review of the tax arrangements applying to managed investment trusts.

The Board made 48 recommendations which seek to improve certainty and reduce compliance costs for the managed funds industry and assist the industry’s international competiveness. In responding to the report the then Assistant Treasurer announced that the “Government is accepting 38 of the Board’s 48 recommendations” and “will put in place a new tax system for Managed Investment Trusts for commencement on 1 July 2011.”

Further information on this review can be obtained from the Board of Taxation Secretariat on (02) 6263 4366 or at Taxboard@treasury.gov.au.

Submissions received