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07 May 2010

Managed investment trusts get new tax regime from 1 July 2011

Significant changes to the taxation of managed investment trusts will be in place by 1 July 2011, which should lead to greater certainty, reduced compliance costs, and (in some cases) less tax payable. The Assistant Treasurer Senator Nick Sherry announced the changes today at an IFSA event held at Clayton Utz' Sydney office.

The four changes form part of the Federal Government's response to the Board of Taxation's report into tax arrangements applying to MITs. Of the 48 recommendations made by the report, the Government has accepted 38.

Attribution, not entitlement, as basis for taxation

Currently, investors can be assessed on capital gains paid to other beneficiaries or retained by the trust. The Federal Government will replace the system based on entitlements with one based on attribution.

MITS with investor beneficiaries with clearly defined rights/entitlements under the trust’s constituent documents will be able to elect to use an attribution system of taxation as a basis for determining when an investor is liable to taxation. Those investors will only assessable on the taxable income that the trustee allocates to them on a fair and reasonable basis, consistent with their entitlements under the trust deed or the trust constituent documents.

"Over or under" distributions

The Federal Government will introduce a legislated carry-forward system for all MITs to deal with “over or under” distributions within a five per cent cap, meaning that MITs will not have to reissue statements or investors revisit their tax returns.

Removing double taxation

There's a potential for double taxation when the distribution to unit-holders is less than their share in the trust's taxable income.

To deal with this, the Federal Government will complement the existing capital gains downward cost base adjustment with an upward cost base adjustment in some circumstances.

Abolition of Division 6B ITAA

The Board of Taxation identified Division 6B of the Income Tax Assessment Act 1936, which relates to corporate unit trusts, as surplus to requirements and it will be repealed. As well, certain complementary amendments are to be made to Division 6C of the Income Tax Assessment Act 1936.

What's coming

The next step is a consultation process on the implementation of these four reforms. The Assistant Treasurer said that a paper on detailed design issues will be released for consultation soon.

Of the Board of Taxation's remaining recommendations, the Federal Government is planning to consider those at some stage in the future and issue a response.

Also on the horizon for MITs are a proposed change to their definition, and allowing them to elect to have the capital gains tax regime as the primary code for taxing gains and losses on the disposal of key investments.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.