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Managed Investment Trusts Tax Review

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.

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Managed Investment Trusts Tax Review

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  1. Managed Investment Trusts Tax Review Chair : Jane Michie

  2. MIT Review: Design Professor Richard Vann

  3. Topics to be covered • Policy principles and terms of reference • Options and relationships • Public element • International element and tax treaties

  4. 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

  5. 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

  6. Options • Distribution deduction • Beneficiary assessment, trustee exempt • Beneficiary assessment, trustee exempt if distribution condition (90%) met • Current approach with fixes • Issues • Cash flow: why? • Issues largely remain the same

  7. 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

  8. 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

  9. International elements • Competitiveness • Analysis of separate regimes • Danger of misuse • Capital revenue • One class of units • Public • Turnover related rents • Business

  10. 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

  11. 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’)

  12. 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

  13. 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

  14. MIT Review: classifying and clarifying Andrew Mills

  15. Topics • A new Div 6C? • control test • active/passive • Capital/Revenue • disposals of trust assets • disposals by investors • Fixed Trust definition/widely held trust

  16. Control Test • Already allowed by Div 6C MIT 49% BHP-B Equities

  17. Control • Already allowed, subject to Div 6B BHP-B MIT 51% 49% BHP-BSub Equities

  18. Control Test • Already allowed by ‘top-hat’ changes MIT Staple Co MIT Sub 100% 100% US REIT Active business 100% Taxable REIT Sub Active Business

  19. Control test • Already allowed - escapes Div 6C 100% common owners Staple Co MIT 100% Interest & rent Active business

  20. Control Test • not allowed under 6C Super funds other investors 20%+ MIT trading business

  21. 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

  22. Active/passive divide • Not currently allowed – royalties MIT Interest Dividends Rent Royalties Building Medical processMining licenceBrand nameother IP Bank Equities    

  23. 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

  24. Capital/Revenue • Policy? • replicating direct investors • discount capital gains? • Implications – domestic and international investors • Treatment of Units • Statutory Rules

  25. Capital/revenue • Structural bias Super fund Non-resident 15% / 30% tax Discount / exemption MIT Equities Equities

  26. Non-resident witholding

  27. 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

  28. 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?

  29. 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 Questions 11.1&2 Question 12.1

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