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Australia Consults On New MIT Tax System

Tuesday, October 19, 2010

Australia’s Assistant Treasurer and Minister for Superannuation and Financial Services, Bill Shorten, has released a discussion paper on the design and implementation details of the government's new income tax system for managed investment trusts (MITs).

"This paper is one further step in the government's plan to overhaul the taxation treatment of MITs and remove uncertainties," said the Assistant Treasurer. "Once implemented, the government's reforms will increase certainty for managed funds, reduce complexity and lower costs for MITs and their investors."

Broadly, MITs are collective investment trusts that are listed, widely held or held by certain collective investment entities. Australian resident retail and wholesale unit trusts are both eligible to be an MIT.

Key features of the new MIT tax system include an elective 'attribution' system of taxation (in lieu of the present entitlement to income method), under which investors will be taxed only on the income that the trustee allocates to them on a fair and reasonable basis, consistent with their entitlements under the trust deed or the trust's constituent documents.

It will also establish the ability to deal with 'under' or 'over' distributions within a 5% cap so that trusts are not required to reissue distribution statements and investors are not required to revisit tax returns; and MIT unit holders will be able to make, in certain circumstances, upward adjustments to the cost base of their unit holdings to reduce the extent to which double taxation might otherwise arise. In addition, MITs will be treated as fixed trusts for various taxation law purposes, such as the trust loss rules.

Two major features of the government's new tax system for MITs have already been legislated. The trustee of a MIT can choose to apply the capital gains and losses regime to the disposal of eligible assets. Also, a reduced rate of final withholding tax (of 7.5%) applies to most foreign investors on fund payments from an MIT.

A substantial proportion of the investment management activities carried out in relation to the trust in respect of Australian assets under management should be undertaken in Australia, in order to attract the withholding tax concession. This is not necessary for capital account treatment.

The government announced the new tax system for MITs in May this year, and its changes are to have effect from July 1, 2011.

Submissions on the discussion paper are requested by November 15, 2010. A further round of public consultation on exposure draft legislation and associated explanatory materials is planned for later this year. It is expected that legislation will be introduced into the Parliament in the first half of 2011.