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Australia Redefines MITs

Tuesday, June 1, 2010

The Australian government has introduced legislation into parliament that will amend the definition of a managed investment trust (MIT) for access to withholding tax concessions, to more closely align the definition used across different parts of the tax law.

The legislation follows the government's comprehensive overhaul of the MIT regime through the development of a new tax system for MITs to start in July 2011; the passage of legislation to allow MITs to make an election to be treated on capital account; and the significant reductions in certain MIT withholding rates from 30% to 7.5% by 2010-11.

The latest reform follows extensive consultation with industry on earlier draft legislation. "These changes will better align the definition of an MIT across the relevant tax laws,” Assistant Treasurer, Nick Sherry, said, “but will also, subject to appropriate integrity measures, see wider access to MIT concessions for certain wholesale trusts, including certain domestic private equity entities."

The new definition of an MIT will apply for both withholding tax and the capital account election, and additionally includes the ability, for the first time, for wholesale unregistered managed investment schemes and government-owned managed investment schemes, commonly referred to as wholesale funds, to be treated as a MIT.

There will be a reduced membership rule threshold for these wholesale funds, with the minimum number of members required to meet the MIT definition falling from 50 to 30; and a special rule for counting the number of members that can be attributed to holdings by superannuation funds and specific other collective investment vehicles to determine whether the wholesale fund is widely held.

A greater flexibility for MITs will be allowed to apply an alternative test to the widely held test during start-up and wind-down phases, to better reflect the fact that MITs may have certain different characteristics during those phases.

"This package of changes will ensure access to the new MIT regime for a range of trusts that were previously either excluded or whose access was in question," the Assistant Treasurer added. "This will help to simplify tax laws and reduce compliance costs for the managed funds industry."

The new legislation also contains a number of integrity measures aimed at ensuring access to the MIT withholding tax arrangements and capital account election rules is focused on trusts that are appropriately widely held collective investment vehicles carrying on passive investment activities.

As such, the new definition includes a requirement that a retail MIT be either a listed trust or have 50 or more members to qualify as a widely held MIT, and that those 50 members be direct members of that retail MIT rather than traced members of investors in the retail MIT.

In addition, there will be a cap on individual foreign resident ownership of no more than 10% of the fund to be applied as a requirement to qualify as an MIT, together with a requirement that the fund is only engaged in passive investment activities – broadly that it is not a trading trust.

Furthermore, to support the Australian funds management industry, the new definition includes a requirement, for MIT withholding tax purposes, that the investment management activities of the fund are carried out in Australia.

There are transitional arrangements in that the legislation includes a special rule so that these changes to the definition of an MIT will not unfairly disadvantage existing investors and funds that qualified as MITs for withholding tax purposes prior to these changes. Such funds will still be able to qualify as MITs for withholding tax purposes for the next five years.

"Overall the amendments introduced today will support the Australian funds management industry and further boost Australia's ability to attract and retain foreign capital," Sherry concluded.