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
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.