On Monday 5 August 2013, Assistant Treasurer David Bradbury announced changes to the under/over attribution and arms length rule in the proposed new tax system for managed investment trusts (MITs) in response to concerns raised by the funds management industry. For details of the originally proposed MIT system please refer to a previous MTN article located here.
Under / Over Changes
The changes to the proposed under/over attribution regime relate to unders/overs that are greater than the de minimus limits, as follows:
- In the case of an 'under' that is in excess of the de minimis, where the trustee did not cause the under intentionally, the trustee may either issue revised distribution statements to beneficiaries or carry forward the 'under' into the next year. However, the 'under' will be uplifted at the general interest charge rate. The trustee may face an administrative penalty where the trustee causes the 'under' carelessly (up to 25 per cent of the 'under') or recklessly (up to 50 per cent of the 'under').
- In the case of an 'over' that is in excess of the de minimis, where the trustee does not cause the 'over' intentionally, the trustee may either issue revised distribution statements to beneficiaries or carry the 'over' into the next year.. The trustee may face an administrative penalty where the trustee causes the 'over' carelessly (up to the greater of 20 penalty units or 10 per cent of the 'over') or recklessly (up to the greater of 40 penalty units and 20 per cent of the 'over').
- Where the trustee intentionally causes an 'under' or 'over' in excess of the de minimis, the trustee must issue revised distribution statements to beneficiaries. An administrative penalty may also apply to the trustee (up to 75 per cent of the 'under'; or up to the greater of 60 penalty units and 30 per cent of the 'over').
A penalty unit is currently $170 per unit.
As you can see, whilst the proposed changes provide a workable solution to legitimise the current industry practice for the treatment of under/over attribution, it will introduce added complexity to the calculation of taxable income in future years where there is an under. The under/over will also be required to be reported in the MITs tax return.
It will also be important to ensure that you have appropriate processes in place at year end to demonstrate that you are not careless or reckless and that you have not intentionally caused an 'under' or 'over'.
Arms length rule changes
Stapled securities will welcome the proposed changes to the arms length rule. The proposed changes:
- carve out two types of services from the application of the proposed arm's length rule between a MIT and an associate of the MIT where the services have been provided between cost and market value. These are:
- services provided by a related entity to an MIT that the MIT could perform itself without breaching the eligible investment business (EIB) rules; and
- services provided by the responsible entity of a MIT to the MIT that it could perform itself without breaching the EIB rules but cannot perform due to the requirements in the Corporations Act 2001.
The Government will soon release an exposure draft legislation to reflect the changes.
The Government has confirmed that it will continue to consult with industry following the election to ensure that the MIT Withholding Tax Regime operates as intended in order to provide certainty and maintain the integrity of the Regime as well as having regard to current industry practice. This consultation will include:
- the announcement in February 2013 to amend the income tax law to ensure foreign pension funds can access the MIT withholding tax regime.
- circumstances where a non resident's share of net income exceeds the distribution amount. The ATO had previously flagged its concern that any taxable income in excess of the fund payment amount may be assessable to the trustee.
These proposed changes are expected to apply from 1 July 2014.
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