Australia: New Attribution MIT rules - practicalities of amending existing trust deeds

Key Points:

Just about every Trust Deed will require amendment so that the fund can operate effectively under the AMIT rules.

The new AMIT regime should very soon be law. The Senate Economics Legislation Committee has recommended that the Senate should pass the bill ‒ without amendment, but subject to a formal post implementation review, to be completed by 1 July 2018.

The AMIT regime has had a long gestation period and several iterations. Where we have arrived is in our view a good and workable system which accommodates contemporary funds practices. It is a significant advance on the arcane present entitlement based rules in Division 6, which were simply not designed with CIVs in mind.

It is now time to consider the practicalities of implementing the regime, and what amendments will be required for existing Trust Deeds ‒ which range from the nice-to-have to the essential.

The AMIT regime high points

The key features of the new regime are that:

  • An AMIT must be a MIT as defined ‒ it is in effect a special class of MIT which irrevocably elects into the AMIT regime.
  • In order to be eligible to elect into the AMIT regime, the rights of fund members to income and capital must be "clearly defined". There are statutory safe harbours, so that an AMIT that is a registered scheme where the rights to income and capital are the same throughout the relevant income year will qualify. Otherwise, one needs to look to the ordinary meaning of the "clearly defined" expression ‒ as expanded upon in the explanatory memorandum and ATO guidance.
  • A multiple class trust election may be irrevocably made by the trustee ‒ so that each class of membership interest is treated as a separate AMIT. This means that it is easier to give members of a fund exposure to particular asset classes within a single fund than is possible under the Division 6 tax regime.
  • The trustee must allocate trust attributes on a "fair and reasonable" basis. There is express character flow-through to investors. However, it is not possible to stream tax attributes to investors with particular tax profiles.
  • Qualifying AMITs will be regarded as fixed trusts ‒ this should avoid the uncertainty associated with applying certain tax rules which distinguish between fixed and non-fixed trusts, including the trust loss rules and the non-resident capital gains tax provisions.
  • Treatment of "unders" and "overs" is regulated ‒ the trustee can choose to reissue AMIT Member Annual Statements, or adjust in the year of discovery.

Should I elect into the regime?

The AMIT regime is elective. It applies from income years starting on or after 1 July 2016. There is an ability to opt in earlier ‒ from 1 July 2015, but only if the trust's income year starts on or after 1 July 2015.

In order to assess whether to opt in or not, trustees will need to ask themselves whether it would be consistent with the trustee's general law and statutory obligations including, for example, whether it would be in the best interests of members to do so. Failure to opt in means that the taxation of the fund and its members will continue to be governed by Division 6.

Going forward the ATO has indicated that for income years commencing after 1 July 2017, it may be less flexible in the administration of the Division 6 rules then currently is the case ‒ in particular in respect of the treatment of unders and overs.

On a more positive note, apart from avoiding the vagaries of Division 6, the AMIT rules offer funds a far greater degree of flexibility around the question of income entitlements and will permit more creative product outcomes. The ability to create multiple class trusts, backed by legislative certainty, should liberate new products.

What changes (if any) will the trustee need to make to the fund documents?

There is little doubt that just about every Trust Deed will require amendment in order that the fund should operate effectively under the AMIT rules. Some amendments, particularly around the clearly defined rights requirement, may be essential ‒ whereas others will be nice to have in order to ensure clarity in how the fund will operate in the AMIT regime.

To the extent that the fund trust deed is amended, it will be necessary to consider whether there has been a resettlement of the trust. In general terms, the resettlement risk will be higher where there are fundamental changes to the entitlements of members which go beyond what is required to qualify for the new AMIT rules.

Where the relevant fund is a registered managed investment scheme, the responsible entity will also need to carefully consider whether any required amendments to the fund constitution could be made unilaterally by the responsible entity or whether a unitholder meeting would be required pursuant to section 601GC of the Corporations Act (this question, broadly, will turn upon whether the amendments will adversely affect members' rights) . It may also be that ASIC will provide industry wide relief from the requirement to hold a unitholders' meeting to provide certainty and consistency of approach.

Clearly defined rights

The trust deed should not allow the trustee or fund manager discretionary distribution rights with respect to a member's capital or income entitlements. There should be an objective benchmark for attribution, which is set out in the constituent documents.

There are discretions which are commonly vested in a trustee, which the ATO has indicated are acceptable, for example the power to determine whether a receipt is income or capital for trust accounting purposes, powers to effect distributions otherwise than in cash and so on. If a power exists to materially diminish or expand a member's rights to income or capital, the ATO has indicated that it will not disqualify the trust from meeting the clearly defined rights test, unless the power is actually exercised.

Should the trustee retain the present entitlement drafting?

Existing drafting to accommodate the present entitlement rules in Division 6 should be maintained, subject to modification. There are two reasons for this. In the case of existing trusts, it may be that adjustments are required for prior years ‒ perhaps as a result of a prior period error or as a result of ATO action. Maintaining the existing distribution machinery in respect of prior periods will facilitate any such adjustment.

Also, there may be a risk that there will be future periods where the AMIT requirements are not satisfied by a fund. However, retaining the present entitlement rules so that they can be switched on should the fund cease to be an AMIT is sensible.

What language should be used for attribution?

There are a number of key considerations in determining the attribution language. The attribution system does not require a trustee to have regard to the amount of any actual distributions when determining attribution amounts. However, a trustee may decide to align attributed tax amounts to actual distributed cash.

The drafting becomes more complex when the trustee of a multi-class AMIT chooses that each of the classes of membership interest will be treated as a separate AMIT for the purposes of applying the rules. If that choice is made, the tax attributes of assets supporting a particular class can effectively be ring- fenced to the membership interests in that class, rather than spread over the AMIT as a whole. This means that for each class, careful consideration should be given to how similar (or how different) the objective benchmark will be for the trustee to attribute income and tax offsets to the members of that particular class.

Under and overs system

Specific drafting may be required to allow for the unders and the overs system to operate. For example, the trustee may be given specific powers to ensure that it can choose to reissue AMIT Member Annual Statements, or to adjust in the year of discovery, notwithstanding that a choice either way could result in different administrative costs for the AMIT and different costs for investors. However, prescriptive drafting should not be necessary. 

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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