Australia: Proposed changes to Investment Manager Regime and Attribution Managed Investment Trust taxation rules

Last Updated: 24 July 2017
Article by Peter Feros

Further refinements to the Investment Manager Regime (IMR) and the Attribution Managed Investment Trust (AMIT) Rules announced this week should give some further clarity to foreign funds seeking to appoint an independent Australian funds manager of their Australian investments, and to trustees and managers of AMITs and managed investment trusts (MITs) (as well as investors in them). That clarity however is not without some reservations, and you'll need to carefully consider how the various regimes affect you.

Investment Manager Regime - addressing uncertainty

After what has been a long journey that began in September 2008 when the Government commissioned the Johnson Report, the IMR has evolved significantly (most notably in 2015), but the question remains - are we there yet?

The further proposed changes to the IMR are to clarify when a foreign fund, which otherwise meet the relevant qualification requirements for the IMR, will obtain the same tax treatment as a direct investment where they invest through an independent Australian fund manager. The proposed change (if enacted) will apply from 1 July 2015.

The Government will also seek stakeholder views on the need for a legislative change to ensure that a foreign fund which is genuinely established and controlled offshore will not become an Australian tax resident merely because it has engaged an independent Australian fund manager.

The proposed change (together with the potential clarification of the residence position of the foreign fund) is therefore a welcome technical clarification. The relevance of this clarification is made more significant given recent case law (Bywater Investments Limited v Commissioner of Taxation [2016] HCA 45; 2016 ATC 20-589 and the Australian Taxation Office draft ruling, TR 2017/D2, which raised potential issues of Australian tax residence for legal entities previously thought to be foreign tax residents.

Attribution Managed Investment Trust - technical tidy-ups

The Australian funds management industry as well as private equity, infrastructure and property investors have also been on a long journey with the various changes to the rules for MITs and AMITs over recent years.

With the prospect of further legislative reform in the context of infrastructure and stapled structures, it is difficult to conclude that we are there as far as settling the myriad issues which have emerged on this near decade-long legislative journey.

However, the further round of proposed changes would appear to clarify a number of important technical issues:

The treatment of tax deferred distributions in the hands of investors will be aligned as between MITs and AMITs. As a result of the proposed changes, investors in MITs receiving tax deferred distributions (being tax deferred because of the use of capital losses in the MIT or a lower tier trust) will need to adjust their cost base for such tax deferred amounts and include those amounts in calculating gains for the purposes of CGT Event E4.

MITs with an income year starting on a date other than 1 July can now opt into the AMIT regime from its first full income year starting on or after 1 July 2015, subject to meeting the appropriate eligibility criteria. This corrects an existing technical issue which prevents early balancing trusts from opting into the AMIT regime early.

There is to be a closer alignment of investing in taxable Australian property (TAP) (including land and interests in land) directly or via a MIT or AMIT. In broad terms, this is to be achieved by ensuring that "fund payments" (ie. amounts subject to MIT withholding) are to be calculated on TAP net capital gains only (among other things, this means that non-TAP capital losses will not be able to "shelter" TAP capital gains for non-resident investors).

The law will be clarified so that MIT withholding is to be calculated on amounts deemed to be paid for tax purposes, and not just distributed in cash.

The meaning of "AMIT" will be expanded so that single unitholder widely held entities can access the AMIT regime. This change will not permit single unitholder MITs to be a withholding MIT. It will also not apply to platforms, wraps or master trusts (commonly referred to as Investor Directed Portfolio Services) but the Government will consult with industry on broadening the eligibility for these widely held entities to access the concessional tracing rules as part of the Corporate Collective Investment Vehicle public consultation process.

Transitional rules that allow certain distributions from trusts that ceased to be public trading trusts or corporate unit trusts as a consequence of the AMIT reforms to be treated as franked distributions will operate so that:

  • franking credits of the trust are not cancelled when it ceases to be a corporate unit trust or public trading trust;
  • franking credits cannot be attached to distributions of post-30 June 2016 income; and
  • in the case of a trust that ceases to be a corporate unit trust, the distribution will retain the character of a unit trust dividend when it is paid to a unit holder.

The rounding adjustment and trustee shortfall tax provisions in the income tax law will be amended to ensure that discount capital gains are properly taken into account under the AMIT unders and overs regime. Essentially, the unders and overs regime allows for a variance to be reconciled in the income year in which the variance is discovered.

CGT event E10 will now clearly happen without the need for a cost base reduction in an income year where the cost base of the asset is nil at the start of that income year. This amendment will address an interpretive issue that has arisen suggesting that CGT event E10 cannot happen in this scenario.

Next steps on the IMR or AMIT journey

So, are we there yet? As long as a fund and fund manager meet the stringent qualification requirements for fitting into the IMR, we think that the answer is a "yes". However, many foreign funds and Australian will not qualify under the IMR. For example, if the foreign fund has a more than 10% associate inclusive interest, the proposed amendment will not change anything for the fund because it would still fail to qualify under the IMR. Accordingly, foreign funds and Australian fund managers will need to carefully review their facts and circumstances before seeking to rely on the IMR.

With AMIT, the answer is "not quite". As trustees and responsible entities consider the appropriateness of the AMIT regime to their circumstances or are already in the regime, it is important that these kinds of technical issues are addressed quickly. As more taxpayers opt into the AMIT regime, other technical issues may well emerge. Real time communication between Treasury, the ATO and industry will continue to be of importance to reduce the risk of unintended tax outcomes.

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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