Managed Investment Trusts (MITs) are registered schemes established and managed by sophisticated Trustees holding an Australian Financial Services License. They enable investors to pool capital to collectively acquire large scale commercial, retail and industrial properties.
Operations are typically limited to passive investment income (leasing). Entities are typically set up as up as unit trusts which provides investors with clearly defined rights to income and capital, yet retaining access to Capital Gains Tax (CGT) concessions.
Taxation of Managed Investment Trusts
Trusts are not typically income tax paying entities, but rather thought of as a prism where income flows through to beneficiaries, retaining its source character.
In some instances the Trustee is assessed - where non-residents are presently entitled to trust income. Ordinarily, the Trustee is required to withhold tax on interest, royalty and dividend payments to non-resident beneficiaries. The Trustee is then assessed on behalf of the non-resident beneficiary on income from other sources.
MITs are attractive investment targets for non-residents, but dealing with the tax treatment of their trust income can be difficult. Distributions are usually paid frequently, in regular intervals throughout the course of the year. It is unlikely that a Trustee will know the composition of a beneficiary's net income, and the tax to pay/withhold - until the end of the year.
To counter this, qualifying MITs are eligible to withhold tax on trust payments to non-resident beneficiaries at a reduced rate. This rate is currently 15% for countries with an effective exchange of information agreements with Australia. For all other countries, the rate is set at 30%. This serves as a final tax on the trust income, simplifying tax concerns for non-resident beneficiaries.
MITs also have access to a capital election which ensures that certain assets are treated as if they are on capital account, providing additional certainty over the tax consequences of transactions.
By virtue of holding large scale commercial properties, MITs are typically eligible for large capital works tax deductions (i.e. amortisation of the original cost of building construction), which often leads to investors receiving a higher cash distribution than they are taxed on.
These differences are referred to as tax deferred amounts, and reduce the cost base of the units held by investors. This can give rise to an E4 capital gain where the cost base is completely exhausted by tax deferred amounts. E4 gains may be reduced by the CGT general discount for eligible entities.
Trusts are ordinarily taxed under Division 6 of the ITAA 36, including MITs.
There are eligibility requirements to access concessions specific to MITs. This prevents non-residents from purposely setting up structures to specifically qualify for concessional tax treatment. These include:
- Trustee is an Australian tax resident
- Trust is deriving passive income (i.e. is not a public trading trust)
- Trust is registered as a managed investment scheme
- Meets requirements that the trust is both widely held and not closely held
The material contained in this publication is in the nature of general comment and information only and is not advice. The material should not be relied upon. Please contact your local Moore Australia office to discuss your specific circumstances or case. Moore Australia, any Australian Member, any related entity of those persons, or any of their officers employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in this publication.