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SUMMARY
• Apply 1 July 2016 with ability to opt in early (1 July 2015) [TBC]• Main changes:
– clearly defined interests– unders and overs– arm’s length test– attribution (although not dissimilar to Bamford position for residents)– debt like instruments (has narrow application)– cost base increase if amount attributed exceeds cash distribution– can make irrevocable election to treat a class of units as if a separate AMIT
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SUMMARY (CONT)
• Trustee tax more likely– any attributed amount not subject to MIT WHT (at beneficiary rate)– sum of components less than taxable income – franking credit over exceeds franking credits in discovery year– excessive income earned from non-arm’s length transactions– beneficiary successfully contests allocation– unders not carried forward
• Changes to MIT qualification– Changes to QI list (apply from 1 July 2014)
• foreign life companies• entities wholly owned by one or more QIs (or their wholly owned subs)
– Temporary breaches permitted if circumstances outside control of trustee
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MIT DEFINITION
1. Attribution MIT Per current definition (except for IMA Test) plus CDI
2. Withholding MIT Basically no change (ie a MIT that satisfies the IMA test)
3. CGT MIT Basically no change (ie a MIT but does not need CDI or to satisfy the IMA test)
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MIT DEFINITION (CONT)
1. Attribution MIT (AMIT)– Gets all benefits of MIT rules (attribution, arm’s length test, unders/overs, cost
base uplifts and CGT election)– Deemed fixed trust treatment– A wholly owned sub trust of an AMIT can also be an AMIT if it satisfies the
licencing requirements and has CDI2. MIT (non-AMIT)
– Continues to be taxed under Division 6 and can make CGT election– Can get MIT WHT rates if a Withholding MIT
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CLEARLY DEFINED INTERESTS
• Two tests• For registered MIS:
– the amount of each member component for each member can be worked out on a fair and reasonable basis
– the right of each member to income and capital of the trust cannot be materially diminished through exercise of a power or right
• For unregistered MIS, per registered MIS plus:– Trustee obliged to treat members of same class equally and different class
fairly– Constituent documents only modified, repealed or replaced by resolution that
would satisfy the voting requirements of a special resolution or an extraordinary resolution (unless no adverse impact)
• Commissioner discretion available
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UNDERS AND OVERS
• Unders and overs can be carried forward by component if insufficient other income characters to allocate to during the year
• Material if greater than– 5% of taxable income– 0.4% of net assets
• Material unders must be uplifted by SIC rate at end of income year (unless in a loss position)– this is a rolling 4 year test– no reversal if fall under threshold in subsequent year
• Must keep a running balance for trust components• Choice to reissue statements if under/over is material • Excess tax offset overs are taxable if franking credits or increase foreign source
income is FITOs (grossed up by corporate tax rate)
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ARM’S LENGTH TEST
• Trustee taxed at 47% on excessive income from entity that is not a MIT if non-arm’s length
• Can reduce by direct expenses• Amount attributed to unitholders is reduced by the excess amount• There is a safe harbour for debt interests (base interest rate + 3% or benchmark
interest rate)• Transitional rule; If scheme entered into before Bill introduced into Parliament the
ALR won’t apply to that scheme until 1 July 2017
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ATTRIBUTION
• No need to distribute• Calculate taxable income as follows:
– calculate by component– can claim CGT discount (but added back by member in their own hands)– allocate expenses on direct v indirect basis– excess unders allocated pro-rata to other income classes
• Attribute taxable income on reasonable basis taking into account– constitution– can’t stream based on tax characteristics– can stream CGT on redemptions
• Unitholder can contest attribution if basis adopted unreasonable• Cost base uplift if attributed amount exceeds cash received
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ATTRIBUTION (CONT)
• Non resident WHT – withhold from amount distributed– if insufficient distribution, trustee pays tax (at WHT rate)– Trustee tax only applies to direct holdings or holdings via custodian– rules also apply to attributed dividends, interest and royalties (including
reporting obligations for interposed entities)
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OTHER
• Obligation to give AMMA statement– within 3 months of year end– must be in approved form– failure results in administrative penalty
• Penalties for material unders and overs if intentional disregard or recklessness– 47% x penalty rate x shortfall– penalty rate is 75% / 50% for unders or 30% / 20% for overs
• Division 6C amendment for super funds from 1 July 2015• Division 6B to be repealed from 1 July 2015
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TRANSITIONAL
• Unders / overs– treat as unders/overs in first year as a MIT– if discovered after commencement date, treated as unders/overs in discovery
year (no uplift applies if material)• Moving between MIT and Division 6
– unders/overs while in Division 6 dealt with in accordance with Division 6– unders/overs while MIT can be carried forward (including while in Division 6).
Note that capital gain treated as ordinary income.
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KEY ISSUES
1. Monitor transitional MITs 2. Review trust deeds to confirm CDI3. MIT qualification
– confirm MIS status of trusts
4. Unders/overs– identify amounts to be transitioned into MIT rules– systems changes will be required (running balance)
5. Arm’s length test– review loans by MITs, guarantees, leases with associates, etc (remember
there is a transitional rule though!)
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KEY ISSUES (CONT)
6. Attribution– trustee can still be assessed if sub 840-M does not apply to the amount
attributed to a non-resident– new definition of fund payment in Division 12A for AMITs
7. Sub trusts– impact on MIT status if used as a JV vehicle– blending of capital losses (although only an issue for WHT MITs)– will they be MITs (must meet licencing requirements)
8. MIT withholding tax issues– fund payment > cash– non-resident trust investors– NTAP capital losses
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The contents of this publication, current at the date of publication set out in this document, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstancesshould always be sought separately before taking any action based on this publication.
© 2014 Greenwoods & Herbert Smith Freehills Pty Limited ABN 60 003 146 852
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www.greenwoods.com.au
The contents of this publication, current at the date of publication set out in this document, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstancesshould always be sought separately before taking any action based on this publication.
© 2014 Greenwoods & Herbert Smith Freehills Pty Limited ABN 60 003 146 852
SYDNEYANZ Tower, 161 Castlereagh StreetSydney NSW 2000T +61 2 9225 5955F +61 2 9221 6516
MELBOURNE101 Collins StreetMelbourne VIC 3000T +61 3 9288 1881F +61 3 9228 1828
PERTHQV.1 Building, 250 St Georges TerracePerth WA 8000T +61 8 9211 7770F +61 8 9211 7755
www.greenwoods.com.au
