Managed Investment Trusts Tax Review

1
Managed Investment Trusts Tax Review

• Chair Jane Michie

2
MIT Review Design

• Professor Richard Vann

3
Topics to be covered

• Policy principles and terms of reference
• Options and relationships
• Public element
• International element and tax treaties

4
Policy principles

• Same tax treatment as direct investment
• Limited to primarily passive investment
• Unitholders assessable if paid or right to
  receive
• Trustee taxed on income not taxed to unitholders
• Trust losses trapped in trust
• Efficiency, equity, simplicity and trade-offs

5
Terms of reference

• Options for specific MIT regime
• Alternatives to present entitlement
• International developments
• Reform Div 6C or separate REIT regime
• Possible removal of Div 6B
• Possible extension of new regime to trusts
  generally

6
Options

• Distribution deduction
• Beneficiary assessment, trustee exempt
• Beneficiary assessment, trustee exempt if
  distribution condition (90) met
• Current approach with fixes
• Issues
• Cash flow why?
• Issues largely remain the same

7
Relationships

• Div 6 repaired and MIT (with or without separate
  REIT regime)
• Div 6 and Div 6C both repaired
• Div 6 replaced with new trust general regime plus
  new Div 6C for trust/company border
• Div 6B seems to be gone
• no argument in paper for retention

8
Public element

• Only necessary for trust/company border
• If separate MIT regime based on public test, how
  to deal with wholesale trusts
• No intention to change current position of
  discretionary trusts

9
International elements

• Competitiveness
• Analysis of separate regimes
• Danger of misuse
• Capital revenue
• One class of units
• Public
• Turnover related rents
• Business

10
Separate REIT regime?

• Common attributes overseas generally
• deductible distributions or transparency
• predominant focus on real estate min. 70-90
  rent
• income or assets test or both
• A number of countries
• expressly exclude profits based rents payments
  for non-ancillary/non-customary services
• Some countries
• de minimis rules for
• non-real estate income
• income from residual non-passive activity
• taxed like companies but exempt on eligible
  income distributed
• allowed minimal income retention

11
Separate MIT regime?

• Common attributes overseas similarities
• emphasis on passive activity eg investing in
  shares securities
• widely held or listed
• minimum distribution requirement
• effective exemption for distributed income
• character retention for capital gains
• Others
• UK taxes eligible income at a lower rate
• both corporate and trust entities (some
  countries)

12
Tax treaties

• Company versus trust approach
• single stream of income
• treaty benefits at MIT level
• how to deal with pension funds
• how to deal with existing treaties (UK etc)
• OECD work
• solutions for both company and trust vehicles
• qualified intermediary approach

13
International considerations

• What issues are currently experienced under
  Australian domestic law and treaties with the
  operation of international rules for MITs
• Would there be advantages in having a deemed
  corporate flow-through CIV regime for
  international reasons

Question 5.1
14
MIT Review classifying and clarifying

• Andrew Mills

15
Topics

• A new Div 6C?
• control test
• active/passive
• Capital/Revenue
• disposals of trust assets
• disposals by investors
• Fixed Trust definition/widely held trust

16
Control Test

• Already allowed by Div 6C

MIT
49
BHP-B
Equities
17
Control

• Already allowed, subject to Div 6B

MIT
BHP-B
51
49
BHP-BSub
Equities
18
Control Test

• Already allowed by top-hat changes

MIT
MIT Sub
Staple Co
100
100
US REIT
Active business
100
Taxable REIT Sub
Active Business
19
Control test

• Already allowed - escapes Div 6C

100 common owners
MIT
Staple Co
100
Interest rent
Active business
20
Control Test

• not allowed under 6C

Super funds
other investors
20
MIT
trading business
21
Div 6C

• Penalty for non-compliance
• Day 1 Failure to comply (ongoing)
• Year 3 Identification disclosure of failure
• Also correct error
• Year 4 ATO assessment of fund
• Amendment of investor assessments
• too late to frank years 1 2

22
Active/passive divide

• Not currently allowed royalties

MIT
Interest
Royalties
Rent
Dividends
Building
Medical processMining licenceBrand nameother
IP
Bank
Equities
?
?
?
?
23
Eligible business - Div 6C

• How to change the eligible investment rules to
  reduce compliance costs enhance international
  competitiveness
• Abolish control test or replace it with
• max. investment in trading entities or
• arms length terms requirement
• Should non-compliance result in tax on only the
  tainted income and how
• Costs and benefits of a separate REIT regime
• Whether 20 complying super fund rule still
  appropriate

Questions 9.1-3
24
Capital/Revenue

• Policy?
• replicating direct investors
• discount capital gains?
• Implications domestic and international
  investors
• Treatment of Units
• Statutory Rules

25
Capital/revenue

• Structural bias

Super fund
Non-resident
15 / 30 tax
Discount / exemption
MIT
Equities
Equities
26
Non-resident witholding
27
Capital/revenue

• (a) How capital/revenue principles applied
  whether consistently across different industry
  sectors
• (c) What considerations support a statutory rule
  putting gains losses on certain investment
  assets (shares, units in unit trusts and real
  property) on capital account
• (d) Whether an irrevocable election for this
  treatment
• (g) Whether a statutory rule for gains
  distributed to complying super funds to be on
  capital account
• (h) Should different considerations apply to
  Private Equity funds

Question 7.1
28
Fixed Trust definition

• current interpretation vested indefeasible
• risk areas allocation of gains for exiting
  unitholders buy/sell margins?
• implications
• losses
• franking credits
• scrip for scrip
• relevance to Review fixing perceived issues to
  be used as basis for definition of MIT?

29
Defining the scope

• How to define widely held for the purpose of
  any new regime
• Allow different classes on interests?
• Allow an irrevocable election into the MIT
  regime?
• Carve out IDPSs (where investors have absolute
  entitlement to specific assets) or provide
  special rules for them?
• Whether any options for change for MITs should be
  extended to other trusts

Questions 11.12
Question 12.1