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CGT Changes For Australian Managed Investment Trusts

by Mary Swire, Tax-News,com, Hong Kong

14 December 2009


Australia’s Assistant Treasurer, Nick Sherry, has released for public consultation the draft legislation on proposed changes to the taxation of gains and losses on the disposal of investments by managed investment trusts (MITs).

An MIT is a public unit trust that is listed, widely held or publicly offered. To retain trust taxation, a public unit trust cannot at any time during an income tax year operate, or control operations of, an entity that carries on activity that is not eligible investment business.

Such business is broadly defined as investing in land for the purpose or primary purpose of deriving rent, or investing or trading in certain financial instruments, including shares, in a company and units in a unit trust.

Beneficiaries that are individuals and superannuation funds are entitled to the capital gains tax (CGT) tax concessions on distributions of capital gains they receive. Foreign resident beneficiaries are not subject to withholding tax on an eligible MIT distribution attributable to a CGT gain, unless the gain relates to taxable Australian property.

The new legislation, amending the Income Tax Assessment Act 1997, provides certainty as to the taxation of gains and losses on investments by eligible MITs. The changes will allow an eligible MIT to irrevocably elect to apply the CGT provisions as the primary code for such gains and losses with effect from the 2008-09 income tax year.

"In 2009, the Bureau of Statistics reported that the Australian funds management industry has over AUD1.2 trillion (USD1.1 trillion) in funds under management and the tax treatment of those funds and the vehicles in which they are held is of the utmost importance," Nick Sherry said. "This measure will provide greater certainty to the managed funds sector and ensure Australia's tax regime remains competitive in attracting foreign funds."

"This measure builds on the cut to the (non-resident) withholding tax rate for MITs announced in the 2008-09 budget,” he added, “and the government's commitment to sweeping reforms to the notoriously complex attribution rules, including foreign investment fund and foreign controlled company rules."

In finalising the design details of the draft Bill, the Government has taken into account the relevant content of the final report of the Board of Taxation on MITs and submissions received from a range of stakeholders.

"As a result of consultations, the draft bill expands the concept of an MIT for the purposes of this measure. These changes will ensure state operated trusts, as well as wholesale trusts, are also able to qualify for the concession," he continued. "Also, the Government has decided to provide further certainty by specifying the assets to be covered by capital account treatment – these are shares, units and certain land investments."

In addition, the bill confirms that, if an MIT does not elect capital account treatment, then the gains and losses on disposals of shares and units will be treated on revenue account, and that distributions or gains on "carried interest" units in an MIT are on revenue account.

The Commissioner of Taxation will be prevented from making amendments to assessments of MITs who elect capital account treatment, in respect of the re-characterisation of the gains and losses from eligible assets for the income years prior to the application of this measure.

The government has asked for further public comment on the draft bill by December 24, 2009, so as to allow for its introduction to parliament early in 2010.

A comprehensive report in our Intelligence Report series giving a country-by-country analysis of offshore investment funds, stock exchanges and trusts, with an analysis of the US QI regime, is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report9.asp

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