The Rudd Government introduced Tax Laws Amendment (No 1) Bill 2010 (the "Bill") into Parliament. The primary focus of the Bill is to legislate the capital account election for Managed Investments Trusts ("MIT'), which was initially announced in the 2010 Federal Budget. This Bill also contains measures that will expand the current definition of an MIT for the purpose of the capital account election. It is hoped that these measures will help in making Australia more attractive as a destination for capital investment and take Australia one step closer to being a regional financial hub.
Broadly, the capital account treatment will allow MITs to irrevocably elect to apply the CGT provisions as the primary code to work out the taxable gains and losses on disposal of certain eligible assets (e.g. shares, units and real property). This election must be made during the 2010 year for existing MITs or by the end of the first year the trust becomes an MIT. If an MIT that choose not to elect the capital account treatment then any disposal of eligible assets (excluding land type assets) will be on revenue account. Importantly, where an MIT does not elect and disposes of land type assets the treatment (i.e. capital or revenue) will be determined under the ordinary rules for distinguishing capital and revenue.
An MIT that does elect the capital account treatment will have improved certainty when preparing its tax statements and tax returns. As a consequence, resident investors will be entitled to the CGT discount on taxable gains distributed. Of greater importance is the impact for non-resident investors whom are exempt from Australian tax on distributions of gains on MIT assets where the assets are not 'taxable Australian property' (i.e. broadly land, interests in land and non-portfolio interests in land rich entities).
Aside from the legislative confirmation of the previously announced capital account treatment the Bill now includes the following measures that will help underpin the effectiveness of the primary measure:
- an expanded concept of a MIT that will allow state operated and wholesale trusts to qualify for the election. It will also provide an allowance for unregistered wholesale schemes to be eligible MIT's where they are managed or operated by an Australian financial services licensee or an authorised representative of an AFSL holder;
- an extension of the "widely held" concept for the purposes of the measure to Australian resident unit trusts where at least 75 per cent of the beneficial interest in the capital and income of the trust is held by eligible widely held entities listed in the existing definition of a MIT, such as life insurance companies and complying superannuation funds and deposit funds and foreign superannuation funds with at least 50 members;
- a "look through" mechanism in the form of a member tracing rule where units in an Australian resident unit trust are held by another trust;
- an extension of the definition of a MIT in the measure to allow individuals who are wholesale clients to be included in the 50 member rule;
- an extension of the scope of the "temporary circumstances rule" to cover situations where the trust may be closely held temporarily or where a trust does not meet the MIT start-up 'seeding' period because of circumstances outside the control of the trustee;
- not treating a return of contributed capital as assessable income for the purposes of the tax treatment of carried interest units;
- an expansion of the specific asset types covered by the measure from shares, units and certain land investments to also include investments that are broadly identical to a share, that is equity interests in a company and shares in a foreign hybrid company; and
- a confirmation that where a MIT does not elect capital account treatment, disposals of shares and units will be deemed to be treated on revenue account.
Should you require any further information about the Bill please contact Stephen O'Flynn or Simon Tucker on (03) 9614 4444.
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