It is therefore critical for MITs who have not yet elected into the regime to consider this as a priority and act now!
Why should I act now?
The current taxation provisions for trusts are not flexible and do not support a lot of the administrative treatments applied by managed funds (e.g. unders and overs and the tax treatment of tax deferred distributions).
ATO commentary, released in conjunction with the enactment of the AMIT legislation, stated that managed funds who choose not to adopt the AMIT regime by 1 July 2017 will place themselves at increased risk for ATO review activity on those administrative issues.
For existing unregistered managed funds (i.e. wholesale funds), the ability to satisfy the prescribed rules in order to make an election into the AMIT regime will depend on whether its trust constituent documents (i.e. trust deed) contain clearly defined rights. The legislation as enacted requires that there must be clearly defined rights at all times during an income year for a fund to be an AMIT.
This will mean that managed funds must make necessary trust deed amendments prior to 1 July 2017 to allow the managed fund the flexibility of being able to elect into the AMIT regime for the 30 June 2018 income year.
What does it mean to have clearly defined rights?
Most unregistered managed funds will not be in a position to qualify for the AMIT regime, as the trust constitutional documents will provide the trustee with too much discretion. This will mean that the rights of unitholders will not be clearly defined in accordance with the ATO’s Law Companion Guideline (LCG) 2015/4.
The LCG prescribes bare minimum thresholds for the trust constituent documents, including a requirement for 75% approval for trust deed amendments and a requirement that the trustee should not be able to exercise discretions that may materially alter the rights of members. There are a substantial number of other changes that are required for the purposes of qualifying for the AMIT regime.
Unless those changes are in place and effective from 1 July 2017, the relevant unregistered managed fund will not be in a position to qualify for the regime for 30 June 2018 income year.
What will be the ATO’s approach?
ATO commentary on the AMIT regime identifies and outlines their anticipated compliance activity approach in two key areas. These are briefly outlined below. The two focus areas are not intended to be exhaustive.
Members’ entitlement variances – unders and overs
Unders and overs arise where the income entitlement amounts reported to unit holders understate or overstate the amounts correctly determined in accordance with tax law. The new AMIT rules have specific provisions for dealing with the problems previously faced by MITs with unders and overs.
For MITs not electing into the AMIT regime from 1 July 2017 which continue to carry unders and overs, the ATO has explicitly expressed that they will be allocating compliance resources in monitoring the treatment of these amounts by MITs.
Tax deferred distributions
Broadly, tax deferred distributions (TDDs) refer to amounts of trust distributions in excess of the amounts assessed to beneficiaries under trust taxation provisions. Generally, where unitholders hold their interests in a managed fund either on capital account, or can apply the CGT primary code rules (i.e. MIT capital account election), the ATO will not seek to treat TDDs as ordinary income in most circumstances. However, the ATO have outlined a number of situations where TDDs distributed to unitholders may be assessed as ordinary income (e.g. where TDDs are effectively interest distributions, relate to TOFA arrangements or trading stock, or where TDDs represent amounts paid for remuneration).
Outside of the AMIT regime, TDDs distributed to unitholders can be treated as assessable income to the unitholders. Such distributions do not result in an increase to the cost base of interests held, and may therefore result in double taxation to unitholders on exit of their investment in an MIT.
Are there issues with making trust deed amendments?
If the managed fund is a property fund, holds dutiable property or has substantial unrealised gains, you will also need to consider resettlement issues within this time frame. While we would not expect ordinary AMIT changes to result in a resettlement of the relevant trust, this is an important issue that needs to be considered as part of the process.
How long does it take to make amendments?
This may depend on whether member approval is required. Furthermore, it may depend on the number of changes required to the relevant trust deed to make it compliant from an AMIT perspective. Given that 30 June 2017 is fast approaching, we would recommend consideration of this issue as soon as possible.
What are my next steps?
Irrespective of whether your managed fund is expecting to adopt the AMIT regime, we strongly recommend that you consider immediately performing an assessment of the trust constituent documents to determine what may need to be changed in order to qualify for the regime.
This will at least allow amendments to be identified and potentially adopted before 30 June 2017, so that the relevant managed fund will have flexibility to elect into the AMIT regime for the 30 June 2018 income year.
If this issue is not acted on, the earliest entry time would be 1 July 2018 (provided the trust deed has been amended before that date). In this regard, the ATO has explicitly expressed that compliance activity may commence in relation to managed funds that have not elected into the AMIT regime from 1 July 2017. Accordingly, deferring this time period may result in higher tax risk for the managed fund and its investors.
Given that there are only a number of weeks left until the end of the income year, we recommend that you contact us as a matter of priority to consider whether the trust deed is compliant with the requirements of the AMIT legislation.
How we can help
Pitcher Partners has extensive experience in reviewing and assessing AMIT eligibility and can assist you in efficiently and effectively identifying required changes. We have worked with a large number of legal firms in assisting with AMIT amendments and have developed a process (AMIT IP) that can identify those critical changes required.
For a discussion on how we can assist you in considering your trust deed and your ability to make an AMIT election, please contact either Alexis Kokkinos (03 8610 5170) or Brenton Chan (03 8612 9570), or alternatively please contact your Pitcher Partners advisor.