Ensuring tax compliance and timely investor reporting: Key steps for fund managers this 30 June

With 15 May now behind us, attention turns to 30 June. With the ATO increasing its compliance focus at all levels (firms, funds, investors) and trusts in particular continuing to be under the microscope, responsible entities, trustees and fund managers must prioritise tax compliance and investor reporting. Failing to address key issues could lead to unexpected tax liabilities for trustees or significant taxable income for members without sufficient cash distributions.

1. Setting a timetable

Where your fund has made distributions during the income year, arrange a time with your tax advisors to review and complete the investor tax (or AMMA) statements before issuing them. The earlier the timetable is set, the greater certainty there will be around meeting investor expectations on delivering the investor statements on a timely basis. Fund tax advisers and administrators acting for multiple fund managers will typically lock in their resources based on agreed upon year-end timetable.

Tip: Get in touch with your tax advisor, fund administrator and custodian (if applicable) to find out when the investor tax (or AMMA) statements will be issued to your investors. This will help you to set a suitable timetable.

2. Final distributions

If you are planning to make a final distribution for the income year, it is advisable to review the trust deed to evaluate, among other things, the income of the trust estate (“distributable income”) and net (taxable) income for tax purposes. If these items are not appropriately managed, there is a risk that the trustee may be subject to tax at the highest marginal rate. It is prudent for trustees to document and record their resolutions in meeting minutes.

In cases where the Fund is an Attribution Managed Investment Trust (“AMIT”), the trust deed may include automatic distribution clauses that create legally binding distributions to investors as of 30 June. As such, it is essential to review the trust deed and consider alternative determinations if the automatic distribution clauses are inappropriate.

Tip: Ensure that resolutions are formalised by 30 June or ensure that you are comfortable with the automatic distribution mechanisms stipulated in the trust deed.

3. Capital account election

A Fund that qualifies as a managed investment trust (“MIT”) enjoys several advantages, including concessional withholding rates for foreign investors, the option to be treated as an AMIT, and the ability to make a capital account election – an irrevocable election to apply CGT as the primary method of taxing gains and losses on disposal of certain assets (e.g. shares in a company, units in a unit trust, land).

It is critical that a MIT looking to rely on the capital account election make it in respect of the first year of becoming a MIT and that the election be made before the lodgement date of the income tax return).

Newly established funds have up to two income years to meet MIT membership requirements, meaning funds may be deemed to be MITs earlier than expected leaving the Fund out of time to make an election.

Tip: If this is the first year of the Fund, evaluate whether it is appropriate to make the capital account election. For example, a debt fund is unlikely to want to make a capital account election, while a property fund is more likely to make such an election. For Funds that may have failed to make an election in time, consideration should be had to seeking a formal extension of time from the Commissioner to make the election.

4. Consider the continued status of the fund as a MIT or AMIT

The classification as a MIT or AMIT is not a once-and-for-all determination; the Fund must satisfy the relevant tests each year, considering factors such as the composition of membership (widely held and closely held tests) and trading activities. Failure to adhere to these requirements can result in the Fund falling out of the regime.

Funds that utilised the start-up period to make the AMIT election need to ensure that they meet the membership requirements, from which were exempt in the first two years, to continue being treated as a MIT at the end of the start-up phase.

Tip: Consider your Fund’s ability to satisfy the MIT requirements for the current year. If you do not accurately determine whether the Fund is a MIT or AMIT, you are at risk of providing the wrong reports to your investors and the ATO (i.e. AIIR and tax distribution statements).

5. Reviewing the fund’s trading activities

A Fund that is a public unit trust may be taxed as a company if it engages in ‘trading’ activities or controls an entity that carries on ‘trading’ activities. These activities include anything other than prescribed passive investment activities such as investing or trading in shares, units, loans, or holding property for rent.

It is noted that the ATO hold a broad view as to what constitutes control (e.g., a 25% ownership interest could constitute control, see ATO ID 2011/11). Even where a unit trust is not a public unit trust, the carrying on of trading activities may result in the Fund ceasing to be a MIT and no longer qualifying for the capital account election, AMIT status, or receiving access to reduce withholding tax rates.

Tip: Ensure the Fund’s compliance with these provisions is reviewed annually, especially if new investments were acquired during the income year.

6. Significant transactions

Significant transactions can have substantial effects on a fund’s bottom line. Even where transactions do not give rise to reductions in taxable income, a loss for accounting purposes could possibly impact investor reporting. Such transactions could include property or other asset disposals, looking to freeze distributions, putting loan repayments or interest income on hold, writing off bad or doubtful debts, or dealing with provisions for impairments of value.

Tip: Consider the impact of any material or once off transactions during the year and seek advice as to the accounting and taxation treatment for the transaction.

7. Preserving losses

Managed funds are subject to the trust tax loss provisions that (generally) do not provide the fund with an ability to rely on a ‘same’ or ‘similar’ business test. Instead, the Fund must satisfy a ‘continuity of ownership’ test that generally requires the trust be both a fixed trust and that it can trace through to the same persons holding the units during the relevant period. Generally, this period begins at the

start of the income year during which the loss was originally incurred and ends on the last day of the income year in which the loss is sought to be claimed.

These rules are complex and the process of tracing through investor vehicles can be lengthy, depending on the nature of the information available. Where the Fund cannot evidence a continuity of the same persons, the use of tax losses can be denied.

Tip: If your Fund is expecting to utilise prior year tax losses in the current income year, it is critically important that you consider your funds eligibility to use those losses. We strongly recommend that you or your tax advisor should consider this issue having regard to your fund as soon as possible.

8. Bad debt write-offs

If the Fund has bad or doubtful debts (amounts owed to it that the Fund considered are likely to be unrecoverable), specific rules apply to determine whether a deduction is allowed. Crucially, much like the use of tax loses, only those debts for which the fund satisfies a continuity of ownership test will meet these requirements. Failure to substantiate that the majority of the same persons held units in the Fund during the relevant period will mean that no amount can be deducted to reduce the accrued income.

The provisions provide a deduction for income amounts (e.g. interest and rent) as well as the principal of the loan where the Fund is a money lender. Each of these amounts will have a different continuity of ownership period – generally, starting the day the debt was incurred and ending on the last day of the income year in which the deduction is sought.

Additionally, the debt needs to be ‘written off’ prior to 30 June. This means that the debt needs to be appropriately authorised as being written off in the books (authorised journal entries) by 30 June or supported by a minute or director’s resolution that is similarly authorised by that date

Tip: If your Fund has any bad debts, it is critically important that you consider your funds eligibility to claim a deduction and, if so, that any write-off occurs prior to 30 June.

9. Non-accrual loans

If your Debt Fund holds loans with a high chance of, or currently in, default, there may be an option to ‘turn off’ accruing interest income from an income tax perspective. The ability to do so will depend on whether certain criteria are satisfied (as set out in the Taxation of Financial Arrangements rules where your fund is subject to that regime, or whether your fund would meet the criteria non-accrual loan requirements outlined in Taxation Ruling TR 94/32). Non-accrual loans (loans where the interest income does not accrue) do not require complex continuity of ownership testing and may help to minimise the differences between tax and accounting amounts.

Tip: Consider the events that have occurred during the year and speak to your advisor as soon as possible to determine the earliest point at which the loan may have become a non-accrual loan.

10. Capital allowance deductions

For property funds, capital allowance deductions (including depreciation and capital works) can be one of the more significant deductions claimed. It is always prudent to keep up to date tax depreciation and capital works schedules. To the extent that information is not available with respect to newly constructed buildings, you should be contacting your quantity surveyor early to obtain a report that breaks down your annual claim.

Tip: Make sure you have reviewed your annual depreciation claims and seek support from a quantity surveyor where information is not readily available.

11. Thin capitalisation

The new thin capitalisation provisions and the debt deduction creation rules (“DDCR”) apply to managed funds. These provisions can result in a significant denial of debt deductions (e.g., interest expenses) claimed by funds that are either majority owned by foreign investors or are managed funds that control offshore investments. If you have not examined the impact of these provisions, it is highly recommended that you do this before 30 June 2025.

Tip: Ensure that you have considered whether the thin capitalisation or DDCR provisions apply to the fund.

12. Don’t miss key upcoming tax compliance dates

The timely reporting of trust information to members is crucial to enable those investors to complete their own income tax returns. Various reports are required to be submitted to the ATO disclosing the trust income as well as reporting on the allocation of income to its members that feeds into its data matching program.

Tip: Be aware of the deadlines that apply to your fund. Significant penalties can apply to funds that do not meet these obligations.

What are the next steps

There are many other year end planning items that must be considered by a fund. Clients should contact their Pitcher Partners representative to organise a year-end tax planning catchup, so that you can review your situation and determine what action is required well before 30 June.