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Tax planning for Managed Funds: Top 5 issues to consider
Technical article

Tax planning for Managed Funds: Top 5 issues to consider

As the end of the financial year approaches, responsible entities, trustees and fund managers should turn immediate attention to taxation, investor reporting and other fund compliance obligations.

In light of the ATO’s continued focus on managed fund compliance reviews, it is critical that trustees and fund managers are comfortable with the managed investment trust (“MIT”) and attribution MIT (“AMIT”) status of their funds before 30 June 2023. Failure to manage key issues could give rise to the trustee paying tax or could result in significant taxable income for your members with little cash distributions to support those liabilities.

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

If you operate a managed investment trust (“MIT”), consider your fund’s ability to satisfy the MIT requirements for the current year. This condition is essential in order to access the concessional MIT withholding rates, the ability to maintain a valid capital account election where relevant (e.g. to treat a property disposal on capital account), and the ability to maintain an election to treat the fund as an attribution MIT (“AMIT”). We understand the ATO will be continuing to focus on this issue for 2023.

If the Fund has been classified as an AMIT, you should ensure that the Fund has satisfied the technical requirements to be an AMIT and that your systems and processes are sufficient to deal with the distribution process including reconciliations that are required in order to avoid the trustee being taxed/penalised on certain unreconciled amounts.

Further, where the Fund has qualified as an AMIT under the transitional (start-up) period, it is critical to determine whether the AMIT provisions will still apply to the Fund (this year or next year). There are anomalous results which can occur for transitioning between CGT event E10 to E4 for members and differences in how distributions must be managed under both provisions.

2. Satisfying the public trading trust provisions

A unit trust that is a public unit trust can be taxed as a company where it carries on ‘trading’ activities. Even where a unit trust is not a public unit trust, the carrying on of trading activities may result in it ceasing to be a MIT, which may result in the capital account election, or the AMIT status of the fund ceasing to apply. It is critical for you to review the Fund’s compliance with these provisions on an annual basis to determine whether a breach of the provisions may occur and what preventative measures (if any) you should be considering before 30 June.

3. Distributions

If you are proposing to make a final distribution for the income year, we suggest that, as part of this process, you review the trust deed to consider, amongst 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 top marginal rate. It is prudent for trustees to document and minute their resolutions.

Where the fund is not an AMIT, you should ensure that resolutions are in place by 30 June (or that you are comfortable with the way in which the trust deed automatically distributes amounts to the beneficiaries).

Where the fund is an AMIT, the trust deed may have automatic distribution clauses that can create legal distributions to investors at 30 June (that may be indefeasible). Accordingly, it is always prudent to review the trust deed and consider alternative determinations where the automatic distribution clauses are not appropriate.

We strongly recommend that if you are proposing to make a final distribution for the income year, to get in contact with your Pitcher Partners representative for a discussion.

4. Significant transactions

Consider the impact of any material or once off transactions (i.e. property or other asset disposals) during the year and if necessary seek advice as to the accounting and taxation treatment for the transaction. It is critical that you consider and communicate any special events that may have occurred during the year with your tax advisor.

For example significant transactions could include, 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. Some of these items may not give rise to reductions in taxable income but may result in a loss for accounting purposes and possibly impact investor reporting.

5. Tax losses

Managed funds are subject to the carry forward trust tax loss provisions that (generally) do not provide the fund with a ‘same’ or ‘similar’ business test. Furthermore, the continuity of ownership test for managed funds generally requires the trust to be both a fixed trust and that you can trace through to the same persons holding the units during the ownership test period.

This can give rise to many difficulties. For example, where the fund has issued multiple classes of units, the fund cannot rely on PCG 2016/16 to treat the fund as a fixed trust and would require the trustee to obtain a ruling from the ATO on the matter. Furthermore, where trusts hold units in the fund, the trustee is required to determine whether that trust has made a family trust election (or not) to determine whether it is reasonable to treat the trust as a single person. Similarly, where a company holds units in the fund, the provisions require the fund to trace to ultimate shareholders.

Failure to substantiate that the majority of the same persons who hold the units in the Fund (through one or more entities) will mean that tax losses should not be used or applied against taxable income. If you have substantial tax losses that you are looking to utilise for this 30 June 2023, we would strongly recommend you consider this issue as soon as possible.

Key upcoming tax compliance dates

The reporting of trust information to members is crucial to enable those investors complete their own income tax returns. In addition, 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 enabling it to undertake its data matching program. Significant penalties can apply to funds that do not meet these obligations.

Report/Activity

Due date

Investor statements (non-AMIT)

AMIT investor statements

Post-30 June

By 30 September

TFN report (June 2023 quarter)

28 July

BAS (June 2023 quarter)

BAS (July 2023)

28 July (25 August with concession)

21 August

Annual Investment Income Report (AIIR)

31 October

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.

This content is general commentary only and does not constitute advice. Before making any decision or taking any action in relation to the content, you should consult your professional advisor. To the maximum extent permitted by law, neither Pitcher Partners or its affiliated entities, nor any of our employees will be liable for any loss, damage, liability or claim whatsoever suffered or incurred arising directly or indirectly out of the use or reliance on the material contained in this content. Pitcher Partners is an association of independent firms. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. Liability limited by a scheme approved under professional standards legislation.

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