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The new tax regime for managed investment trusts is here – Are you ready?
Technical article

The new tax regime for managed investment trusts is here – Are you ready?

The new Attribution Managed Investment Trust (AMIT) legislation has now passed into law and we have developed a tool kit that can assist Funds.

The new Attribution Managed Investment Trust (AMIT) legislation has now passed into law.  The new provisions can be early adopted by qualifying managed investment trusts (Funds) from 1 July 2015 or alternatively can be adopted for income years commencing on or after 1 July 2016.
Pitcher Partners have developed an AMIT implementation package (AMIT-IP) which is a powerful tool kit that can assist Funds with identifying potential implementation issues as well as providing guidance on resolving such issues. The functionality of the package is further explained below.

A.    Where are we at?

The long awaited passing of the AMIT Bills Package (introduced into Parliament in early December 2015) on 4 May 2016 is expected to bring about a significant move away from the inflexibilities embedded in the previous tax provisions governing the funds management industry.

The AMIT regime is an elective regime for qualifying Funds, which introduces a number of key (modernised) provisions that will provide more flexibility in dealing with income derived by an AMIT  and the taxation treatment of investors in the AMIT. Broadly, the key advantages expected to be afforded to AMIT’s from the new rules will include deemed fixed trust status, a recognised under and over regime, upwards cost base adjustments, multi-class unit election and more.

The new rules are complex and will without a doubt have a significant impact on trustees, fund managers, custodians and ultimately, the investors. Whilst the time has not yet come to be in panic mode, we believe it is prudent to turn your attention to these new rules as a matter of priority.

The new rules can be applied from as early as 1 July 2015 (see “Timing” below). While Funds can consider a detailed review of the provisions and its impacts for this 30 June 2016, we highlight that it would be very difficult to complete such a review and implement appropriate changes by 30 June this year.

Accordingly, we recommend that Funds consider a “high level” review for 30 June 2016 and a more detailed review for 30 June 2017.

Pitcher Partners have developed an online AMIT implementation package (AMIT-IP), which is an online tool that allows your Fund to control the review of the new provisions. We also have a short form checklist to help you conduct a high level review for this 30 June 2016.  Please speak to us if you are interested in using this tool.

This bulletin highlights the potential issues to be considered in relation to preparing your funds management business from an operational, reporting and product planning perspective. It also outlines the steps in the process should you be considering to elect-in to the new regime.

B.    Will I be impacted by the new rules?

In order to be able to elect into the new regime as an AMIT, the trust must be a qualifying Fund.  A qualifying Fund is based on the current definition of a MIT that qualifies for the capital account election (with some small modifications).

Generally, a MIT must be an Australian resident trust which is recognised as a Managed Investment Scheme (MIS) under the Corporations Act. It will also need to have the majority of its investment portfolio in passive type investments (i.e. eligible business activities) and will either need to be a registered MIS or alternatively be managed by an AFSL holder. Finally, the widely held and not closely held tests will need to be satisfied.

In addition, the provision provides an extended start-up period (up to 2 years if the Fund is established on 1 July) during which trusts do not need to meet the “widely held” and “not closely held” requirements to qualify. This will be a welcomed change for many start-up wholesale managed funds who would otherwise be disqualified from accessing the benefits of the AMIT regime. Practically, this means that for funds created on 1 July, trustees and fund managers could potentially be afforded up to 2 years to build up their member base to the required level (e.g. 25 members for an unregistered wholesale MIS).

Not all qualifying Funds will be eligible to elect into the regime.  That is, a qualifying Fund must be one where the investors have “clearly defined” rights to income and capital.

Generally, where a MIT is a registered MIS under the Corporations Act, the clearly defined rights limb is deemed to be satisfied (and thus the MIT will be eligible to make an AMIT election).

However, where an existing MIS is unregistered, the ability to satisfy the clearly defined rights limb will depend on the rights of investors under the constitution.  While some safe harbours may assist, the ability to pass this test will ultimately come down to the rights of members under the trust constituent documents (i.e. trust deeds).

We encourage all existing Funds, who believe that they may qualify to be an AMIT under the new rules, to review their positions to ensure any eligibility requirements can be promptly managed. We also encourage start-up Funds to turn their attention towards reviewing their eligibility at inception (i.e. at the time of drafting the constitution), to ensure that the Fund is given an opportunity to potentially access the new AMIT regime.

C.    What are the key implementation issues?

The new provisions are complex and if a decision is made to elect into the AMIT regime, a number of changes will be required to current practices and processes in relation to reporting (both internal and external), operations and from a product planning and marketing perspective. We highlight some of the key implementation issues in further detail below.  As noted earlier, our AMIT-IP tool can assist you in identifying and assessing these risks and opportunities.

i.    Determining ability to qualify for the new regime

The first step that will be important for all Funds is to determine whether it will qualify for the regime.  This will include a determination of whether the fund is a qualifying Fund (i.e. a MIT) and whether there are clearly defined rights.  It is likely that most unregistered Funds will be required to make amendments to their trust deed or constitution to satisfy this first step.

ii.    Trust constituent documents

There is a reasonable likelihood that amendments will need to be made to trust deeds to ensure the trusts have clearly defined rights and that there is nothing in the relevant trust deeds that may prevent the trustee from taking advantage of the flexibility with which attribution provides (e.g. disposing of property in a property fund to fund a unit redemption, streaming of income to different classes of units etc).  A number of other issues will need to be considered in respect of the trust deed: for example, whether references are made to Division 6; whether special redemption distributions can be made; if the trust deed allows for unders and overs; and whether the trust deed works for a fund that moves in or out of the regime.

Amendments to the trust deed may require special unit holder approvals and appropriate disclosures to members, which will also need to be managed.

iii.    Product planning and marketing

Entering into the AMIT regime will require Funds to update their marketing material as well as the Product Disclosure Statements (PDS) or Information Memorandums (IM) of existing products. The extent of the impact on existing products will need to be determined and appropriately managed.

In our view, the new regime also provides greater flexibility in developing products that can be offered to the market. For example, the ability to establish peer-to-peer funds, segregated asset funds, accumulation funds, tiered-equity stack property lending funds and foreign currency denominated funds, etc.

Special new rules help to accommodate these new products under the AMIT regime, including (but not limited to): the attribution provisions, which allow for income streaming (subject to an anti-avoidance provision); the class rules, which allows assets and taxable income of a Fund to be quarantined; debt-like interests, which allows preference units to be treated as debt for tax purposes; the look-through rule, which allows income character to be retained.

Given that the ATO has confirmed its commitment of resources to increase audit activity surrounding a broad range of cross-border activity, it would be prudent to ensure that tax risks are managed appropriately in relation to any new products in this space.

iv.    Tax Compliance and operations

Funds will need to consider the extent to which changes will be required to their current systems and operations including potential changes to unit pricing, registry as well as tax compliance processes.

From an operational and registry system perspective, there will be a need to consider the ability of current systems to accommodate the “attribution” system, upwards cost base adjustments as well as withholding tax changes (given withholding tax will be levied on attribution as opposed to being on payment).

There will also be new tax compliance requirements including AMMA statements and a prescribed AMIT income tax return which the ATO will expect to be lodged electronically.

v.    Tax policies and risk

The new regime includes a large number of penalties that could be payable by a trustee.  Trustees therefore need to seriously consider the new penalty regime and when those rules can apply as part of their overall review for AMIT provisions.  This will need to be a part of the internal tax policies and risk frameworks currently adopted by the trustee and the Fund. This will be of particular importance to those funds whose practice includes carrying forward unders and overs  to ensure due care has been taken in validating and dealing with these amounts.

The ATO have confirmed that unders and overs will be an area of particular interest from an audit activity perspective. However, this is not expected occur until after the AMIT transitional period expires (i.e. post 30 June 2017).

We also note that the new AMIT provisions have introduced a new non-arm’s length income (NALI) provision, which is applicable to all MITs (i.e. irrespective of whether the MIT is an AMIT).  To the extent that a MIT derives income that is in excess of arm’s length income, the trustee will be taxed at 30% on that excess. Trustees should therefore be considering the impact of this rule on new and existing Funds.

vi.    Due diligence and M&A

Funds should also consider the impact that the new rules may have in regards to due diligence procedures for M&A activity (e.g. revising due diligence checklists to ensure the new regime is considered as part of future acquisitions).

D.    Timing

If you are currently a Fund, a decision will need to be made as to whether you qualify for the regime.  To the extent that the new regime could apply, the critical question that trustees will need to address is whether they will elect into the new regime and when.

The new rules will commence from 1 July 2016.  Accordingly, eligible Funds will be able to elect into the AMIT regime irrevocably from that date.

The option to retrospectively “opt-in” early from 1 July 2015 is also available. However, in our view (having regard to Funds we have considered to date) we do not see any significant advantages of opting-in early unless the Fund is critically dependent on one of the new special rules (e.g. the class rules, fixed trust status for franking credits, accumulation requirements etc). Furthermore, where funds have not yet fully considered the extent of which the new regime will impact the business, it would be risky to attempt to adopt the new regime for 30 June 2016.

However, if you are expecting to elect into the regime from 1 July 2016, we recommend that a comprehensive review of your funds management business be performed in light of the AMIT regime as soon as possible. This is because you will likely need to apply the new regime for fund payments made after that date.  For many funds, this would either be at 31 December (for half yearly distributions) or an earlier date to the extent that further interim distributions are made.

Accordingly, we recommend that you consider commencing this review in the coming months to ensure a holistic understanding of the operational, reporting and investor management issues and considerations is obtained and managed in time. As outlined below, we have developed an online implementation package (AMIT-IP) which can assist you on this review.

E.    What is AMIT-IP?

AMIT-IP is Pitcher Partners AMIT implementation package.  This is an online tool that allows you to assess all of the risks and opportunities of the new regime.  The online tool is a collaborative tool that allows the Fund manager to complete the review themselves, which can then be reviewed by Pitcher Partners.  The package is online, real-time, and can be accessed by an unlimited number of staff and external persons.  For further information on AMIT-IP, please contact your Pitcher Partners representative.

F.    What are my next steps?

The new regime is certainly designed with the intent of providing more flexibility and opportunities for growth in the funds management industry. However, there will be significant considerations from an operational, reporting and investor management perspective for those that are impacted by these changes.  Furthermore, for those Funds that do not adopt the regime, the ATO have indicated that they will commence reviews of those Funds post 30 June 2017.

To access further information in regards to the AMIT legislation including key features, application to investment funds and new product opportunities, refer to our Tax Alert in December 2015 (New Tax Rules for Funds Providing Growth Opportunities).

For a more comprehensive discussion on how the new regime may apply directly to your business, please contact your Pitcher Partners advisor or alternatively, any of the contacts listed below.

Prepared by Alexis Kokkinos and Brent Chan

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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