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Managed Investment Trusts Tax Review. Chair : Jane Michie. MIT Review: Design. Professor Richard Vann. Topics to be covered. Policy principles and terms of reference Options and relationships Public element International element and tax treaties. Policy principles.

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mit review design

MIT Review: Design

Professor Richard Vann

topics to be covered
Topics to be covered
  • Policy principles and terms of reference
  • Options and relationships
  • Public element
  • International element and tax treaties
policy principles
Policy principles
  • Same tax treatment as direct investment
  • Limited to primarily passive investment
  • Unitholders assessable if paid or right to receive
  • Trustee taxed on income not taxed to unitholders
  • Trust losses trapped in trust
  • Efficiency, equity, simplicity and trade-offs
terms of reference
Terms of reference
  • Options for specific MIT regime
  • Alternatives to present entitlement
  • International developments
  • Reform Div 6C or separate REIT regime
  • Possible removal of Div 6B
  • Possible extension of new regime to trusts generally
options
Options
  • Distribution deduction
  • Beneficiary assessment, trustee exempt
  • Beneficiary assessment, trustee exempt if distribution condition (90%) met
  • Current approach with fixes
  • Issues
    • Cash flow: why?
    • Issues largely remain the same
relationships
Relationships
  • Div 6 repaired and MIT (with or without separate REIT regime)
  • Div 6 and Div 6C both repaired
  • Div 6 replaced with new trust general regime plus new Div 6C for trust/company border
  • Div 6B seems to be gone
    • no argument in paper for retention
public element
Public element
  • Only necessary for trust/company border
    • If separate MIT regime based on public test, how to deal with wholesale trusts
    • No intention to change current position of discretionary trusts
international elements
International elements
  • Competitiveness
    • Analysis of separate regimes
    • Danger of misuse
      • Capital revenue
      • One class of units
      • Public
      • Turnover related rents
      • Business
separate reit regime
Separate REIT regime?
  • Common attributes overseas – ‘generally’:
    • deductible distributions or transparency
    • predominant focus on real estate – min. 70-90% rent
    • income or assets test or both
  • ‘A number’ of countries:
    • expressly exclude profits based rents & payments for non-ancillary/non-customary services
  • ‘Some’ countries:
    • de minimis rules for:
      • non-real estate income
      • income from ‘residual’ non-passive activity
    • taxed like companies but exempt on eligible income distributed
    • allowed minimal income retention
separate mit regime
Separate MIT regime?
  • Common attributes overseas – ‘similarities’:
    • emphasis on passive activity eg investing in shares & securities
    • widely held or listed
    • minimum distribution requirement
    • effective exemption for distributed income
    • character retention for capital gains
  • Others:
    • UK taxes eligible income at a lower rate
    • both corporate and trust entities (‘some countries’)
tax treaties
Tax treaties
  • Company versus trust approach
    • single stream of income
    • treaty benefits at MIT level
    • how to deal with pension funds
    • how to deal with existing treaties (UK etc)
  • OECD work
    • solutions for both company and trust vehicles
    • qualified intermediary approach
international considerations
International considerations
  • What issues are currently experienced under Australian domestic law and treaties with the operation of international rules for MITs
  • Would there be advantages in having a deemed corporate flow-through CIV regime for international reasons

Question 5.1

topics
Topics
  • A new Div 6C?
    • control test
    • active/passive
  • Capital/Revenue
    • disposals of trust assets
    • disposals by investors
  • Fixed Trust definition/widely held trust
control test
Control Test
  • Already allowed by Div 6C

MIT

49%

BHP-B

Equities

control
Control
  • Already allowed, subject to Div 6B

BHP-B

MIT

51%

49%

BHP-BSub

Equities

control test18
Control Test
  • Already allowed by ‘top-hat’ changes

MIT

Staple Co

MIT Sub

100%

100%

US REIT

Active business

100%

Taxable REIT Sub

Active Business

control test19
Control test
  • Already allowed - escapes Div 6C

100% common owners

Staple Co

MIT

100%

Interest & rent

Active business

control test20
Control Test
  • not allowed under 6C

Super funds

other investors

20%+

MIT

trading business

div 6c
Div 6C
  • Penalty for non-compliance

Day 1 Failure to comply (ongoing)

Year 3 Identification & disclosure of failure

Also correct error

Year 4 ATO assessment of fund

Amendment of investor assessments

= too late to frank years 1 & 2

active passive divide
Active/passive divide
  • Not currently allowed – royalties

MIT

Interest

Dividends

Rent

Royalties

Building

Medical processMining licenceBrand nameother IP

Bank

Equities

eligible business div 6c
Eligible business - Div 6C
  • How to change the eligible investment rules to reduce compliance costs & enhance international competitiveness
  • Abolish control test or replace it with:
    • max. % investment in trading entities; or
    • arm’s length terms requirement
  • Should non-compliance result in tax on only the ‘tainted’ income and how
  • Costs and benefits of a separate REIT regime
  • Whether 20% complying super fund rule still appropriate

Questions 9.1-3

capital revenue
Capital/Revenue
  • Policy?
    • replicating direct investors
    • discount capital gains?
  • Implications – domestic and international investors
  • Treatment of Units
  • Statutory Rules
capital revenue25
Capital/revenue
  • Structural bias

Super fund

Non-resident

15% / 30%

tax

Discount / exemption

MIT

Equities

Equities

capital revenue27
Capital/revenue

(a) How capital/revenue principles applied & whether consistently across different industry sectors …

(c) What considerations support a statutory rule putting gains & losses on “certain investment assets (shares, units in unit trusts and real property)” on capital account

(d) Whether an irrevocable election for this treatment …

(g) Whether a statutory rule for gains distributed to complying super funds to be on capital account

(h) Should different considerations apply to Private Equity funds

Question 7.1

fixed trust definition
Fixed Trust definition
  • current interpretation – vested & indefeasible
  • risk areas – allocation of gains for exiting unitholders; buy/sell margins?
  • implications
    • losses
    • franking credits
    • scrip for scrip
  • relevance to Review – fixing perceived issues; to be used as basis for definition of MIT?
defining the scope
Defining the scope
  • How to define ‘widely held’ for the purpose of any new regime
  • Allow different classes on interests?
  • Allow an irrevocable election into the MIT regime?
  • Carve out IDPSs (where investors have absolute entitlement to specific assets) or provide special rules for them?
  • Whether any options for change for MITs should be extended to other trusts

Questions 11.1&2

Question 12.1