Australia's new MIT tax system may hide costs

Australia's new MIT tax system may hide costs

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Australia's new tax system for managed investment trusts (MITs) will enhance the attractiveness of Australian assets to offshore investors, but the introduction of a trustee administrative penalty, might result in higher administration costs.

The new tax system is intended to modernise the tax rules for eligible MITs and increase certainty for both MITs and their investors. The trustee administrative penalty aims to encourage accountability in trustees and protect investors, but One Investment Group says there could be devil in the details:

"Whilst the proposed administrative penalty is seen by the legislature as consistent with other penalties imposed on individual taxpayers for tax shortfalls, it is noted that the circumstances affecting individual taxpayers versus attribution MIT (AMIT) trustees are not the same," said Justin Epstein, executive director at One Investment Group.

"In this regard, it cannot be said that the motivations of an individual taxpayer in managing their tax affairs is in any way consistent with that of a trustee in performing its contractual and legal obligations in managing the tax affairs of the AMIT."

After reviewing the Federal Government's draft legislation, the firm has queried Schedule 2, item 5, section 288-115 of the Bill which proposes to introduce an administrative penalty for intentional or reckless disregard of the law by the trustee of a MIT. 

One Investment Group said while it is not opposed to the need for an administrative penalty in these cases, further guidance is needed to provide trustees and investors with clarity over their potential exposure. The firm said that the timing of transitional arrangements, financial costs and unintended consequences need further discussion.

Epstein has also called for the Australian Securities and Investment Commission to grant  class order relief so that trustees will not need to obtain member approval to amend a trust’s constitution in order to qualify as an AMIT.

"Our concern is the circumstances in which a trustee could reasonably consider that the change to the trust’s constitution will not adversely affect members’ rights are limited," said Epstein.

"It is our view that would be more favourable, in terms of uncertainty, time and financial costs, than requiring trustees to seek the exercise of the Commissioner of Taxation’s discretion to treat an MIT as having clearly defined interests."

The firm further argues that the regulator should take a similar approach to the implementation of changes to registered schemes and issue class order relief to allow responsible entities to make unilateral constitutional amendments in order to facilitate the scheme becoming an AMIT. The proposed Bill does not allow for this as currently drafted.

Epstein also suggests that some components of the new regime only apply to assessments for income years starting on or after July 1 2016. The draft Bill states that amendments will apply to assessments for income years starting on or after July 1 2015.

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