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Funds Managing Tax Monitor

Fund Managing Tax MonitorDecember 2012

There are a number of recent tax law changes and proposed tax reforms relevant to the funds management industry, both the taxation of fund vehicles themselves, but also changes affecting the tax efficacy of investment structures. The changes are not intended to cover all changes – wider tax law tax changes should still be considered and monitored.

Funds Managing Tax Monitor aims to track on a regular basis the status of recent and mooted changes, to help you keep an eye on the progress of these developments. The first edition focuses on changes that take effect after 1 July 2012, or that remain outstanding/subject to consultation.

Fund payment withholding tax (WHT) increased from 7.5% to 15% Status
  • Managed Investment Trust (MIT) WHT on fund payments to non-residents of Exchange of Information (EOI) countries has increased from 7.5% to 15%
  • No grandfathering for long-term deals signed in reliance on the 7.5% rate
  • List of EOI countries has been updated.
  • Royal Assent on 29 June 2012
  • Fund payments made on or after 1 July 2012.
Clean Building MIT 10% concessional tax rate Status
  • Concessional final WHT of 10% on fund payments from eligible 'Clean Building' MITs made to non-residents of EOI countries
  • MIT must hold one or more clean buildings which are new energy-efficient buildings for which construction began on or after 1 July 2012
  • Special rules allow character to flow through a chain of trusts – meaning a new line item for distribution statements.
  • Tax Laws Amendment (Clean Building Managed Investment Trust) Bill 2012 awaiting royal assent
  • Fund payments made on or after 1 July 2012.
Investment manager regime (IMR) Status
  • 'Conduit income' measure – Certain widely held foreign funds will not be subject to Australian tax solely because the fund engages the services of an Australian-based agent, manager or service provider
  • 'FIN48' measure – For foreign funds which have not lodged a tax return or have had an assessment made of their income tax liability, certain income may be disregarded or treated as Non Assessable Non Exempt income.
  • Royal Assent on 13 September 2012
  •  'Conduit income' measure –  1 July 2011 onwards
  • 'FIN48' measure – 1 July 2011 and earlier income years.
Removal of Capital Gains Tax (CGT) discount for non-residents Status
  • Non-residents will no longer be eligible for the CGT 50% discount in respect of capital gains that accrue after 8 May 2012. The 50% CGT discount will still be available for capital gains that accrued before this time, but only where the non-resident chooses to obtain a market valuation of their CGT assets as at 8 May 2012. This measure primarily affects direct investments in Australian real property (or non-portfolio holdings) held through trusts.
  • Applicable to CGT gains accruing after 8 May 2012.
Foreign Account Tax Compliance Act (FATCA) Status
  • Certain institutions (such as banks, hedge funds and superannuation funds) will be required to report information about offshore accounts and investments held by U.S. taxpayers to the U.S. Internal Revenue Service annually or withhold 30% of certain payments relating to U.S.-sourced income
  • The Australian Government is exploring the feasibility of an intergovernmental agreement (IGA) with the U.S. The objective of such an agreement would be to minimise compliance costs for Australian stakeholders.
Modernising the taxation of trust income Status
  • The two models proposed in the Policy Options Paper released by the Assistant Treasurer are:
    • The 'economic benefits model'  – this would assess beneficiaries on taxable amounts 'distributed' or 'allocated' to them, with the trustee assessed on any remaining taxable income
    • The 'proportionate assessment model'  – this would assess beneficiaries on a proportionate share of the trust's taxable income equal to their proportionate share of the 'trust profit' of the relevant class.

Note that these measures are only intended to apply to entities that are outside the new MIT regime, which is proposed to commence at the same time.

  • Policy Options Paper released 24 October 2012
  • Consultation in progress
  • Release of exposure drafts expected in early 2013
  • Introduction of legislation expected mid-2013
  • Proposed reforms to commence on 1 July 2014.
New tax system for MITs Status
  • Key changes expected include:
    • Elective attribution regime, i.e. unit holders would be assessed on reasonable attribution of taxable income
    • Codified treatment of under/overs
    • Cost base uplifts (where taxable income exceeds distribution)
    • Corporate unit trust rules to prevent the transfer of businesses taxed at the company tax rate into trusts to be replaced by arm's length transaction requirement
    • The definition of 'public' to be amended to automatically omit trusts with 20% or more superannuation investors.
  • Consultation in progress
  • Release of exposure drafts expected in early 2013
  • Introduction of legislation expected mid-2013
  • Start date deferred – now proposed to be 1 July 2014.
Definition of 'fixed trust' Status
  • To address the problem that very few trusts are able to satisfy the existing definition without reliance on the Commissioner's discretion
  • Proposal that MITs with clearly defined rights be given deemed fixed trust status is under consideration.
  • Consultation in progress
  • Proposed reforms to commence on 1 July 2014.
Definition of limited recourse debt Status
  • 'Limited recourse debt' definition amended to include arrangements where the creditor's right to recover the debt is effectively limited to the financed asset or security provided
  • Potentially relevant for special asset investments in infrastructure/real estate.
  • Exposure draft legislation and explanatory memorandum released October 2012. Submissions due by 12 November 2012.
Collective Investment Vehicle Review Status
Review of:
  • Limitations of taxation regimes of collective investment structures (e.g. MITs)
  • Benefits of broader range of tax flow-through vehicles.
  • Board of Taxation report provided in December 2011
  • Government yet to indicate response to Board of Taxation findings.
Thin capitalisation Status
  • The potential changes mooted in the federal Budget include a reduction in the 'safe harbour debt' ratio from 75% to 60% and the removal of the arm's length debt test
  • Relevant for specialist asset structures with high gearing.
  • Discussion paper released for submissions on 21 September 2012.
  • No clear recommendation made by Business Tax Working Group (BTWG).
Foreign Accumulation Fund (FAF) rules Status
  • Integrity rule specifically targeted at portfolio investments of Australian residents in foreign accumulation or roll-up funds
  • The new rules have a more streamlined application than the predecessor Foreign Investment Fund rules that have been repealed. 
  • The FAF integrity rule will not apply for the 2010-11 income year, as previously announced by the Government. The FAF rules will only have application for income years starting on or after the date it receives royal assent.
Controlled Foreign Company (CFC) Rules Status
These measures could reduce the CFC implications arising from commercial property investments.

Changes aim to:
  • Improve targeting of CFC rules
  • Simplify legislation
  • Increase access to dividend exemptions and methods
  • Improve integrity provisions.
  • Submissions on draft legislation released in February 2011 under review
  • Further consultation expected to be undertaken in 2012
  • Measures deferred until at least 1 July 2013.

 

Bad debt deductions and related parties Status
  • Proposed reforms to deny a bad debt deduction where the debtor is a related party not in the same tax consolidated group
  • Of particular interest is the meaning of "related party".  Essentially, the proposed definition is intended to encompass the existing definitions of "associate" (contained the CFC provisions) and "associated entity" (in the thin capitalisation provisions). 
  • Submissions on Discussion paper closed on 10 August 2012.
BTWG draft final report Status
  • BTWG unable to recommend a revenue-neutral package to lower the company tax rate
  • BTWG had received feedback from many businesses asserting that they would be worse off as a result of the trade-offs canvassed in a previously released Discussion Paper. These trade-offs included reducing the amount of depreciation companies could claim and forcing businesses to finance their operations with more equity and less debt.
  • Draft final report released 24 October 2012
  • BTWG will not be seeking written submissions, but intends to shortly submit its final report to the Deputy Prime Minister and Treasurer.
Stamp Duty –Victorian Landholder Duty Status
  • Landholder duty was introduced from 1 July 2012 in Victoria. This substantially reforms the stamp duty applicable to transfers of interests in landholding entities (e.g. it introduces new threshold for units)
  • Taxpayers should consider the impact in respect of any transaction that involves an interest in Victorian land pre- or post-1 July 2012, including acquisitions, IPOs and/or restructures and seek advice for any dealings.
  • Commencement – from 1 July 2012.

 

GST – Reduced Input Tax Credits (RITC) Status
  • The Government has amended the RITC applicable to the costs of certain managed investment schemes and superannuation funds. Broadly, the change seeks to reduce the RITC to 55% (rather than the normal 75% level) for the GST incurred by affected entities on business costs. All acquisitions are potentially affected, not just those supplied by an entity's trustee or responsible entity.
  • Commencement – from 1 July 2012.

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