The new tax system for managed investment trusts (MITs) will enhance the attractiveness of Australian assets to offshore investors, leading to greater sales opportunities and the promotion of local funds management expertise. However, while the proposed reforms bring many positives, an industry expert has warned of the devil in the detail, following the recent deadline for submissions on the draft legislation, which closed on Thursday, 23 April.
Justin Epstein, Executive Director at One Investment Group, said changes to the MIT regime are an opportunity to reduce complexity and reposition Australia as a top-tier destination for global investment capital but argued that implementation costs might be a sticking point for some stakeholders in the managed funds industry.
“A key motivation for our clients in establishing a MIT qualifying vehicle is to create attractive Australian investment opportunities that fall within the MIT tax regime,” said Epstein. “Enhancing the attractiveness of Australian assets for offshore investors results in increased potential investors, which subsequently leads to greater sale opportunities for Australian assets.”
According to a Treasury statement, the new tax system aims to “modernise” the tax rules for eligible MITs and “increase certainty” for both MITs and their investors. However, in a submission based on its review of the Federal Government’s draft legislation, One Investment Group cautioned that the timing of transitional arrangements, financial costs and unintended consequences need further discussion.
Specifically, Epstein believes the introduction of a trustee administrative penalty, whilst intended to encourage accountability in trustees and protect investors, might result in higher administration costs. Schedule 2, item 5, section 288-115 of the Bill proposes to introduce an administrative penalty for “intentional” or “reckless” disregard of the law by the trustee of a MIT.
“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,” he said.
“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.”
In its submission, One Investment Group makes the point that whilst it is not opposed to the need for an administrative penalty in cases of clear “intentional” or “reckless” disregard of the law, further guidance is needed to provide trustees and investors with clarity over their potential exposure.
Epstein further called for the granting of class order relief by the Australian Securities and Investments Commission (ASIC) 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,” he said.
“Given this, we respectfully submit that the introduction of the changes by the Bill be accompanied by the granting of class order relief by ASIC to relieve trustees from the requirement to obtain member approval to amend a trust’s constitution in order to qualify as an AMIT. It is our view that this approach 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.”
One Investment Group’s submission 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.
Finally, the draft Bill states that amendments will apply to assessments for income years starting on or after 1 July 2015, but Epstein has suggested that some components of the new regime only apply to assessments for income years starting on or after 1 July 2016.
Source: One Investment Group
