Introductory Info

Date introduced: 20 September 2018
House: House of Representatives
Portfolio: Treasury
Commencement: Various dates, as set out in this Digest.

The Bills Digest at a glance

Overview

The Bill contains four Schedules that are unrelated and independent of each other.

The main focus of the Bill is to clarify, and in some instances, simplify the operation of the taxation rules relating to the AMIT regime. Broadly, the AMIT regime is a set of special rules designed to ensure that individuals and entities can invest in MITs without having to worry about complex tax laws. An important element of the AMIT regime is the requirement on trustees of MITs to issue an AMMA Statement clearly setting out the tax obligations of each investor.

Schedule 1 of the Bill makes a number of technical amendments to the AMIT regime. These amendments seek to address a number of issues raised by industry and stakeholders by clarifying how key provisions of the AMIT regime operate and by addressing unintended consequences. The main focus of these changes is to ensure that the AMIT rules continue to deliver certain tax outcomes for investors.

Schedules 2 and 3 of the Bill contain amendments to extend Deductible Gift Recipient (DGR) status to six new entities,[8] as well as entities that have the principal purpose of promoting Indigenous languages.

Schedule 4 of the Bill adopts recommendations of the Productivity Commission and the Competition Policy Review to repeal subsection 51(3) of the CCA. This provision currently allows the holders of intellectual property (IP) rights to impose conditions on the assignment or licensing of their IP which amount to a restrictive trade practice. Removing the exemption in the CCA will bring Australia into line with the United States, Canada and Europe.

Key issues

Although the purpose of the AMIT regime is to simplify and streamline the tax treatment of MITs and reduce compliance costs, the amendments fail to remove much of this complexity. As noted by PWC in relation to the 2016 reforms:

While the proposed new regime goes some way to addressing the difficulties in applying the current trust tax law provisions to managed investment trusts, the proposed rules are complex and feature a range of new obligations and potential penalties that must be carefully considered. [9]

The amendments in the Bill do clarify, and in some instances, simplify the operation of the AMIT rules.[10] Nonetheless, the legislation remains highly complex—in large part due to the legislative drafting style.

The Financial Services Council raised some concerns about whether the current start dates of the new rules allow sufficient time for industry to implement the proposed changes, as the new AMIT rules may commence prior to the 2018–19 income year.[11] These concerns do not appear to have been addressed in the Bill.

Purpose of the Bill

The primary purpose of the Treasury Laws Amendment (2018 Measures No. 5) Bill 2018 (the Bill) is to amend laws relating to MITs to clarify their tax treatment and provide greater certainty to investors.[12]

The Bill also amends the:

• ITAA 1997 to add six additional charities to the list of eligible DGRs
• ITAA 1997 to extend DGR status to entities that have the principal purpose of promoting Indigenous languages and
• CCA to remove an exemption which currently allows holders of IP to impose conditions on the licensing or assignment of IP rights that would otherwise amount to a restrictive trade practice.

Commencement

• Sections 1 to 3 commence on Royal Assent
• Schedules 1 and 2 commence on the first 1 January, 1 April, 1 July or 1 October to occur after Royal Assent
• Schedule 3 commences on 1 July 2019 and
• Schedule 4 commences six months after Royal Assent.

Structure of the Bill

The Bill consists of four Schedules:

• Schedule 1 makes a number of amendments to various tax laws to clarify the taxation treatment of MITs and AMITs
• Schedule 2 of the Bill amends the ITAA 1997 to include six new entities as DGR entities
• Schedule 3 amends the ITAA 1997 to extend the type of entities included in the register of cultural organisations to include entities that have the principal purpose of promoting Indigenous languages and
• Schedule 4 amends the CCA so that conditional licensing or assignment of IP rights, such as patents, registered designs, copyright and eligible circuit layout rights are no longer exempt from being restrictive trade practices.

Background

Schedule 1—Managed Investment Trusts

Schedule 1 of the Bill makes technical amendments to the MIT and AMIT rules in order to ensure that these regimes operate as intended. The amendments also seek to provide industry with increased investment certainty and assist entities in deciding whether to opt-in to the AMIT regime.[13]

What is a Managed Investment Trust?

Broadly, a MIT is a type of trust in which members of the public collectively invest in primarily passive income activities, such as investments in shares, property or fixed interest assets.[14]

MITs are attractive to investors as they present an opportunity to pool capital with other investors, enabling investment in larger and more diversified assets than would otherwise be the case.[15] Further, there are a number of tax advantages associated with the MIT regime, discussed in more detail below.

For a trust to qualify as a MIT, section 275-10 of the ITAA 1997 requires the following conditions to be satisfied:

• the trustee of the MIT is an Australian resident or the central management and control of the MIT is in Australia
• the MIT does not carry on or control an active trading business
• the MIT is a managed investment scheme within the meaning of section 9 of the Corporations Act
• the MIT is a widely held trust that is not closely held[16] and
• the MIT is registered under the Corporations Act, or if a wholesale MIT,[17] the ITAA 1997.[18]

Why do special rules apply for Managed Investment Trusts?

On 7 May 2010, the then Assistant Treasurer, Senator Nick Sherry announced the Rudd Government would put in place a new tax system for MITs for commencement on 1 July 2011.[19] These reforms were part of the Government’s commitment to make Australia the financial services hub of Asia,[20] and followed a decision in 2008 to reduce the level of withholding tax imposed on certain MIT distributions to foreign residents from 30 per cent to 7.5 per cent.[21]

At the time of introducing these new rules, Australia had the fourth largest onshore managed funds market in the world.[22] However, as the taxation rules applying to managed funds were highly complex and uncertain, the Government considered that introducing a new set of rules that removed complexity and uncertainty, would enhance the international competiveness of Australia’s managed funds sector and reduce compliance costs.[23]

It should be noted that the MIT withholding tax rate imposed on distributions to foreign residents was increased to 15 per cent from 1 July 2012 for non-residents located in a country with an exchange of information agreement with Australia—there is a 30 per cent MIT withholding rate applying to MIT distributions to a non-resident located in a country with no exchange of information agreement with Australia.[24]

Subsequent Government Announcement

On 19 July 2017, the then Minister for Revenue and Financial Services, Kelly O’Dwyer announced that in response to concerns identified by industry, further changes would be made to improve Australia’s financial services taxation regime.[25] These included, amongst other things, an announcement that amendments would be made to the AMIT rules to ensure they operated as intended.

The Government released exposure draft legislation in respect of the AMIT amendments on 18 June 2018, with consultation closing on 16 July 2018.

Taxation of Managed Investment Trusts

Managed investment trusts and their members are generally taxed under the trust provisions in Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936), unless the trustee makes an election to apply the AMIT rules.

One of the key purposes of the MIT regime is to make tax outcomes for investors more certain and less complex. The MIT regime seeks to simplify the tax outcomes for investors, and reduce compliance costs through the following core rules and principles:

• The trustee of an eligible MIT can make an irrevocable election to become an AMIT, which provides members and beneficiaries with a simpler alternative to the existing taxation rules.[26] Further, the rules are also far more flexible, allowing trustees of AMITs to make adjustments to amounts of tax that members must pay where there has been an error made in previous years (known as the unders and overs regime).[27]
• Gains or losses from the disposal of certain assets that are attributed or paid to investors can be taxed under the CGT rules.[28] This means that investors can apply the capital gains discount to these amounts, thereby reducing their tax paid. These rules are known as the capital treatment election.[29]
• Withholding taxes are payable in relation to amounts of dividends, interests, or royalties (DIR) that are attributed or paid to a foreign resident. These taxes are collected by imposing a withholding obligation on the MIT trustee. Withholding tax is imposed in line with the withholding tax rates under relevant tax treaties.
• A specific MIT withholding tax on amounts of Australian sourced income, other than DIR, that are attributed or paid to foreign investors.[30] The MIT withholding tax ‘switches off’ the requirement to pay Australian income tax on these amounts – thereby offering a lower rate of tax (15% for residents of countries that have an exchange of information agreement in place with Australia, and 30% for all other residents).[31]

Where an election to apply the AMIT rules is not made, the general rules relating to the taxation of trusts contained in Division 6 of Part III of the ITAA 1936 apply. These rules are highly complex, and are a major reason why the AMIT regime was created.

Who is eligible to be an AMIT?

In order to be eligible to apply the AMIT rules, a MIT must satisfy the conditions outlined in section 276-10 of the ITAA 1997. Broadly, the following requirements must be satisfied:

• the trust is a managed investment trust in relation to the income year
• the rights to income and capital arising from each membership interest in the trust are clearly defined at all times when the trust is in existence in the income year[32]
• if the trust is a MIT only because its members are MITs or widely-held entities that are listed under subsection 275-20(4) of the ITAA 1997, then its members must only be MITs and
• the trustee of the MIT has made an election to apply the AMIT rules.

What is the AMIT regime?

The Tax Laws Amendment (New Tax System for Managed Investment Trusts) Act 2016 introduced the AMIT rules with effect from 1 July 2016. Under these rules, the trustee of a MIT can make an irrevocable election to be an AMIT for tax purposes.

The Explanatory Memorandum to the Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015 (2015 Bill), states that the AMIT rules provide the following benefits to investors:

• The trust will be treated as a fixed trust for income tax purposes. This means that amongst other things, members will be considered to have a vested and indefeasible interest in a share of the income and capital of the AMIT.[33]
• Income or profits derived or received by the MIT that are attributed to members retain the same tax character they had in the hands of the trustee for income tax purposes. Therefore amounts of capital earned by the MIT will be treated as capital (and able to be discounted under the CGT rules) in the hands of members.[34]
• Reduction of double taxation by allowing members to adjust their membership cost base to recognise differences between amounts received by a member and amounts included in their assessable income.[35]
• A new capital gains event ‘AMIT non-assessable payments (CGT event E10)’ to recognise that members may have a capital gain or loss in respect of the receipt of non-assessable payments.[36]
• An unders and overs system that allows a trustee to make adjustments to amounts attributed to members where incorrect amounts were included in members’ assessable income in previous years. Such variances are highly likely when calculating member attribution amounts, as the trustee may not have complete information at the time of preparing and issuing the AMMA Statement.[37] The unders and overs system largely codified the prevailing industry practice for reconciling these variances.[38]

How does the attribution model of taxation operate?

As noted above, prior to the AMIT rules being introduced, beneficiaries or members of trusts had to include in their assessable income, the share of trust income to which they were presently entitled.[39] As explained by the Board of Taxation, in the context of a MIT, the concept of net present entitlement was particularly problematic:

A problem with the use of present entitlement in the context of MITs is where an MIT sells assets to obtain funding for redemptions of units (that is, to pay out beneficiaries withdrawing from the trust). Whilst a gain on the disposal of the assets may be in whole or in part the source of the redemption payment, there is an issue as to whether the redeeming unit holder can be characterised as a beneficiary presently entitled to the income of the trust estate in respect of the relevant year of income. If they cannot be so characterised, then the liability for tax payable on the gain (whether it be revenue or capital in nature), would fall on the trustee and/or ongoing beneficiaries. This may lead to MITs increasing the end of year distributions to match the gain which Division 6 includes in the assessable income of the ongoing beneficiaries.[40]

As discussed below, the AMIT regime seeks to address these concerns by adopting a simplified and more streamlined approach to taxation of MITs and their members, as well as the introduction of an unders and overs system to make adjustments for incorrect amounts of tax paid in previous years.

Taxation outcomes for AMIT members—attributed amounts

Under the AMIT model of taxation, members are taxed on amounts attributed to them by the trustee of an AMIT.[41] A key objective of these rules is to tax a member in broadly the same way they would have been taxed if they had held the assets of the AMIT directly.[42]

Unlike the trust rules contained in Division 6 of Part III of the ITAA 1936, members are not distributed or attributed a net share of trust income. Rather, the AMIT is required to:

• split its earnings and income into specific classes or categories of income—for example, income may be broken up into earnings from dividends, royalties, interest, franked distributions and proceeds from the sale of assets
• the AMIT then ‘matches’ the expenses it has incurred to each category of income
• the final amount remaining of each category of income is known as the determined trust component and
• the determined trust component is then attributed evenly amongst all members of the AMIT (the total of this attributed amount is known as the determined member component).[43]

This is illustrated below in the following simplified example:

Example one

An AMIT earns $100 of interest income and a further $200 from the sale of shares. The AMIT had interest expenses of $80 ($30 of these expenses were incurred in earning the interest income and $50 in buying the shares) and commission expenses of $20 in relation to the shares income. The AMIT calculates the following amounts to be attributed equally amongst its members:

• Interest income $70 ($100 less $30) and
• Shares income $130 ($200 less $50 less $20).

Importantly, subsection 276-80(2) of the ITAA 1997 provides that a member of the trust is treated as deriving, receiving or making a determined member component in the member’s own right, meaning it receives the same tax treatment as the AMIT. This means that for tax purposes, the determined member component retains the same tax characteristics for the member as it did for the AMIT. For example, if an AMIT treats the sale of assets as a capital gain, it will also be a capital gain in the member’s hands and capable of being reduced by the CGT discount.

When calculating a determined member component, the trustee of the AMIT may not have complete information about the amount of income it has earned from other AMITs.[44] In order to deal with this situation, subdivision 276-F of the ITAA 1997 contains special rules, known as unders and overs, which allow the trustee to make adjustments in later years to determined member components, where amounts attributed in previous years were not correct. As stated in the Explanatory Memorandum to the 2015 Bill:

... an attribution MIT will often have incomplete or interim information at the time it needs to work out the trust components of particular characters for an income year where it holds units in other attribution MITs and has not received AMMA statements from those other attribution MITs for that income year. In these circumstances, the trustee has no alternative but to work out trust components of particular characters based on estimated amounts of those components.[45] [Emphasis added].

Taxation outcomes for AMIT members—capital gains event E10

Members of AMITs are required to make annual adjustments to the cost base of their membership interests. These adjustments are done in order to reflect increases or decreases in the value of the membership interest, for example, where a MIT reinvests some of a fund payment into the MIT.

The ATO Law Companion Ruling LCR 2015/11 Attribution Managed Investment Trusts: annual cost base adjustments for units in an AMIT and associated transitional rules summarises when upward and downward adjustments occur:

CGT event E10 downwards adjustments reflect, broadly speaking, actual payments received by the member. Upwards adjustments are, broadly speaking, equal to the sum of amounts included in the member's assessable income (or otherwise as a relevant capital gain) and non-assessable non-exempt income in respect of the AMIT. The downwards and upwards adjustments are netted off against each year to arrive at a net cost base adjustment amount, which is the amount by which the cost base of the member's interest in the AMIT is adjusted.[46]

• Under section 104-107C of the ITAA 1997, the difference between the cost base increase amount and the cost base reduction amount will be the AMIT cost base net amount—this will either be:
  • a shortfall where the cost base reduction amount falls short of the cost base increase amount.[47] In this case, the cost base must be increased by the shortfall amount[48] and
  • an excess where the cost base reduction amount exceeds the cost base increase amount.[49] In this case, the cost base must be reduced by the excess amount.[50]

Where the reduced cost base amount exceeds the existing cost base of the membership interest, CGT event E10 will happen.[51] As discussed below, the Bill contains technical amendments to make CGT event E10 operate as intended.

Taxation outcomes for non-resident AMIT members—withholding taxes

Generally, non-residents will not be subject to Australian income tax on amounts attributed to them by an AMIT.[52] Rather, where an AMIT satisfies the definition of a withholding MIT, an amount of withholding tax will be applied to payments made to non-residents.

A MIT will generally be a withholding MIT where a substantial proportion of its investment management activities relate to Australian assets, taxable Australian property, or shares, units or interests listed on the Australian Stock Exchange.[53]

Broadly, withholding taxes apply to:

• payments of dividends, interest or royalty amounts to non-residents—withholding tax rates are set in line with the existing DTAs. Payments of royalties and dividends to residents of countries with no DTA will attract withholding taxes of 30 per cent and payments of interest to residents of countries with no DTA will attract withholding taxes of ten per cent and
• fund payments to non-residents, excluding payments of dividends, interest or royalties (known as MIT withholding tax).[54]
• Where a withholding MIT makes a fund payment to a non-resident,[55] the following withholding tax rates currently apply:
• where the address or place for payment of the recipient is in an information exchange country:
  • 10% for fund payments made after 1 July 2012 that are attributable to fund payments from a clean building managed investment trust[56] and
  • 15% for all other fund payments made after 1 July 2012.
• In all other cases the withholding rate is 30 per cent.[57]

Taxation outcomes for AMIT trustees

Broadly, a trustee of an AMIT will be required to pay tax on amounts of income that are not attributed to members or taxed at the member level.[58] This ensures that all income of the AMIT is subject to taxation, and broadly aligns with the rules in Division 6 of Part III of the ITAA 1936 which require trustees to pay tax on amounts that are not distributed to beneficiaries.

In the context of an AMIT, this scenario will most commonly arise where a trustee does not attribute an amount to members or the trustee incorrectly calculates the attribution amount leading to a shortfall or an ‘under’. The trustee will be subject to tax at the highest marginal tax rate. However, shortfall amounts will be reduced to the extent that they have been reflected in an ‘under’ that has been attributed to a member.[59]

Schedule 2—Deductible Gift Recipients

The income tax law provides that taxpayers may claim deductions in respect of gifts or donations of $2 or more made to a DGR. One of the rationales for this is that DGR status helps organisations attract public financial support for their activities.[60]

Division 30 of the ITAA 1997 contains the categories of entities and specifically listed entities that have DGR status. Where an organisation does not fall within the general categories provided for in the ITAA 1997, the ATO is unable to approve the entity as a DGR. Accordingly, a legislative amendment to the ITAA 1997 is required in order to specifically list those organisations as DGRs.

Schedule 2 to the Bill amends the ITAA 1997 to provide DGR status to six new entities, described below:

• Australian Sports Foundation Charitable Fund—a registered charity established to support projects where sport is the vehicle to achieve charitable aims
• Australian Women Donors Network—a registered charity established to provide a voice for gender inclusive philanthropy across all focus areas including education, health, disability, youth and the arts
• Paul Ramsay Foundation Limited—a registered charity established to be the recipient of the Ramsay bequest from the Paul Ramsay Foundation to pursue one or more of the following charitable purposes in Australia: advancing health, advancing education and advancing social or public welfare
• The Q Foundation Trust—a registered charity with the principal purpose of advancing education and engagement in science and technology in Australia
• Smile Like Drake Foundation Limited—a registered charity that supports research into preventing drowning and provides water safety education programs for schools and
• Victorian Pride Centre Ltd—a registered charity established to own and operate a centre in the State of Victoria to facilitate and host support services, facilities and resources for the lesbian, gay, bisexual, transgender, and/or intersex community.[61]

Schedule 3—Extending DGR status to entities promoting Indigenous languages

As noted above, the income tax law provides that taxpayers may claim deductions in respect of gifts or donations of $2 or more that are made to a DGR entity. One of the categories under which an entity can be granted DGR status is the ‘cultural organisation’.[62] As noted in the Explanatory Memorandum, the definition of cultural organisation includes organisations that have the principal purpose of promoting the arts of Indigenous persons but it does not include organisations that have the principal purpose of promoting languages of Indigenous persons.[63]

Schedule 3 of the Bill amends the ITAA 1997 so that cultural organisations include organisations that have as a principal purpose, amongst other things, the promotion of the languages of Indigenous persons.

This delivers on a commitment made by the Government in the 2017–18 Mid-Year Economic and Fiscal Outlook.[64]

Schedule 4—Repeal of subsection 51(3) of the CCA

Part IV of the CCA outlines a range of prohibited behaviours and practices that constitute restrictive trade practices. Currently, subsection 51(3) of the CCA contains an exception to some of the prohibited behaviours in respect of conditional licensing or assignment of intellectual property rights.

Schedule 4 removes this exception in line with recommendations of the Productivity Commission and the Competition Policy Review and brings Australia in line with other countries such as the United States, Canada and Europe.[65]

Therefore, as a result of this amendment, the transfer or assignment of intellectual property rights will be assessed under competition laws in the same manner as other commercial transactions.

Committee consideration

Senate Standing Committee for the Scrutiny of Bills

The Senate Standing Committee for the Scrutiny of Bills had no comment on the Bill.[66]

Senate Standing Committee for the Selection of Bills

The Senate Standing Committee for the Selection of Bills recommended that the Bill not be referred to a committee for inquiry.[67]

Policy position of non-government parties/independents

The Australian Labor Party (ALP) supported the Bill’s passage through the House of Representatives on 18 October 2018. [68] At the time of writing, no comments from other parties or independent members of Parliament have been identified.

Position of major interest groups

The Government has not released the submissions received from Treasury consultation.[69] However, the Financial Services Council (FSC) has made its submission in relation to draft amendments publically available.[70]

The FSC’s main contention is that the Bill does not deliver on the Government’s commitment to consult on amendments to address issues relating to residency that arise under the Investment Manager Regime.[71] This appears to relate to a press release, ‘Improving Australia’s financial services regime’ issued by the then Minister for Revenue and Financial Services, Kelly O’Dwyer on 19 July 2017.[72]

The FSC submission also raises a number of other technical issues including:

• That the commencement date be changed from the 2017–18 income year to the income year commencing after the Bill receives Royal Assent, so as to allow sufficient time for industry to implement the changes.[73]
• Concerns that the amendments to Tax File Number (TFN) withholding rules will not be effective in respect of deemed payments, as there is no payment to withhold an amount from, and trustees should be indemnified by investors who have not quoted their TFN.[74] Item 20 of Schedule 1 to the Bill appears to directly address this issue by allowing the trustee to offset these amounts against debts or amounts owing to the member.
• A number of technical drafting errors with proposed subitem 75(3A) of Schedule 5 to the Tax Laws Amendment (New Tax System for Managed Investment Trusts) Act 2016 (TLAA 2016) (as contained in the exposure draft)—these appear to have been subsequently addressed in the Bill through proposed amendments to subitem 75(2) of Schedule 5 to the TLAA 2016 by item 37 of Schedule 1 to the Bill.[75]
• A change to the drafting of proposed paragraph 75(4)(c) of Schedule 5 to the TLAA 2016 (as contained in the exposure draft) to ensure trusts with substituted accounting periods are able to distribute franking credits—this appears to have been subsequently addressed in the Bill (see item 41 of Schedule 1 to the Bill).[76]
• The FSC also raised a number of technical drafting errors which appear to have been addressed in the Bill.[77]

Financial implications

Schedule 1—AMIT technical amendments

The Explanatory Memorandum does not state what the financial impact of the proposed measure in Schedule 1 to the Bill will be, rather the Explanatory Memorandum states:

This legislation contains technical amendments reflecting the policy intent of the 2015-16 MYEFO measure Managed investment trusts – adjustments to the new tax system. This measure was estimated to have an unquantifiable cost to revenue.[78]

Schedule 2—Deductible Gift Recipients

The Explanatory Memorandum relies on the financial impact contained in the 2018–19 Budget, which ‘was estimated to be $0.6m over the forward estimates period to 2021–22’.[79]

Schedule 3—Extending DGR status to entities promoting Indigenous languages

The Explanatory Memorandum relies on the financial impact contained in the 2017–18 Mid-Year Economic and Fiscal Outlook and states that the ‘measure was estimated to have a negligible cost to revenue over the then forward estimates period’.[80]

Schedule 4—Repeal of subsection 51(3) of the CCA

The proposed measure contained in Schedule 4 to the Bill is expected to have no financial impact.[81] The compliance cost impact is ‘expected to be low’.[82]

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[83]

Parliamentary Joint Committee on Human Rights

The Parliamentary Joint Committee on Human Rights considered that the Bill does not raise any human rights concerns.[84]

Key issues and provisions

Schedule 1 – AMIT technical amendments

While Schedule 1 to the Bill is not divided into legislative Parts, the Explanatory Memorandum broadly categorises the changes made by the Schedule into four parts:

• Part 1 makes a number of technical amendments to the MIT and AMIT rules, including:
  • amending the ITAA 1997 to clarify which entities are eligible to be MITs
  • extending the MIT rules to provide that the Future Fund and its wholly owned entities are eligible investors and
  • making a number of amendments to ensure that MIT trustees and unitholders are correctly taxed on discount capital gains
• Part 2 amends the ITAA 1997 to ensure that Capital Gains Tax event E10 operates as intended
• Part 3 makes modifications to the ITAA 1997 and TAA to clarify how the withholding tax rules apply to MITs and AMITs and
• Part 4 extends the transitional MIT rules contained in the TLAA 2016 for a further 12 months and ensures that trusts with substituted accounting periods can access these rules.[85]

Part 1—Technical amendments to the MIT and AMIT rules

The main focus of part 1, being items 7 to 9, 11 and 17 of Schedule 1 to the Bill, is to make a range of technical amendments to rules around which entities can access the AMIT regime.

Extending who is eligible to be a MIT member

Proposed paragraph 275-20(4)(ia) and proposed subsection 275-20(4A) of the ITAA 1997 (at items 7 and 8 of Schedule 1 to the Bill) expressly state that the Future Fund Board of Guardians and its wholly owned entities are now eligible to be investors in MITs. The Future Fund is Australia’s sovereign wealth fund ‘established in 2006 to strengthen the Australian Government’s long-term financial position’.[86] The Future Fund Board is responsible for deciding how to invest the Future Fund in accordance with the Future Fund Act 2006.[87]

Item 9 repeals paragraph 276-10(1)(c) of the ITAA 1997 which broadly provides that a MIT can access the AMIT regime where its members are all specified widely-held entities (for example, a life-insurance company or complying superannuation fund) listed under paragraph 275-20(4) of the ITAA 1997. The Explanatory Memorandum states that ‘[t]his requirement is unnecessarily restrictive and was unintended.’[88] As a result this amendment ensures that MITs that have a single unitholder that is a specified widely-held entity listed in section 275-45 can access the AMIT regime.[89]

Discount capital gains changes

Schedule 1 to the Bill also makes modifications to the ‘unders and overs’ regime. Broadly, item 10 repeals subsections 276-315(4) and (5) of the ITAA 1997, the effect of which is that any shortfall amounts relating to discounted capital gains remain discounted in the hands of the MIT member.

Item 11 amends subsection 276-415(4) of the ITAA 1997 so as to ensure that for the purposes of calculating shortfalls on discounted capital gains, any discount capital gains for determined member components are not grossed up. The Explanatory Memorandum states that this ensures that where the relevant character is a discount capital gain, the amount of the determined member component will not be doubled and will remain the discounted amount.[90]

Part 2—Technical amendments to the MIT and AMIT CGT rules

This Part makes amendments to, and seeks to clarify the operation of, CGT events E4 and E10.

MITs: CGT event E4

Where a trustee makes a payment to a member of a trust in respect of their interest in the trust, and a part of that payment includes an amount that is not included in the member’s assessable income, CGT event E4 will occur where that non-assessable part is greater than the cost base of the relevant membership interest. Item 2 inserts proposed subsection 104-71(6) of the ITAA 1997 to clarify the operation of CGT event E4 by making it clear that where that payment has been offset against a capital loss, the capital loss amount is not excluded from the non-assessable amount of the payment. That is, in determining the amount of the non-assessable payment, the payment can be reduced by any capital losses applied by the MIT. This also aligns the tax treatment of MITs with the comparable CGT event E10 for AMITs.[91]

AMITs: CGT event E10

Items 3 to 5 modify the operation of CGT event E10 in section 104-107A of the ITAA 1997.

Where a member of an AMIT receives non-assessable payments from the AMIT, the cost base (or reduced cost base) of the asset needs to be adjusted.[92] This reflects changes in the value of the member’s interest in the AMIT. Where the net amount of the adjustments is greater than the asset’s costs base, the asset’s cost base will be reduced to nil and any remaining excess will give rise to a capital gain as a result of CGT event E10.[93] However, currently where the cost base of the asset is nil at the start of the income year, the cost base cannot be reduced which prevents CGT event E10 from occurring.

These amendments seek to modify the law to make it clear that where a member’s membership interest is nil, CGT event E10 can still occur, with the capital gain being the amount the cost base adjustment exceeds the cost base amount. Further, proposed subsection 104-107A(2) of the ITAA 1997 will deem the CGT event to occur in the year the cost base would have been reduced, if the cost base were not nil.

Therefore, items 3 to 5 address a drafting issue with the section 104-107A of the ITAA 1997 which prevents CGT event E10 from occurring where the cost base of the asset is $0 at the start of the income year.

Part 3—Technical amendments to the MIT and AMIT withholding tax rules

Withholding provisions: deemed payments and actual payments

Items 12 and 14 make modifications to paragraphs 840-805(2)(b) and 840-805(3)(b) of the ITAA 1997 to clarify that the MIT withholding rules apply to deemed payments as well as actual payments made by an AMIT which are attributable to foreign resident members.

Item 13 adds a proposed note to subsection 840-805(2) of the ITAA 1997 which clarifies that a fund payment may not actually reflect the actual amount paid to a member. Further, item 15 adds a proposed note to subsection 840-805(3) of the ITAA 1997 clarifying that the MIT withholding rules apply to payments to members made by custodians on behalf of the MIT.

Item 19 inserts a proposed note in subsection 12-140(1) of Schedule 1 to the TAA 1953 to clarify that deemed payments are treated as having been paid for the purposes of the withholding tax provisions.

Items 31 to 33 amend section 12A-215(1) of Schedule 1 to the TAA to clarify that all AMITs (regardless of whether they are a withholding MIT) have a withholding obligation in respect of any deemed payments made in relation to dividends, interest or royalties.

Tax File Number withholding provisions

Items 20 and 21 deal with amendments to the TFN withholding rules.

Proposed subsection 12-140(3) of Schedule 1 to the TAA provides the trustee with the ability to set off any TFN withholding amounts which the trustee of the AMIT was required to pay on behalf of a member, against any debts due by the AMIT to the member. This appears to address concerns raised by the FSC that the trustee of an AMIT should not be liable for TFN withholding liability where the member fails to provide their TFN.[94]

Proposed section 12-152 of Schedule 1 to the TAA also contains an amendment to ensure that TFN withholding tax cannot be imposed on a payment more than once.[95]

Withholding tax on deemed payments

Items 23 and 24 amend the definition of a MIT and AMIT for withholding purposes, so as to clarify that an AMIT that only makes deemed payments (that is, no actual cash distributions) can be a withholding AMIT,[96] and that an AMIT that only makes deemed payments to foreign residents can also be a withholding AMIT.[97]

Withholding tax on AMIT and MIT fund payments

Items 25 to 30 contain a range of technical amendments in relation to calculating an amount of withholding tax on taxable Australian property gains for MITs and AMITs. Broadly, these items amend subsections 12-405(2) (relating to MITs) and 12A-110(3) (relating to AMITs) of Schedule 1 to the TAA. The purpose of these provisions is to ensure that fund payments for the purposes of applying the MIT withholding tax amounts do not include dividends, interest, royalties, capital gains or losses, or amounts that are not from an Australian source.[98]

Items 25 to 30 also modify the method statements in subsections 12-405(2) and 12A-110(3) of Schedule 1 to the TAA so as that in determining the fund payment, capital gains from taxable Australian property are not reduced or offset by capital losses from non-taxable Australian property. As stated in the Explanatory Memorandum:

This ensures that, where a fund payment is made to a foreign resident member, the amount of withholding tax payable by the MIT or AMIT is calculated on taxable Australian property net capital gains. [99]

Part 4—Technical amendments to the AMIT transitional rules

Items 34 to 46 make a number of technical amendments to the AMIT transitional rules contained in Schedule 5 of the TLAA 2016. The AMIT transitional rules were introduced as part of the AMIT rules introduced in 2016 and among other things provided:

• that corporate unit trusts or public trading trusts that ceased to be corporate tax entities as a result of amendments made to Divisions 6B and 6C of Part III of the ITAA 1936, could nonetheless continue to treat distributions as frankable distributions and utilise accumulated franking credits until 30 June 2018[100] and
• transitional tax treatment for pre-exiting MITs.[101]

Items 35 to 42 effectively extend the transitional rules for entities which, as a result of the AMIT reforms, ceased to be corporate unit trusts or public trading trusts, to allow them to continue to treat distributions as frankable distributions until 1 July 2019.

Items 18 and 43 to 45 extend the application of the transitional rules to apply to corporate unit trusts and public trading trusts with substituted accounting periods—as a result, the transitional rules are no longer limited to entities that have income years starting on 1 July.

Application

The amendments made by:

• item 2 apply to distributions made in relation to the 2017-18 income year or later[102]
• item 9 apply in relation to the 2017-18 income year and later income years[103]
• item 18 and items 43 to 45 apply in relation to the 2016-17 income year and later income years[104] and
• any other items of Schedule 1 to the Bill apply in relation to the 2018-19 income year and later income years.[105]

Schedule 2—Deductible Gift Recipients

Schedule 2 of the Bill amends the ITAA 1997 to provide DGR status to six new entities. The proposed changes are summarised in table 1: summary of changes to proposed DGR listings.

Table 1: summary of changes to proposed DGR listings

Entity	Proposed period of DGR status	Proposed provisions of the ITAA 1997
Australian Sports Foundation Charitable Fund	After 30 June 2018 and before 1 July 2023	Proposed table item 10.2.9 in section 30-90
Australian Women Donors Network	After 8 March 2018 and before 9 March 2023	Proposed table item 11.2.11 in section 30-95
Paul Ramsay Foundation Limited	After 30 June 2018 and before 1 July 2020	Proposed table item 13.2.24 in section 30-105.
The Q Foundation Trust	After 31 December 2017 and before 1 January 2023	Proposed table item 2.2.46 in subsection 30-25(2)
Smile Like Drake Foundation Limited	After 8 March 2018 and before 9 March 2023	Proposed table item 2.2.45 in subsection 30-25(2)
Victorian Pride Centre Ltd	After 8 March 2018 and before 9 March 2023	Proposed table item 4.2.44 in subsection 30-45(2)

Source: Parliamentary Library.

Schedule 2 of the Bill also makes minor consequential amendments to the table contained in section 30-315 of the ITAA 1997 which is an index of the specifically listed DGR entities and general categories.[106]

Schedule 3—Extending DGR status to entities promoting Indigenous languages

Item 1 of Schedule 3 to the Bill amends subsection 30-300(2) of the ITAA 1997, by omitting the words ‘arts of’ and replacing it with the words ‘arts or languages of’. As a result, section 30-300 of the ITAA 1997 will now define a cultural organisation as a body corporate, trust or unincorporated body established for a public purpose by the Commonwealth, a state or territory, that amongst other things, ‘has its principal purpose as promoting the literature, music, a performing art, a visual art, a craft, design, film, video, television, radio, community arts, arts or languages of Indigenous persons, or movable cultural heritage’.[107]

The Explanatory Memorandum states that the term ‘languages of Indigenous persons are intended to refer to the traditional or historical languages of those persons’.[108]

Schedule 3 to the Bill commences on 1 July 2019.[109]

Schedule 4—Repeal of subsection 51(3) of the CCA

Item 1 of Schedule 4 repeals subsection 51(3) of the CCA and item 3 of Schedule 4 repeals subsection 51(3) of Schedule 1 to the CCA. As stated in the Explanatory Memorandum, Schedule 1 to the CCA is the Competition Code and ‘is applied as a law by the states and territories’.[110] This means that there will no longer be an exemption from the application of Part IV of the CCA regarding the prohibition on restrictive trade practices, ‘for conditional licensing or assignment of IP rights such as patents, registered designs, copyright or eligible circuit layout rights’.[111]

Application

Item 2 of Schedule 4 creates proposed Division 4 in Part XIII of the CCA, which contains proposed section 186. It clarifies that the amendment to subsection 51(3) of the CCA applies to a licence granted, an assignment made, or a contract, arrangement or understanding entered into before, on or after the commencement of Schedule 4 to the Bill.[112]

Schedule 4 to the Bill commences six months after the Bill receives Royal Assent.[113] According to the Explanatory Memorandum:

The delayed commencement will give individuals and businesses time to review existing arrangements to ensure they comply with the competition provisions of the CCA. If necessary, they can apply to the Australian Competition and Consumer Commission for authorisation of their existing arrangements under Part VII of the CCA.[114]

However, proposed section 186 does not apply to the extent that it would result in an acquisition of property (within the meaning of section 51(xxxi) of the Constitution) from a person otherwise than on just terms.[115]

Concluding comments

The majority of the changes contained in this Bill are of a technical and uncontroversial nature.

However, it does not appear that the FSC’s concerns in relation to the start dates for the new rules have been addressed. As such, there may be a question as to whether there will be sufficient time for taxpayers to design and implement systems to respond to the new rules.