1. Managed Investment Trusts Tax Review Chair : Jane Michie

2. MIT Review: Design Professor Richard Vann

3. Topics to be covered Policy principles and terms of reference Options and relationships Public element International element and tax treaties

4. 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

5. 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

6. Options 1.Distribution deduction 2.Beneficiary assessment, trustee exempt 3.Beneficiary assessment, trustee exempt if distribution condition (90%) met 4.Current approach with fixes Issues –Cash flow: why? –Issues largely remain the same

7. 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

8. 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

9. International elements Competitiveness –Analysis of separate regimes –Danger of misuse Capital revenue One class of units Public Turnover related rents Business

10. 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

11. 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’)

12. 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

13. 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

14. MIT Review: classifying and clarifying Andrew Mills

15. Topics A new Div 6C? –control test –active/passive Capital/Revenue –disposals of trust assets –disposals by investors Fixed Trust definition/widely held trust

16. Control Test Already allowed by Div 6C 49% MIT BHP-B Equities

17. Control Already allowed, subject to Div 6B 51% 49% MIT BHP-B Sub Equities BHP-B

18. Control Test Already allowed by ‘top-hat’ changes 100% MIT Sub US REIT Staple Co MIT Taxable REIT Sub 100% Active business 100% Active Business

19. Control test Already allowed - escapes Div 6C 100% Interest & rent MIT Active business Staple Co 100% common owners

20. Control Test not allowed under 6C Super funds MIT trading business other investors 20%+

21. Div 6C Penalty for non-compliance Day 1Failure to comply (ongoing) Year 3Identification & disclosure of failure Also correct error Year 4ATO assessment of fund Amendment of investor assessments = too late to frank years 1 & 2

22. Active/passive divide Not currently allowed – royalties Bank Equities Building MIT Medical process Mining licence Brand name other IP  Interest RoyaltiesRent Dividends

23. 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

24. Capital/Revenue Policy? –replicating direct investors –discount capital gains? Implications – domestic and international investors Treatment of Units Statutory Rules

25. 15% / 30% tax Discount / exemption Capital/revenue Structural bias Non- resident Super fund MIT Equities

26. Non-resident witholding DistributionWithholding rate Interest paid to non-resident10% Franked dividend paid to non-residentNil Unfranked dividend paid to treaty country resident15% Unfranked dividend paid to non-treaty country resident30% Rent income paid to information exchange country22.5% non-final, 15%-7.5% final Rent income gain paid to non-info. exchange country30% Royalty paid to a resident of a treaty country10% Royalty paid to a resident of a non-treaty country30% Australian source capital gain paid to non-residentNil Australian source revenue gain paid to a non-resident30%

27. 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

28. 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?

29. 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 Question 12.1 Questions 11.1&2