AMIT is here

Here’s a summary of the good news

On 21 June 2016 ASIC released the much anticipated waiver paving the way for registered schemes to modify their constitutions to become attribution managed investment trusts (AMITs) without the need for a unitholder meeting.

ASIC has also granted relief from the duty to treat members who hold interests of the same class equally where responsible entities attribute part of a determined trust component to a member under the new tax system.

There’s been some panic about a 30 June 2016 or 1 July 2016 deadline for action, but there is no requirement that action be taken by either of those dates. Even for those who are looking to opt-into the AMIT regime for the 2016/2017 Tax Year, the ATO has provided an extension of time to 31 October 2016 to allow any managed fund to review and amend constitutions / trust deeds for compliance with the AMIT regime for that tax year.

And in case you missed it, here’s the background to the excitement

Ending a process that stated in 2009, a new tax system for managed investment trusts (MITs) was introduced on 5 May 2016.  This new AMIT regime can apply to both registered schemes and unregistered schemes that qualify as a MIT.

The new regime introduces the concept of an attribution managed investment trust (AMIT), which is a MIT where the rights of trust members to income and capital are clearly defined at all times during the year. To get the benefits of this regime, the trustee / responsible entity a MIT that qualifies as an AMIT must make an (irrevocable) choice to be an AMIT.

So next steps

Is AMIT in unit holder’s best interest:  The first and last step for any action taken by a responsible entity or trustee is to determine if the proposed action is in the best interests of members.

A trustee / responsible entity could consider the following as benefits to members:

• Clarity:  the AMIT regime gives greater certainty as to how the ATO will treat AMITs for tax. For example an AMIT is treated as a fixed trust and so, among other positives, franking credits should be available for distribution to unitholders. This can benefit funds investing in equities when receiving dividends from companies they have invested in.
• Flexibility: amounts related to income and tax offsets can be attributed to members on a fair and reasonable basis (departing from the present entitlement regime which allows, at least theoretically, members to call for the income the law deems them to be entitled to).  Unit classes can be treated as separate AMITs and so potential difficulties with multi-class funds are overcome.
• Opportunities: The introduction of AMITs also offers opportunities for additional product innovation.  Debt funds accumulating interest payable by their borrowers may benefit from the ability to accumulate income without unintended tax consequences. Further opportunities exist for multi class products based on hedge/unhedged, foreign currency denomination, different portfolio and illiquid side pockets.

What is less clear are the benefits that flow from the regime that now allows unders/overs at the trust level to be carried forward and dealt with in the income year in which they are discovered. This works where there has been no change in membership of the trust, but the benefits may be less clear to members who join in a year where the trustee discovers it has underestimated its taxable income in a prior period.

Other benefits include:

• Different portfolio classes can elect to be treated as separate AMITs (to avoid cross tainting) and
• Upward cost base adjustments where differences between amounts paid and amounts attributed

While the benefits of opting in seem clear, it is less clear that there are benefits in being in among the first to opt-in while some of the practical implementation issues are resolved.

Does your MIT qualify as an AMIT?  The next step for the responsible entity / trustee to determine is whether their scheme or trust will qualify as an AMIT.

With a few additional criteria, in most cases, a trust / scheme which qualified as a MIT will qualify as an AMIT.  The basic MIT criteria include:

• connections with Australia,
• not a trading trust,
• managed investment scheme,
• trustee / responsible entity holds an AFSL and
• the trust / scheme is “widely held”.

The additional criteria for a MIT to qualify as an AMIT are:

• The rights of members to income and capital are clearly defined at all times when the trust is in existence in the income year.
• The trustee has made an irrevocable choice to be an AMIT.

The rights of members in a registered managed scheme are deemed to be “clearly defined”, so once the responsible entity has determined “best interests” and completed the steps below, all it need do for the scheme to be an AMIT, is to tell the ATO.

Trustees of unregistered managed investment schemes will need to review their trust deeds a little closer.  Under the new regime, rights of members in an unregistered scheme will be “clearly defined” where the rights to income and capital attaching to each member’s interest are the same (disregarding things like fees or charges imposed on the members and issue and redemption prices of interests in the scheme).  This means trustees of unregistered schemes with multiple unit classes should be cautious when determining whether members’ rights are “clearly defined” and the trust qualifies as an AMIT.

So you’ve made your mind up, your trust / scheme is likely to qualify and you want to opt in, so how do you do it?

Again, it’s easier for responsible entities of registered schemes than it is for trustees of unregistered schemes.

Amending the constitution

While the rights of members in a registered managed scheme are deemed to be “clearly defined”, the constitution may still require amendment to adopt the AMIT regime.

Under an existing Class Order, the responsible entity of a registered scheme where all members are wholesale clients may amend the constitution by taking reasonable steps to consult with each member before making the changes.

The responsible entity of a registered scheme that includes retail investors may rely on ASIC’s new waiver ASIC Corporations (Attribution Managed Investment Trusts) Instrument 2016/489  and amend the registered scheme’s constitutions to adopt the AMIT regime without holding a members’ meeting.

Under this new instrument the responsible entity of the registered scheme will need to

1. Post a statement on their website:

The statement needs to explain that the responsible entity intends to amend the scheme’s constitution, the reasons for this and the effect of the amendments. The statement must also explain that within seven days of the posting of the statement to the website, members can request that a meeting be called to consider the amendments.  The notice should state that the responsible entity will change the scheme’s constitution in the way it has identified unless it receives a request to call and hold a meeting of unitholders from members with at least 5% (by value) of the votes that could be cast on a special resolution.  The statement must include an email address for members to contact the responsible entity to request the meeting.

2. Review requests received within 7 days of posting

If 5% or more of the total number of members request a meeting within seven days of the statement being posted on the website, a members’ meeting will be required to approve the amendments. If no members’ meeting is required after seven days since the statement was posted on the website, responsible entities can make the amendments without the need for member approval.

3. Follow the usual path for amending constitutions plus member notification

Once the change is made, a copy of the amendments will need to be lodged with ASIC before the changes can take effect.

In addition, the responsible entity will need to send each member a further notice summarising the reasons for the changes and the effect of the changes the next time they send a communication to all members.

The instrument also relieves responsible entities from the duty to treat members who hold interests of the same class equally where responsible entities attribute part of a determined trust component to a member under the AMIT regime. This will also reduce uncertainty about breaches of the duty to treat members equally without compromising fairness.

With no deeming provisions under the new regime, unregistered schemes must review their trust deeds to confirm whether members’ rights to income and capital are defined in a way that qualifies for the AMIT election. Trustees of unregistered schemes will need to determine whether they have the ability to change the trust deed to incorporate the terms required before electing to be treated as an AMIT and follow the procedures set out in that deed to make the amendments required.

Regardless of the method used, before amending their constitution both responsible entities of registered managed investment schemes and trustees of unregistered schemes will need to consider the following:

• Resettlement: will the amendments be considered as a resettlement of the trust for either stamp duty of income tax / CGT purposes?
• Grandfathering: for registered schemes, is the constitution currently relying on provisions introduced before the latest version of RG134 that will need to be updated if the constitution is updated and if so, are these amendments covered by the scope of ASIC’s Instrument 2016/489;
• Offering documents: consider whether the adoption by the fund of AMIT would be something investors should be aware of before investing; and
• Operational practicalities: Checking with your fund administrators, registry providers and other relevant service providers as whether they are ready to support you in AMIT before electing to opt-in.