During the week of the Federal Budget and before Parliament was dissolved, a set of Tax Bills (the Managed Investment Trusts bills) were passed introducing new rules about how taxation will apply to certain ‘Managed Investment Trusts’ (we will advise more on these rules later).
The Bills also contained a change to the Public Trading Trust Rules. Public Trading Trusts are trusts with units issued to the public or (exempt entities, previously including superannuation funds) that control a trading business (non-passive income) either owned directly or indirectly via shares in a company.
Public trading trusts are taxed as if they are a company – pay tax at the company tax rate and can frank distributions, while ‘normal’ unit trusts are flow through entities with the ultimate unitholders bearing any tax liability.
The consequence of the change is that a greater than 20% ownership of units by complying superannuation funds will no longer cause a trust to be a public trading trust with effect from 1 July 2015. This change is welcomed as the public trading trust rules can be detrimental from a cash flow perspective. Ultimately, cash flow from investments in these trusts should now flow to superannuation fund investors more quickly.
Fortunately, transitional rules provide that where former Public Trading Trusts that have changed back to ‘normal unit trusts’ have paid PAYG Instalments or Income Tax, they may continue to pay franked distributions to their unit holders for any distributions made before 1 July 2018, thus getting the benefit of the ‘corporate tax’ already paid.
The transitional rules however appear deficient as they do not deal with what happens to the tax paid as a ‘Corporate Tax Entity’. Therefore trustees need to be careful with how they address the transition. There may also be an opportunity to claw back instalments already paid to assist with earlier cash flows.
It is important for Trustees to consider 2015/16 distributions already made, tax paid and likely future distributions before deciding on a course of action.
Should you wish to discuss how these rules affect your public trading trust, and how to approach franking distributions during the 2016 year, please contact Jamie Towers on 07 3218 3900.
Please note that this publication is intended to provide a general summary and should not be relied upon as a substitute for personal advice.