Relief for restructured managed investment funds

The Managed Investments Act 1998, (MIA) made changes to the regula-tion of managed investment funds with the aim of ensuring greater ac-countability of fund managers to investors.

The Managed Investments Act 1998, (MIA) made changes to the regula-tion of managed investment funds with the aim of ensuring greater ac-countability of fund managers to investors.

These changes will entail:

* each scheme having a single responsible entity. This replaces the previous two tier structure of management company and independent trustee;

* the responsible entity being licensed by the ASIC;

* schemes with more than a specified number of members or where they have been promoted by a promoter must be registered by the ASIC;

* the responsible entity must submit a compliance plan to the ASIC setting out how the measures to be taken to ensure the scheme com-plies with the Corporations Law and the custodial arrangements to be put into place for the scheme's assets; and

* schemes will be subject to financial reporting, meetings and annual return obligations.

The MIA stipulates that funds must comply with these changes by 1 July 2000.

The Government recognised that the restructure of funds could result in a new trust being created, which could create substantial taxation problems for the funds and their members.

For example, where a new trust is created under the requirements of the MIA and the assets of the original trust are transferred to the new trust, those assets would be disposed of and reacquired at their market value. Any assets acquired before 20 September 1985 would lose their pre-CGT status and, where an asset was originally acquired af-ter 19 September 1985, an immediate capital gains tax liability may arise. Also, any revenue and capital losses belonging to the original trust would not be available to the new trust.

As a result of recognising these adverse tax consequences, the Assis-tant Treasurer announced, in July 1998 and March 1999, that amend-ments would be made to the Income Tax Assessment Act to ensure that funds suffered no adverse tax consequences from restructuring re-quired under the MIA.

Last month, the Government introduced Taxation Laws Amendment Bill (No 7) 1999 (Bill No 7), containing amendments to deal with the prob-lems created by the changes to the MIA. Under Bill No 7, the creation of a new entity on the restructuring of the fund will be treated as a continuation of the original entity where certain requirements are met. Also, a change in ownership of the scheme's assets or a member's interest in a scheme will not result from the scheme's restructure.

The fund will be eligible for relief where:

* it makes changes to the scheme to become a registered scheme in ac-cordance with the MIA requirements;

* it existed on 1 July 1998;

* it is administered as the same kind of entity immediately before and after the changes;

* the changes are undertaken during the period 1 July 1998 to 30 June 2000; and

* the membership of the scheme did not alter as a result of the changes.

The members of such schemes are also eligible for relief for any un-intended tax consequences that arise because a scheme becomes a reg-istered scheme.

In addition, certain amendments to trust deeds not strictly required by the MIA will attract the same taxation protection. This will oc-cur, for example, where the purpose of the amendment is to improve the overall operation of the fund. Tax relief will be granted in these circumstances so long as the amendments do not create shifts in value between members or a class of members, the market value of mem-ber's rights is not reduced and there is no change in the membership of the scheme. Examples of acceptable amendments include those that clarify members' entitlements and those dealing with fees and expense recoveries.

Stamp duty relief

The changes required under the MIA will also have stamp duty implica-tions, since trust deeds will require amendments and trust property may need to be transferred. A number of State Governments have al-ready announced concessions to deal with the potential stamp duty im-plications.

On 21 July 1998 the Victorian Treasurer announced tax relief for transfers of scheme property to new responsible entities from 1 July 1998. Legislation is to be introduced in the current session of the Victorian Parliament to exempt such transfers from stamp duty in Vic-toria.

NSW has already introduced legislation to allow for concessional duty of $10 for the amendment of any instrument, transfer of dutiable property or declaration of trust required under the MIA.

Presumably, all other States will now follow suit to ensure that there are no adverse stamp duty consequences from transactions required under the Managed Invest-ments Act.

Annamaria Carey is tax principal, Greenwood and Freehills.