Understanding tax regulatory changes can be complex. Below we’ll discuss the ‘New Tax System for Managed Investment Trusts (MITs)’ which received Royal Assent on 5 May 2016 and how Praemium has incorporated these rules in their reports. In summary, the ‘new’ rules allow a Managed Investment trust (MIT) to qualify as an Attribution Managed Investment Trust (AMIT) where the members of the trust have clearly defined rights to the income and capital of the trust.
One of the main changes under the AMIT regime state that the trustee of the trust can attribute taxable income, offsets and credits to unitholders on a fair and reasonable basis. The rules allow an AMIT to attribute taxable income of the trust to unitholders without a distribution of (cash) income. This is relevant in understanding the new rules, as under the ordinary tax laws dealing with trusts, the taxable income of a trust is allocated on a present entitlement basis.
The second main change is the calculation of both upward and downward adjustments to the cost base of the units held by unitholders. Prior to the introduction of the AMIT rules, unitholders could only reduce the cost base of their units. A reduction in the cost base was generally the result of receiving non-assessable distributions, such as tax-deferred distributions. Whilst those rules regarding the reduction to the cost base remain, the regime now allows unitholders to increase the cost base of their units, generally in cases where the attributed taxable income to the unitholder exceeds the cash distribution. It can be a complex calculation for Capital Gains Tax (CGT) reporting when both downward and upward adjustments to a cost base are present.
Praemium’s reports take all the complexity out of AMIT reporting. All the components for AMIT trust reporting are incorporated in the reports, allowing clients to minimise compliance costs and be assured of accurate tax reporting.
As an example, the Income report accounts for any taxable amounts attributed to members which are not paid in cash, whilst the system knows these amounts do not form part of the cash received in client’s cashbooks. In addition, both the Realised CGT and Unrealised reports are automatically updated to account for any cost base adjustments. Once the tax components have been updated as part of the year-end update process, the system recalculates the CGT disposal gain or loss for each parcel sold during the tax year, using the updated cost base. In addition to accurate CGT reporting, this also achieves the best result for each portfolio based on the CGT optimization method chosen.