28 September 2022

The Australian Taxation Office (ATO) has reported from its ongoing review of the Top 1000 Managed Investment Trusts (MIT) that the existing tax risk governance processes fund managers and responsible entities have in place to deal with over and under distributions have generally been satisfactory. However, they have encouraged fund managers to continually review and improve their tax policies and year-end trust governance processes to help mitigate future unders and overs and improve year-end estimates.

One significant contributor to unders and overs is the reliance on third party generated information at year end or at the time of preparing the distribution statements which is then trued-up (later verified or corrected) by the time the income tax return is completed at a later time.

The ATO’s four proposed principles for funds to consider in relation to trust governance over third party data are:

1. The fund needs to understand the roles and responsibilities of the third party service providers.

2. The entity needs to be satisfied that the tax policies of third party service providers are prepared in accordance with the tax law.

3. The entity needs to be satisfied that the returns and tax outcomes of investments are properly reflected in the reporting obligations.

4. The entity needs to seek assurance from independent parties in relation to the accuracy of the data received and processed by service providers.

Benefits of AMIT regime for trust governance over third party data

Fund managers of MITs should consider the benefit of electing into the Attribution Managed Investment Trusts (AMIT) regime especially if the MIT has investments that inherently result in yearly over and under distribution adjustments – such as passive fund-of-funds investments held by custodians or other third party sources.

AMITs are allowed under legislation to appropriate any over and under distribution corrections in the following year’s distribution statement to allow consistency between distribution statements and the tax returns. By implication of exclusion to the under/over rules, ordinary MITs that are not AMITs are, strictly speaking, required to lodge their income tax return based on the trued-up amount. This then requires the re-issuing of amended distribution statements that match to the trued-up amounts resulting in increased compliance costs and administrative work both for the funds and its investors.

Next steps for fund managers and responsible entities

In light of the ATO’s proposed principles in dealing with tax governance over third party data, we strongly encourage fund managers to engage with their investment custodians or external reporting providers to help ensure proper controls are in place to mitigate any unders and overs. These controls must, at a minimum, be documented and later tested to ensure all MITs and AMITs are complying with the ATO principles.

You should also consider whether:

• You need to update your MITs/AMITs’ Tax Risk Governance framework in accordance with the ATO’s principles.

• You require guidance and assistance in reviewing your custodian and external reporting providers’ tax policies to ensure they align with your own funds tax risk framework.

• You are satisfied with your current process of ascertaining the level of accuracy of information provided to you by third party sources in preparing income tax distribution statements.

• You elect into the AMIT regime to take advantage of the under/over treatment.

• Under and over distributions are a yearly, material and contentious issue for your funds in terms of dealing with investors and/or with the ATO.

Our highly experienced tax consultants are here to assist you to help ensure all aspects of your funds’ tax risk governance policies and procedures are documented (and tested) in accordance with the ATO’s expectations during ongoing Top 1000 MIT Streamlined Assurance Reviews. Submit this form and one of our team will be in touch.