A GUIDE TO PUBLIC INVESTMENT FUNDS

Tax Treatment of Public Investment Funds in Australia

This is the final article in CNM Legal’s four-part series: A Guide to Public Investment Funds. The series provides an overview of registration, regulation, marketing and tax treatment of public investment funds in Australia. This article will discuss the topic of the tax treatment of public investment funds in Australia, focusing on the types of entities that can be public trusts and the tax treatment of those entities.

What types of entities can be public funds?

In Australia, most retail public funds are structured as unit trusts. Broadly speaking, a unit trust is a type of trust where a trustee holds legal ownership of property on behalf of beneficiaries according to the terms outlined in a trust deed. The beneficial interests in the trust property are divided into units, which are granted, sold, or redeemed by the trustee. Holders of these units typically have entitlements to a proportionate share of the trust’s income and capital.

On the other hand, ‘corporate collective investment vehicles’ (‘CCIVs’) have the legal structure of a company limited by shares. CCIVs operate as umbrella vehicles comprising one or more sub-funds, with each sub-fund comparable to a separate unit trust. Beneficiaries of each sub-fund are issued with different classes of shares. While each sub-fund does not possess a distinct legal personality, its assets and liabilities are expected to be segregated from those of other sub-funds. The primary advantage of a CCIV over a unit trust is the legal separation it provides between the assets and liabilities of each sub-fund. This separation allows multiple ‘funds’ to be housed within a single CCIV through the use of separate sub-funds, potentially reducing administrative burdens for large fund managers.

What is the tax treatment of public funds?

Unit trusts in Australia typically operate as flow-through entities for income tax purposes. In essence, this means that investors are liable for Australian income tax on their proportional share of the trust’s net taxable income, rather than the trust itself bearing the tax burden. To maintain this favourable tax treatment, it is crucial that the beneficiaries of the unit trust are entitled to all of the trust’s accounting income by the end of the relevant income year.

However, if a unit trust qualifies as a ‘public trading trust’ in a specific income year, it is treated similarly to a company for certain Australian income tax purposes. In such cases, the trustee of the trust is taxed on the trust’s taxable income, rather than the income flowing through to the beneficiaries.

In essence, a trust is considered a trading trust for a given income year if it engages in a trading business or controls the operations of another person conducting a trading business. A trading business, as defined by tax laws, generally excludes activities considered eligible investment business, with certain exceptions.

Unit trusts may qualify as either managed investment trusts (‘MITs’) or attribution managed investment trusts (‘AMITs’). A MIT must meet specific requirements for a given income year, including not being classified as a trading trust, being a managed investment scheme, having wholesale membership or being a registered scheme, and having an appropriate spread of ownership interests.

Some advantages of a trust being classified as an MIT include final tax rates on fund payments made to foreign resident investors, which vary depending on whether the investor’s country has an effective exchange of information agreement with Australia. Additionally, MITs may make irrevocable capital account elections, ensuring that gains and losses on certain assets are consistently treated as capital gains.