SMSF Adviser reported in July that the draft version of this legislation, exposure draft Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015 (Cth) had been introduced to exclude superannuation funds entitled to a refund of franking credits from the 20 per cent tracing rule for public trading trusts.
DBA Lawyers told SMSF Adviser that the legislation just introduced in Parliament, Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015, also made the same proposal to exclude superannuation funds from the 20 per cent tracing rule but that it provides some clarification on how franking credits are to be utilised.
“[Currently] if you have a super fund that has a 20 per cent or more interest in a unit trust and that unit trust is, for instance, conducting a development activity, then the unit trust is taxed as a company and must pay the company rate of tax. Being taxed as a company it then makes franked distributions,” explained Mr Butler.
“Under the new position from 1 July 2016, it will no longer be treated as a company.”
Mr Butler said it wasn’t clear in the exposure draft of the legislation what would happen to the franking credits that SMSF trustees had clocked up over the years.
The new legislation he said has now established that SMSF trustees will have the ability to the end of 30 June 2018 to take advantage of any overhung franking credits.
“SMSF practitioners will therefore need to be on the lookout; if they have clients who hold public trading trusts with say a connection with self-managed funds, they now have a process from mid-2016 to work out franking credits so that they don’t lose them,” said Mr Butler.
“If they don’t distribute them before June 2018 the franking credits would evaporate.”
Practitioners he said will also need to look at the unit trust deed because the unit trust deed may need to be amended because they’ve probably got provisions in them now to comply with corporate tax provisions.
“After mid-2016 they’ll have to amend [the unit trust deed] to make sure it’s now a flow through, as in what we call a division six trust,” he said.
“The legislation is a bit of a re-confirmation of the good news but we’ve now got some direction on franking credits; we’ve basically got two years to utilise them.”
Mr Butler said the legislation will also lead to more efficient developments and carry on businesses involving unit trusts moving forward in cases where you have investments by a super fund.