Simon Clark, Asia Pacific Regional Leader – Private Equity, provides insight into whether the AMIT regime requires changes to be made to the distribution clauses.
As we move into the Attribution Managed Investment Trusts (AMIT)-era we need to consider how present entitlement to income from a trust will interact with the so-called ‘attribution regime’. If present entitlement no longer drives the allocation of taxable income, what will happen to the income distribution outcomes under trust constitutions.
To date, Managed Investment Trusts (MIT) income distribution clauses have generally been of two types – they are either based on a requirement to:
Clearly the first question is whether existing constitutions allow for attribution as a separate matter from distribution. I suspect that many do not.
Beyond that, the answer appears to depend on whether you want to access the flexibility accorded by the AMIT rules to effectively attribute taxable income without the need to distribute anything noting, of course, the complexities arising from the withholding tax outcomes where the cash distributed is not sufficient to (at least) fund the relevant liabilities.
If the distribution clause is based on taxable income, amendment would seem to be necessary if additional cash is to be retained and taxable income merely allocated. I would expect that we would not see many clauses of this type in the future.
Where the distributable income is defined in the constitution, the answer will depend upon the terms of that definition but again it is unlikely that the definition would be flexible enough to allow for wholesale retention of cash and the allocation of the taxable income. I would expect this type of clause to become the default position but will be interested to see how much additional discretion to retain income is built-in to future versions of this clause.
Overall, it would seem that in most cases the constitution will need to be amended if the full benefits of attribution are to be available.
Are there any consequences which arise from amending the constitution to give effect to these changes whereby tax liabilities are allocated, income (whatever that term means) may not be fully distributed and becomes capital? I will leave it to a better trust lawyer than I to work this out, although I suspect the market rather than tax outcomes (absent another global financial crisis or something similar) will dictate the level of distributions. I suspect also that investors might pay more attention to the distribution policy (if any) announced by trusts to see how they intend to use this new flexibility to retain cash and convert it into capital (without the need for a dividend reinvestment plan (DRP)).