CGT treatment of MITs raises ‘discrete issue’

“SMSFs commonly use managed funds to obtain diversified investment exposure. Their tax treatment should not turn on whether that exposure is held directly or through a pooled vehicle,” the association said in its submission.

While noting that industry participants have presented the detailed funds management mechanics separately, the SMSF Association highlighted its concern about the downstream impact on SMSF investors.

“A complying superannuation fund should receive materially the same CGT outcome whether it holds an investment directly or obtains economically equivalent exposure through a MIT or AMIT,” the submission read.

It continued that under existing law, a complying SMSF can typically apply capital losses against non-discount gains before discount-eligible gains, thus preserving the benefit of the one-third superannuation CGT discount.

Where the same exposure is held through an MIT or AMIT, the trust calculates its gains and applies losses before distributing or attributing amounts to investors.

“The proposed loss-ordering rules can therefore reduce the pool of discount-eligible gains before the SMSF receives its attributed amount,” the submission read.

“The SMSF cannot reverse that trust-level allocation. In a simple case, this can result in $15 of tax rather than $10 for each $100 of affected gain, despite the underlying economic investment being unchanged. The proposed changes will have a material impact on SMSF investors.”

The association presented ATO SMSF annual return data for the year ended 30 June 2024 to provide insights into sector exposure, and said proposed subsections 276-85 and 4B would reverse the benefit of indexation for investors not entitled to it, including complying superannuation funds.

“However, the gross-up does not necessarily undo the loss allocation already made at trust level. It also introduces investor-specific treatment into an AMIT reporting model that has historically operated on a standardised basis,” the submission read.

“Where units are held through custodians, nominees or platforms, the AMIT trustee may know only the registered holder and not whether the underlying investor is an SMSF, individual or another entity. This creates a material risk of incorrect AMMA statements, AIIR reporting and pre-filling, with compliance costs ultimately borne by investors.”

On trustee election, the association said proposed section 110-36A could address cases where no member is entitled to indexation, but it is unlikely to provide a complete solution for mixed-investor or multi-tiered funds.

A single indexation-eligible investor could stop the election from applying to the fund as a whole, while the need to establish member status “just before the CGT event” could create practical verification challenges, it said.

“An SMSF investor has no control over the composition of the fund’s other investors and should not be disadvantaged as a consequence,” the submission read.

The SMSF Association provided three recommendations to address the issues, and said the changes are necessary to give practical effect to the intended exclusion of superannuation funds and avoid tax-driven distortions in SMSF investment decisions.

First, to preserve tax neutrality, it recommended amending the second tranche of provisions so that a complying superannuation fund investing through a MIT or AMIT is not denied the CGT treatment available on an economically equivalent direct investment.

Second, it suggested making the section 110-36A election workable by removing or modifying the all-member eligibility condition or providing class-based treatment, alongside clear, reasonable-reliance rules, appropriate treatment of multi-tiered structures, and a safe harbour where investor information later proves correct.

Its third and final recommendation is to preserve standardised AMIT reporting, and the final framework should not require trustees to determine the underlying investor characteristics that they cannot reasonably obtain.

“Any gross-up or adjustment mechanism should also address consequential cost-base effects, including CGT event E10 for AMITs, and where relevant CGT event E4 for other trusts,” the submission read.

CGT event E10 occurs when an AMIT's annual cost base reduction exceeds the cost base of that interest. CGT event E4 happens when a trustee makes a non-assessable payment to a beneficiary for a unit or fixed interest in a trust.