Treasury recently published a draft Taxation Laws Amendment Bill, suggesting changes to the income tax treatment of disposal of assets within a collective investment scheme (CIS) or unit trust fund.

Currently fund managers can sell financial instruments within a CIS structure without triggering any capital gains tax (CGT).  Effectively a CIS can reinvest its capital gains without tax consequence.  You only trigger CGT if you sell units in the fund at a maximum effective rate of 18%.

Treasury believes there is an uneven playing field between the CIS industry and other industries. The draft proposes that the disposal of financial instruments by a CIS within 12 months after acquisition be deemed to be income and therefore subject to income tax (at a far higher effective rate than capital gains), which can range from 0% to 45% depending on the unit holder’s overall taxable income. 

Furthermore, Treasury has proposed applying the first-in-first-out method with regards to the identification of identical financial instruments being disposed of by a CIS. This will add a significant administrative burden on CIS management companies and will require major system upgrades. This could ultimately lead to higher fees.

As these proposed changes will have a significant impact on our clients, we will watch developments closely.  It’s likely that the industry will be very vocal about the suggested changes.  In a country where the savings rate is low this seems to will be counterproductive. 

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