Financial Markets (Repeals and Amendments) Act 2013 – related changes

Clauses 213(55) and 266

Issue:   Effective date of change of reference

Submission

(KPMG)

We strongly support this remedial amendment to the definition of “public unit trust” to reverse an unintended change made on the introduction of the Financial Markets Conduct Act 2013, the relevant section of which took effect from 1 December 2014.  The amendment is currently proposed to take effect from enactment of the tax bill.  As the unintended change was effective from 1 December 2014, the proposed amendment should take effect from that same date.

Comment

Paragraph 30(5)(f) of Schedule 1 of the Financial Markets Conduct Regulations 2014 applies for two years from 1 December 2014.  This section treats, for the purpose of the public unit trust definition in the Income Tax Act 2007, a regulated offer made under the Financial Markets Conduct Act 2013 as including a reference to an offer that would have been an offer of securities to the public under the Securities Act 1978 if the Securities Act 1978 had not been repealed.

This transitional provision is intended to ensure that a public unit trust that qualified under the Income Tax Act 2007 definition before 1 December 2014 would continue to do so until a permanent solution could be enacted in this tax bill.  Officials will refer to these regulations in the Tax Information Bulletin to assist taxpayers to be aware of them.

A principle of law drafting is that retrospective application dates should only be used when necessary.  Officials do not consider them to be necessary in this instance.

Further, due to the reduction in the threshold in paragraph (b)(vi) and (vii) from 25 percent to 5 percent, there may be a small number of unit trusts that previously were public unit trusts but that will no longer meet the new criteria.  Officials consider it would be inappropriate to retrospectively remove the public unit trust status of these entities.

Recommendation

That the submission be declined.


Issue:   Change to the level of allowed investment

Submission

(KPMG)

We do not support the amendment to reduce the 25 percent shareholding percentage in paragraph (b)(vi) and (vii) of the “public unit trust” definition, to 5 percent.  This is not a remedial amendment resulting from changes to financial markets regulation.

This change could have significant impacts for unit trusts that currently rely on paragraph (b) of the “public unit trust” definition, who will be caught unawares and potentially lose their status as a result.  The change has not been consulted upon and it is not clear that the amendment is required or justified to address any perceived or real concerns.  This change should be omitted from the tax bill and subject to wider consultation, rather than being enacted as a remedial amendment, which it is not.

Comment

Before 1 December 2014 a unit trust that qualified as a “public unit trust” under paragraph (b) of the definition could have unit holders who met one or more of a number of categories.  These categories included:

  • a person with a 25 percent shareholding interest or less in the unit trust, treating all associated persons as one person, if the unit trust offered securities to the public under the Securities Act 1978;
  • a person with a shareholding interest of 25 percent or more in the unit trust, treating all associated persons as one person, if their interest is 25 percent or more because of unusual or temporary circumstances, such as the recent establishment or forthcoming termination of the unit trust, and if the unit trust would meet the requirements of any of paragraphs (a), (c), (d) and (e), and if the unit trust offers securities to the public under the Securities Act 1978.

The Securities Act 1978 was replaced by the Financial Markets Conduct Act 2013 on 1 December 2014.  The current legislation, as amended by the Financial Markets (Repeals and Amendments) Act 2013 to include regulated offers in respect of the unit trust made under the Financial Markets Conduct Act 2013, covers certain offers that are not covered under the previous wording but also omits other offers that could result in certain unit trusts who currently meet the definition of “a public unit trust” no longer qualifying.

The Financial Markets Conduct Act 2013 does not include a concept equivalent to “securities offered to the public” so it is not possible for the income tax definition of a “public unit trust” to remain identical to its original outcome.

The bill proposes to remove the criteria regulated offers are made in paragraphs (a), (b)(vi) and (vii), and will instead rely on the existing criteria, which relate to the number of unit holders, the widely held status of those unit holders and other similar criteria.  In the absence of other changes this would make it much easier for unit trusts who do not make regulated offers or who would not have offered securities the public to meet the public unit trust definition.

For paragraph (a) the existing 25 percent threshold is considered appropriate as it will still be necessary to have at least 100 unit holders, which would usually only occur when the units are offered to the public.

For paragraph (b)(vi) and (vii), if there were no threshold changes, this would allow a public unit trust to not make regulated offers and have as few as four unit holders, each with a 25 percent interest.  Officials do not consider this would be consistent with the general concept of a public unit trust.  By reducing the threshold to 5 percent a public unit trust that satisfies paragraph (b)(vi) will have to have at least 20 unit holders.  It would not be tenable to remove the regulated offer requirement and leave the current threshold in place.

Officials note that a public unit trust only has to meet one of paragraphs (a) to (e) therefore a unit trust that no longer met the requirements of paragraph (b), due to these changes, could still qualify under one of the other paragraphs, such as having more than 100 unit holders (paragraph (a)) or having less than 100 unit holders but being reasonably regarded as a widely held investment vehicle for direct investment by members of the public despite its number of unit holders or investors (paragraph (c)).

Officials consider it is appropriate that any unit trust that, because of the changes in this bill, no longer satisfied paragraph (b) of the definition, and did not meet any of paragraphs (a), (c), (d) or (e), would be excluded from being a public unit trust.  As this provision applies from enactment of the bill, this change could only affect a public unit trust on a prospective basis.

Recommendation

That the submission be declined.