NO.009

The Treasurer announced today that cash management trusts will be subject to flow-through taxation under the new business entity tax regime outlined in A New Tax System. This means that the income earned and distributed by cash management trusts will not be taxed in the hands of the trustee but rather in the hands of individual investors at their marginal tax rates. This will ensure that there is no adverse cash flow effects on people receiving distributions of assessable income from cash management trusts.

This issue arises from the second discussion paper of the Review of Business Taxation, A Platform for Consultation, released today. The Review is chaired by Mr John Ralph, AO.

The release of this paper is welcomed and sets the basis for wide-ranging discussion on business income tax issues.

One of the issues identified in A New Tax System to be resolved in the consultative phase of business tax reform is the effect of the proposal to tax trusts like companies on the cash flow of some investors in cash management trusts. Cash management trusts are widely held trusts that derive their income from investments in a wide range of debt instruments and distribute that income fully each year.

The Government has decided that flow-through taxation treatment will apply to cash management trusts and, in principle, to other collective investment vehicles. Collective investment vehicles include widely held unit trusts that distribute all, or virtually all, of their income annually, such as bond trusts, common funds, managed funds and property trusts.

While an in-principle decision has been taken for flow -through taxation treatment to apply to other collective investment vehicles as well as cash management trusts, there are a number of design details that will be determined after the release of the final report of the Review of Business Taxation. These include the tax treatment of the distributions of the profits of collective investment vehicles that are not paid out of the assessable income of the vehicles (taxpreferred income). The Reviews second discussion paper canvasses a number of options as to how this should be treated.

The advantages and disadvantages of the alternative ways of treating the tax-preferred income of collective investment vehicles will be subject to full consultation and analysis in the context of the Review of Business Taxation. A decision will be announced after the final report of the Review.

Contact: Wayne Mayo (Treasury)

(02) 6263-4480

22 February 1999