Issue: Entry and exit fees
For an entity to be a portfolio investment entity (PIE) it must meet various requirements, including in relation to the types of income it can derive. A PIE must derive less than 10 percent of its income from sources other than land, financial arrangements, excepted financial arrangements, and rights and options in relation to those things.
This restriction should be modified so a PIE does not face the 10 percent restriction on entry and exit fees. These fees are payable when investors invest in, or exit, a PIE. They are intended to cover the brokerage and administration costs incurred by the PIE.
PIEs are intended to be passive investment vehicles. A PIE must earn most of its income in forms that might be expected to arise from passive investments such as rents, dividends or interest. The ability for a PIE to derive up to 10 percent of its income from other sources was designed to cover incidental forms of income such as entry and exit fees.
Officials understand that entry and exit fees could inadvertently become a large portion of a PIE’s income if there is a period of particularly low investment returns. However, officials consider this issue would need further analysis to ensure removing the 10 percent restriction from entry and exit fees does not have any unintended consequences.
That the submission be declined.
Issue: Disposal of certain shares by a PIE
Section CB 26 should not apply in relation to dividends from a listed PIE. There is no need for the section to apply as the unimputed portion of such dividends are not taxable under section CX 56C.
This change should apply no later than the commencement of the 2013–14 income year.
Officials agree there is no need for section CB 26 to apply. Section CX 55 provides that gains arising from the sale of most Australian and New Zealand-listed shares are excluded income for PIEs and similar entities. However, section CB 26 deems a taxable dividend to arise when a share that satisfies the criteria of section CX 55 is sold after a dividend is declared but before the dividend is paid. This is to prevent a PIE turning a taxable dividend receipt into a non-taxable gain on sale.
These concerns do not arise for dividends received from listed PIEs as those dividends are not taxable in any event. There is no tax advantage in selling a share in a listed PIE after a dividend is declared but before it is paid.
Officials do not agree that the application date of this change should be the beginning of the 2013–14 income year. Many PIEs will have already finalised their tax positions for most of that year. As such, only some investors in some PIEs would benefit from the retrospective application. Officials consider an application date of Royal assent more appropriate.
That the submission be accepted subject to officials’ comments.