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Australia: Year-end tax implications for managed funds, investors (COVID-19)

Australia: Year-end tax implications for managed funds

There may be significant tax implications of year-end distributions from Australian managed funds because of the coronavirus (COVID-19) pandemic.

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High levels of equity market volatility and sharp movements in foreign exchange rates, particularly from March through to June 2020, have meant that many funds that were previously on track for a positive year-end performance have experienced a substantial decline.

This may create a number of potential tax issues not only for managed funds but also their investors.

  • Funds that paid interim distributions throughout the year may find that their pre-COVID-19 distributions exceed the fund’s total attributable income for the year. Funds in this position will be issuing member annual (AMMA) statements at year-end that show amounts that were previously thought to be income being reclassified as tax-deferred distributions or returns of capital, leading to cost-base adjustments for investors.
  • These so called “over-distributions” may also create issues for non-residents in terms of excess withholding tax levied on the interim distribution amounts. When a fund distributes and withholds based on estimated components throughout the year, COVID-19-induced volatility could lead to withholding tax liabilities for foreign investors greater than the actual amount attributed for the year.
  • A further impact of foreign exchange losses is often a reduction of foreign income. In absence of foreign income, funds cannot pass on the benefit of foreign income tax offsets. Combined with the Burton decision restricting the availability of foreign income tax offsets in respect of capital gains, investors may need to expect reduced foreign income tax offsets from managed funds this year.

For institutional investors (such as superannuation funds), this uncertain environment may have a number of repercussions for year-end tax provisioning and also unit pricing. When preparing tax provision calculations, superannuation funds will often treat cash distributions from managed funds as assessable income or estimate these components for the year.

The actual attributable income will be corrected once the AMMA statements are made available—often at the time of preparing the income tax return. For funds that are reclassifying income as return-of-capital or tax-deferred distributions this year, this approach could lead to a substantial over-provision of tax.

The tax provisioning process in respect of managed fund distributions will also have a knock-on consequence for the unit pricing of superannuation funds, with significant adjustments to reverse the effect of over-provisioning. Superannuation fund tax teams need to be vigilant in respect of the potential impact on their fund’s tax provisioning and tax accruals within unit pricing and consider these aspects in line with the fund’s unit pricing policies and overall tax governance framework.


For more information, contact a KPMG tax professional in Australia:

Natalie Raju | +61 2 9335 7929 | nraju1@kpmg.com.au

Edward Tweddle | +61 2 9346 5623 | etweddle@kpmg.com.au

The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

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