income from Australian managed fund (trust)

by **danny3** on Wed Aug 31, 2011 2:53 pm

I'm a UK resident - non-domiciled but filing under the arising basis - who isn't 100% sure how to deal with income from an Australian managed fund/trust and would appreciate any advice on this.

My understanding of trust distributions is that I ignore franking credits and the tax deferred component (which I deal with later if I sell the investment) and declare non-primary production income and "other foreign source income" as dividends on my UK tax return, converted to sterling as of 30 June 2010 and 31 December 2010 as appropriate. I can claim the "non-resident withholding tax withheld" as a tax credit. And any distributed capital gains are treated as UK capital gains, with no benefit from the 50% discount rate.

I had to ask the fund manager for a breakdown of the December 2010 distribution so I could separate that from the June 2011 distribution.

Can anyone confirm that this is the correct way of handling trust distributions?

by **section 44** on Wed Aug 31, 2011 4:05 pm

You need to understand whether or not for UK tax purposes the fund is regarded as opaque or transparent, this will involve understanding the nature of the fund - that is, how it is constitued. If it is a trust then what sort of trust is it?

by **danny3** on Wed Aug 31, 2011 10:54 pm

The fund is an ordinary managed fund - one of Australian Ethical's unit trusts.

I'm not sure what "opaque" and "transparent" mean in the context of Australian managed funds, and Google isn't being helpful - can you point me at definitions of those terms? Australian managed funds are transparent in the sense that they pass dividends, capital gains, franking credits, etc. through to the holder, but I don't know if that's what the UK term means.

by **section 44** on Thu Sep 01, 2011 3:26 pm

A unit trust may be opaque or it may be transparent. It would depend on how the trust is constituted (i.e. the drafting of the trust deed).

Broadly:

If something is "opaque" for tax purposes then it means that it is a taxable entity in its own right. For example, a company. If you invest via a company then the company may be subject to tax on its profits and, separately, you would be subject to tax on the profits that you realise from the company such as distributions.

If something is "transparent" for tax purposes then it means that it is effectively ignored such that the investors are treated as if they held the underlying investments directly. For example, a partnership. If you invest via a partnership then the partnership itself is not subject to tax but you may be subject to tax on the profits of the partnership irrespective of whether or not those profits have been distributed.

Clearly if you are investing in a fund then you need to know whether you are only subject to tax on your receipts from the fund or, instead, subject to tax on the receipts of the fund.

by **danny3** on Thu Sep 01, 2011 7:12 pm

Thanks, that's a nice explanation.

I'll check with the trust in question, but based on that it looks to me like Australian managed funds are transparent. I assume that means I deal with the capital gains, dividends, tax credits, etc. individually.

whether you are only subject to tax on your receipts from the fund or, instead, subject to tax on the receipts of the fund

My understanding is that Australian managed funds have to distribute all their earnings and tax liabilities - and tax benefits, though unfortunately I can't use the franking credits in the UK.