Accountants tax Guide June 2014

Accountants tax Guide June 2014 Macquarie Wrap 1 macquarie.com

The purpose of the Accountants Tax Guide (the Guide) is to provide accountants with a more thorough understanding of how Macquarie treats components of income and expenditure for taxation purposes. This Guide is not intended to provide taxation advice and accountants who use this Guide must make their own determination as to whether or not the treatment outlined below is appropriate for their clients personal circumstances. macquarie.com.au/wraptax Our dedicated Wrap tax website for accountants contains detailed information relating to tax reporting including: technical information: stapled securities, listed investment companies and much more guides to the Tax Report glossary of terms Australian Taxation Office (ATO) links and resources. 2

Table of Contents 1. Introduction 4 1.1 Assumptions 4 1.2 Legislative developments and other relevant matters 4 2. Income 5 2.1 Fixed interest and cash investments 5 2.2 Dividend income 5 2.3 Managed investments and listed trust income 6 2.4 Foreign income 7 2.5 Other income 7 6.6 Stapled securities 12 6.7 Controlled foreign companies (CFCs) 12 6.8 Non-approved assets 12 7. Non-resident investors 12 7.1 Assumptions and principles 12 7.2 Withholding tax treatment 13 7.3 Changes in residency 13 8. No Tax File Number (TFN), Australian Business Number (ABN) or exemption provided 13 3. Capital gains tax (CGT) 7 3.1 General CGT rules 7 3.2 Taxable Australian Real Property (TARP) 8 4. Corporate actions 8 9. Withholding tax deducted at source (Australian residents) 13 9.1 United States of America (USA) 13 9.2 Canada 14 9.3 Ireland 14 4.1 Return of capital distributions 8 4.2 Bonus share issue 8 4.3 Taxation of rights 8 4.4 Share buy-back 9 4.5 General roll-over relief 9 4.6 Scrip for scrip roll-over relief 9 4.7 Demerger roll-over relief 9 5. Fees and expenses 9 5.1 GST and RITC changes 9 5.2 Stamp duty 10 5.3 Adviser fees and brokerage 10 5.4 Other fees and expenses 10 6. Specific security treatments 10 6.1 Convertible notes 10 6.2 Debt / equity rules 10 6.3 Pooled development funds (PDFs) 11 6.4 Listed investment companies (LICs) 11 6.5 Instalment warrants 11 3

1. Introduction 1.1 Assumptions Macquarie relies on certain assumptions when administering an investor s account. In making these assumptions, Macquarie does not consider an investor s personal circumstances. Note however that there are certain circumstances in which Macquarie deviates from these assumptions and these are explained further in this Guide. Macquarie relies on the following general assumptions: Macquarie assumes that all investors, whether individual or otherwise, are residents of Australia for taxation purposes. The exception to this is where an investor has advised on their Macquarie application form (or subsequently) that they are a non-resident Macquarie assumes that all assets have been purchased on capital account (ie for long-term investment purposes). Macquarie does not consider the tax implications for investors who hold their investments on revenue account (eg share traders) or for speculative purposes Macquarie discloses all information on the Tax Reports as the investor is the beneficial owner of the assets. For joint accounts, the amounts shown in the Tax Reports should be split in accordance with each investor s interest in the assets held in their account. We assume that joint account investors hold equal interests in all assets in their account all income received by investors from assets held within the Service has been treated in accordance with Australian taxation laws that were in force as at 30 June 2014 Macquarie reports all information as provided by share registries and product issuers and does not make any comment relating to the accuracy or treatment of this information Macquarie calculates the 45 day rule on all assets in respect of denied franking credits. For preference shares, the 90 day rule has only taken into account all buy and sell transactions up to 15 August 2014. Macquarie has assumed that all assets are held by investors at risk Macquarie accepts the tax attributes, such as acquisition date and cost base information that it receives from advisers when investors transfer their assets into the Service. Macquarie does not verify the accuracy of this information and the reporting of any gains or losses are calculated based upon the tax attributes advised Macquarie assumes that an investor has no carry forward losses (capital or revenue). Macquarie does not maintain a record of any prior year losses whether generated within the Service or otherwise capital gains and capital losses are calculated in accordance with the method advisers have selected for each investor. If no election is made, capital gains or capital losses will be calculated using First In First Out (FIFO), where the first parcel purchased is deemed to be the first parcel sold. Other methods available to advisers to elect on an investor s behalf are: Minimum Gain / Maximum Loss (Min Gain / Max Loss) disposals are allocated against the open parcel that will generate the lowest gain (or maximum loss), taking into account a 50% or 33¹/3% discount (where applicable) on gains where the assets have been held for at least 12 months Specific Parcel Selection advisers have the ability to select, on an investor s behalf, specific parcels relating to assets that have been sold during the current financial year in order to calculate the investor s capital gains tax (CGT) position. However, there are certain circumstances in which parcel selection will not be available. Macquarie has treated expenses in the following manner: where no election has been made for adviser fees, expenses will be treated as unallocated within the Tax Reports establishment fees have been treated as non-deductible dealer service fees have been treated as unallocated government charges and administration fees have been treated as deductible any interest paid on margin loans has been treated as deductible Macquarie has assumed that investors are not registered for GST any stamp duty incurred may need to be taken into account when determining an investor s taxable position. 1.2 Legislative developments and other relevant matters The Taxation of Financial Arrangements (TOFA) regime began on a mandatory basis from 1 July 2010. Taxpayers can elect to apply this regime where they do not satisfy the eligibility criteria. Macquarie has not considered the application of this regime to an investor s account on the assumption that one of the exclusion criteria has been met and the investor has not elected for the TOFA regime to apply to their account. Macquarie has relied on information provided by product issuers regarding the income flowing through listed trusts and unlisted managed funds on our investment menu. Further, we have not made any determinations as to whether any trust or fund is a fixed trust as defined and hence not precluded the flow through of any franking credits. The Foreign Investment Fund (FIF) provisions have been repealed and at the time of writing this guide, have not been 4

replaced. It is anticipated that the Foreign Accumulation Fund (FAF) provisions will soon be enacted. Legislation has been enacted that removed the 50% CGT concession for non-residents (for Australian tax purposes) on capital gains accrued after 8 May 2012. This change should be taken into account to determine a non-resident investor s CGT position. Legislation has recently been enacted that denies franking credits received from dividend washing arrangements from 1 July 2013. The law ensures that an Australian resident investor will only be entitled to one set of franking credits where they sell shares ex-dividend and buy cum-dividend in the period after the share goes ex-dividend. For further information on dividend washing please see 2.2.2. 2. Income 2.1 Fixed interest and cash investments Fixed interest and cash investments income includes distributions from investments in the Macquarie Cash Management Account (CMA) and Macquarie Consolidator Cash Account (CCA). Interest from the CMA and CCA is recognised in the Tax Reports when the interest is paid. Fixed interest and cash investments income also includes, but is not limited to: income from convertible notes income from fixed interest securities any amounts paid in respect of term deposits any amounts received upon closing out positions on margin loans. Any interest received in respect of distributions from managed funds and listed trusts is shown in the Managed Investments and Listed Trusts (T) section of the Tax Reports. 2.2 Dividend income Dividend income reported includes any franked and/or unfranked dividends received from listed equity investments held within the Service. Listed equity investments include, but are not limited to fully paid ordinary shares, instalment warrants and stapled securities. Dividend income is reported in the Tax Reports as assessable when the dividends are paid or credited. Also reported with dividend income are any franking credits attached to fully (or partially) franked dividends. Where franking credits have been denied due to the application of the 45 day rule (refer to 2.2.1), the credits have been disclosed as follows: Tax Report Summary (Summary Report): total franking credits distributed and any denied franking credits have been disclosed in the Trust Distributions and Dividends sections. The amount of credits appearing in the Tax Return Amount column are the amount of credits received in the Service which may be able to be claimed as a tax offset in an investor s tax return (ie the difference between the total credits received and those denied under the 45 day rule). Tax Report Detailed (Detailed Report): the amount disclosed under Franking Credits on the Tax Report has not been reduced by the amount of credits denied. Rather, the gross amount of credits has been reported. The amount of credits that have been denied due to the application of the 45 day rule (or 90 day rule where applicable) by Macquarie are detailed in the Denied Franking Credits (DF) section of the Detailed Report. Any denied credits are separated out into denied credits from listed securities and denied credits from listed trusts and managed funds. Any dividends received in respect of distributions from managed funds and listed trusts are shown in the Managed Investments and Listed Trusts (T) section of the Detailed Report. 2.2.1 The 45 day rule Subject to the limitation of scope described below, Macquarie has applied the 45 day rule, a specific anti-avoidance tax rule which denies certain franking credits, to an investor s account. If investors have bought and subsequently sold assets within 45 days (not including date of purchase and date of sale) and a dividend has been received during that period this rule may apply. If this is the case, investors may need to subtract the relevant franking credits attached to that dividend as they may not be entitled to claim these franking credits. Note that the 45 day rule may not apply to Australian resident individual investors who receive $5,000 or less in franking credits from all sources during the tax year. Macquarie has not applied the $5,000 de minimis rule to an investor s account. Macquarie has undertaken broad based calculations to arrive at the amount of denied franking credits disclosed, having regard to assumptions and the limited information regarding an investor s personal circumstances. The amount of credits denied has been disclosed in the Summary Report and in the Denied Franking Credit (DF) section of an investor s Detailed Report. The amount of denied franking credits has been separately disclosed for listed securities, managed investments and listed trusts. 2.2.2 Dividend washing From 1 July 2013, a specific integrity rule was enacted that denies the benefit of additional franking credits where dividends are received as a result of dividend washing. Dividend washing occurs where investors seek to claim two sets of franking credits on what is effectively the same parcel of shares. Macquarie has used best endeavours to undertake calculations to arrive at the amount of denied franking credits disclosed as a result of dividend washing, having regard to the assumptions stated below: 5

assets affected are ASX listed fully paid ordinary shares the company has paid a franked dividend (ie a dividend with an entitlement to an attached franking credit) shares are sold without an entitlement to the dividend (ex div), on or between ex-date and ex date + 3 days new shares are bought with an entitlement to the dividend (cum div), on or after the sale date up to and including ex date + 3 days where a differing number of shares are bought (than the number of shares sold), the calculation will deny the franking credit entitlement on the smaller of the shares sold and shares bought. Please note, the amount of franking credits denied has been disclosed in the Summary Report and in the Denied Franking Credit (DF) section of the Detailed Report. 2.3 Managed investments and listed trusts Managed investments and listed trust income reported may include distributions of: interest dividends capital gains foreign income other income franking credits (including Trans-Tasman imputation credits) foreign income tax offset non-assessable amounts (such as tax free and tax deferred/ return of capital amounts). Distributions of capital gains are reported in the: Capital Gains/Losses section as capital gains from trust distributions of the Summary Report Managed Investments and Listed Trusts (T) section of the Detailed Report. Distributions of foreign income are reported in the: Foreign Source Income section of the Summary Report either the Managed Investments and Listed Trusts (T) section or the Listed and Unlisted Securities (S) section of the Detailed Report. Note that income from managed investments and listed trusts also includes any distributions made from trusts which form part of a stapled security. Income from managed investments and listed trusts is included as assessable income on an accruals (present entitlement) basis. 2.3.1 Distributed capital gains Any capital gains distributed by managed investments and listed trusts are disclosed in the Detailed Report on a distribution by distribution basis. The distributed capital gain is doubled and reported as a gross discounted capital gain. The Summary Report undertakes a net CGT calculation, which is limited by the assumptions listed in the Capital gains tax section. These amounts are to determine an overall CGT position that is to be disclosed in an investor s income tax return at the capital gains item. These amounts are not to be included in the trust distribution section of the income tax return. This is consistent with ATO guidelines (readily available on the ATO website). Note however that there is an ATO Interpretative Decision (ID) which states, on a strict interpretation of the current tax law, these distributed capital gain amounts are to not only be included in the CGT section of the income tax return but also in the trust distribution section with an accompanying deduction (equal to the amount of the distributed capital gain) to ensure there is no double taxation. 2.3.2 Tax free and tax deferred/return of capital distribution amounts For distributions that have tax free and tax deferred/return of capital amounts as components, adjustments to the cost base and/or reduced cost base (as relevant) of these assets have been made. 2.3.3 CGT concession amount The CGT concession amount relates to the non-assessable CGT discount component distributed to investors by managed funds and listed trusts. Such amounts are made through the sale of assets held for at least 12 months. Investors are not required to adjust the cost base of their units for such amounts paid on or after 1 July 2001. Your Detailed Report separately discloses any CGT concession amounts, as reported by the product issuer. However, as this amount is non-assessable, it is not included in the calculation of an investor s net capital gain. As a result, this amount will not be disclosed in the Summary Report. 2.3.4 Excess tax deferred and return of capital distribution amounts Distributions comprising tax deferred or return of capital amounts can reduce the cost base of an asset to zero. Any subsequent distribution amounts which would otherwise reduce the cost base to below zero will result in an immediate capital gain. The amount of the capital gain will be equal to the amount of tax deferred and/or return of capital distribution. Normal discounting rules or indexation may apply to reduce the amount of the capital gain so long as the relevant criteria have been met. Any capital gains arising in respect of units held in managed investments or listed trusts are known as E4 capital gains. Any capital gains arising in respect of shares held in an investor s account are known as G1 capital gains. Note, an investor cannot make a capital loss as a result of an E4 or a G1 event. E4 and G1 capital gains arising in the year ended 30 June 2014 will be reported in the Excess Assessable Gains (X) section on 6

the Detailed Report and as capital gains from trust distributions on the Summary Report. 2.4 Foreign income Foreign income includes both foreign dividend income distributed by direct foreign equities held within the Service and any foreign income distributed by managed funds and listed trusts held within the Service. The Summary Report discloses foreign income as one amount and separately shows any foreign income tax offsets (FITOs) also distributed, or otherwise available. The Detailed Report separately discloses foreign income on either a distribution by distribution basis in respect of managed investments and listed trusts or a payment by payment basis in respect of foreign equities. Foreign income is net of any FITOs, as advised by the share registries or distributed by the product issuer. The Tax Reports disclose the amount of FITOs, as advised by the share registries or the product issuers. Investors are only able to claim as a tax offset the lesser of the foreign tax paid or the Australian tax payable on the foreign income derived. Macquarie has not made any determination as to the FITO entitlement of the investor. The Tax Reports include any foreign dividend income as assessable when the foreign dividends are paid and include any foreign income distributed from managed investments and listed trusts as assessable on an accruals (present entitlement) basis. 2.4.1 Conduit foreign income Conduit foreign income is foreign income that is ultimately received by a non-resident through one or more interposed Australian tax entities. The current tax laws allow conduit foreign income to flow through Australian tax entities to non-resident investors without being subject to Australian withholding tax. Any conduit foreign income received from assets held within an investor s account has been disclosed as unfranked dividend income on the Summary Report. It is separately disclosed as conduit foreign income on the Detailed Report. 2.5 Other income Other income reported includes, but is not limited to: gains or losses made on the disposal of traditional securities (including certain convertible notes) any product issuer rebates to which an investor may be entitled. The Tax Reports include any Other Income as assessable when the traditional securities are disposed of or when product issuer rebates are credited to the investor. 3. Capital gains tax (CGT) 3.1 General CGT rules Only current year capital gains and capital losses in respect of investments held within the Service have been included on the Tax Reports. Macquarie has provided advisers, on behalf of the investor, with the ability to make certain elections that will impact the manner in which an investor s realised capital gains or capital losses are calculated. The three elections open to an adviser are: FIFO where the first parcel purchased has been deemed to be the first parcel sold. If an election has not been made on behalf of the investor, capital gains and capital losses will be calculated using the FIFO method. Min Gain / Max Loss where disposals will be allocated against the open parcel that will generate the lowest capital gain or maximum capital loss. Specific Parcel Selection where an adviser can select specific parcels to allocate against securities that have been disposed of during the current tax year in order to calculate an investor s CGT position. However, advisers do not have the ability to select parcels in relation to certain security types, such as instalment warrants, or under certain circumstances, such as some corporate actions. Macquarie relies on the information provided by advisers and investors regarding cost base and acquisition details in relation to assets transferred into the Service. Macquarie makes no determination as to the accuracy of the information provided. 3.1.1 Types of capital gains There are three types of capital gains that the investor can derive. These are: 1. Discounted capital gains These occur when the investor has held or is deemed to have held an asset for at least 12 months. For resident individuals and trusts, the discount is 50%. For complying superannuation funds, the discount is 33¹/3%. Companies and non-residents are not entitled to any discount. The discounted capital gains disclosed on the Tax Reports show both the gross (100%) amount and the discounted amount. 2. Indexed capital gains These occur when the investor has held an asset for at least 12 months. The indexation method allows the cost of the asset to be increased by an indexation factor that is based on the consumer price index (CPI) movements up to 21 September 1999. Where this method is chosen, the discount method cannot 7

apply. However a choice is available in order for a taxpayer to minimise their net capital gain. 3. Other capital gains These occur when an asset has been held for less than 12 months, and are calculated by simply deducting the cost base of the asset from the sale proceeds. Note that investors may only realise a capital gain or capital loss in respect of an asset that was purchased on or after 20 September 1985. Assets with an acquisition date prior to 20 September 1985, will generally be treated as a pre-cgt asset. Any capital gain or capital loss will be disregarded and no gains or losses will be reported in respect of these assets. 3.2 Taxable Australian Real Property (TARP) TARP capital gains arise where: an investor has a direct interest, or a more than 10% indirect interest, in a TARP asset For indirect interests, the total underlying assets related to real property (by way of market value) are more than the total value of the underlying assets not related to real property. Australian residents are assessed on both TARP and non-tarp capital gains they derive during an income year. Non-residents will only be assessed and subject to a final withholding tax on TARP capital gains received through managed funds and listed trusts that satisfy the definition of managed investment trust for tax purposes. Where an investor is an intermediary for Australian tax purposes, the TARP and non-tarp classification of capital gains is important as it may impact upon their withholding obligations. For Australian resident investors who are not intermediaries, this distinction will have no impact on their taxable position. In the Summary Report, Macquarie has shown capital gains from managed investments and listed trusts as TARP or non-tarp capital gains as notified by the product issuers. In the Detailed Report, Macquarie has not classified TARP and non-tarp gains but instead classified capital gains as discounted, indexed or other (as appropriate). For the purposes of the non-resident withholding tax reconciliation, only TARP gains are taken into consideration when calculating a non-resident investor s CGT position. For further information on the non-resident withholding tax reconciliation conducted at year end, please see 7.2.1, Reconciliation of withholding tax for non residents. Note that Macquarie has assumed that any capital gains realised upon asset disposals are non-tarp capital gains on the basis that an investor holds a less than 10% ownership interest in the asset. 4. Corporate actions Below outlines Macquarie s tax treatment for investors who have participated in corporate actions during the tax year. 4.1 Return of capital distributions Return of capital distributions require adjustments to the cost base and reduced cost base of the listed or unlisted security. Any such adjustments have been made as at the return of capital date (as advised by the product issuer). 4.2 Bonus share issue When a bonus share issue is made and it is not assessable, the bonus shares are taken to have been acquired when the original shares were acquired. The cost base of the original shares has been apportioned between the original shares and the bonus shares issued on or after 20 September 1985. 4.3 Taxation of rights The taxation of rights will depend on whether or not the assets that are subject to the right are pre-cgt assets. 4.3.1 Rights over pre-cgt assets The right will be acquired on the date on which the contract to purchase the right was entered into. Where the right expires or is sold, any capital gain or capital loss will be disregarded. Any shares or units acquired upon exercise, will be acquired for CGT purposes on the exercise date. The cost base of the assets acquired under the exercise will be the cost base of the right and any amount required to be paid upon exercise. There is no taxing point at the time of exercise. A capital gain or capital loss may arise when the assets acquired as a result of any exercise are disposed of. 4.3.2 Rights over post-cgt assets issued for no cost The right will be acquired on the date the original assets were acquired. When the right expires or is sold, a capital gain or capital loss will arise equal to the difference between the proceeds received and the cost base of the right. For non-renounceable rights, the acquisition date will generally be the allotment date as specified by the documentation provided by the product issuer. For renounceable rights, the acquisition date will generally be the exercise date. The cost base of the assets acquired under the exercise will be the sum of the cost base of the right and any amount required to be paid upon exercise. In the case of renounceable and non-renounceable rights, the cost base 8

of the asset will typically be the amount that the investor is required to pay for the asset. There is no taxing point at the time of exercise. A capital gain or capital loss may arise when the assets acquired as a result of an exercise are disposed of. 4.4 Share buy-back The current treatment of a share buy-back depends on whether it is an on-market or an off-market share buy-back. All buy-backs processed in the Service for the year ended 30 June 2014 were off-market share buy-backs. Generally, the difference between the purchase price and the amount debited to the company s share capital account is treated as a dividend which may or may not be franked (depending on the company s circumstances). Further, the amount debited to the share capital forms part of the disposal proceeds of the share being bought back. The remainder of the deemed proceeds is the value by which the market value of the share being bought back exceeds the buy-back price. Macquarie processes an investor s participation in a share buyback in accordance with the offer document associated with the share buy-back. Further, the components of the share buy-back for tax purposes are confirmed if, and when, the ATO releases a class ruling and/or tax calculator in respect of the share buy-back. 4.5 General roll-over relief Macquarie has adopted a consistent methodology for the treatment of capital gains (and in certain circumstances capital losses) realised on securities eligible for scrip for scrip roll-over relief, demerger roll-over relief, exchange of units in a unit trust for shares in a company roll-over relief and exchange of shares in a company for shares in another company roll-over relief. Where eligible for roll-over relief, Macquarie has elected to apply the relief to defer any capital gain for investors for the securities affected. Where ineligible to elect roll-over relief, Macquarie has realised those shares and/or units and subsequently reacquired the same value of shares and/or units in the newly merged, acquired or demerged entity, in accordance with the corporate action. 4.6 Scrip for scrip roll-over relief Scrip for scrip roll-over relief may be applied where interests in one entity, e.g. a share or a unit, are exchanged for replacement interests in another entity e.g. another share or a unit. The replacement asset must be of the same type as the original asset. Generally, in order for scrip for scrip roll-over relief to be applied, the interests held by an investor must be post-cgt assets and a capital gain would otherwise have been recognised if the assets had been sold. Scrip for scrip roll-over will not apply to investors in a capital loss position for those relevant assets. In cases where scrip for scrip roll-over relief has been applied, an ATO class ruling and/or tax calculator (where available) has been consulted to ensure that Macquarie has processed the roll-over relief in accordance with current taxation laws. Investors and their accountants should ensure that the roll-over has been applied correctly for their own personal circumstances. Where scrip for scrip roll-over relief has been applied, investors will see on the Macquarie reports available that they hold interests in the new entity from the date that the merger or takeover occurred and the cost base and acquisition date of these interests will be the same as the interests held in the original entity. Note that in some instances only partial roll-over will be applied. This will occur where investors do not receive like for like interests. For example, investors may receive cash as well as shares (or units) in the corporate action. In such circumstances, investors will have realised capital gains representing the cash received as a result of the corporate action. The proceeds representing the shares (or units) received will be granted partial scrip for scrip rollover relief where the relevant conditions have been met. In these cases, the cost base of the interest has been separated into components attributable to the cash and share proceeds. 4.7 Demerger roll-over relief Demerger roll-over relief is available where a company or trust group restructures and splits into more than one entity. In order for roll-over relief to apply, the restructure must occur on or after 1 July 2002. Unlike scrip for scrip roll-over relief, the pre-cgt status of assets is maintained. In cases where demerger roll-over has been applied, an ATO class ruling and/or tax calculator (where available) has been consulted to ensure that Macquarie has processed the roll-over in accordance with current taxation laws. Investors and their accountants should ensure that the roll-over relief has been applied correctly for their own personal circumstances. Where demerger roll-over has been applied, the investors cost base remains unchanged (although it will be apportioned between two or more entities) and the acquisition date of their original interests will be maintained in the demerged entities that they now hold. For all demergers that occurred during the 2014 income tax year, any demerger dividend is deemed to be non-assessable non-exempt income to the investor. Investors may or may not receive cash in respect of this amount. Macquarie has disclosed these amounts as exempt income on the Tax Reports. 5. Fees and expenses Where fees have been reported in the Unallocated column of the Detailed report, Macquarie will not separately report these fees in the Summary Report, as no determination has been made in relation to their deductibility or otherwise. These fees will be disclosed via a footnote in the Summary Report. 5.1 GST and RITC changes All fees reported on the Tax Reports include any applicable Goods and Services Tax (GST), net of any reduced input tax credit (RITC) claimed, unless expressly stated otherwise. 9

Macquarie may be able to claim a RITC of 75% of the GST paid on some of the fees reported in the Tax Reports. This may include fees for certain brokerage services, investment portfolio management, administrative functions and custodial services. Macquarie may also be able to claim a RITC of 55% of the GST paid on some of the other fees charged. Where Macquarie has claimed a RITC, the benefit will be passed on to the investor. To the extent that an investor has claimed a credit for the GST reported on the expenses disclosed, the fees reported may need to be adjusted depending on the investor s individual circumstances. 5.2 Stamp Duty Any stamp duty which has been incurred may need to be taken into account when determining an investor s taxable position. 5.3 Adviser fees and brokerage The tax treatment of ongoing fees and transaction fees is determined by the nature of the services provided by the adviser to the investor. Macquarie has provided advisers with the ability to elect how to treat these fees in the Summary Report and Detailed Report. Where the adviser has not made any election, or they have elected that the Adviser fees be treated as unallocated, Macquarie has reported Adviser fees as unallocated. Macquarie has relied upon the elections made by the adviser and has not considered whether the treatment is correct. Macquarie recommends that independent taxation advice be sought to determine the appropriate treatment for the deductibility of Adviser fees for investors. Please note that any brokerage costs have been added to the cost base of assets, where applicable. Establishment fees have been treated as non-deductible. 5.4 Other fees and expenses The Tax Reports may include the following other fees and expenses: government charges administration fees dealer service fees interest paid on margin loans. 5.4.1 Government charges and administration fees Administration fees represent the fee charged by MIML for the administration of an investor s account. Government charges and administration fees have been classified as fully deductible. This may not be appropriate given the individual circumstances of the investor and Macquarie recommends that independent taxation advice be sought. 5.4.2 Dealer service fees Where applicable, Macquarie has reported dealer service fees in the Unallocated column of an investor s Detailed Report. Macquarie has not made a determination as to the deductibility or otherwise of these fees and recommends that independent taxation advice be sought as to the appropriate tax treatment. 5.4.3 Interest on margin loans Macquarie has assumed that the amount of interest on a margin loan is fully deductible for Australian resident investors. This may not be the case depending on the investor s individual circumstances and Macquarie strongly recommends that the investor seeks independent taxation advice as to the deductibility (including timing) of interest on margin loans. Please note that the amount of interest expense disclosed in the Tax Reports is the amount provided to Macquarie by the margin lender. Should this not reconcile to any information an investor has directly received from the margin lender, the investor will need to contact the margin lender directly. Where a margin loan is jointly held across two or more Wrap accounts, please note that Macquarie equally splits the margin loan interest across those accounts. Macquarie recommends that each investor seeks independent taxation advice in order to assess whether or not this split is correct and make the appropriate amendments where required. 6. Specific security treatments 6.1 Convertible notes Interest bearing convertible notes issued prior to 14 May 2002 are generally treated as traditional securities for income tax purposes. Broadly, this means that any gain or loss on the disposal, conversion or redemption of a traditional security is assessable or deductible under specific provisions. These amounts appear in the Other Income (O) section of the Tax Reports. This above treatment may differ where the securities were issued on or after 14 May 2002. In general terms, for such securities, no assessable gain or deductible loss will arise to the investor upon conversion into ordinary shares. Rather, the taxing point will be deferred until the disposal of the ordinary shares that were acquired on conversion or exchange. The gain or loss on the ultimate disposal of the ordinary shares will be subject to the CGT provisions for the period before, as well as after, conversion or exchange. Macquarie has treated convertible notes in accordance with the issue dates as notified in the applicable Product Disclosure Statements (PDSs) made available by the product issuer. 6.2 Debt / equity rules The debt equity rules adopt a substance over form approach for the tax classification of financial instruments. Generally, returns from debt interests will be treated as deductible to the issuer but not frankable, whereas returns from equity interests will be treated as frankable but not deductible to the issuer. 10

Debt instruments will generally be treated as traditional securities to the holder. That is, any gain on disposal or redemption will be included in assessable income and any loss will be an allowable deduction. As noted in section 1.2, Macquarie has not considered the application of the TOFA regime to an investor s account on the assumption that one of the exclusion criteria has been met and the investor has not elected for the TOFA regime to apply to their account. Equity instruments will generally be treated as CGT assets for tax purposes. 6.3 Pooled development funds (PDFs) Capital gains derived upon sale of interests (shares) in a PDF is exempt from tax if the company is a PDF at the time of sale. Also, unfranked dividends of a PDF may be treated as tax exempt. For franked dividends of a PDF, the investor has the option of treating this amount as tax exempt or treating the dividends as assessable and claiming the franking credits attached to the franked dividends. Macquarie has elected to treat the franked dividends as assessable and has reported any income and credits distributed to an investor in their Tax Report. Any expenses incurred by the investor in relation to these dividends may be deductible. Where a company ceases to be a PDF during the tax year, the shares in the PDF are deemed to have been disposed of immediately before the company ceases to be a PDF and reacquired immediately for market value. Any gains made on the deemed disposal are exempt from tax. Any losses recognised on the deemed disposal are disregarded and are not available to offset against assessable income. 6.4 Listed investment companies (LICs) Where a resident investor receives a dividend from a LIC, to the extent that the dividend is fully or partially franked, the franking credits attached to that franked dividend are also included in the investor s assessable income on a paid or credited basis. The investor may then be entitled to a tax offset equal to the amount of the franking credits attached to the dividend received. Where the dividend received is unfranked, this amount is included in the investor s assessable income. For dividends received by non-residents, the withholding tax rules may apply. Where a LIC distributes a dividend that is attributable to a capital gain, known as the attributable part, investors are able to benefit from the CGT discount on assets realised by the LIC on or after 1 July 2001, provided that the assets have been held for more than 12 months by the LIC. For individuals and trusts that are Australian residents at the time the dividend is paid, 50% of the attributable part may be claimed as a tax deduction. For complying superannuation funds, 33¹/3% of the attributable part may be claimed as a tax deduction. Where applicable, the amount of the allowable deduction associated with the attributable part of a LIC distribution is the 50% or 33¹/3% amount of the capital gain disclosed. This will be reported under the expenses paid column of the Detailed Report, and under Other in the expenses section of the Summary Report. Note that the amount reported will need to be grossed up and any relevant discount applied for investors other than individuals or trusts to arrive at the correct expense amount. Where an attributable part has been disclosed by the product issuer, the investor can request from Macquarie a copy of the relevant dividend statement where the investor had a holding in these securities at any time during the tax year and received a dividend. Macquarie will advise at the time of the request whether or not this information is available. 6.5 Instalment warrants The tax treatment of instalment warrants is complex. Outlined below is the approach Macquarie has taken in regard to the treatment of instalment warrants for tax reporting purposes. The Detailed Report discloses all income derived from the underlying asset associated with an instalment warrant in the respective Managed Investments and Listed Trusts (T) section or the Listed and Unlisted Securities (S) section. Capital gains and capital losses on the disposal of an instalment warrant are also reported in the Disposal of Capital Items (R) section. The Summary Report discloses such income in the Dividends and/or Trust Distribution sections as relevant, while any capital gains and capital losses on disposal are shown at the Capital gains from disposal of assets section. The Tax Reports do not disclose: the borrowing costs (deductible or non-deductible) associated with an instalment warrant any deductible interest or refunded interest amounts on instalment warrants any carry forward balances relating to an investor s instalment warrant holdings from prior income years (eg the recognition of any interest paid). An Issuer Instalment Warrant Tax Report Summary and Issuer Instalment Warrant Tax Report Detailed will be provided and will detail information on the investors instalment warrant holdings as provided by the instalment warrant issuers. These reports provide the investor with a summary of: prepaid interest amounts interest refund amounts borrowing fee amounts. As provided by the issuer, the amounts reported are separated into amounts for individuals or for self-managed superannuation funds. The Issuer Instalment Warrant Tax Report Detailed provides detailed information for each instalment warrant held in the investor s account. The expense recognition rules in relation to interest (including any refunded prepaid amount) and borrowing fees may differ between warrant issuers and may depend on the nature of the taxpayer. Independent calculations may be required to 11

determine whether the expense amounts disclosed are correct for an investor s personal circumstances. 6.6 Stapled securities Stapled securities are created when two or more different securities are contractually bound together so that they cannot be sold separately, but are instead treated as a single security on the Australian Securities Exchange (ASX). Many different types of securities can be stapled together, for example, a stapled security may consist of a share in a company and an interest in a trust. Income from stapled securities may include dividends, interest and listed trust and/or managed fund distributions in their returns to investors. For some stapled securities we have split this income and reported separately under each individual entity. For other stapled securities we have reported the income on a consolidated basis under the Managed Investments and Listed Trusts (T) income section. The timing of this income has been reported according to the rules for each individual entity as outlined above. Where an investor has disposed of a stapled security throughout the tax year, Macquarie has reported a separate capital gain and/or capital loss in respect of the underlying assets of some stapled securities. For all other stapled securities, Macquarie has reported a consolidated position in respect of the disposal. There may be some situations where excess tax deferred/ return of capital amounts have been distributed causing a capital gain to be realised in the current tax year. Where this is the case and where sufficient information has been made available to Macquarie, the Excess Assessable Gains (X) section of the Detailed Report will disclose the amount of excess tax deferred/ return of capital distributions which have given rise to a capital gain (known as E4 or G1 capital gains) during the tax year. Macquarie relies on information from the following sources: trade information provided to Macquarie when an investor purchases a stapled security whilst an investor within Service transfer-in information provided by an adviser at the time of an investor s transfer into the Service information contained in a PDS which is made available at the time the securities are stapled any year end information provided by the product issuers outlining cost base or non-assessable distribution payment information. Should this information be incorrect or not relevant for an investor s personal circumstances, the amount of the excess gains reported may not be correct. 6.7 Controlled foreign companies (CFCs) Any unrealised income that may accrue in relation to CFC investments is also separately disclosed on the Tax Reports as reported to Macquarie by the product issuer. 6.8 Non-approved assets Due to circumstances outside of Macquarie s control, certain events and corporate actions may result in the acquisition of assets that we cannot reflect in our reports, such as certain international or unlisted securities. In some instances, we may not receive tax information in a timely manner, or at all. We will use best endeavours to report tax events as they apply to an investor s portfolio. Where an investor or their adviser has been made aware of such an event, they should generally seek to monitor any events relating to these assets that may have a tax impact. 7. Non-resident investors 7.1 Assumptions and principles 7.1.1 Assumptions Macquarie relies on the following assumptions in performing the reconciliation of non-resident withholding tax (WHT): non-resident investors are individuals distribution statements issued by product issuers are correct non-resident investors have a portfolio (less than 10%) interest in any unlisted managed funds. 7.1.2 Principles The following are the principles that Macquarie has relied upon in performing the reconciliation of WHT: the reconciliation has been performed only in respect of assets held in an investor s account where a WHT amount has been disclosed in relation to listed equity income in the Detailed Report, this has been calculated and withheld by the share registry and not by the Service the reconciliation does not include any direct TARP asset disposals that may have occurred throughout the year the reconciliation only details those components where tax is required to be withheld a reconciliation has only been performed where nonresident investors have their account open at the time of the adjustment. Where the account has been closed prior to the making of the adjustment, we are unable to perform a reconciliation as there is no account into which we can make an adjusting entry in relation to unfranked dividends and interest: we have determined the appropriate WHT rate to be applied based on the country of residence provided by the investor where investors are resident of a country with which Australia has negotiated a Double Taxation Agreement (DTA), the rate specified in that DTA has been applied where the DTA advises more than one rate, the most conservative of those rates has been chosen 12

where investors are resident of a country with which Australia has not negotiated a DTA, the non-treaty WHT rates have been applied (30% for unfranked dividends and 10% for interest amounts) in relation to Australian other income and TARP capital gains (discounted, indexed and fully taxable), a withholding tax rate of 15% has been applied where the non-resident is a resident of a country with which Australia has an effective Exchange of Information (EOI) Agreement. Where the nonresident is a resident of a country with which Australia does not have an EOI, the applicable withholding rate is 30% the reconciliation has not taken into account distributions of non-tarp capital gains as this distribution component is not required to have non-resident WHT deducted no consideration has been given to the potential impact of the local tax regime of the various countries in which the nonresident investors reside. 7.2 Withholding tax treatment 7.2.1 Reconciliation of withholding tax for nonresidents Macquarie has performed a reconciliation of non-resident WHT on distributions from unlisted managed funds and listed equities, for all non-residents with an open account at the time of reconciliation. The reconciliation details provided are a guide to the correct tax position for non-resident investors in relation to any investments they hold within the service. Due to differing individual circumstances, and the necessity of applying overriding assumptions and principles in the reconciliation process, we strongly recommend that investors seek independent taxation advice on this matter. 7.2.2 How does Macquarie reconcile WHT? Product issuers provide Macquarie with the component breakdowns of distributions after each financial year and through product issuer tax statements (generally received between July and October after the relevant tax year). As such, prior to the receipt of these tax statements, it is not possible for Macquarie to apply the specific withholding rates against the component breakdowns of distributions received during the year. Accordingly, where there have been interim distributions throughout the year, we calculate WHT at 15% of the gross distribution at the time the distribution is paid. Note that share registries deduct and remit any WHT for listed securities. Once product issuers and share registries have provided Macquarie with the actual components of each distribution, we calculate the difference between the amount that was withheld throughout the year and the amount that should have been withheld. As a result of this reconciliation, where necessary, an adjustment (deposit or withdrawal) is made to the investor s cash hub. The Non-resident WHT column under the Managed Investments and Listed Trusts (T) section of the Tax Report discloses the amounts withheld throughout the year. 7.3 Changes in residency Where a non-resident has changed residency during the year, we have withheld tax at the correct rates taking into account any residency change. A residency change may include any of the following examples: a resident becoming a non-resident a non-resident moving from one overseas country to another overseas country a non-resident moving back to Australia and becoming a resident. Where a non-resident has changed residency, we will continue to withhold tax in accordance with their original country of residence until we have received all completed and correct paperwork. Once this paperwork has been received, we will update our systems to apply the correct WHT rates (as per the relevant DTA or EOI rates, as applicable) for unlisted managed funds. In relation to listed securities, we will notify the relevant share registry of any residency change when all completed and correct paperwork is received. The registry will then update their systems accordingly. We strongly recommend that investors seek independent taxation advice in relation to the accuracy of this reconciliation based on their own individual circumstances. 8. No Tax File Number (TFN), Australian Business Number (ABN) or exemption provided Where an investor has not provided their TFN, ABN or has not claimed a valid exemption by the record date of the distribution or dividend, tax may have been withheld by share registries from investment income for investments in ASX listed securities and listed trusts, and by Macquarie for unlisted managed funds. Tax will be withheld at the highest marginal tax rate plus the Medicare Levy. If an amount has been withheld, it is disclosed on the Tax Reports. This amount may be claimed as a credit in the investor s income tax return. 9. Withholding tax deducted at source (Australian residents) 9.1 United States of America (USA) For listed securities which derive income in the USA, the Internal Revenue Service (IRS) requires certain documentation from the 13