B43/1993 MERIDIAN INVESTMENT TRUST (EX ESTATE MORTGAGE DEPOSITORS TRUSTS) - ASSESSMENT UNDER THE INCOME AND ASSET TESTS

DATE OF ISSUE: 24 AUGUST 1993

MERIDIAN INVESTMENT TRUST (EX ESTATE MORTGAGE DEPOSITORS TRUSTS) - ASSESSMENT UNDER THE INCOME AND ASSET TESTS

The purpose of this Instruction is to advise of the income and asset test treatment of investments in the restructured Estate Mortgage (EM) investment trusts when they are merged and listed on the Australian Stock Exchange (ASX).

Background

2.Estate Mortgage Managers Limited (EMML), which managed and marketed six separate EM investment trusts, failed in March 1990. Income ceased to be credited to the trusts and investor unit redemptions were frozen. Unitholders were advised that they were likely to have only a small percentage of their capital returned. As a result, the assessment of income from EM investments has been suspended since 1 June 1990 and the assessment of asset value has been suspended since 20 February 1991.

3.Since the failure of EMML, a complex series of legal actions and counter actions have been made by the liquidators, managers and creditors of EMML. The freeze on redemptions has continued and no income has been credited to the trusts.

4.Global Funds Management (GFM) was appointed manager of the trusts in October 1990.

5.In November 1991, GFM put a proposal to unitholders to restructure the trusts such that the six EM trusts were merged into one consolidated trust and that the consolidated trust be listed on the ASX. Unitholders agreed to this proposal and GFM subsequently advised the Department of Social Security (DSS) that listing of the merged and renamed Meridian Investment Trust was scheduled to take place in September 1993.

GFM Representations re Treatment of Meridian Investment Trust on Listing

6.GFM recently made a representation to DSS regarding income and asset test treatment of the Trust upon listing. GFM requested that:

• a nil asset value be assessed, on the grounds that investors who choose not to sell their units are doing so because they cannot sell until value is restored to their units; and

• income only be assessed when the value of the units increases to the level at which the investor's capital has been restored (calculated by GFM as being a unit price of $2.56).

7.DSS did not support the treatment proposed by GFM on the basis that it would not be in accordance with the rules for calculating investment income set down in legislation.

8.Instead, the Minister for DSS made a number of policy determinations regarding the income and asset test treatment of investments in the Meridian Investment Trust.

9.The Department of Veterans' Affairs (DVA) has adopted the same policy as DSS with regard to this matter in accordance with Repatriation Commission decision CM 4506, which stipulated that DVA adopt DSS policy treatment in this matter to ensure consistency of assessment.

Treatment of the Trust Upon Listing - General

10.Importantly, for both income and asset test treatment purposes, the Meridian Investment Trust will continue to be treated as a managed investment. This is because the Trust, despite stock exchange listing, is still regarded as being a managed investment in nature.

11.In effect, the restructured Trust will be treated as a continuation of a past investment - a practice consistent with the treatment of the restructuring and listing of other formerly unlisted property trusts which have occured over the past 18 months.

12.When the Trust is listed, income and asset test suspensions on client unitholdings in the Trust will be lifted. The effective date to be used for application of income and asset values to client assessments is unknown at this stage as this is largely dependant on when the Trust is listed.

Assets Test Treatment

13.For asset test purposes the nominal $1.00 unit value which the Manager currently proposes to issue units in the Trust at upon listing will be used to calculate asset value. This is consistent with the treatment of other managed investments.

14.After entry of the initial $1.00 unit value into the Managed Investment Database and client assessments, asset value will be regularly recalculated and applied to client assessments by global automatic managed investment reassessment runs or upon client request as per standard managed investment assessment practice.

Income Test Treatment

15. Assessment of income for the Trust will be basically subject to the usual managed investment assessment rules (see DI B25/93 for details).

16.Income for client investments in the Trust which are assessed on realisation will be assessed on the basis of any cents per unit distributions made and profit or loss made on partial or complete realisation of the investment. As is the standard managed investment assessment practice, any realised loss will be able to be offset against realised profit for another managed investment where the periods that the profit and loss are held for overlap.

17.Income for client investments in the restructured Trust which are assessed on an ongoing basis will be assessed on the basis of the rate of return calculated for the investment over the immediately preceding 12 months. The rate of return is calculated by comparing the investment price at the start of the 12 month period and its current price (as well as including any income distributions). It has been determined that the currently proposed unit price of $1.00 will be used as the initial current price for the rate of return calculation for the Trust.

18.It has also been determined that in the year after listing, the rate of return will be calculated by comparing the current market price for the investment to the issue price of $1.00. The rate of return will then be multiplied by the asset value to calculate income. In subsequent years the rate of return will revert to being calculated on the usual basis of the performance over the previous 12 months.

19.After calculation of the initial rate of return for the Trust, income will be regularly recalculated and applied to client assessments by global automatic managed investment reassessment runs or upon client request as per standard managed investment assessment practice.

Application of Revised Meridian Investment Trust Details to Managed Investment Database and Client Assessments

20.The timing of the introduction of the new unit price for the Meridian Investment Trust to the Managed Investment Database and subsequently to client assessments depends upon when listing actually occurs. As noted earlier, GFM have previously advised DSS that this is due to occur in September 1993. Branch Offices will be kept advised of developments with regard to this matter.

21.Upon listing of the Trust, calculation of the initial asset value for client unitholdings will be performed automatically through the application of the $1.00 unit price to the Managed Investment Database. This unit price will then be applied to client assessments - where it will be displayed as the "buyback" price on the PP.II and PP.MI PIPS screens - by an automatic managed investment reassessment run (either fortnightly or global) immediately after listing occurs.

22.However, Branch Office processing staff should be aware that all client assessments containing Meridian Investment Trust holdings will require manual reassessment. This is because the merging of the six separate EM trusts into one trust will result in all investors in the Trust being issued with revised unitholdings on replacement certificates. All cases will therefore require a manual calculation to convert the number of old units held by the client to new units. These cases will be forced out for manual action by the same automatic managed investment reassessment run which will be used for application of the new buyback price.

23.Application of a rate of return for income test purposes will be performed automatically by the first global automatic managed investment reassessment run which occurs after the instalment of the initial $1.00 buyback price into client assessments. This will allow some time of active unit trading to pass in order that a rate of return can be established according to the rate of return formula ie., comparison of the base unit price and the market price plus distributions (if any).

24.Assuming the Trust is listed in September 1993, application of the initial rate of return will occur with the global automatic managed investment reassessment run due to be run with the December 1993/January 1994 quarterly advices run. Processing for this run will occur approximatley in mid December.

25.It should be noted that continuing litigation being pursued by the new trustee on behalf of GFM/unitholders may result in value being restored to the Trust prior to listing, with a consequential increase in unit value. Obviously, if this should occur prior to listing of the Trust, a unit value other than $1.00 will be used in the calculation of initial asset value and as the 12 month base for calculation of rate of return for income test purposes.

Updates

26.The treatment of the Trust outlined in this Instruction may change should detail related to the merging and listing of the Trust alter.

27.Branch Offices will be kept informed regarding details related to the Meridian Investment Trust matter (such as the timing of listing of the Trust, initial unit price, unit conversion calculations, etc) via the Investment Policy Officer (IPO) network and further Departmental Instructions.

Contact Officer

28.The contact officer regarding inquiries related to this Instruction is Martin Dibb - telephone 06-2896706. Queries regarding aspects related to the Managed Investment Database or automatic managed investment reassessment runs should be referred to Evelyn Johnson, IPO NSW - telephone 02-2137129.

TONY ASHFORD

NATIONAL PROGRAM DIRECTOR

BENEFITS