The Corporate Collective Investment Vehicle Framework and Other Measures Bill 2021 was introduced in the House of Reps on 25 November 2021 proposing to introduce a corporate funds management vehicle to be taxed as an AMIT (a CCIV). It was promptly referred to a Senate Committee, which delivered its report on 3 February 2022. The recommendation was that Parliament should pass the Bill promptly (despite several concerns of various reputable firms, canvassed below … ).
The Bill proposes to
- establish the tax and regulatory frameworks for corporate collective investment vehicles (CCIVs) to be used for funds management.
- It also proposes to amend the SIS Act so as to include a new retirement income covenant that will require trustees of RSEs to develop a retirement income strategy for beneficiaries who are retired or are approaching retirement.
The CCIV measures occupied the bulk of the Report, including regulatory and tax framework (as to the latter, see an extracted part of the report, below).
- The Committee acknowledged that there is overwhelming support for the CCIV regime.
- The Committee considered that the intent of the Bill, ie to increase the international competitiveness of Australia’s managed fund industry, would be met as CCIVs share the characteristics of other internationally recognised investment structures.
The retirement income covenant issues were also canvassed in the Report.
- The Committee was supportive of the intent of the covenant to better develop the retirement phase of superannuation and the principles based requirements of the covenant for superannuation trustees to formulate, review regularly and give effect to a retirement income strategy for beneficiaries approaching or who are in retirement.
The recommendation was that Parliament pass the Bill as soon as practicable in order to provide certainty to stakeholders working towards the 1 July 2022 deadline (for both proposals). While helpful submissions proposing amendments had been received, these should not slow or stop the passage of the Bill.
[LTN 22, 4/2/22]
[Tax Month – February 2022 – Previous 2022] 5.2.22
CCIV taxation framework
Taxation of sub-funds that fail ‘widely held’ conditions (prevent intended AMIT tax regime)
2.14 Submitters commented that an aspect of the bill that could be improved is the specific provisions that deal with the taxation of a CCIV sub-fund in the event widely held conditions are not satisfied.
2.15 King & Wood Mallesons noted that the policy aim of these provisions is to produce an equivalent tax outcome to the current trust regime, but stated that the ‘current drafting does not achieve this policy objective’.
2.16 Mr David Hawkins, Acting Assistant Director, Special Tax Regimes Unit, Corporate and International Tax Division, Treasury, explained that for the CCIV tax framework to provide equivalent tax outcomes, sub-funds of a CCIV would be taxed like an Attribution Managed Investment Trust (AMIT).
2.17 Mr D Hawkins noted that Treasury’s understanding of market practice ‘is that it’s very, very rare for a fund that wants to operate as an AMIT to ever fall out of those tax rules’. He further outlined that a safe harbour exists in the law currently for temporary circumstances that are outside the influence of the trustee.
2.18 Noting that it is anticipated that the vast bulk of CCIV sub-funds would be taxed like an AMIT, Mr D Hawkins explained that for the cohort of funds that are described as non-AMIT, or in the event a sub-fund fails the requirements, the CCIV sub-funds would fall into existing division 6 tax principles, which currently occurs in the law.
2.19 Therefore, Mr D Hawkins stated that ‘enforcing the widely held rule for funds that aren’t widely held does not take away from the policy intent of the CCIV’.
2.20 Mr Andrew Werbik, Assistant Commissioner, Policy Analysis and Legislation, Australian Taxation Office (ATO) told the committee that the ATO has not identified any specific issues should a CCIV fail and division 6 principles apply.
Accounting profits (as proxy for ‘trust income’)
2.21 FSC submitted that in the case of a MIT, the trust deed will determine the income to which relevant beneficiaries must be presently entitled. FSC explained that by contrast:
… the CCIV legislation introduces a requirement that the amount to which beneficiaries must be presently entitled is based on accounting profits. This is different from the way managed funds normally operate.
2.22 FSC argued that the reliance on accounting profits would introduce issues for CCIV members, and in some cases, would result in extra tax being imposed on the sub-fund.
2.23 FSC and King & Wood Mallesons believed that a solution to the problem would be to ‘remove reliance on a concept of accounting profits and rely on the definition of trust income as contained in the deed’.
2.24 Pitcher Partners submitted that a key concern was the use of ‘profits’ as a proxy for the ‘income of a trust estate’ for a non-AMIT sub-fund.
2.25 Pitcher Partners believed that the difference between this term and taxable income would likely result in many cases where a CCIV sub-fund would be taxed at 47 per cent. Pitcher Partners explained that this would mean that ATO resources would be diverted to resolving these issues, and would create a risk on uptake of the CCIV regime, as compared to the current use of unit trusts as the vehicle of choice for fund managers.
2.26 Pitcher Partners provided that in order for the CCIV regime to be a vehicle that meets its objectives of successfully attracting foreign investment, the bill could be amended by:
- allowing a CCIV sub-fund the ability to make an irrevocable election to treat income of the trust estate as being its taxable income (with certain adjustments); or
- allowing a CCIV sub-fund to be taxed on an attribution basis (rather than present entitlement basis).
2.27 Mr D Hawkins, Treasury, explained to the committee that the proposed CCIV structure would be a corporate entity and would have a regulatory framework that provides for that. Mr D Hawkins acknowledged that the reference to accounting profits is a different concept to what stakeholders would have to deal with currently. However, Mr D Hawkins told the committee ‘we have to look at that in the context of what we’re dealing with; we’re talking about a CCIV, which is a corporate entity’.
2.28 In response to concern about the prospect of a 47 per cent tax rate and whether a CCIV sub-fund would be worse off, Mr D Hawkins explained that Treasury does not think the CCIV ‘is doing anything different to give rise to that different tax outcome’.
2.29 Mr D Hawkins said ‘[o]ur deeming principle is seeking to make certain that the outcomes that funds can currently access carry over to the CCIV. We think the bill does that’.
2.30 Mr Werbik explained that as part of implementing the new measures of the CCIV, the ATO is actively working through what sort of public advice and guidance might be needed to set out more detail on how these provisions of the CCIV might work. The ATO has also established a CCIV Working Group to canvass industry perspectives around what support would be needed to implement the new CCIV.
Tax rules relying on concepts of dividend
2.31 FSC noted that tax rules for CCIVs do not apply based on entitlement to distributions, but instead rely on the tax definition of a ‘dividend’. FSC argued that the use of this expression would add complexity to the administration of a CCIV, and in in some instances could prevent distributions to investors.
2.32 FSC recommended that the reliance on dividend ‘should be replaced by reliance on entitlement’.
2.33 Mr D Hawkins, Treasury, reiterated that the CCIV would be a corporate entity, and as such would have a regulatory framework that includes corporate law concepts like dividends and solvency. Mr D Hawkins explained that ‘[a] high-level example is the CCIV will pay out a dividend; a trust will never need to do that. So there’s already a difference there’.
2.34 Mr Werbik, ATO, further clarified that as the legislation takes the approach that it is a legal form company, the tax definition of a dividend would not be a particular issue for the ATO. However, Mr Werbik stated that to ‘the extent that there are things that need to be clarified: we [would] certainly take that on board in our public advice and guidance, subject to prioritisation’.
2.35 In relation to terms being clarified, Ms Kate Metz, Senior Executive Leader, Investment Managers, Australian Securities and Investments Commission (ASIC) also highlighted that ASIC would also ‘publish relevant regulatory guides before 1 July to ensure corporate directors understand their obligations and duties under the regime and can become appropriately licensed and operationally competent’. Ms Metz noted that ASIC plans to publicly consult on these regulatory guides before they are published.
[APH website: Report Findings]
[Tax Month – February 2022 – Previous 2022] 4.2.22