The Bill introducing a ‘corporate’ vehicle for existing AMIT flow through tax – more internationally recognisable than our predominant ‘trust’ structure (minus the other amendments…)

Schedules 1 to 4 to the Bill amend corporate and financial services law to establish a CCIV as a new type of a company limited by shares that is used for funds management. A CCIV is an umbrella vehicle that is comprised of one or more sub-funds and is operated by its single corporate director.

1.2  Schedule 5 to the Bill amends the taxation law to specify the tax treatment for the newly established CCIV. The amendments give effect to the core CCIV tax framework to ensure that the CCIV is taxed on a flow-through basis, with the objective that the general tax treatment of CCIVs and their members align with the existing tax treatment of AMITs (and their members).

1.3  This Chapter of the explanatory memorandum discusses the policy context for CCIVs and provides an overview of the regulatory and tax frameworks.

1.4  All legislative references in this Chapters 1 to 12 are to the Corporations Act unless otherwise stated.

1.5  All legislative references in Chapter 13 are to the ITAA 1997 unless otherwise stated.

1.6  In November 2009, the Australian Financial Centre Forum released the Australia as a Financial Centre: Building on our Strengths report (the Johnson report). The Johnson report made several policy recommendations aimed at increasing Australia’s cross-border trade in financial services and improving the competitiveness and efficiency of the financial sector.

1.7  In relation to funds management, the Johnson report included recommendations to develop the ARFP regime, along with the establishment of a new collective investment vehicle with a corporate structure.

1.8  The ARFP provides a multilateral framework that allows eligible funds to be marketed across member countries, with limited extra regulatory requirements. The ARFP is intended to support the development of a regional managed funds industry through improved market access and regulatory harmonisation. The Government implemented legislative changes for the ARFP regime in mid- 2018, and the program commenced in February 2019 (after Japan and Thailand enacted their respective legislative changes).

1.9  The Johnson report also identified Australia’s need for a collective investment vehicle that provides flow-through tax treatment, maintains investor protection and is more internationally recognisable than a MIS (Australia’s current trust based collective investment vehicle). To address this gap, the report recommended that the Board of Taxation review the scope for providing a broader range of collective investment vehicles that would be subject to flow-through taxation.

1.10  The then Government accepted this recommendation and the subsequent Review of Tax Arrangements Applying to Collective Investment Vehicles was released by the Board of Taxation in December 2011. The review recommended the creation of new collective investment vehicles which provide tax neutral outcomes for investors. The report also recommended that overseas experience in offshore jurisdictions inform the design of the new collective investment vehicles.

1.11  In the 2016-17 Budget, as part of the Ten Year Enterprise Tax Plan, the Government announced it would introduce tax and regulatory frameworks for two new types of collective investment vehicles, the CCIV and a limited partnership collective investment vehicle.

1.12  In the 2021-22 Budget, the Government reconfirmed its commitment to establishing the CCIV regime and announced a commencement date of 1 July 2022 for the regime.

1.13  Schedules 1 to 5 to the Bill establish the regulatory and tax frameworks for CCIVs.

1.14  In developing the regulatory framework for CCIVs, a key policy objective has been to increase the competitiveness of Australia’s managed funds industry internationally to attract offshore investment.

1.15  In developing the tax framework for CCIVs, the policy objective has been to ensure that a CCIV is taxed on a flow-through basis, with the general tax treatment of CCIVs and their members aligned with the existing tax treatment of AMITs (and their members).

1.16  To this end, the Government has focused on ensuring the CCIVs framework would offer internationally recognisable investment products, flow-through tax treatment, commercial flexibility and strong investor protections.

1.17  Australian funds management is currently conducted through a MIS, which has a trust-based structure. While the Australian managed funds industry is well established, it is predominantly domestically focused. Many offshore investors perceive the MIS structure to be inappropriate for large-scale funds management. The limited range of vehicles that can be used for funds management reduces the ability for Australian funds management to engage competitively with financial centres that offer significant cross-border funds management through the use of corporate vehicles for collective investment, such as Europe, the United Kingdom and Singapore.

1.18  The Government has analysed the regulatory regimes of leading fund domiciles, target export markets, and major financial centres in our region. The regulatory framework draws on the features of other equivalent vehicles internationally. It has been developed to facilitate the competitiveness and commercial viability of CCIVs while ensuring integrity of Australia’s investor protections and tax framework.

1.19  Like other international corporate collective vehicles, CCIVs will operate with a corporate structure, meaning they will have the legal form of a company limited by shares with most of the powers, rights, duties and characteristics of a company.

1.20  Aligning Australia’s regulatory framework with well-developed international regimes can lower the barriers to entry for new fund managers seeking to operate in Australia. This can increase competition and allow Australian consumers greater product choice, including exposure to new asset classes.

1.21  The introduction of the CCIV regime is also intended to complement the ARFP as it will provide Australian fund managers with a vehicle that will be compliant with the requirements for the ARFP and is similar to the corporate funds already available in parts of Asia.

1.23  The CCIV regulatory framework utilises a company structure limited by shares so that it is recognisable to offshore investors and fund managers.

1.24  As a company, a CCIV will generally be subject to the ordinary company rules under the Corporations Act unless otherwise specified. Features of the MIS regime have also been incorporated into the design of CCIVs to the extent that they are consistent with the policy objective. In doing so, regulatory parity is maintained (to the extent possible) between the existing MIS framework and the CCIV framework. This will ensure efficient operation of the domestic funds management industry and ease of adoption for fund managers wishing to establish a CCIV.

1.25  For example, a CCIV must have share capital but the CCIV can issue some or all of its shares as being redeemable at the member’s option. This feature is similar to a member’s right to withdraw from a registered scheme. Further, while other types of companies are required to appoint natural person directors, a CCIV must have a single corporate director, which is consistent with the OEIC model and also similar to the structure for MISs (which are operated by a corporate trustee).

1.26  The CCIV regulatory framework distinguishes between retail and wholesale CCIVs. It aligns with the retail investor protections of a registered scheme while also replicating elements of the flexibility and lighter touch regulatory approach applying to wholesale MISs. This reflects the higher degree of investor sophistication among wholesale investors and their capacity to negotiate bespoke contractual protections and assess investment risks.

1.28  A CCIV is a new type of company that is limited by shares and has as its director a public company with an AFSL authorising it to operate the business and conduct the affairs of the CCIV (the corporate director).

1.29  A company may be registered as a CCIV if it meets certain basic registration requirements, including that upon registration it will have at least one sub-fund (which must have at least one member). The registration requirements are broadly similar to those of other companies.

1.30  Upon registration, the persons identified in the application as the proposed corporate director and members of the CCIV assume those roles (subject to meeting the relevant requirements for the roles). The shares specified in the application form are taken to be issued to those members upon registration.

1.31  A CCIV may be either retail or wholesale, with retail CCIVs subject to a regulatory framework that encompasses additional regulatory protections necessary for retail investors. Wholesale CCIVs are subject to a more limited regulatory framework, reflecting the higher degree of investor sophistication among wholesale investors and capacity to negotiate bespoke arrangements with fund providers.

1.32  A CCIV will be a wholesale CCIV unless it has at least one investor that acquires securities in the CCIV as a ‘retail client’ (within the existing meaning in Chapter 7 of the Corporations Act) because securities in the CCIV were issued or transferred to them in circumstances that would have required a PDS be given to them. In this case, the whole CCIV is treated as a retail CCIV.

1.33  A retail CCIV with a single sub-fund, or a sub-fund of a retail CCIV (that has a single sub-fund) may be included in the official list of a prescribed financial market operated in Australia. Listing of a retail CCIV with more than one sub-fund, or of multiple sub-funds of a retail CCIV, will be considered further once the CCIV regime is operating.

1.34  These restrictions only apply to listing on a prescribed financial market operated in Australia. Nothing in the new law prevents a security in a CCIV from being quoted on a financial market or settled using financial market infrastructure, such as the ASX Quoted Assets Market, subject to the rules of the relevant market. The restrictions on listing do not affect the capacity for a security in a CCIV to be quoted (regardless of the number of sub-funds of that CCIV).

1.35  A CCIV is an umbrella vehicle that is comprised of one or more sub-funds. Each sub-fund may offer investors a different investment strategy. The capacity to group these funds together under one umbrella vehicle supports funds managers to build capacity and economies of scale.

1.36  A sub-fund of a CCIV is all or part of the CCIV’s business that is registered by ASIC as a sub-fund of the CCIV. A sub-fund is established on registration.

1.37  The initial sub-fund (or sub-funds) of the CCIV are registered by ASIC as part of the registration of the CCIV. Registration of a sub-fund of the CCIV after the registration of the CCIV itself is by a standalone process.

1.38  An ARFN is given to each sub-fund as part of the registration process. A sub- fund’s name is the name specified in the record of the sub-fund’s registration. A sub-fund’s name is subject to naming requirements, including that it must have the CCIV’s name at the start of its name.

1.39 Similar to a company and a registered scheme, a CCIV must maintain a register of its members that includes certain information (such as the details of the sub-fund that the members shares are referable to). If a CCIV is a member (for example, under cross-investment within a CCIV), then the CCIV’s register of members must also identify the sub-fund to which the CCIV’s membership relates.