25 August 2017

Corporate Collective Investment Vehicles: The investment vehicle for the next generation!

This article was written by Andrew Clements

The Assistant Treasurer has today released for public comment exposure drafts of key legislation for corporate collective investment vehicles. This continues Australia’s development as a funds management centre of the world.

New corporate collective investment vehicle

The exposure draft includes amendments to Australia’s corporation law to allow for the creation of an Australian corporate collective investment vehicle (CCIV).

The amendments are modelled on the United Kingdom’s open-ended investment company legislation.

The new structure is a potential game changer as to the form of collective investment vehicles offered to both domestic and foreign investors.

The new draft regime is targeted at providing an investment vehicle that can also be suitable for a multi-class corporate structure. Crucially, the draft legislation seeks to provide a liability firewall between the classes. The exposure draft legislation and materials are available here: https://consult.treasury.gov.au/financial-system-division/asia-region-funds-passport/

Key design features of the new CCIV

The key features of the regulatory framework for CCIVs are explained in the Explanatory Memorandum as:

  • A company may register as a CCIV if the company is a company limited by shares and operated by a single corporate director.
  • The Corporate Director must be a public company that holds an Australian financial services licence (AFSL) authorising it to operate a CCIV.
  • A CCIV must not have any officers or employees other than the Corporate Director.
  • The Corporate Director owes duties to the members of the CCIV and these duties will take precedence over the duties the corporate director owes to its own shareholders.
  • A CCIV must have at least one sub-fund at all times.
  • A CCIV may be open- or closed-ended.
  • A CCIV must have a constitution that includes certain prescribed content requirements if the CCIV is a retail CCIV. A retail CCIV must also have a compliance plan.
  • A retail CCIV must have a depositary that holds the assets of the CCIV on trust for the CCIV and supervises certain aspects of the corporate director’s responsibilities for the benefit of members. A wholesale CCIV may choose to have a depositary.
  • The Corporate Director or Depositary may appoint an agent or otherwise engage a person to do anything it is authorised to do in connection with the CCIV (except for the depositary’s supervisory role over the Corporate Director).
  • A retail CCIV is subject to the full regulatory framework for CCIVs whereas a wholesale CCIV is subject to minimal requirements.

Regulatory framework as it applies to a retail CCIV

The diagram shows the regulatory framework as it applies to a retail CCIV.

A wholesale CCIV is not required to have a depositary or a compliance plan (or an auditor of a compliance plan).

The appointment of an agent or custodian of the corporate director or depositary is optional for both retail and wholesale CCIVs.

Asia Region Funds Passport (Passport)

Also released today as exposure draft legislative to give effect to the Asia Region Funds Passport in Australia.

The new structure is critical to the success of the Passport Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, said:

The Passport will give Australian funds managers access to economies across the Asia-Pacific region with combined gross domestic product of US$6.9 trillion. It established appropriate cross border recognition while promoting strong investor protections.

The Minister’s media release is available here: http://kmo.ministers.treasury.gov.au/media-release/085-2017/

The new regime builds on the existing attribution managed investment trust regime. It is designed to provide Australia with a globally competitive vehicle for both domestic and foreign investors. Key to this will be a simpler structure (that is, not dependent on existing trust concepts) and a structure more recognisable by global investors.

Importantly, under the Memorandum of Cooperation (which took effect on 30 June 2016), the Passport comes into effect from 1 January 2018 (when two or more of the Passport participants pass the requisite legislation). It is understood that the enabling legislation for other participants is currently being developed.

How will the new collective investment vehicle be taxed?

The exposure draft legislation does not include the new tax rules.

It is expected the new CCIVs will be taxed in a similar way to attribution managed investment trusts (AMITs). The tax rules applicable to AMITs are to be extended to CCIVs.

The prudential requirements for access to the proposed CCIV regime are contemplated to be also similar to those for AMITs. Namely:

  • the activities of the collective investment vehicle are limited to certain prescribed activities; and
  • the relevant investment vehicle must be sufficiently widely held.

Importantly, if those requirements are not satisfied then the CIV entity will be taxed under the default position. The operation of the default position is a critical area to monitor.

Enabling legislation to the Passport

The consultation drafts also provide for an additional chapter for inclusion in the corporations law to deal with the introduction of the Passport.

What do you need to know?

  • Independence is a key aspect for retail funds

    A key feature of the CCIV is the independence of the depository from the Corporate Director. This is aimed at providing retail investors extra protection.

    These rules provide for statutory independence between the depositary and the custodians it appoints on one hand, and the Corporate Director on the other. The application of this requirement will be critical to determine the extent a vertically integrated financial organisations are able to take advantage of the proposed CCIV regime.
  • Importance of effective roll-over relief

    The draft legislation does not include at this time any mechanisms for roll-over relief from existing AMITs into the new CCIV regime. The availability of this relief will be important in ensuring the new regime’s success. It is expected that some form of tax relief would be available.
    The success of the regime will also depend on there being an appropriate cost-effective corporate mechanism to facilitate the re-organisation of existing funds and structures into the new regime.

What happens next?

There is a relatively short consultation phase to provide input in relation to the new regime.

Submissions close on 21 September 2017.

There will be an additional consultation period after the core legislative framework and any consequential amendments are settled.

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