New collective investment vehicles for funds management - A huge step forward
The announcement of the introduction of new forms of collective investment vehicles (CIV) continues the wave of positive reforms in the funds management industry.
New collective investment vehicles
It is proposed that there be introduced two new CIVs:
- a corporate CIV; and
- a limited partnership CIV.
The corporate CIV will be introduced from income years starting on or after 1 July 2017. This will be followed by the limited partnership CIV for income years starting on or after 1 July 2018.
This measure is estimated to have an unquantifiable cost to tax revenue over the forward estimates period. To implement this measure, the Government will provide $2.0 million to the Australian Taxation Office and $7.8 million to the Australian Securities and Investments Commission, which will be partially offset by $0.7 million in registration fees.
These reforms will enhance the international competitiveness of the Australian managed funds industry by allowing fund managers to offer investment products using vehicles that are commonly in use overseas. This will also maximise the effectiveness of related Government initiatives aimed at increasing access to overseas markets, including the Asia Region Funds Passport.
Important in the context of the Asian Region Funds Passport regime
The introduction of these new CIVs is regarded as critical for the success in Australia for the new Asian Region Funds Passport regime.
The Memorandum of Cooperation for the Asian Region Funds Passport regime was signed with Japan, South Korea and New Zealand on 28 April 2016.
The Asian Passport is an international initiative to facilitate cross-border offerings of eligible investment schemes. The Memorandum comes into effect on 30 June 2016. Other eligible APEC economies will become an original participant if they sign before 30 June 2016.
The corporate legislation to implement the Passport under the Memorandum of Cooperation must be implemented prior to 31 December 2017.
More familiar product for foreign investors
Until now, Australian fund managers wishing to offer foreign investors an investment opportunity in an Australian tax transparent fund have been practically limited to managed investment schemes (trusts). Trusts are an unfamiliar investment vehicle to most offshore investors which (at worst) has led to some investors to decline to invest in Australian funds or (at best) has resulted in fund managers spending time and resources to educate overseas investors on trust structures.
The new CIVs, on the other hand, present a familiar product to foreign investors and will bring Australia in line with international best practice.
The benefit of the reform for non-resident investors to provide the ability to invest into a familiar legal form. That is, a form that is equivalent to that currently being offered in jurisdictions such as Luxembourg by existing managers under the UCITS regime.
The vehicles are aimed at providing alternate collective investment structures to the existing managed investment trust regime.
The introduction of these vehicles would represent a significant change to the range of investment products which may be offered in Australia. It seeks to create a different legal form to provide equivalent tax outcomes for Australian investors.
A key driver will be to provide managers with the functionality to have, amongst other things, classes designated different categories of assets or different currencies.
New vehicles not limited to non-resident investors
The new vehicles should also be available to resident investors. They are not limited to non-residents or participants through the Passport regime.
Key eligibility criteria
The entities are to have similar eligibility criteria to the current managed investment trust regime.
- being subject to appropriate regulation in Australia that is equivalent to the managed investment scheme requirement for managed investment trusts;
- being widely held; and
- engaging primarily in passive business.
What is needed to make the new regime a success?
The initiative is very welcome.
The success of the new initiative will depend on the adoption of an appropriate base for the new legislation, for example the UK Open-Ended Investment Companies Regulations 2001.
The regulation of offerings of a corporate investment vehicle in a corporate sense is to operate on the same basis of an interest in an existing managed investment trust.
Before these structures can be used however, changes will need to be made to the Corporations Act and potentially state partnership legislation including to facilitate distributions (including capital returns) in open-ended funds and to ensure that partnerships do not fall foul of managed investment scheme laws. At the moment, laws regulating disclosure to retail investors occurs under a prospectus regime (for companies) and for a product disclosure regime (for trusts). Ideally, the new investment vehicles being introduced will trigger a consolidation of the two existing disclosures regimes into one common set of rules, rather than adding to the existing rules.
It will be important to ensure that there are equivalent government outcomes in relation to a managed investment trust and a new CIV so as to not create a bias against the new form of investment vehicle.
For more information, please see our previous alerts, available here.
New tax hedging regime
The government has announced reform to the taxation of financial arrangements through the redesign of the new TOFA framework. The new simplified rules apply for income years on or after 1 January 2018.
Importantly, one of the measures includes a new tax hedging regime which appears to be specifically designed to ensure easier access and encompass more types of risk management arrangements and remove the direct link financial accounting.
It also includes simplified rules for the taxation of gains and losses on foreign currency to preserve current tax outcomes.
The reform of the treatment of hedging and gains and losses on foreign currency will be an important supplement to ensure the attractiveness of the new collective investment regime and the new multiclass attribution managed investment trusts.
Withholding tax rates
There have been no changes announced to the withholding tax regime to apply to either collective investment vehicles or managed investment trusts.
There has been a long-standing concern about the complexity of the Australian tax withholding rules and the adverse impact on non-resident investing in Australian assets through managed investment trusts.
The proposed changes to the TOFA rules may assist with the removal of some of the complexities. Please see our Corporate article for further details regarding the proposed changes to the TOFA rules.
Managed Investment Trusts
There have been no further Attribution Managed Investment Trust changes. The legislation to implement the regime is expected to pass Parliament tomorrow.
For a full analysis of this year's Budget measures, please see Australian Federal