Treasury has released comprehensive drafts of both the regulatory and tax legislation for the Corporate Collective Investment Vehicle (CCIV) regime. The regulatory piece in particular is a great improvement on earlier drafts, and brings the proposed laws closer to readiness for implementation.
The revised exposure drafts released on 19 January 2019 and open for comment until 28 February, draw together the earlier “tranches”, and extend to a total of 369 pages of legislation.
If the few remaining issues are resolved, the CCIV will be set to become Australia’s modern globally competitive investment vehicle for domestic and foreign investors.
Regulation that works better for both consumers and industry
Following on the improvements to the draft Corporations Act provisions we reported last June (see our previous alert), further positive changes have been made on a number of points that we, the Financial Services Council and others have been advocating:
- The “structural” test for independence of the depositary has been replaced by a requirement to separate the depositary from any investment management entity, and a proposal to apply “functional” separation requirements through regulations. This will be more in line with the majority of international standards, and is likely to be welcomed by many industry players.
- In the previous draft, the process for appointment and change of the depositary involved shareholder meetings, and there were concerns that this could allow entrenchment of an underperforming depositary. Under the revised legislation, on retirement or replacement of the depositary the corporate director need only give notice and an explanation to ASIC. In addition, the right of shareholders to requisition a meeting to vote on a change of depositary, as previously proposed, is preserved. The draft also retains a helpful process for automatic vesting of assets in the new depositary, similar to the “statutory novation” arrangements for registered schemes.
- The strict liability of the depositary for acts of its agents, such as subcustodians in other countries, has been removed.
- The financial assistance rules which apply to trading companies are no longer proposed to apply to CCIVs.
- The legislation does not require the constitution for retail CCIVs to deal specifically with the issue price of shares, apparently moving away from the rigid requirements for pricing of units in a registered scheme. There is, however, a requirement to base redemption proceeds on net asset value.
- A number of changes have been made so that sub-funds of the CCIV are appropriately treated as a separate “fund” in relation to the assessment of liquidity, voting, related party transactions, assessment of solvency and assessment of the PDS test for small offers. Unfortunately, amendment of the CCIV constitution can still only occur with a vote of all members, even if the change affects only one sub-fund.
A few gaps
There are a few points on which the draft legislation is not yet ideal. There may be scope for some refinements in the consultation period.
- At this stage, listing of CCIVs has been expressly ruled out, although shares in a CCIV could be traded on ASX’s AQUA market if the rules are adjusted to accommodate it. The Explanatory Memorandum states that listing will be considered further once the CCIV regime is operating. This is not optimal, as legislative changes will be required to accommodate it later, and this would require policy makers, politicians and Parliament having the appetite to revisit it. If issuers of listed products are interested to have the regime expanded to cover listing of CCIVs, now is the time to raise it with Treasury in submissions.
- There are not yet any hoped-for transitional provisions to allow a unit in an existing managed investment schemes to convert into a CCIV share. There may be progress on this during the consultation period, as Treasury has previously indicated in a forum that they are considering what is needed for transition, , and it is contemplated in the draft tax legislation (see below). Product rationalisation by transition of existing funds to the CCIV regime could be an important benefit for the industry.
- The existing law that a director can be liable for insolvent trading by a company has not been disapplied in the case of CCIVs. This does not put CCIVs on an equal footing with managed investment schemes, where directors can only be liable for insolvent trading of the responsible entity company, not the fund. If this is not changed, the risk will need to be managed, as it is in companies, with appropriate contractual protections and management oversight.
- No amendments have yet been made to allow interfunding (ie one sub-fund of a CCIV investing in another) but this is also a point on which we think there is some possibility of change in response to submissions.
- Joint investment in the same asset, and a CCIV changing its company type to an ordinary company should it cease to qualify as a CCIV, are still prohibited.
Some challenges remain on tax
Default tax system
While the current draft legislation is broadly aligned with the attribution managed investment trust (AMIT) tax regime, a range of technical points, and one significant issue, may discourage the use of CCIVs if not addressed. If a sub-fund in a CCIV fails to satisfy the relevant tests (eg widely held, not closely held, trading and residency tests) other than on a temporary basis, then the default tax rules will apply, and impose corporate tax on the sub fund. However, they do not provide the sub fund with the ability to frank distributions which are made to investors, making the position worse than it would be for a MIS in similar circumstances.
A concession has been included in the exposure draft in relation to sub funds which fail to satisfy the prudential requirements and as a result would be taxed under the default tax rules. A form of capital gains tax relief is provided to enable the sub fund to be converted into a company, but the rollover relief is narrow and does not cover revenue assets and tax losses. Also, the change is not reversible, and the matching “change of company type” regulatory provisions are not included in the current exposure draft.
Changes to unders and overs regime
The exposure draft has retained the contentious change to the penalty regime for unders and overs. It is to apply both to CCIVs and AMITs. It inserts an administrative penalty for an “over” or “under” in attributions in a CCIV or AMIT which results from failure to take reasonable care to comply with a taxation law. It will continue to be an issue which is the subject of extensive submissions, particularly in relation to its application to existing AMITs.
One of the key concerns which had been raised in relation to the earlier draft of the tax rules was the risk of tax contagion due to the conduct in one sub-fund effecting the tax status of another sub-fund.
There has been a significant improvement in the rules dealing with tax contagion. The exposure draft effectively deals with these concerns by treating each sub-fund as a separate taxpayer. For example, a sub-fund undertaking a trading business and accordingly being taxed under the default tax rules will not alter the tax status of other sub-funds.
However, this means that the preconditions which must be satisfied in order to be a qualifying sub-fund (such as widely held and closely held tests) must be satisfied independently for each sub-fund.
Reconstruction relief for existing AMIT to convert into the CCIV regime
A key aspect of the regime was the ability for existing AMITs to “convert” into corporate collective investment vehicles. This conversion process is important for the ability of managers to simplify their existing structures through the conversion of existing funds into a corporate collective investment vehicle. The tax rollover provisions to facilitate conversion have been significantly improved, and now extend to include not only the capital gains tax consequences but also, revenue assets and tax losses. Previously only capital gains tax consequences were covered, and this would have been a major impediment to existing funds converting into CCIVs. The rollover relief is, however, still relatively limited in so far as it requires a rollover from a single AMIT into a single CCIV sub-fund and does not allow for rollover from other entities such as listed investment companies.
Treasury has not commented on the timing for introduction of the legislation into Parliament, but with an election due by mid May there could well be delays.
The consultation period is open until 28 February 2019, and submissions may be made on line through the Treasury website in the Consultation Hub under Corporate Collective Investment Vehicle Bill. We plan to participate in submissions, and would welcome your thoughts.