Does the Federal Budget announcement of a new selection of Collective Investment Vehicles herald the dawn of a new age in investment management in Australia? Is this the beginning of the end for Australian Unit Trusts?

Long reviled by practitioners and investment professionals as unwieldy, hard to explain and sell to offshore investors, and carrying undue degrees of risk for their trustees, Unit Trusts or Managed Investment Schemes have only been the default setting for collective investment management in Australia because the entities more widely understood and used overseas have not been treated as tax-transparent here.  

The Budget included an announcement of the proposed introduction of two types of Collective Investment Vehicle: a corporate (company) vehicle, and a Limited Partnership. 

It is expected that the Limited Partnership will be targeted mainly at wholesale type investors, whereas the Corporate vehicle will be attractive for retail as well as wholesale type investors.

Marketability

These reforms should improve the competitiveness of the Australian managed funds industry by allowing us to use vehicles widely understood and employed overseas.  The particular tax attributes that investors and managers will find attractive include:  

  • 'flow-through' tax treatment based on the MIT attribution model (Corporate vehicles) and based on general partnership tax rules (eligible Limited Partnerships);
  • deemed capital account treatment.

Tax Transparency for Everyone

The new vehicles will be available to both resident and non-resident investors and will be part of the new Asian Region Funds Passport Regime, which was documented by Memorandum of Co-operation on 28th of April 2016 and is due to pass into law before the end of next year. 

What don't we know yet?  

New tax and regulatory frameworks are expected to be introduced over the next 12 months.  We are on tenterhooks, to see whether the opportunities presented to make this regime truly world-class will be seized by the Legislature.  

On the tax front we expect that the eligibility criteria will be similar to the current managed investment trust regime, so that the new vehicles will need to: 

  • qualify under the relevant regulatory regime (as with the requirement for MITs to be a managed investment scheme)
  • be widely held
  • earn primarily passive returns.  

On the regulatory front, changes will be required to the Corporations Act and partnership legislation - to provide for distributions including by way of return of capital in open ended funds and to clarify the borders with the managed investment scheme rules. We don't yet know what is proposed in relation to regulating disclosure around offers of vehicle interests.  

We're not just waiting to see what turns up - we're actively involved in consultations with the ATO and Treasury. Please reach out if you'd like to engage with this process. 

When can we buy one?

The corporate vehicle is due to become available for income-years starting 1 July 2017, with the limited partnership available from 1 July 2018.  

The End of Unit Trusts?

Perhaps not.  The widely-held test may mean that sophisticated wholesale investors looking for vehicles to house small club deals, separately managed accounts, or other captive vehicles and tax-efficient asset holding structures are still channelled into using trusts. 

And do we still need stapled structures?

Yes.  The retention of a passive/active income distinction means that stapled structures will likely persist, but may now incorporate the new vehicles on the passive side.

Dear Santa…

If we had magic wands, what would we wish for (apart from a pony)? 

  • A merged regime under the Corporations Act for offering securities in privately placed companies and managed investment schemes and the new collective investment vehicles, so that there would be no disclosure arbitrage preferencing one entity over another and the regime was simple and easy to understand.
  • The widely held rules would look through large investors like sovereign wealth funds, pension funds, super funds and the like and deem them widely held, without any requirements for the vehicle to be directly owned by more than one entity or owned through a chain of entities.
  • Transitional provisions would allow the industry to move to the new vehicles without losing losses, costs base or incurring stamp duty.  There's no certainty on that at this point.
  • Some insolvency treatment certainty would be nice too, please Santa, for different classes of interest in the one vehicle, including for AMITs.  

Ok, perhaps we have a better chance at the pony.

What else?

A new Taxation of Financial Arrangements framework will apply for income years on or after 1 January 2018.  It includes reform of taxing of hedging contracts and gains and losses on foreign currency, which should fit in nicely with these collective investment vehicle reforms .

The new Attribution Managed Investment Trust (AMIT) rules passed into law on the 4th of May, and commence 1 July 2016.  The new rules include a new attribution method to allocate taxable income to investors in the MIT, dealing with income unders and overs and including the ability to have multi-class AMITs that can elect to treat each class as a separate trust for the purposes of calculating and attributing the taxable income of the trust to investors, which gets our structuring hearts all a-flutter but probably is keeping the custodians and back-office administrators up at night.  Other changes introduced include updating the list of eligible entities (including foreign life insurance companies), clarifying the tax treatment of deferred distributions and introducing an arm's length rule for related party transactions.