On 27 August 2021, the Department of the Treasury of the Australian Government (Treasury) released a package of documents including exposure draft legislation and exposure draft explanatory memorandum for industry feedback on the regulatory and tax components of the corporate collective investment vehicle (CCIV) regime (see here for relevant materials). Treasury has proposed that a commercially viable form of the CCIV regime will be in place with effect from 1 July 2022.
In the 2016-17 Federal Budget, the Government announced that it would introduce regulatory and tax frameworks for two new types of collective investment vehicles, being a CCIV and a limited partnership collective investment vehicle. Since then, Treasury has overseen a number of consultation periods and revisions to the CCIV regime. Johnson Winter & Slattery has previously published an article which outlined the key features of the CCIV regime when industry consultations were undertaken in September 2017 which can be accessed here.
CCIVs are to be structured as an umbrella vehicle or umbrella fund incorporating one or more sub-funds. A CCIV is a company limited by shares with most of its powers, rights, duties and legal characteristics congruent to those of a natural person or body corporate. A sub-fund, on the other hand, will not have a legal personality.
CCIVs serve as an alternative vehicle to that of managed investment schemes (MIS) with a closer alignment to European-style corporate funds (under the European Undertakings for Collective Investment in Transferable Securities (UCITS) Directive). The latter is a popular vehicle in parts of Asia.
It is also proposed that, where CCIVs qualify as attribution managed investment trusts (AMITs) under Division 276 of the Income Tax Assessment Act 1997 (Cth) (1997 Act), they will be taxed as AMITs. Otherwise, the general taxation of trust provisions will apply to CCIVs, and in both cases each sub-fund will be treated as a separate trust for taxation purposes.
What is a CCIV?
A CCIV is a company that is limited by shares and has, as its sole director, a public company which holds an Australian financial services licence (AFSL) with the appropriate authorisations to operate a CCIV. A CCIV is required to have a constitution and at least one sub-fund which has at least one member.
Like the MIS regime, CCIVs can be either retail or wholesale, with a more comprehensive regulatory regime applying to retail CCIVs in order to protect retail investors. However, unlike the MIS regime, all CCIVs must be registered as a company with the Australian Securities and Investments Commission.
A CCIV cannot change into another type of company and another type of company cannot change into a CCIV.
What is a sub-fund of a CCIV?
A sub-fund is the vehicle through which the business and operations of the CCIV must be conducted. On registration of the CCIV, at least one sub-fund must be established and be identifiable through a unique name and Australian registered fund number (ARFN). The registration of additional sub-funds after the registration of the CCIV is a separate process.
The securities issued by the CCIV must be referrable to a sub-fund. The assets and liabilities of the CCIV must be attributed to a specific sub-fund. If required, the corporate director must convert a single asset that would otherwise be spread across multiple sub-funds into money or another form of fungible property to enable the separate allocation of the property. Any allocation made by the corporate director must be ‘fair and reasonable in the circumstances’. The assets of the CCIV (and each sub-fund) may be held by the CCIV or by another person (such as a depositary) on trust for the CCIV.
What is a corporate director of a CCIV?
The corporate director of the CCIV is responsible for the operations and affairs of the CCIV. These functions are to be conferred on the corporate director by the constitution of the CCIV and the Corporations Act 2001 (Cth) (Corporations Act). Since the CCIV, itself, has no officers or employees who are individuals, the corporate director is responsible for the conduct of the CCIV. The Corporations Act imposes a series of statutory duties which are owed by the corporate director in its capacity as an officer of the CCIV and to the members of the CCIV.
As aforementioned, the corporate director is required to hold an AFSL with a new type of authorisation for the provision of the financial service of ‘operating the business and conducting the affairs of a CCIV’. Whilst it is expected that a CCIV will carry on more than one type of financial service in the course of its operations, Treasury anticipates that a CCIV will generally provide the financial service of ‘dealing in a financial product’.
What is a member of a CCIV?
An entity will be a member of a CCIV if it holds one or more shares in the CCIV. As noted above, each share must be referrable to a sub-fund. Each share will have certain rights and obligations. These include voting entitlements, rights to dividends and capital distributions from the CCIV referrable to a sub-fund.
What are the requirements for securities issued by a CCIV?
A CCIV may issue both shares and debentures on the basis that any security issued is referrable to only one sub-fund of the CCIV. Subject to its constitution, a CCIV may also redeem redeemable shares, pay dividends to members or reduce share capital if the sub-fund to which the redeemable shares, dividends or capital relate is solvent immediately before the transaction and if the transaction would not result in the sub-fund becoming insolvent immediately after it is completed.
Despite being a form of company, CCIVs are not subject to the disclosure requirements set out in Chapter 6D of the Corporations Act. Rather CCIVs must adhere to the product disclosure statement (PDS) disclosure regime contained in Part 7.9 of the Corporations Act as amended by Treasury’s proposed modifications. Therefore CCIVs are required to provide a PDS to retail clients seeking to acquire its securities. This means that, retail CCIVs will also be subject to the design and distribution obligations under Part 7.8A of the Corporations Act.
Key Proposed Changes
This section highlights the key changes to the CCIV regime proposed by Treasury in this latest round of consultation.
A depositary is a separate company appointed by the CCIV that holds its assets on trust and whose functions include the oversight of certain operational activities of the CCIV Treasury has removed the requirement for retail CCIVs to have an independent depositary on the basis that there should be sufficient flexibility to enable the alignment of commercial models with particular markets and investors as required.
Cross-investment refers to the practice of one sub-fund of a CCIV holding one or more shares that are referrable to another sub-fund of the same CCIV. Cross-investment could be used to achieve management and operational efficiencies, as well as enabling the opportunity to establish fund of funds structures in the one CCIV.
Treasury states that cross-investment will enable CCIVs to utilise funds management structures such as:
- building blocks/master-feeder structures, which involve the establishment of multiple sub-funds that hold particular asset classes (building block sub-funds) and other sub-funds that have different levels of exposure to those building block sub-funds; and
- hedging structures, which involve establishment of a sub-fund that holds the core assets of the CCIV and additional sub-funds that hold shares and hedging instruments in the core sub-fund.
Listing on Prescribed Financial Markets in Australia
Treasury proposes that retail CCIVs with one sub-fund may now be included in the official list of a prescribed financial market operated in Australia from 1 July 2022. However, wholesale CCIVs and retail CCIVs with multiple sub-funds remain prohibited from listing in Australia. These prohibitions do not impact the ability of a CCIV to quote a security on a financial market such as the ASX Quoted Assets Market subject to the financial markets own set of rules.
Whilst the regulatory framework is designed to provide certainty as to the legal status and operation of CCIVs and sub-funds, the tax framework is aimed at ensuring that members can achieve the attribution and flow-through of income and income tax treatment from a CCIV through either the existing AMIT regime or the default regime for the taxation of trusts in Division 6 of Part III of the Income Tax Assessment Act 1936 (Cth) (Division 6).
Treasury has articulated that despite being registered as a company under the Corporations Act, the deeming principles in the proposed Subdivision 195-C of the 1997 Act will have the effect of deeming a trust relationship to exist between the CCIV, the business, the assets and liabilities of a sub-fund and its members for the purposes of applying taxation laws. This deeming provision will result in the following:
- the assets, liabilities and business referable to a specific sub-fund will be treated as a separate trust;
- the CCIV will be treated as the trustee of each sub-fund which will be taken to exist as a separate unit trust known as a the CCIV sub-fund trust; and
- the members of the CCIV will treated as the beneficiaries of the CCIV sub-fund trust.
Further, each sub-fund of a CCIV will be treated as a separate trust for taxation purposes with the relevant taxation laws that apply to trustees, trusts and beneficiaries applying to the CCIV.
Provided it meets the AMIT eligibility criteria in respect of a CCIV sub-fund, a CCIV sub-fund can attribute amounts of assessable income, exempt income, non-assessable non-exempt income, and tax offsets derived or received by the CCIV that have a particular character to members. These amounts will retain their character and will then be taxed as such in the hands of the members as if the member directly derived such amounts.
Unlike managed investment trusts that qualify as AMITs which can choose to be taxed as AMITs, CCIV sub-funds which qualify as AMIT will be mandatorily taxed as AMITs. CCIV sub-funds will not have a choice.
In circumstances where a CCIV does not meet the eligibility criteria for the AMIT regime in connection with a specific sub-fund for a particular income tax year, the tax treatment will default to that of the general trusts taxation framework in Division 6.
Johnson Winter & Slattery intends to prepare a further tax analysis of the proposed model for CCIVs in the coming weeks.
Submissions on this public consultation can be made until 24 September 2021. Please contact us if you would like more information on the regulatory or tax implications of the proposed CCIV regime.