In brief
Written by Partners Marc Kemp and Charles Armitage
It is surprising the Federal Government did not make more of its release on 4 June of the Board of Taxation's report on tax arrangements applying to collective investment vehicles. We can only assume that the government was slightly embarrassed that the report, handed to the previous government in 2011, has taken nearly four years to emerge, blinking, into the light. Be that as it may, it is here now, and it makes for interesting reading. If the Board's recommendations are followed, they will change the Australian funds management industry. Put at its most basic, the report recommends nothing less than breaking the near-monopoly that the unit trust has held over collective investment vehicles in Australia.
The Board holds as axiomatic the conclusions in the 2009 Johnson Report that offshore investors are dissuaded from investing in Australian funds because they do not understand unit trusts, and that if they had access to a broader range of collective investment vehicles, Australian fund managers would be better able to compete with offshore fund managers. This premise found support in the interim report of the Murray Inquiry, released in July 2014, which pointed out that Australia's financial sector was the largest sector in the Australian economy in 2012-13, but that financial services exports represent only a small proportion of Australia's trade, accounting for around 4.5 per cent of total trade in services at the end of 2013.
How does the Board propose that this be changed? In essence, by offering additional collective investment vehicles the same tax neutrality as unit trusts, if they exhibit certain collective investment vehicle (or CIV) characteristics. We summarise these vehicles and the proposed CIV characteristics below.
Additional CIVs
Having regard to overseas experience, particularly in Ireland and Luxembourg, the Board recommends that at least three additional vehicles be given CIV status.
Type of vehicle |
Description |
|---|---|
|
Corporate CIV |
To be modelled on the Luxembourg SICAV (ie an investment company with variable capital). As with open-ended collective investment schemes, the investor is in principle entitled at all times to request the redemption of their units and payment of the redemption amount in cash. CIVs established as companies will need flexibility to allow investors to withdraw their investments, requiring amendments to the Corporations Act 2001 (Cth) restrictions on redeeming and buying back shares and reducing share capital. |
|
Limited partnership CIV |
A partnership managed by a general partner (which has unlimited liability for partnership debts), with passive limited partners (whose liability is limited to their investment in, and commitment to, the partnership). A common private equity fund structure outside Australia; within Australia its use is generally limited to venture capital funds to take advantage of favourable tax treatment limited to those funds. |
|
Common contractual fund (CCF) CIV |
Commonly used in Ireland as a collective investment undertaking, under which investors participate and share in the assets of the undertaking as co-owners by contractual arrangement. The CCF is an unincorporated body, not a separate legal entity. As a result, investors in a CCF are treated as if they directly own a proportionate share of the underlying investments of the CCF, rather than shares or units in an entity which itself owns the underlying investments. The Irish CCF is established by a management company that is vested with powers for the management of the property of the fund. A CCF will also generally have a custodian in which the property of the CCF is entrusted. Investors in a CCF have their liability limited to the amount of their investments. |
The Board did not propose any change to Australia's existing CIVs, including listed investment companies, managed investment trusts or venture capital limited partnerships/early stage venture capital limited partnerships – or to their tax treatment.
When would the additional vehicles enjoy CIV-status?
The Board recommended that a corporate CIV, a limited partnership CIV, or a CCF CIV should enjoy CIV status if it has the following broad characteristics. In general terms, CIV status would confer on it the proposed tax outcomes tabulated below. These characteristics would be familiar to fund managers, investors and advisers, as they are similar to those which apply to managed investment trusts.
- It is widely held, on a look-through basis.
- It engages mainly in passive investment activities.
- It does not carry on a trading business, or control another person that carries on a trading business.
- Finally, it is an Australian resident and, if it is to have access to the concessional withholding tax rate on fund payments presently available to managed investment trusts, it should have a significant connection with Australia.
Proposed tax outcomes
Type of vehicle |
Tax recommendations |
|---|---|
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Corporate CIV |
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Limited partnership CIV |
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CCF CIV |
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Where to next?
All good things take time. Treasury is consulting with interested parties to refine its response to the recommendations. Given how long it has taken to amend the managed investment trust regime to allow attribution managed investment trusts (a discrete process less complicated, one would think, than introducing a broad-based collective investment vehicle regime with attendant changes to corporate, partnership and tax law), we recommend you not hold your breath. However, we think this reform is important and urge those responsible for its carriage to persevere, not least because, without it, Australia's participation in the Asia region funds passport is unlikely to reap all of the rewards it promises.