Written by Senior Overseas Practitioner James Kanabar
Avid readers of Unravelled over the past few years cannot have failed to notice that there are moves afoot to introduce two new forms of collective investment vehicle, each promising a shiny, tax-neutral alternative to the unit trust and, hopefully, saving Australian lawyers a lot of sleepless nights and migraines attempting to explain the finer points of trust law to overseas counterparties and their advisers.
As part of its 2016-17 Budget, the Federal Government announced its intention to introduce both a corporate collective investment vehicle (CCIV) and a limited partnership collective investment vehicle (LPCIV). As we reported, on 25 August the Federal Government released exposure draft legislation and explanatory materials for the CCIV, announcing a consultation period for interested parties to provide feedback. Allens provided detailed feedback on the draft, which you can find on our dedicated CCIV website.
Not content with the extent of the deforestation, on 26 October the Australian Securities and Investments Commission (ASIC) released draft updates to four existing Regulatory Guides, along with drafts of two new Regulatory Guides, for managed investment schemes (MISs), CCIVs and Asia Region Funds Passport (Passport) funds, and announced a consultation period which will run until 8 December. As we reported, Allens will provide submissions on the guidance, both in its own name and through its involvement with key industry bodies.
As set out in the explanatory materials which accompanied the draft CCIV legislation, the Federal Government's intention is to maintain regulatory parity, to the extent possible, between the existing MIS and the new CCIV frameworks. However, some funds are apparently more equal than others and there is no evidence of this parity when it comes to wholesale funds – as we reported in September, unlike its MIS counterparts, a wholesale CCIV must register with ASIC, and its corporate director will be subject to more onerous duties and liabilities than those which apply to the trustee of an unregistered MIS, including the requirement to have an AFSL, the assumption of statutory liability for acts of agents, and restrictions on redemptions based on solvency.
It may be that this position is intentional, given the stated aim of introducing the new collective investment vehicles – namely, to attract offshore investors who are dissuaded from investing in Australian funds because they do not understand unit trusts. The CCIV has been modelled on the English and Welsh open-ended investment company (OEIC) and the Luxembourg SICAV, both of which are highly prevalent internationally as retail fund vehicles. By contrast, the limited partnership, which will be the second cab off the collective investment vehicle rank, has long been viewed as the (or, as a minimum, a) vehicle of choice for offshore wholesale funds and is the darling of the private equity world. The timing of the release of the draft CCIV legislation (to coincide with the release of draft Passport legislation) is also indicative, in light of the somewhat lofty aspiration for the Passport to rival UCITS as a global brand for retail funds.
However, if the intention is for the LPCIV to be attractive to wholesale fund managers, one can only hope that the draft limited partnership legislation, when released (and there is no fixed timetable for its release) will not expand the definition of what constitutes a retail vehicle in the same way as the draft CCIV legislation does. As currently drafted, a CCIV will be a retail CCIV if it is 'promoted by a person, or an associate of a person, who was, when the CCIV was promoted, in the business of promoting CCIVs to persons who are, or would be, retail clients...', which would cause CCIVs that would otherwise only have wholesale shareholders to be treated as retail CCIVs – for example, a property group that has a listed CCIV and which also operates wholesale funds structured as CCIVs would need to treat those wholesale funds as retail CCIVs – and therefore bring those funds and their operators within the ambit of more extensive regulation than would apply if they were structured as unit trusts. Although regulation is by no means the only factor, all other things being equal, a fund manager, promoter or consortium leader is likely to choose the less heavily regulated vehicle, all of which means that this is an issue which will need to be resolved if either of the new collective investment vehicles is expected to gain traction as a wholesale vehicle.
The transition of existing MISs to CCIVs is not dealt with in either the draft legislation or the accompanying explanatory materials and there is a threshold question of whether transitioning from a registered scheme or wholesale unit trust to a CCIV should be facilitated. In our view, it should, bearing in mind that the CCIV structure is being introduced so Australia has a form of internationally-recognisable investment product. Responsible entities and trustees should have the option to transition if they consider it is in the best interests of their investors to do so, but thought would need to be given to how that transition would be best (and most cost-effectively) achieved and to the key issue of exemptions from capital gains tax and stamp duty imposts.
As noted above, the CCIV has been modelled on the OEIC and the SICAV, and one aspect of the proposed regime which has been transposed from England (and the best practice guidelines of the OEIC regime) is the independence test for agents of a CCIV's corporate director and depositary, which will supplement the general AFSL obligations regarding managing conflicts of interest. The test is extremely broad and would require administrative and custody functions to not only be performed by different legal entities (which is often not the case for MISs) but by entities from separate corporate groups. The requirement to split those services, by introducing an independence requirement that extends to agents, seems arbitrary and will likely result in inefficiencies and increased cost to investors. The same issue will arise in respect of any service provider to the CCIV: if the depositary and corporate director cannot rely on the same expert advice (for instance, audited accounts) such advice will need to be obtained twice, with associated costs ultimately passed on to investors.
Similarly, any compliance plan auditor must be a registered company auditor, audit firm or authorised audit company who cannot be the corporate director, depositary, custodian (nor an associate of any of these entities), nor an auditor of the corporate director's financial statements (although they may be from the same audit firm in this instance). There is an implication that the compliance plan auditor cannot generally be from the same audit firm as the auditor of the corporate director, depositary or custodian. Consequently and given the size and concentration of the Australian market, it may be difficult in practice to nominate a compliance plan auditor who satisfies the independence requirement.
In the midst of all the discussion around the introduction of two new collective investment vehicles, it should be noted that Australia already has limited partnerships – the reason they are not widely used as collective investment vehicles is because, subject to some narrow exemptions for venture capital and early stage venture capital limited partnerships, they do not offer tax neutrality. All of which is a roundabout way of saying that the tax treatment of CCIVs will go a long way to determining their success and it would be helpful to see the draft tax legislation sooner rather than later – although the Federal Government has not given a fixed legislative timetable, our expectation is that the next tranche of CCIV legislation will be the exposure draft tax legislation and could be released before the end of the year. As noted in our submissions, because of the significant differences in the legal structures, rather than amend or add to the existing Attribution Managed Investment Trust (AMIT) tax legislation, we think CCIVs should be covered by separate tax legislation reflecting the flow-through concepts embodied in the AMIT tax rules and applying them specifically to CCIVs.
In light of the draft CCIV and Passport legislation, ASIC has released Consultation Paper 296 (CP296) and drafts of six Regulatory Guides in relation to CCIVs, Passport funds, MISs (with ASIC taking the opportunity to reorganise and update its existing substantive guidance) and certain Australian Financial Services licensees involved in funds management. Two of the guides are entirely new, with four representing a reboot of existing ASIC guidance.
CP 296 contains the usual ASIC health warning that the drafts represent an indication of the approach it may take and do not represent ASIC's final policy. Additionally, the drafts are based on the exposure drafts of the CCIV and Passport legislation and, as such, are subject to change as that legislation evolves – it would not surprise us if ASIC is required to make significant changes to the draft guidance following release of the next tranche of CCIV and Passport legislation.
ASIC also intends to make less substantive amendments to other, existing Regulatory Guides, noting (somewhat nebulously) that it will release those less substantive amendments 'later' and not confirming whether those changes will be subject to consultation.
We await the revised drafts of the CCIV and Passport legislation and, more imminently, a first draft of the CCIV tax legislation.
In the meantime, ASIC will be holding an information session on its draft guidance in Brisbane, Sydney and Melbourne on Friday, 24 November, with submissions due by 8 December.