The end of the unit trust monopoly - tranche 1 of the revised CCIV bill

By Penny Nikoloudis
Banking & Finance Government Private Capital Tax

In brief

On 13 June 2018, the Federal Government released the first tranche of the revised exposure draft legislation for the new corporate collective investment vehicle, one of the two forms of collective investment vehicle which it pledged to develop as part of the 2016-2017 budget. We are undertaking a comprehensive review of the draft for the purpose of preparing submissions to Treasury and will provide further updates in due course. In the meantime, Partner Penny Nikoloudis, Senior Overseas Practitioner James Kanabar and Associate Mai Go provide a high-level overview of the draft.


As we have previously reported, on the recommendation of the 2009 Johnson Report and the findings from the 2015 Board of Taxation's report, on 25 August 2017 the Federal Government released the first exposure draft of the legislation introducing the proposed corporate collective investment vehicle (CCIV Bill). The purpose of the CCIV regime (timed to coincide with the introduction of the new Asia Region Funds Passport) is to introduce a form of investment vehicle that both retains the tax flow-through treatment of the unit trust, and which is also more familiar to offshore investors, to assist Australian fund managers to compete for capital more effectively with their offshore counterparts. That theme was encapsulated by The Hon Kelly O'Dwyer MP in her remarks accompanying the release of the revised draft CCIV Bill:

“The CCIV vehicle will allow Australian fund managers to market to participating Asian financial markets using a well-recognised corporate structure vehicle — creating access to Asia’s expanding middle and upper class."

What's changed in the CCIV bill? 

Following consultation on the CCIV Bill last year, the Federal Government has now released for consultation the first tranche of the revised draft of the CCIV Bill (Revised CCIV Bill), addressing amendments to:

  • the proposed new Chapter 8B of the Corporations Act 2001 (Cth) (Corporations Act), which establishes the regulatory framework for CCIVs; and
  • ensure the correct application of Chapters 2A to 2P of the Corporations Act to CCIVs; and
  • the explanatory materials to incorporate a summary of the proposed legislative approach to depositary independence.

In the course of considering the Revised CCIV Bill more closely, we will provide further updates as our review proceeds. Below is a preliminary overview of some of the key changes that have been made since the first CCIV Bill. We have also noted whether the Revised CCIV Bill has addressed some of our more significant concerns that we had raised in our submissions to Treasury on the exposure draft. 

Corporations Act Section Subject matter Provision in Revised CCIV Bill Allens comments
s.1234L(1) Depositary to have supervisory responsibility The depositary of a CCIV must take reasonable care to verify that the activities it is required to supervise are carried out in a manner that complies with the CCIV's constitution and the Corporations Act.
  • This section previously provided that the depositary must take reasonable care to ensure the activities of the Corporate Director (CD) were compliant, creating uncertainty as to whether the obligation arises on an ongoing 'real time' basis.
  • The amendment assists in clarifying that the depositary will be reviewing the CD's activities and transactions on a backward-looking basis, and may make the role more attractive to potential service providers (both local and global).
s.1234P Breach reporting The depositary must notify ASIC within 10 business days of becoming aware of or having reasonable suspicion that a breach relating to an activity for which it has supervisory responsibilities has occurred if that breach or suspected breach is or would be, in the opinion of the depositary, a material breach of the Corporations Act.
  • We submitted that the inclusion of breaches which the depositary 'reasonably suspects' have occurred represents a material shift from the current positon that applies to licensees under s912D. In our view, there is little justification for imposing a reporting obligation based on mere suspicion (as opposed to actual awareness). However, this has not been revised.
  • While 'serious breach' has been replaced with 'material breach', 'material breach' is similarly undefined. It is unclear whether it is intended that 'material breach' and 'significant breach' (which applies in the context of AFS licensee breach reporting) are to be interpreted as separate concepts.
ss.1234D,1234H, para 4.29 -4.59 EM Independence of depositary (including agents) The independence requirements for depositaries in s1234D are still under development. However, the explanatory memorandum accompanying the Revised CCIV Bill (the EM) sets out the proposed independence requirements as a guide to the development of legislation. On that basis, it is proposed that:
  • a depositary must meet a higher level of independence in relation to the persons who are effectively the directing minds of the CCIV (ie, the CCIV, its CD and entities performing CD functions).
  • any agent appointed by a depositary must not be the CD and must also meet the independence requirements.
  • It appears from the EM that depositaries will be prohibited from providing services to a CCIV where the depositary has certain relationships with that CCIV, its CD and/or any entity performing CD functions in respect of that CCIV, including where a depositary is an associate of a director of the CD.
  • We previously questioned whether it is appropriate to include 'agents' and 'associates' in the independence test, regardless of their role or relationship.
  • At present, many funds have administrative and custody functions performed by the same entity (or within the same corporate group). An independence test that covers agency and associate relationships will likely necessitate a division of those functions and result in inefficiencies and increased costs to investors. Similarly, in a smaller market such as Australia with fewer service providers, the proposed restrictions will, in our view, pose practical difficulties for CCIVs and their CDs seeking to appoint a depositary that does not fall foul of the broad tests of independence.
ss.1237C(1)(c)and D(1)(c) Conflict of duty owned by the CD and its officers
  • All officers of a CCIV, including its CD, must act in the best interest of members.
  • An officer of the CD must act in the best interest of members.
  • The best interest duty could give rise to difficulties in the context of transactions between sub-funds (eg, where sub-fund A wishes to acquire an asset from sub-fund B).
  • It appears that safe harbours suggested in our submissions to allow the efficient functioning of the sub-fund model (such as permitting transfers between sub-funds where the transfer is at fair value and reasonable in all circumstances) have not been adopted.
ss.1245K – 1245L Liquid/illiquid sub-funds In line with the Chapter 5C test for a registered managed investment scheme, a sub-fund is liquid if 80% of the value of its assets are liquid. The liquid/non-liquid distinction has been retained, despite being notoriously difficult to apply and open to manipulation.
s.1232F Definition of 'retail CCIV' and 'wholesale CCIV'
  • A CCIV is a retail CCIV if:
    • the issue of a security in the CCIV gave rise to an obligation to give a PDS; or
    • the acquisition by a person of the security occurred under a custodial arrangement (as defined in s1012IA) and the Corporations Act required the custody provider to give the person a PDS.
  • A CCIV is a wholesale CCIV if it is not a retail CCIV.
  • The definition of 'retail CCIV' has departed from the previous proposed definition, which provided that a CCIV is a retail CCIV if it was promoted by a person who was, when the CCIV was promoted, in the business of promoting CCIVs to retail clients.
  • In our view, the revised definition removes the previous concern that CCIVs that only have wholesale shareholders would be treated as retail CCIVs if the promoter operated both wholesale and retail CCIVs.
s.1647 Transitional provisions The first period for reporting to ASIC will start when the Revised CCIV Bill commences, and ends at the next 30 June or 31 December (whichever is earlier). This transitional period has been introduced as part of the new Revised CCIV Bill. However, further transitional arrangements have not been provided, including whether transitioning from a registered scheme or wholesale unit trust to a CCIV should be facilitated (noting that any transition regime would need to consider tax and stamp duty relief if it were to be in any way palatable).

What next?

The Federal Government is seeking submissions on the draft from interested parties by 11 July 2018. We have been heavily involved in the consultation process over the past few years, and will be preparing an Allens submission on the Revised CCIV Bill. We will also be contributing to submissions by key industry bodies.

It is unclear when the second tranche of the revised legislation will be released, but Treasury has indicated it will cover the remaining substantive areas of the CCIV framework, including external administration, consequential amendments to Chapter 7 and penalty provisions.

Also still in the works is the revised draft of the CCIV tax legislation which, once released, will give us a more complete picture of how the final CCIV framework will look. As we reported in April's Unravelled, there were fundamental issues with the first draft of the CCIV tax legislation. If those issues remain largely unresolved then, given the centrality of taxation to both the genesis and the prospects of the vehicle, we fear that the CCIV will fail to meet the Federal Government's lofty aims and will be rendered a white elephant.

We have written extensively on the CCIV and proposed new limited partnership CIV over the past three years. You can find all of our publications, together with the draft legal and tax legislation, draft ASIC guidance and related Allens submissions on our dedicated CCIV Hub