In brief
Written by Managing Associate James Kanabar
Avid, or even occasional, readers of Unravelled over the past few years cannot have failed to notice the Federal Government's proposal to introduce two new forms of collective investment vehicle – each a shiny, tax-neutral alternative to the unit trust which (and note the heavy dose of self-interest here) will hopefully lead to a marked reduction in the sleepless nights and migraines resulting from the task of explaining 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), with the CCIV the first cab off the rank. As we reported, on 13 June Treasury released tranche 1 of the revised draft legislation 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. No sooner had the ink dried on the first round of submissions from industry participants than Treasury was filling our inboxes with tranche 2 of the revised draft CCIV legislation, covering (among other things) the application of the Chapter 7 financial services regime to CCIVs, corporate director liability and the proposed penalties framework.
Wholesale CCIVs: possible but not probable
There is no doubt that the CCIV is being introduced with retail funds in mind, and there are a number of very good reasons for that approach. The genesis of the introduction of the two new collective investment vehicles is unequivocally expressed in the Board of Taxation's report on tax arrangements applying to collective investment vehicles, released by the Federal Government on 4 June 2015. Consistent with the 2009 Johnson Report, the report considers that offshore investors are dissuaded from investing in Australian funds because they do not understand unit trusts, and that access to a broader range of collective investment vehicles would help Australian fund managers to compete for capital with their offshore counterparts. In that vein, the CCIV has been modelled by reference to two forms of overseas vehicle in particular:
- the SICAV (société d'investissement à capital variable), an investment vehicle used in a number of European civil law jurisdictions, including Belgium, France, Italy, Luxembourg and Spain; and
- the English and Welsh Open Ended Investment Company (OEIC), an open-ended collective investment vehicles structured as a corporate, allowing investors to realise their interests within a reasonable time at a price calculated by reference to the value of the OEIC's assets (with its acronym somewhat amusingly (for me at least) pronounced 'oik').
The SICAV is one of the most prolific Luxembourg investment vehicles (the Board of Taxation report noted that in the five main Asian jurisdictions that have authorised the sale of European funds – Hong Kong, Singapore, Taiwan, Japan and South Korea – about 75% are Luxembourg-based Undertakings for Collective Investment in Transferable Securities-compliant funds (UCITS), of which 90% are SICAVs). While OEICs are not as ubiquitous as Luxembourg SICAVs, they are used for retail funds and are the preferred legal form of open ended investment in England and Wales, having replaced the unit trust as the more traditional open-ended investment vehicle.
The timing of the introduction of the CCIV legislation (hot on the heels of the Asia Region Funds 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. By contrast, the limited partnership, which will be the second cab off the collective investment vehicle rank, has long been viewed as the vehicle of choice for offshore wholesale funds. In short, managers of and investors in retail funds globally are highly familiar with corporate forms of collective investment vehicle and, to paraphrase that oft-quoted 1980s classic, Field of Dreams, the approach seems to be one of 'if we build it like they're used to, they will come'.
All of that said, it makes little sense to make the CCIV actively unattractive to wholesale fund managers, which, if the legislation is implemented in its current form, is likely to be the effect. While some of the more egregious elements of the first exposure draft have, thankfully, fallen by the wayside, the revised tranches provide (by way of example) that:
- the operator of a CCIV (the single corporate director) must be a public company and have an Australian Financial Services Licence;
- a CCIV (whether wholesale or retail) must lodge a copy of its constitution (and any modifications thereto) with ASIC, a requirement which does not currently apply to unregistered managed investment schemes (nor does it apply to proprietary companies). Wholesale fund constituent documents typically contain a plethora of proprietary information and, in our experience, fund operators can be extremely sensitive to the possibility of that information becoming publicly available; and
- restrictions in relation to related party transactions, which apply to bodies corporate and, in a modified way, responsible entities of registered managed investment schemes but which do not apply to operators of unregistered managed investment schemes, will apply to CCIVs.
It is difficult to fathom why the Federal Government would want to disincentivise the use of CCIVs by wholesale fund managers – given all of the effort, time and money expended on the creation of the CCIV, it would surely make more sense for the CCIV to be as attractive as possible to as many people as possible, which could be achieved by providing for wholesale CCIVs a light-touch regime in line with that which currently applies to wholesale managed investment schemes? Perhaps a clue to the real motivation behind the more stringent wholesale CCIV regime lies in the proposed definition of a 'Retail CCIV' – while, in response to submissions (including from Allens), the Federal Government has seen sense and narrowed the original proposed definition ('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'), the current draft definition does not contain the exceptions in s.601ED(1) of the Corporations Act, ie unlike a managed investment scheme, even if a CCIV does not have more than 20 members and is not promoted by a person or an associate of a person who is in the business of promoting CCIVs, it will still be a retail CCIV if the issuing of its securities would necessitate the giving of a PDS. Similarly, despite the protestations contained in our submissions, ASIC's revised Regulatory Guide 132 (Funds Management: Compliance and Oversight) extends to licensed operators of unregistered managed investment schemes and wholesale CCIVs the obligation to have in place a documented compliance management system, with the somewhat flimsy justification that those operators should already be licensed and therefore subject to ASIC supervision. All of which suggests that, rather than an attempt to dissuade wholesale managers from adopting the new CCIV, the new regime is further evidence of the inexorable march towards increased oversight and regulation. While that is perhaps unsurprising in the current climate (and reflective of similar trends overseas, manifest in the regulation of wholesale funds in Europe through the Alternative Investment Fund Managers Directive), wholesale investors are more than capable of making their own judgements and protecting their own interests, and the imposition of significant and unnecessary burdens on operators of wholesale schemes and CCIVs will increase the costs of those funds while delivering few, if any, benefits to their wholesale investors.
Tax
We are still yet to see a revised draft of the CCIV tax legislation (and there is no fixed timetable for its issue). 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 CCIV, whether or not a CCIV is required to file a copy of the its constitution with ASIC will pale into insignificance. As noted in April's article, we remain hopeful that the shortcomings with the first draft will be ironed out and that the revised legislation, when released, will represent a tax regime which is reasonable when compared to the Attribution Managed Investment Trust regime.
What next?
We (and many others) have made detailed submissions on Tranches 1 and 2 of the revised CCIV regime. We eagerly await responses those submissions and sight of the revised tax legislation.