The introduction of corporate collective investment vehicles (CCIVs) will be a “game changer” for the Australian funds management industry, writes Holley Nethercote’s David Court.
Australia's funds management industry has been measured as the sixth largest in the world, behind the US (by a very long way); Luxembourg (by about half); Ireland; Germany; and France, and ahead of Singapore; the UK; Japan; and China, and the largest in the Asia-Pacific region, largely as a result of Australia's pool of superannuation assets.
However, the government thinks that we can do even better. According to The Board of Taxation's Review of Tax Arrangements applying to Collective Investment Vehicles, "Australia’s collective investment sector is mainly made up of Australian resident investors using Australian funds for investment in Australian assets.
"There is potential for significant growth if Australian funds were to more actively target the management of funds sourced from foreign investors, particularly for investment in foreign assets."
In the 2016-17 federal budget, the government announced it would introduce a corporate collective investment vehicle (CCIV), along with a limited partnership CIV, to be similar to the Luxembourg style corporate funds already popular in parts of Asia.
On 25 August 2017, Treasury released exposure draft legislation for consultation to introduce the CCIV (the rules for the limited partnership CIV are still under development).
Corporate collective investment vehicles
No doubt, the introduction of CCIVs will be a game-changer for funds management in Australia. A key motivation for introducing CCIVs is to increase the competitiveness of Australia’s export funds management industry through the introduction of internationally recognisable investment products.
Corporate Investment Vehicles have been growing in popularity overseas for some time (particularly from Europe and recently Asia) and are now well established and internationally recognisable structures.
A CCIV will have a corporate director, which must be a public company that holds an AFSL. This entity would be similar to a responsible entity of a unit trust structured managed investment scheme (MIS). Investors in a CCIV will be issued with shares rather than the units that an investor in an MIS receives.
A CCIV is also prohibited from having any directors other than the corporate director, as well as any employees in order to ensure the CCIV only undertakes passive investment activities.
Unlike an unregistered wholesale MIS, a wholesale CCIV must be registered with ASIC, but it is intended that these regulatory requirements on CCIVs be flexible and light-touch.
One positive development with the CCIV is the express recognition of sub-funds, which have always been problematic under the MIS structure.
Sub-funds are not individually registered with ASIC, as they are not separate legal entities, but the corporate director must give ASIC prior written notice of the establishment of each new sub-fund.
Rules for the allocation of assets and liabilities between sub-funds in a CCIV have been included in this exposure draft legislation. However, provisions about restructures and arrangements for a CCIV and assets allocated to each sub-fund will be included in the next round of exposure draft legislation.
We expect that disclosure and compliance requirements between CCIVs and MISs will be broadly similar to avoid regulatory arbitrage.
We also expect the process for establishing a CCIV (i.e. registration of the CCIV, application for the AFSL authorisations to issue interests in a CCIV and operate a CCIV corporate director and disclosure requirements) will require further time to implement once the exposure draft legislation is finalised and passed.
Worth the wait for Australian local fund managers?
At present, Australian fund managers have no options for fund structure other than the MIS.
The introduction of the CCIV, coupled with a range of limited partnership structures, will provide fund managers in Australia with much greater choice of fund structure for more varied applications.
However, when the CCIV legislation is passed and comes into effect, it is unlikely to lead to the overnight demise of the traditional unit trust MIS that managers, investors, advisers and regulators are by now thoroughly familiar with.
Broadly tax neutral outcomes for investors between Australian CCIVs and unit trust MISs has been a policy intention of the government. Taxation consequences are likely to be a significant consideration for a fund manager when choosing from the future range of fund structures.
Worth the wait for foreign funds managers?
The introduction of the CCIV is intended to lower the barriers to entry for foreign fund managers seeking to operate in Australia by aligning Australia’s regulatory framework with well-developed international regimes through the availability of more internationally recognisable funds structures (e.g. similar to the Luxembourg SICAV and the UK's Open-Ended Investment Company, on which the CCIV is modelled).
Basically, under the proposed regime, Australian legal documentation may be easier for foreign funds managers to prepare because of the availability of more internationally recognisable funds structures. Also, the introduction of the Asia Region Funds Passport will lower barriers to entry into the Australian market for certain Asia-Pacific jurisdictions.
What to expect
The consultation period for the CCIV bill has now ended and another round of exposure draft legislation is expected to will be released by Treasury in due course.
We have not yet seen any proposed guidance from ASIC in relation to disclosure and AFSL authorisation requirements for issuers of CCIVs and CCIV corporate directors (which we expect to be broadly similar to requirements for an MIS).
Details of the crucial taxation treatment is also still to be released. Therefore, watch this space. There is much to still be determined.
David Court is a partner at commercial law firm Holley Nethercote.
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