Australian Federal Government commits to the new corporate collective investment vehicle (CCIV) regime with updated draft legislation
The Australian Federal Government has released updates to the proposed core regulatory and tax framework for the new corporate collective investment vehicle (CCIV) regime. This development comes after the Federal Government committed to establishing a commercially viable regime for CCIVs by 1 July 2022. It is a welcome and much awaited step forward for the Australian funds management industry, aimed at putting its investment offerings on a similar footing to other jurisdictions for global investment.
A reminder of where we have come from
It has been well documented for over a decade that the lack of an internationally recognisable collective investment vehicle has caused opportunities to be missed in the Australian managed funds industry. A principal concern has been that foreign investors are not sufficiently familiar with the unit trust, that is the general model for Australian funds. Being less common overseas, a lack of clarity around this structure has contributed to uncertainty and perceived risk from foreign investors.
The CCIV has therefore been designed with a view to increasing the competitiveness of the Australian managed funds industry internationally to attract offshore investment. In this regard, the Government has had a focus on ensuring the regulatory and tax framework for CCIVs would offer internationally recognisable investment products, flow-through tax treatment, commercial flexibility and strong investor protections.
The draft law for CCIVs has been in circulation for some time. Back in 2018, the first of several tranches was released for public consultation. The regulatory framework followed analysis by the Government of the regulatory regimes of leading fund domiciles, target export markets and major financial centres in our region. The framework drew from the features of other equivalent vehicles internationally, such as European funds operated under the UCITS Directive and the UK open ended investment company (OEIC). More recently, Singapore has introduced laws providing for variable capital companies (VCCs) which has arguably increased the pressure domestically to introduce an equivalent offering. However, certain key features and issues with the previous tranches of CCIV draft legislation have proved problematic and been the subject of feedback from industry.
The new exposure draft package
The draft CCIV package released in August 2021 is a combination of regulatory and tax components. It includes:
- The introduction of a new Chapter 8B in the Corporations Act 2001, containing the core provisions outlining the establishment of CCIVs and their regulatory requirements.
- Amendments to other legislation to support the implementation of CCIVs (including amendments to the Australian Securities and Investments Commission Act 2001 and the Personal Property Securities Act 2009).
- Various amendments to tax legislation to ensure that the tax treatment of CCIVs aligns with the existing treatment of attribution managed investment trusts, providing investors with the benefits of flow-through taxation.
The 2021 package of regulatory and tax law has also sought to address a number of the concerns with earlier iterations. In particular, changes have been made from a regulatory perspective in the following areas:
- There is now greater flexibility as to the use of depositary services. A depositary is a separate company that holds the assets of the fund on trust and oversees the operation of certain activities related to the fund. Previously, retail CCIVs were required to have an independent depositary and wholesale CCIVs could choose to have a depositary. Under the revised position, all CCIVs will have the option (but not the requirement) to utilise a depositary or custodian. This can be seen as a positive move which creates greater flexibility and aligns the CCIV approach with the current requirements for managed investment schemes.
- Cross-investment between different sub-funds of a CCIV has been permitted. This development means that, consistent with other international collective investment vehicles, a CCIV may acquire, in respect of one sub-fund, shares that are referable to another sub-fund of the CCIV. Once acquired, the shares are then held as an asset of the first sub-fund. The holding is subject to certain restrictions, in particular that while the CCIV is generally entitled to vote at a meeting of the members of the second sub-fund, the CCIV will not be able to vote on resolutions of members of the whole CCIV. This restriction is intended to preserve the voting powers of the other members in the CCIV.
- CCIVs will be able to list on a prescribed financial market in Australia with one sub-fund. Under the previous proposals, a CCIV (including sub-funds of a CCIV) were prohibited from being listed in Australia. While this restriction did not affect the ability to quote securities in a CCIV on other platforms (such as ASX’s AQUA platform for managed funds and structured products), in practice these other platforms are restricted to CCIVs with liquid assets. The new approach therefore takes a staged approach in response to feedback in consultation. Consideration will be given to listing CCIVs with more than 1 sub-fund in due course after the current legislation is introduced.
In general terms, the tax framework for CCIVs seeks to ensure the attribution flow-through taxation arrangements applying to attribution managed investment trusts are also available to CCIVs, subject to meeting certain eligibility criteria. The latest package of tax provisions has been introduced with commentary that the draft law has been streamlined and simplified to achieve this. However, initial industry feedback on the package suggests that there is more work left to do with this part of the framework.
Next steps for the funds industry
With Australia’s CCIV now more clearly on the horizon, it will be critical for fund managers, super funds, investors and a range of other financial and fundraising institutions to consider:
- How their business model or investment strategy will be compatible with the CCIV regime.
- The opportunities for investment for both existing and potential clients.
- The effect of and opportunities arising from the latest changes to the CCIV regime.
A brief initial period of consultation on the legislative package by Treasury closed on 24 September 2021. As the regime is intended to take effect on 1 July 2022, funds industry stakeholders will be watching the progress with great interest.