The new vehicles will be a corporate CIV and a limited partnership CIV. The availability of these new CIVs is expected to significantly enhance the ability of Australian fund managers to offer their products to international investors.
New type of collective investment vehicle
The Australian Government's 2016-2017 budget papers state that a corporate CIV will be introduced for income years starting on or after 1 July 2017. This will be followed by a limited partnership CIV for income years starting on or after 1 July 2018.
These reforms will enhance the international competitiveness of the Australian managed funds industry by allowing fund managers to offer investment products using vehicles that are commonly in use overseas.
The proposed two new CIVs will also maximise the effectiveness of related Government initiatives aimed at increasing access to overseas markets, including the Asia Region Funds Passport. The Asia Region Funds Passport is an international initiative which aims to increase the access of Australian fund managers to overseas markets.
The new CIVs will be required to meet similar eligibility criteria as managed investment trusts, such as being widely held and engaging in primarily passive investment. Investors in these new CIVs will generally be taxed as if they had invested directly. The new CIVs will be able to be offered to both domestic and international investors.
Commentary
This announcement in the budget is intended to boost the Australian funds management industry by providing for new forms of 'flow-through' collective investment vehicles that are recognisable and understandable by foreign investors. These vehicles, however, are not intended to be limited to foreign investors.
In an Australian context, the typical flow-through collective investment vehicle is the trust. Further tax concessions are available in respect of particular types of trusts known as 'managed investment trusts'. While having a long and established history (including in a commercial context) in Anglo-Australian law, the trust is not a typical investment vehicle in many financial centres across the world. Corporate structures are more common in many foreign countries.
This Government initiative is also designed to improve the effectiveness of the Asian Region Funds Passport. Information about the Passport can be found in our earlier Alert: Asia Region Funds Passport: Draft rules a step towards a regional market for managed investment funds. An Australian CIV structured as a corporation or as a limited partnership may facilitate the commercial success of the Passport from an Australian perspective because Asian investors may better understand such vehicles better than trusts, thus improving the attractiveness of the Australian fund. On 28 April 2016, representatives from Australia, Japan, Korea and New Zealand signed the Asia Region Funds Passport’s Memorandum of Cooperation (MoC), which comes into effect on 30 June 2016, after which participating economies (including Australia) have up to 18 months from 30 June 2016 to implement domestic arrangements to give effect to the MoC.
Although this is a welcome initiative, an important further step, to compete with other Asian jurisdictions like Hong Kong, will be a review of the application of Australia's withholding tax rules to CIVs.
Based on the policy objectives, it would suggest that certain capital gains made on the disposal of securities by the CIV, and franked dividends received by the CIV, could be distributed to foreign investors free from tax. Whereas, unfranked dividends derived by the CIV, and included in the distributions to foreign investors, would remain subject to withholding tax. The final design of the tax aspects of CIVs remains subject to detailed consultation between Treasury and industry.
The detail of the proposed new CIVs will need to be developed in consultation with industry. It is not known which overseas model(s) of CIVs will be used for any draft legislation. From a funds perspective, the new measure will require a consideration of existing corporations laws (and potentially partnership laws), particularly the laws regarding managed investment schemes and the offer and promotion of financial products. The development of these new investment vehicles may also require amendments to the draft Passport rules, particularly where the concept of a 'collective investment scheme' is limited to a registered managed investment scheme.
MinterEllison will be making submissions on the design of the CIVs, and welcomes any suggested features that you would like to be included in the final design of the these new vehicles.
