In brief
The Federal Government today released exposure draft legislation for the new corporate collective investment vehicle, one of the two forms of collective investment vehicle that it pledged to develop as part of the 2016-2017 budget. Partners Marc Kemp and Charles Armitage and Senior Overseas Practitioner James Kanabar summarise the key features of the proposed CCIV, and compare and contrast them to those of equivalent overseas vehicles.
Background
As we reported, on 4 June 2015, the Federal Government released the Board of Taxation's report on tax arrangements applying to collective investment vehicles. Consistent with the 2009 Johnson Report, the report considered 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.
The Board of Taxation report advocated extending tax neutrality to three additional collective investment vehicles (or CIVs): a corporate CIV, a limited partnership and a common contractual fund, two of which (the corporate CIV and limited partnership) the Federal Government undertook to develop and introduce.
Exposure draft and key features of the corporate collective investment vehicle
The draft legislation envisages that provisions regulating the corporate CIV (CCIV) will be introduced by way of amendments to the Corporations Act 2001 (Cth). As we noted in our update in April on the proposed Singapore Variable Capital Company (S-VACC), those of us who work regularly with the Corporations Act, together with the myriad associated regulations, modifications and exemptions, know just how difficult it can be to navigate. As the Corporate CIV is being introduced to make Australian funds easier to comprehend and more accessible to foreign investors, it may have made sense for the Federal Government to consider (in light of the scope of its power to legislate on corporations) whether it would be possible to adopt the Singaporean approach by creating standalone enabling legislation to legislate for the form and characteristics of the CCIV, rather than adding an additional layer of complexity to the Corporations Act. That horse has likely bolted.
The proposed key features of the CCIV are as follows:
- CCIV and Sub-Funds: CCIVs will be regulated and administered by ASIC and can be either open or closed-ended. The CCIV will be a single legal entity and must have at least one sub-fund. Sub-funds will not have separate legal personality but each sub-fund's assets will be segregated and sub-funds will be insolvency remote. Any CCIV investment must be made through a single sub-fund. The proposal to make statutory provision for the insolvency remoteness of sub-funds is a positive step as, in line with the approach taken in jurisdictions which have protected cell companies, it obviates the need (arising under the current Australian regime) for complicated drafting in the constituent document and risks of cross-subsidisation.
- Corporate Director: a CCIV must have a single Corporate Director. Like the responsible entity of a registered scheme, the Corporate Director:
- must be a public company;
- must have an appropriate AFSL;
- must ensure compliance by the CCIV with the law and its constitution;
- owes duties to the members (including a best interests duty);
- will be liable to the members for breach of duty; and
- can appoint a manager and/or administrator.
- Depositary: unlike the position for registered schemes, it will be mandatory for a CCIV offered to retail investors to have a depositary, which must be a public company, have an appropriate AFSL and be independent of the Corporate Director. The depositary will have key Corporate Director oversight duties (which it cannot outsource), and custodial duties (which it may delegate to a custodian). The depositary must assume liability for loss of assets held on trust and loss resulting from breach of duty. This depository role – which is not uncommon in other jurisdictions – may involve an evolution of the role that custodians currently play in Australia, and may also allow Australian funds to comply more easily with the Alternative Investment Fund Managers Directive (AIFMD) requirements of certain European countries, notably Germany and Denmark.
- Registration and notification: provisions regarding registration (including fees) will be similar to those applying to registered schemes. Each CCIV will have an ACN and each sub-fund will be given an Australian Registered Fund Number, and CCIVs must include 'CCIV' at the end of their name. A CCIV must notify ASIC of each sub-fund before offering shares which carry an interest in a new sub-fund (and must inform ASIC of that sub-fund's investment strategy). CCIVs will also be required to notify ASIC of any material changes to the information provided as part of its registration.
- Disclosure and meetings: the issue or sale of CCIV shares to retail investors will require a PDS but the prospectus regime will not apply. Rules governing meetings will be in line with those apply to registered schemes, rather than the rules for bodies corporate.
- Tax: The exposure draft legislation does not deal with taxation issues but the explanatory materials which accompany it do reiterate that it is the Government's intention that CCIVs will be tax-neutral in a manner equivalent to Managed Investment Trusts. Like Attribution Managed Investment Trusts (AMITs), CCIVs will be permitted to attribute amounts to specific investors for tax purposes. Similar to the position for AMITs, non-resident investors will typically be taxed at concessional rates on attributable income and will be subject to withholding. Separate exposure draft legislation dealing with this proposed flow-through tax regime for CCIVs is to be released at a later date.
Comparison against equivalent overseas vehicles
Given the stated aim in introducing the new forms of CIV, it is encouraging to see that, as suggested in our September 2015 publication, the proposed CCIV adopts features from a number of equivalent overseas vehicles. Those overseas vehicles (which we analysed in the September 2015 article) will be more familiar to many overseas investors than the unit trust. Although by no means exhaustive, the table below compares the key features of the CCIV with those of equivalent overseas vehicles:
| CCIV feature | Comparison against overseas vehicles |
|---|---|
|
Single Corporate Director |
Market practice dictates that most English and Welsh Open-Ended Investment Companies (OEICs) have a single corporate director, which has a similar role to that proposed for the CCIV Corporate Director. By contrast, Luxembourg SICAVs (société d'investissement à capital variable) are self-managed by a board of directors (appointed by the shareholders). |
|
Sub-Funds |
Luxembourg SICAVs are typically established with sub-funds, which (in line with the proposal for CCIVs) have separate investment strategies and are insolvency remote. Similarly, protected cell companies (also referred to as segregated portfolio companies), which are prevalent in a number of traditional 'fund' jurisdictions, including the Cayman Islands, Delaware, Guernsey, Ireland and Jersey, may create one or more cells, which are insolvency remote from each other cell and from the core assets of the PCC. The S-VACC is also proposed to have similar sub-funds. By contrast, sub-funds of Guernsey and Jersey incorporated cell companies have separate legal personality. Unlike the CCIV (which must have at least one sub-fund), Luxembourg SICAVs and English and Welsh OEICs can be established as a single entity. |
|
Depositary |
Given the depositary requirements under AIFMD and the Undertakings for Collective Investment in Transferrable Securities Directive (UCITS), investors are highly familiar with the concept of an independent depositary with both oversight and safe-keeping functions. |
|
External administration and deregistration |
The Federal Government has noted that it is exploring different options but is considering the English and Welsh OEIC model. |
What next?
We are preparing a detailed summary of the exposure draft legislation, which will critically analyse the proposed features of the CCIV.
The Federal Government has asked for submissions on the draft from interested parties, with a request to focus on certain key themes (including depositary obligations, independence requirements, sub-fund design, passive investment requirement and the need for flow-through tax treatment, natural person directors, and international best practice and recognisability of design). Allens will participate in the consultation process and will be preparing a submission on the draft legislation.