Contributed by Ken Woo, Partner, Grahame Roach, Partner and Darren Mack, Director; PwC Australia
Late last year, the government released exposure draft legislation for comment in relation to the tax treatment proposed for the new Corporate Collective Investment Vehicle (CCIV). This follows the earlier release of draft legislation dealing with the regulatory framework proposed to apply to CCIVs.
The package of legislation governing CCIVs was first foreshadowed in the 2016/17 Budget, where the government announced proposals for two new Corporate Investment Vehicles (CIVs), the CCIV and a limited partnership CIV. The new CIVs were designed to be internationally recognised vehicles to attract foreign investors including under the Asia Region Funds Passport. Broadly, the proposed tax treatment of CIVs aligns with the current tax arrangements for Attribution Managed Investment Trusts (AMITs), but there are some important differences to be noted.
The new rules, released in exposure draft form on 21 December 2017, propose a new group of attribution entities referred to as an Attribution Investment Vehicle (AIV) which is defined to include both an AMIT and an Attribution CCIV (ACCIV). When introduced, the legislation will presumably also cover attribution limited partnerships. Amendments will be made to the AMIT provisions to incorporate the new terminology, which will effectively replicate most of the current AMIT features into the new ACCIV.
Equivalence with domestic vehicles
The new CIVs that are proposed seek to provide Australian fund managers with vehicles that will be more readily capable of being marketed in Asia. This presents a challenge for Australia, as local industry will now also need to take into account domestic investors seeking to invest in domestic assets. Consequently, these new CIVs also need to strike a point of equivalence with existing domestic vehicles, in particular, the Managed Investment Trust (MIT)/AMIT regime. The table below summarises some of the points of equivalence.
Under the proposed rules, there are two main areas where it is anticipated equivalence with other domestic vehicles will require attention. The first area is the regulatory requirement for a depository, and the second is the application of company taxation where a CCIV fails to qualify as an ACCIV.
Equivalence with international vehicles
The need for flow-through taxation treatment and retention of the character of tax components, which are essential for Australian investors to obtain the benefit of franking and foreign income tax offsets as well as discount capital gains treatment, may be seen as a point of competitive advantage over foreign corporate vehicles that do not feature character flow-through treatment, ie where distributions are dividends for income tax purposes. It remains to be seen how foreign markets will respond to this difference in competitive advantage.
Withholding taxes and non-Australian investors
There has been some conjecture as to whether an ACCIV regime would feature reduced withholding taxes for foreign investors. The reality is that, many ACCIVs will make distributions that largely do not attract any Australian withholding taxes. For example, franked dividends, widely-held interest bearing debentures and non-taxable Australian property capital gains do not attract withholding tax.
Key features of an ACCIV proposed feature
Qualification requirements of an ACCIV
In substance, for tax purposes, an ACCIV will replicate most of the features of an AMIT, except that it is in corporate form (and subject to the Corporations Act). The intent is that foreign investors will be more familiar with a corporate vehicle rather than a unit trust.
Like for like
An AMIT may be constituted as a multiclass entity where each class of an AMIT may be elected for treatment as a separate AMIT. Likewise, a sub-fund of a CCIV may be constituted as a multiclass sub-fund, where each class may be elected for treatment as a separate ACCIV.
Attribution of amounts
An ACCIV will be required to issue an AIV member annual statement, setting out the amounts attributed within three months after year end. Although these procedures for ACCIVs are the same for AMITs, it is worth questioning whether operationally, ACCIVs will want to adopt the same tight year-end timelines for the issue of annual statements to investors as AMITs. For these new vehicles, it is worth considering whether there is an opportunity to set market expectations regarding distributions and mitigate operational risk.
“Unders” and “overs”
The distribution process for ACCIVs, as noted above, should be considered in order to mitigate “unders” and “overs”. Refer comments below for the penalty regime related to “unders” and “overs”.
Transfers between sub-funds
These rules are analogous to the segregation rules for life companies. Therefore, if asset transfers are contemplated, from an administration perspective and depending on custodian systems, it may be preferable to transfer cash rather than track “disposed” assets in different sub-funds.
The ability to make a multiclass election mirrors the rules for AMITs. Importantly, in order to maintain the ACCIV status of the entire entity, each sub-fund must satisfy the relevant requirements.
Deemed capital account treatment
These rules replicate the existing election available for MITs.
Discount capital gains not applicable
The ability to flow-through discount capital gains is equivalent to the treatment for AMITs.
New CGT event M1
The requirement to track cost base adjustments may be a challenge operationally for ACCIVs and AMITs alike. CGT event M1 which covers AIVs is essentially the same as the current CGT event E10.
Liability to pay tax
Unlike the AMIT rules, it is the ACCIV which is potentially liable to tax in such circumstances rather than the trustee of the AMIT.
Operators of ACCIV should be aware that if a substantial portion of investment management activity relating to certain Australian assets for each sub-fund is not conducted in Australia, the concessional withholding ACCIV status is compromised.
Similar to AMITs, ACCIVs will need to ensure there are robust processes and procedures in place around the management of “unders” and “overs”.
CGT roll-over relief on transition
Managers may find it more attractive to use these roll-over provisions to transition an established AMIT into an ACCIV in order to market their fund offshore under the Asia Region Funds Passport, rather than establishing a new product, knowing that the widely-held and closely-held tests are already met. However, this will also mean that the manager will need to ensure that the relevant infrastructure is in place to support the CCIV under the regulatory requirements (ie corporate director and independent depositary), which was not required while the product was an AMIT.
Failure to qualify as an ACCIV
This rule is designed to discourage operators from setting up CCIVs without the intention of being an ACCIV. The draft explanatory memorandum also states that a CCIV must deregister from being a CCIV if it does not elect into the regime or fails to meet the eligibility requirements of being an ACCIV. This could have catastrophic implications where the CCIV or a sub-fund subsequently does not meet the relevant criteria such as the widely-held and closely-held tests.
This is consistent with AMITs being excluded from a tax consolidated group.
The success of the ACCIV will depend on how the industry embraces the new CCIV structure (and in particular, some of the new regulatory requirements), and the acceptance of a new corporate vehicle by foreign investors under the Asia Region Funds Passport regime. Foreign investors will still need to understand the various attributed components in the new AIV member annual statement, and the corresponding withholding tax that could apply to certain Australian-sourced income. A lot will depend on how the CCIV is marketed and promoted in the region by fund operators, industry bodies and the Australian Government. On 5 January 2018, the Asia Region Funds Passport Joint Committee called for expressions of interest for participation in a pilot program for the passport. This program will be a litmus test as to the acceptability of the CCIV in the region and whether there are any barriers to entry.