31 May, 2016
New corporate and limited partnership fund vehicles are coming to Australia.
The Australian Government intends to introduce a tax and regulatory framework for two new types of collective investment vehicles (CIVs):
- a corporate CIV; and
- a limited partnership CIV.
The new tax and regulatory regime, recently announced in the Australian Government's 2016/17 Federal Budget, is intended to increase the competitiveness of the Australian managed funds industry by allowing vehicles that are commonly used offshore. This is because at the moment the vast majority of Australian funds are established as trusts which are not well understood by some foreign investors.
The collective investment vehicles
The CIV announcement says that a "corporate CIV" will be introduced for income years starting on or after 1 July 2017, followed by a "limited partnership CIV" for income years starting on of after 1 July 2018.
The tax attributes of the new CIVs will include 'flow-through' tax treatment.
The new CIVs will be required to meet similar eligibility criteria as managed investment trusts. This means that they will need to be (or deemed to be) widely held and be engaged primarily in passive investment. The proposal does not limit the availability of CIVs to non-resident investors.
There will also need to be extensive changes to corporate, funds and partnership regulation to facilitate these new CIVs. In particular, there will need to be amendments to the Corporations Act 2001 (Cth), including to provide for capital distributions and redemption of interests in the corporate CIVs, and, potentially, the Australian financial services licensing and disclosure requirements. State governments may also need to be involved given the interaction with the existing State-based partnership laws (which are inconsistent between the various States).
Given the complexity of the changes to be made, whoever the federal election in July will need to act quickly to meet the proposed start dates.
We understand that Treasury will consult with industry in relation to the changes.
Practical implications for Australian fund managers and investors
While the specific rules are yet to be released, flow-through tax treatment for these new fund vehicles will allow investors to be taxed as if they had invested directly in the underlying assets of the fund. This would be consistent with most other jurisdictions with significant managed funds industries.
Many foreign investors have difficulty understanding Australian managed funds due to a lack of familiarity with the prevailing unit trust structure. However, foreign investors are generally very familiar with both corporate and limited partnership CIVs of this kind.
The Australian Government hopes that the new rules will increase the marketability of Australian managed funds by providing investment vehicle options that are internationally recognised and more familiar to foreign investors.
The changes are also seeking to enhance the ability of Australian fund managers to take advantage of the Asian Region Funds Passport.
We see this as a welcome announcement. However, the effectiveness of this initiative will depend on the details and ensuring that the new rules do not discriminate against the new CIVs.
For further information, please contact:
Lewis Apostolou, Partner, Baker & McKenzie