27 August 2021

The makings of a successful CCIV regime: release of CCIV Mark II

CCIV Mark II deals with the major stumbling blocks which had held back the CCIV from successful implementation 

In the May 2021 Budget, the Government announced its intention to finalise the corporate collective investment (CCIV) regime, with target commencement on 1 July 2022. The new draft legislation released today can make that a reality.

CCIV can provide benefits to managers with both domestic and international focus

The CCIV will be an investment vehicle with a corporate structure that provides flow-through tax treatment applying the Attribution Managed Investment Trust (AMIT) regime to the CCIV. Its stated purpose is to enhance the international competitiveness of Australian managed funds, but there could be significant benefits for the domestic funds industry too.

CCIV Mark II deals with the major stumbling blocks

The majority of issues that were holding back the CCIV from successful implementation have now been addressed, so that the CCIV will be on an equal footing with the MIS regime, and it is now realistic to expect it to be adopted by the Australian funds industry.

The concerns we had previously with the CCIV regime being more onerous than the rules for a managed investment schemes (MIS) are detailed in our earlier alert.

CCIV designed to be internationally competitive

The architecture of the CCIV is based on the UK open ended investment company, adapted to align with the practical operation of Australian MISs, that are structured as trusts. Benefits of a CCIV include the efficiency of protected cells (sub funds of the CCIV that are not separate entities but which have a separate pool of tax and insolvency-remote assets and liabilities), and statutory limited liability for investors. 

The CCIV was first announced in the 2016-17 Budget, and significant work was done on producing drafts of the corporate and tax legislation to implement it up to 2019, but there were unresolved issues. Resources were diverted to implement the Hayne Royal Commission findings, and work on the CCIV stopped. Singapore and Hong Kong launched their equivalent structures, and Australia lagged. That is now to be remedied, with a practical proposal that has taken on board much of the industry feedback on earlier drafts.

What makes CCIV Mark II better?

The majority of issues that were holding back the CCIV from successful implementation have now been addressed.

  1. A level playing field for tax:

    The CCIV is to be assessed under the same rules as apply to an AMIT. The objective is to align the general tax treatment of CCIVs and their members with the existing tax treatment of AMITs (and their members). This should considerably simplify the introduction of CCIVs for managers who wish to use them.

    Default tax equivalent to treatment of AMITs. The earlier drafts of the tax legislation imposed disadvantages to using a CCIV as compared with a MIS. For example, there was an unacceptable risk that if a CCIV ceased to meet the tests to be a flow-through tax entity, it would be taxed as a company but unable to distribute franked dividends – worse than the outcome for either a MIS or a company. That has now been amended, so that tax outcomes in a CCIV should be the same as in a MIS. For example, where a CCIV does not satisfy the AMIT eligibility criteria in respect of a sub-fund for a particular tax year, then the CCIV tax treatment will generally default to the general trusts taxation framework for that year.
  2. Much simpler without a depositary: The requirement for a depositary with a supervisory function that would hold the fund’s assets for all CCIVs with retail client investors, was a significant sticking point for industry because of the cost and complexity. In this revised draft, it will be optional to appoint a depositary if desirable, for example to promote a CCIV offshore.
  3. Listing no longer prohibited: The old draft legislation prohibited listing of a CCIV on a securities exchange. Particularly for funds that do not have liquid underlying assets, such as property trusts, the choice of moving to listing once the fund has scale is important. The new draft facilitates listing, so the CCIV will be able to be used for a broader range of funds.
  4. Cross investment allowed: Applying the rule that a company must not buy its own shares, the previous draft laws prohibited one “cell” of a CCIV acquiring shares in another, undermining the multi-fund benefit of the CCIV structure. Cross investment is now permitted

What may be coming next? CCIV Mark III

Ability to transition from MIS: When drafting paused in 2019, no provision had yet been made for existing MIS funds to change their form to a CCIV. A transition process that provides a simple way for a fund to change legal form, and preserves the tax status of both the fund and investors, is important.

If an efficient path to transition is provided, an existing fund with a track record could convert to a CCIV for the export market, and domestic funds managers could rationalise their fund offerings through merger and other structural changes without risks around tax, stamp duty and investor meetings. This could help bring down the price of managed funds for consumers. 

With this short timeframe between announcement and implementation, it seems it was not possible for Treasury to include transitional provisions in this draft, but we expect they will look to introduce them.

Now there is some certainty around the form of the legislation and its viability, discussions with the state stamp duty authorities about how they might facilitate transition can also commence.

Next steps for you

Consultation on the draft legislation is open until 24 September 2021. 

Please contact us if you would like assistance with preparing submissions on particular aspects of the proposed legislation, or if we can help you be first to market with a CCIV product. 

We have already prepared a pro forma CCIV constitution, and will have an implementation package ready for when the proposal becomes law.

Look out for our client seminar on CCIV coming very soon to a screen near you!

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