First full view of the CCIV regime
In the December 2017 and September 2018 editions of Fundamental, we discussed the proposals to establish a new type of investment vehicle with a corporate structure, the Corporate Collective Investment Vehicle (CCIV). In this edition, special counsel Joel Taylor explores the positive changes made since the draft legislation was first introduced and highlights some areas that could still benefit from greater flexibility.
The whole picture
Public consultation is underway on two exposure draft bills that will implement the tax and regulatory components of the CCIV regime. Earlier drafts of the proposed legislation were released in three tranches, but this is the first time the complete package of reforms (including explanatory materials) has been made available. Although the Federal Government has not set a date to introduce the new law, this is likely to be the last public opportunity to provide input.
The proposed new law contains:
- A new chapter in the Corporations Act containing the core provisions outlining the establishment of CCIVs and their operational and regulatory requirements.
- Amendments to other legislation to support the implementation of CCIVs (such as amendments to the Australian Securities and Investments Commission Act and the Personal Property Securities Act).
- The tax legislation, which ensures the tax treatment of CCIVs broadly aligns with the existing treatment of attribution managed investment trusts (AMITs), providing investors with the benefits of flow-through taxation.
In response to feedback (including our own submissions), the Federal Government has incorporated a number of improvements in the draft legislation which include the following:
Overall, there has been a simplification of the depositary requirements. The independence requirement is now satisfied by a legal separation of the depositary (and those persons engaged by the depositary to perform depositary functions) from any entity directing investment decisions of the CCIV. A depositary no longer has extended liability for its agents (and sub-agents). The corporate director of a CCIV now has the power (independent of the members) to remove a depositary. Wholesale CCIVs may, but are not required to, have a depositary.
There is now a much stronger segregation of sub-funds with each sub-fund being treated as if it was a separate fund (for the purposes of tax and otherwise) which reduces the risk of contagion from other sub-funds.
Payment of dividends has also been simplified with the primary test being the solvency of a sub-fund both immediately before and after the dividend payment.
Need for greater flexibility
Although the latest draft legislation includes some welcome changes, there are still a number of areas that could benefit from greater flexibility being introduced.
Legal personality of sub-funds
A sub-fund cannot elect to have its own separate legal personality. This may be restrictive for those investors needing certainty that there will be no contagion from other sub-funds. Also, it may be problematic where a jurisdiction or a particular law does not distinguish between entities that do not have a separate legal personality.
Sub-funds are not permitted to invest in other sub-funds of the same CCIV.
Sub-funds must satisfy the relevant tests for flow-through taxation by themselves (rather than the CCIV as a whole) and the consequences of failing can be severe – the sub-fund would then permanently be subject to corporate tax being imposed with the inability to frank dividends.
It is not possible to list a CCIV although shares in a CCIV could be traded on the ASX's AQUA market if permitted under their listing rules.
If you have any insights or concerns you would like to share about the proposed reforms, then please contact a member of our Funds Management team. We are making a further submission to the Federal Government on the CCIV bills with submissions being due by 28 February 2019.