A quiet part of the Federal Budget 2021-22, which has not received much attention in the Australian press or the broader post-Budget analysis, was the announcement that the Federal Government intends to proceed with the plan to introduce a Corporate Collective Investment Vehicle (CCIV). This reactivates a measure from the Federal Budget 2016-17 (page 39). Based on the announcement this time, the CCIV will be available from 1 July 2022.
Why should we care about CCIV?
A CCIV is structured as a legal form corporation. It would be a public company limited by shares and ‘structured as an umbrella fund with sub-funds, each of which may hold different assets and have different investment strategies’. It would be available only for widely held collective investment and would be taxed on a flow-through basis.
The original idea around the CCIVs was clever. Australia has a strong funds management industry (in 2020, Australian managed funds had just over AUD 3,997 billion of funds under management) and this plays to that strength – this measure has the potential to encourage a very large amount of investment into and through Australian funds.
The potential investment from Asia is particularly huge. In 2011, European UCITS compliant funds held somewhere between AUD 467 to 667 billion under management from Asia. UCITS stands for Undertakings for Collective Investments in Transferable Securities. It is a passport scheme for managed funds in Europe – it allows funds to operate and be marketed across Europe if they have authorisation from one single member state.
The Federal Government previously indicated that increasing the export of fund management services is ‘likely’ to bring ‘positive flow-on benefits’, namely to ‘increase job numbers, [an increase] in the government revenue base and an increase in aggregate gross domestic product’ (page 4). But what revenue will flow from this is unclear – the latest Budget estimated ‘an unquantifiable impact on receipts over the forward estimates period.’
An alternative that may be more attractive to foreign investors than the trust form that we currently use for collective investment in Australia
The idea of the CCIV has been under consideration and development in Australia for around 12 years. The case for a CCIV was first made by the Australian Financial Centre Forum in its report Australia as a Financial Centre: Building on Our Strengths (the Johnson Report) in 2009 and then reiterated in the Board of Taxation’s Review of Tax Arrangements Applying to Collective Investment Vehicles: A Report to the Assistant Treasurer in 2011.
Collective investment in Australia at scale is currently organised through unit trusts. This includes public offer retail trusts, cash management trusts and some wholesale financial trusts.
These trusts are taxed on a flow-through basis. Broadly, flow-through designs tax the underlying owner (not the vehicle as an entity) and amounts derived through the vehicle retain their character and any attendant preferences. Where these trusts satisfy criteria, namely being widely held and deriving predominantly passive income, they are treated as a Managed Investment Trust (MIT). MITs can also elect to be taxed under a specially designed regime (the Attribution Managed Investment Regime or AMIT regime). The AMIT regime sidesteps the complexity of the normal rules for taxing trusts in Australia, in particular, it allocates amounts to owners on an ‘fair and reasonable’ attribution basis rather than being strictly linked to income entitlements.
There are a number of advantageous features of MITs. A significant benefit is that withholding tax is currently applied at a concessional rate (15% or 30% for non-concessional MIT income) to fund payments (amounts other than dividends, interest and royalties) made to a foreign owner who is resident of a country with an exchange of information agreement with Australia. Australia’s usual withholding regime applies to dividends, interest and royalties. However, payment of some amounts, such as non-real property capital gains and franked dividends, are not taxed. Additionally, subject to satisfying requirements, a MIT can make an irrevocable election for the proceeds from disposing of eligible assets to be treated as deemed capital gains.
The Board of Taxation’s 2011 report (pages 5, 8-9) noted that Australia’s trust regime is not easily understood by foreign investors, particularly in European civil law countries. The suggestion is that our continued use of the trust, even after the introduction of the AMIT regime, has made foreign investors reluctant to invest in Australian managed funds. It is unclear how much truth there is practically in this now.
The idea behind introducing the CCIV (para 1.6) is to give foreign investors a form that they recognise and are comfortable with that is taxed on a flow through basis. The CCIV was also intended to be consistent with the Asia Region Funds Passport system, which is broadly the Asian equivalent of the European UCITS.
The economic justification for introducing a CCIV is that although Australia’s financial services sector is ‘arguably the most sophisticated and advanced…in the region…our exports and imports of financial services are low by international standards.’ The Board of Taxation noted that in 2009, between 3.5 and 11 per cent of total funds under management were sourced from offshore (page 6). The argument is that if Australia ‘had access to a broader set of appropriate investment vehicles to sell into Asia which were taxed on a flow through basis’, ‘then more funds management vehicles would be managed and administered out of Australia’ (page 5). The Board of Taxation argued that ‘there is potential for significant growth if Australian funds were to more actively target’ foreign sourced funds, ‘particularly for investment in foreign assets (that is, conduit investment)’ (page 6).
Ireland and Luxembourg have historically targeted conduit investment through specially tailored vehicles that are attractive to investors: Ireland uses the contractual fund (CCF) and Luxembourg offers a corporate fund (SICAV) (which is broadly similar to a US open-ended mutual fund). The Board of Taxation noted that in 2011, the SICAV was the dominant form in Asia (pages 7 and 9). Both CCF and SIVAC are UCITS compliant.
Are we too late?
Australian Treasury released draft legislation for the tax treatment of CCIVs in late 2017. The CCIV model it used was based on the English Open-Ended Investment Company (OPEIC). The OPEIC is a legal form public (listed) company that is taxed as a flow-through that the UK designed specifically for managed funds and it has been around for over 20 years.
The original proposal in the Budget 2016-17 was to introduce a CCIV first, followed by a limited partnership CIV one year later. The difference between the two is obviously the legal form. It is unclear from what was announced in the Budget 2021-22 if this is still the plan. The rationale previously was to emphasize that the type of entity was not important (implicitly so long as it is not a trust), that flow through treatment would be available if the activities are the right type (primarily passive investment), the investors are the right type or number (the vehicle is widely held), and there is a funds management activity and regulation in Australia.
It is likely that Australian Treasury will try to pick up where this plan was left in 2018. (Treasury had released several tranches of exposure draft legislation covering different dimensions and conducted consultation by the end of 2018). But this idea faced some resistance then – the main argument against it was that introducing a CCIV would not be a silver bullet, but the reasoning varied. One tax practitioner argued that the attractiveness of Australian managed funds was more dependent on Australia simplifying our current withholding tax system. The current executive director of Intertrust Australia and President of the Executive Committee of Property Funds of Australia argued that it would take time for the CCIV to be established and for investors to become familiar with it, pointing to the fact that the UCITS had been around for 25 years and was in its ‘fifth iteration’, and so there might be some reluctance for some who were now familiar with the Australian trust structure to switch and accordingly there would need to be ‘proper tax transition arrangements’. It is unclear how widely these concerns were shared in practice or industry at the time, and their relative strength now.
Academically, the question is whether this measure is five to ten years too late to have maximum possible impact. As a broader observation and based on experience in the private context, once you go so far down a path and trusts become a familiar structure, it is challenging to change course and switch back to another legal form. This might be possible in the collective investment context, but the question is whether the benefits now outweigh the costs.
However, given the announcement to move forward with this plan now, it would be best for Treasury to work closely with practitioners (both legal and tax) and those in the funds management industry to refine the legislative package further to ensure this is implemented in a way that is most beneficial to Australia.
Other Budget Forum 2021 articles
Structural Changes, but No Sustainability Reset, by Miranda Stewart.
This Was an Election Budget on Steroids, by John Hewson.
The Volunteer Workforce Is Key to Achieving Budget Priorities, by Sue Regan.
Looming Tax Cuts Prevent Genuine Expenditure Reform, by Maria Racionero.
Australia’s Planned Patent Box: A Means of Stimulating Innovation? By Sonali Walpola and Tracy Wang.
Don’t Shoot in the Dark: Business Support in the Australian Budget, by Andrés Bellofatto, Begoña Dominguez and Jorge Miranda-Pinto.
Fiscal Policy in the COVID-19 Era, by Chris Murphy.
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