A new impending investing vehicle

SMSFs will soon have access to a new structure for collective investments. Michael Hallinan details how these structures will operate.

A new company-based structure will soon be available to undertake collective investment. Currently most collective investment structures are trust-based structures, such as unit trusts. While the new company-based structure, called corporate collective investment vehicles (CCIV), will have the same taxation treatment that currently applies to attribution managed investment schemes, it may have significant non-taxation features over trust-based structures as well.

The first noticeable feature is the companybased structure may have a far greater recognition and familiarity with foreign investors who are the intended consumers for an Australian cross-border funds management industry. The second feature is that a company-based structure may provide a solution, if not a far better solution, to the problem regarding the difficulty of terminating uneconomic (managed) investment products. The deadweight cost to the funds management industry of having to maintain subscale investment products should not be underestimated, resulting from regulatory costs and, in particular, the IT costs associated with maintaining systems for subscale investment products.

While listed investment companies are a type of company-based investment structure, CCIVs will have greater flexibility in that they can be open ended or closed, they can be wholesale or retail, listed or unlisted, they can offer multiple investment products while having the same investor protections as currently apply to managed investment structures and have a flow-through tax treatment.

Mutual funds versus CCIVs

CCIVs are often referred to as mutual funds in overseas jurisdictions.

A mutual fund is a term used to describe an investment vehicle that has the legal form of a company. The investors buy into the investment vehicle by acquiring shares or, more correctly, a particular class of shares, and they cash out their investment by selling the shares. In many countries, such as the United States, investment vehicles are structured as companies, while in Australia, New Zealand and the United Kingdom, investment vehicles have typically been structured as unit trusts.

By introducing mutual funds into Australia, the federal government hopes to encourage overseas investors to invest locally in Australian investment vehicles or to use Australian-based investment vehicles to invest in South-East Asian economies by allowing those investments to be made by means of mutual funds, with which they are familiar, rather than by unit trusts, which are a far less familiar structure.

In short, the government hopes to expand the Australian funds management industry by encouraging overseas investors to use the services of the local funds management industry whether to invest locally or to invest in South-East Asia.

Legislative background

In late 2009, the Johnson report, “Australia as a Financial Centre: Building on our Strengths”, was released. The report recommended that policy changes be made to increase Australia’s cross-border trade in financial services and to improve the competitiveness and efficiency of the financial sector. In relation to the funds management segment of the financial services industry, it recommended the establishment of an Asian Region Funds Passport and also the introduction of a new collective investment vehicle, effectively referred to as a CCIV.

The Asian Region Funds Passport regime was introduced in September 2018 with the coming into force of Part 8A “Asia Region Funds” of the Corporations Act, enacted by the Corporations Amendment (Asia Region Funds Passport) Act 2018.

The CCIV regime will commence from 1 July 2022 when Part 8B of the Corporations Act comes into force. Part 8B was introduced by the Corporate Collective Investment Vehicle Framework and Other Measures Act 2022. Coincidentally, and completely irrelevantly, the retirement investment covenant provisions were also introduced by this act. Unfortunately, the technique employed in drafting Part 8B is that it is not a self-contained code for CCIVs and sub-funds, but contains a number of sections that modify non-Part 8B sections as those sections apply to CCIVs. However, those other non-Part 8B sections have not been modified to expressly apply to CCIVs or sub-funds. Consequently, there will be considerable page turning between Part 8B and the other parts of the Corporations Act.

Legal structure of CCIVs

A CCIV is a company limited by shares that has been registered under the Corporations Act. It will have only one corporate director and that director must be a public company that holds an Australian financial services licence (AFSL) authorising the public company to manage and operate a CCIV. For a CCIV to be registered it must have at least one sub-fund and that sub-fund must have at least one member.

The name of a CCIV must include, at its end, Corporate Collective Investment Vehicle or CCIV. Each sub-fund of a CCIV will have its own Australian registered fund number (ARFN). Additionally, each sub-fund will, as a matter of commercial necessity rather than law, have its own superannuation product identification number (SPIN).

For each sub-fund, there will be a corresponding class of shares. Class A shares will be referrable to sub-fund A, Class B shares will be referrable to sub-fund B and so on. Each share within a class must have the same dividend rights as the other shares of that class unless the constitution of the CCIV provides otherwise. The economic value of the share will be determined solely by the net value of the sub-fund to which the share is referrable. While an investor may hold any number of shares in various different sub-funds, there cannot be any crosssubsidisation or liability contamination between the various sub-funds.

A sub-fund can be considered as a separate/discrete pool of assets owned both legally and beneficially by the CCIV. For example, the CCIV may operate an investment pool restricted to Australian equities (sub-fund A to which A class shares are referrable), may operate an investment pool restricted to North American equities (sub-fund B to which B class shares are referrable).

Importantly, sub-funds are not trusts and an investor holding shares that are referable to a particular sub-fund does not have any legal or equitable proprietary interest in the assets that constitute the sub-fund. A CCIV can only operate through its sub-funds. It can only operate a business or commercial/investment activity if that business or activity is allocated to one and only one sub-fund. All shares or debentures issued by the CCIV must be allocated to sub-funds. The CCIV cannot issue a share or debenture unless the share or debenture is allocated to a subfund. In short, it cannot have any assets that are not allocated to a sub-fund.

A CCIV will elect to be either a retail CCIV or a wholesale CCIV. The distinction broadly corresponds to the present distinction between retail managed funds and wholesale managed funds. A retail CCIV will be subject to a more intense regulatory regime given the investors are retail clients. For a CCIV to qualify as a wholesale CCIV it must not have any retail investors. If a CCIV has one retail investor in one sub-fund, it will be a retail CCIV. Consequently, it is not possible for a CCIV to have some sub-funds that have retail investors while other sub-funds have only wholesale investors.

As a general statement, but a statement that is subject to various exceptions, normal rules applying to companies under the Corporations Act will apply to CCIVs. For example, CCIVs will be able to issue redeemable shares, however, those shares will be redeemable at the option of the shareholder, thereby mimicking a unitholder right to unilaterally exit an openended unit trust.

The CCIV itself will have no employees. The directors and employees of the single corporate director will, under Part 8B of the Corporations Act, be able undertake certain activities as the agent of the CCIV, such as entering into contracts on behalf of the CCIV.

In a similar manner to retail managed investment schemes, retail CCIVs must have a compliance plan and appoint a compliance plan auditor.

Distributions from a sub-fund to an investor will be by way of dividends, whether they be income or capital or both. A CCIV may reduce its share capital by means of a buy-back.

CCIVs and financial services

The CCIV will not itself have to hold an AFSL as the corporate director of the CCIV is deemed for the purposes of chapter 7 of the Corporations Act to provide any financial services that are provided by the CCIV. However, the deeming does not apply to the issue of shares of the CCIV.

It is the corporate director of the CCIV that must hold an appropriate AFSL that authorises the corporate director to provide the financial service of “operating the business and conducting the affairs of a CCIV”.

The offer document for shares in a subfund will be a product disclosure statement rather than a prospectus. The issuer of the offer document will be the CCIV and any dealing in shares of a sub-fund will be undertaken by the corporate director. The design and distribution obligations of Part 7.8A of the Corporations Act will apply to retail CCIVs, as well as the Australian Securities and Investments Commission’s product intervention powers.

How do they affect superannuation?

While one significant aspect of the CCIV regime is to attract offshore clients to the Australian funds management industry, superannuation funds will be able to invest in retail CCIVs and, if the super fund qualifies as a wholesale client, wholesale CCIVs.

The attraction of CCIVs to superannuation funds may lie in their company-based structure and flowthrough taxation treatment of sub-fund distributions. The company-based structure of sub-funds may allow sub-funds that are subscale to be more readily and easily terminated compared to terminating a unit trust.

The flow-through taxation treatment of CCIVs will mirror the current taxation treatment of attribution managed investment trusts, which will make CCIVs a more attractive investment than listed investment companies.

The attribution method of taxation allows the CCIV sub-fund, and also attribution managed investment schemes, among other things to:

• carry forward under and overestimates of tax amounts into the financial year in which the under or overestimate is identified without adverse tax consequences,

• be treated as fixed entitlement entities – this is important as the investors are treated as having a fixed entitlement to income and capital and the trust or sub-fund has to satisfy less onerous conditions to carry forward and deduct tax losses and it enables imputation credits to flow to investors, and

• allow investors, in certain circumstances, both upward and downward adjustments to the cost base of their holdings to eliminate double taxation that may otherwise arise. To conclude, SMSFs will now have the opportunity of investing in CCIV subfunds in addition to or as an alternative to managed investment schemes and listed investment companies.