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Submission No. 296 Back to full list of submissions
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Review of Business Taxation

Submission on Definition of Collective Investment Vehicles

Background

It is proposed that "Collective Investment Vehicles" will not be subject to the proposed entity taxation regime.

Collective Investment Vehicles ("CIV’s) are proposed to be broadly defined as;

  1. Trusts with over 300 members
  2. Trusts where more than 75% of the interests are held by other CIVs, superannuation funds, PSTs, ADFs, the statutory funds of life insurance companies AND the trust is registered as a Managed Investment Scheme.

Given that retail trusts with over 300 members will already be required to be registered as Managed Investment Schemes the definition of CIV has effectively developed into;

A registered Managed Investment Scheme with either (i) more than 300 members or (ii) more than 75% of the members are CIVs etc.

Regulation of Managed Investment Schemes

The purposes of the Managed Investments reforms were to clarify the legal responsibilities between trustees and managers and protect investors in managed funds by making the regulation of managed funds consistent with the regulation of retail superannuation products.

It is clear that the Managed Investments Act requirements are primarily designed to protect retail investors. For example schemes where all the issues of interests have been excluded issues under the Corporations Law, including where the amount subscribed was at least $500,000 there is no requirement to register the scheme with the ASIC. Excluded issues are generally only made to large institutional investors such as superannuation funds and life insurance companies, and is generally referred to as the "wholesale market".

Unregistered Managed Investment Schemes available in the wholesale market would be disadvantaged by not being classified as CIVs

Given the distinction that is made within the Corporations Law (including the managed investments provisions) between "retail" and "wholesale" investors, the requirement for a CIV to be registered as a Managed Investment Scheme would impose an unnecessary compliance and cost burden upon schemes distributed within the "wholesale" market for those funds seeking to obtain CIV status. The disadvantages of not being classified as a CIV would make those funds relatively unattractive to investors, and would be expected to effectively result in all those schemes becoming registered so as to achieve CIV status.

The trusts in this category are mainly special opportunities in development capital and infrastructure which involve only a small number of investors - say 2-12, or perhaps up to 30. These investors are generally large superannuation funds that wish to invest in this area, but do not have the necessary resources to undertake their own management and analysis and thus pool money with AMP in these types of trusts. These investors would be reluctant to invest if there were either adverse tax impacts (ie if the Trusts was taxed as a company, despite them being superannuation funds with a special tax rate) or if costs of compliance etc increased dramatically to achieve MIA compliance. The basis of their existing investment would also be significantly impacted if these trusts were not treated as CIV, however the illiquid nature of the underlying investments means that they cannot actually withdraw their funds.

The exclusion of these types of trusts from CIV would thus have an adverse impact on

  • existing superannuation savings.
  • flow of new money to infrastructure/development capital from superannuation funds.

Once Collective Investment Vehicles have been identified, there is no additional protection to the revenue from forcing lower tier CIVs to comply with the Managed Investment Scheme rules.

An Example - the Impacts on AMP Asset Management

AMP Asset Management has over $2.5 billion in funds managed through "wholesale" trusts that under the current Corporations Law are not required to register as managed investment schemes. As the unitholders in these trusts are predominantly superannuation funds and life company statutory funds we believe that the 75% unitholder test should be sufficient to categorise these trusts as Collective Investment Vehicles.

The additional requirement to be registered as a Managed Investment Scheme in order to achieve CIV status will impose the costs and obligations of retail investor protection upon wholesale trusts where the current government policy has determined that this is unnecessary. There will be substantial costs involved in restructuring our currently unregistered trusts in order to comply with the requirements for Managed Investment Schemes. These costs are estimated to be in the order of $250,000 to $500,000 excluding the transaction costs that may be incurred in transferring over $2.5 billion of fund assets to the Single Responsible Entity.

Registration as a Managed Investment Scheme may be useful for determining a category of Collective Investment Vehicles – It should not be a mandatory requirement

Registration as a Managed Investment Scheme may be an appropriate criteria for defining some Collective Investment Vehicles due to the very stringent regulations surrounding registration of the scheme and the licensing of the scheme operator. Refer to Appendix A for a summary of the requirements.

The Managed Investment Scheme rules are prudential consumer protection rules that are a useful benchmark for identifying vehicles for tax that should get CIV treatment, but it is illogical to make all vehicles comply with these rules to get a particular tax effect and breaches one of the main objectives of the review, being simplification.

Comparison to United States

It is worth noting that the use of pass-through entities, such as US Limited Liability Companies by foreign institutional and wholesale investors is permitted without the requirements for those schemes to be registered under the US securities and investments laws. In the Private Equity market, where returns are derived mainly from capital gains, unregistered Australian wholesale schemes would be less attractive to an Australian investor than a similar US scheme. This has obvious implications for the flow of institutional private equity capital.

Conclusion

For the reasons outlined above once Collective Investment Vehicles have been identified, there is no additional protection to the revenue from forcing lower tier CIVs to comply with the Managed Investment Scheme rules.

The Managed Investment Scheme rules are prudential consumer protection rules that are useful benchmark for identifying vehciles for tax that should get CIV treatment, but it is illogical to make all vehicles comply with these rules to get a particular tax effect and breaches one of the main objectives of the review, being simplification.

We believe that the 75% unitholder test (without the need for MIA compliance) in addition to the 300 member test should be sufficient to categorise these trusts as Collective Investment Vehicles.

 

David Bull
Manager, Finance
Private Capital Division
AMP Asset Management Australia Limited
Telephone: 02 9257 5665
Facsimile: 02 9257 7989


Appendix A

Summary of Requirements for Managed Investment Schemes

  • Responsible Entity must be a public company & hold a dealer’s licence issued by ASIC authorising it to act as Responsible Entity of the relevant type of managed investment scheme ("Scheme").
  • Before granting a dealers licence, ASIC requires that the proposed Responsible Entity demonstrates:
    1. it has adequate accounting, computer, compliance and operating systems;
    2. it has responsible officers with the educational qualifications and experience appropriate to the kinds of Schemes the licence authorises the Responsible Entity to operate;
    3. its responsible officers are of good fame and character;
    4. if it intends to appoint agents or external service providers to do anything in connection with a Scheme, that due care and skill have been used in choosing those agents, and their ongoing performance will be monitored;
    5. it has access to sufficient financial resources to meet the ongoing cash requirements of its Schemes which would arise under reasonably foreseeable circumstances for a minimum of three months; and
    6. it has appropriate professional indemnity & fraud insurance covering claims up to, and in aggregate, $5,000,000 or the value of Scheme assets (whichever is less).
  • In most cases, a Responsible Entity must have and maintain net tangible assets of at least $5,000,000 or appoint a custodian to hold scheme assets. If a custodian is appointed, in most cases it must have and maintain net tangible assets of at least $5,000,000.
  • A Scheme must have a Constitution (previously known as a trust deed) in registrable form (i.e. must comply with Corporations Law & ASIC requirements).
  • A Scheme must have a Compliance Plan (which must be approved by ASIC and comply with Corporations Law requirements) which sets out the procedures the Responsible Entity must follow to ensure it complies with the Scheme’s Constitution and the Corporations Law.
  • Schemes must be audited annually by a registered company auditor. Many Schemes are also required to have either an audit or an audit review each half-year that does not coincide with the annual audit. Further, a separate registered company auditor is required to audit the Responsible Entity’s compliance with the Compliance Plan on an annual basis.

A Responsible Entity is required to have a majority of independent directors, or establish a Compliance Committee with a majority of independent members to monitor the extent to which the Responsible Entity complies with the Compliance Plan and to report its findings to the Responsible Entity and, in some circumstances, to ASIC.