Is this a New Age in Australian Investment Management?

1. Corporate CIV (Modeled on the Luxembourg SICAV).
2. Limited Partnership CIV (The commonly used structure for Private Equity funds globally).
3. Common Contractual Fund (CCF) CIV (modeled on the Irish collective investment undertaking).

The report is potentially ground-breaking as its recommendations do not merely suggest changes to the Unit Trust scheme, but actually propose revolutionising the traditional Australian fund management sector. These new vehicles (CIVs) are anticipated to pointedly improve the ability of Australian fund managers in offering their products to international investors by providing a tax-effective alternative to the current pooled investment trusts (Unit Trusts), which have proven problematic for funds looking to attract offshore investors.

The impact for fund managers

As Australia looks to take a leading role in the evolution and reformation of international tax policy, the new proposals introduced via the budget should enhance the competitiveness of Australian managed funds operating locally and looking to passport into the rest of APAC. The Australian government has been making pointed progress toward improving cross-boarder investment capabilities for onshore funds; as demonstrated in the signing of the Statement of Understanding in September 2015. The commitment to joining the Asian Region Funds Passport means Australia is helping drive a region-wide initiative alongside New Zealand, Republic of Korea and Singapore to deliver a multilaterally agreed framework facilitating the cross-border marketing of managed funds across the Asia region. With this in mind, the introduction of CIVs to the Australian market will enable local funds to far better utilize this framework when it comes to fruition in 2017, an undoubtedly positive progression for the local economy and investment management industry.

Click Here for more information on the Asian Region Funds Passport.

Is this the end of the Australian Unit Trust?

It seems inevitable then that the introduction of these new CIVs could signify the beginning of the end for the traditional Australian Unit Trust. Unit Trusts, which have historically been the default foundation for collective investment management in Australia, are widely seen as cumbersome and difficult to market to offshore investors. The Unit Trust structure became the standard framework in Australia predominantly due to the fact that more common global entities (like CIVs) were not being treated locally as tax-transparent. If this change means it will become easier for foreign allocators to invest in Australian funds through familiar corporate and limited partnership structures, the local fund landscape will surely change for the positive. With this in mind, it may not then be a surprise if a subsequent casualty of this progression turns out to be the traditional Unit Trust.

What will a CIV do?

CIVs permit investors to pool their funds and turn over the management of these assets to a fund manager. The new CIVs will give fund managers in Australian the ability to really utilize the Asian Region passport and reduce the traditional barriers to investing in the countries funds as a result of the unfamiliarity of unit trusts to foreign investors. In turn, the overall marketability of Australia’s manged funds industry will be far easier and more appealing which could be a game changer for the country as a whole in terms of domestic product growth.

When will the proposed changes take effect?

• For income years starting on or after 1^st July 2017 the Corporate CIV will be introduced.
• For income years starting on or after 1^st July 2018 the Limited Partnership will come in to place.

Who is eligible?

New CIVs will need to meet requirements similar to that of managed investment trusts; those investing in these new vehicles will generally be taxed as if they had invested directly. In order to be eligible for all three types of CIV the fund will need to adhere to the following criteria:

• Engage in predominantly passive investment activities.
• Not carry on a trading business or control another person that carries on a trading business.
• Hold Australian residency status.

Conclusion

This seems to be a really positive move by the Australian government who are looking to enhance the ability for success in the local funds management industry. These changes will further improve the effectiveness of the Asian Region Funds Passport by streamlining the process for foreign investors which can only be a positive move for Australia.

For more information on investing in Australian funds or setting up a CIV please contact our local Australian offices: Melbourne | Sydney.

Click Here for Apex’s Australian Tax Services.