With effect from 1 July 2022, the new regulatory and tax regime will look to introduce flow-through corporate entities that, despite being an incorporated company paying legal form dividends, will be treated as a trustee of one or more unit trusts (referred to as ‘sub-fund trusts’) for all tax law purposes. The tax regime operates through a series of deeming principles to create this tax law fiction.
This article provides a high level summary of some of the current key commercial and tax advantages and disadvantages of CCIVs. Given the infancy of the new regime, it is expected to generate novel tax and commercial issues for investors and fund managers.
What is a CCIV?
A CCIV is a legal form company limited by shares registered with the Australian Securities and Investments Commission (ASIC) under the new Chapter 8B of the Corporations Act 2001.
A CCIV has a sole corporate director holding an Australian Financial Services License (AFSL) authorising it to operate the activities of the CCIV. The primary governing document of the CCIV is its constitution which will contain different provisions depending on whether it is a retail or wholesale CCIV.
While a CCIV is not a managed investment scheme (MIS), there are separate requirements which build in similar protections for CCIV investors (as available under MIS).
The intention is for the CCIV to operate as an umbrella vehicle comprised of multiple “sub-funds”, each offering different exposure to different investments.
From a tax perspective, a CCIV is deemed to be a trustee of each of the sub-funds which are deemed to be unit trusts and may, where the requirements are satisfied, be Attribution Managed Investment Trusts (AMITs).
The effect is that each sub-fund trust is a separate entity for tax purposes with separate tax registrations (i.e. tax file number, GST registrations etc.) and compliance obligations (i.e. annual trust tax returns).
Shareholders in the CCIVs are treated as unit holders in the sub-fund trusts to which their shares are referrable to, benefitting from flow-through taxation.
Example CCIV structure
Below is a simplified structure diagram, of a CCIV:
CCIV benefits and disadvantages
Below we have provided a high-level summary of some of the current key commercial and tax advantages and disadvantages of CCIVs.
- International competitiveness – given that many overseas investors are unfamiliar with the unit trust structure used in Australia, the purpose of implementing the CCIV framework was to make investing in Australia more attractive for overseas investors by introducing an internationally recognised corporate collective investment vehicle.
- Flexibility and scale – the CCIV structure enables the operators of CCIVs to offer clients different investment strategies under the one umbrella vehicle. This umbrella structure is beneficial as the multiple sub-funds are governed by a single constitution rather than having each sub-fund governed by separate trust deeds (as is the case with current trust structures) Further, CCIVs may generally engage in cross-investment between its sub-funds (so long as such cross-investment is not circular). All of this allows fund managers to build capacity and economies of scale.
- Risk management – The assets and liabilities of each sub-fund are strictly segregated from all other parts of the CCIV’s business, including the assets and liabilities of each other sub-fund. Although similar sub-fund like structures could be established under traditional MIS (unit trust) structures by creating different classes of units, there was no legal segregation of assets and liabilities in those circumstances. The CCIV structure provides investors with greater protection by removing cross-class liability risk as the assets of each sub-fund can legally only be applied for the purposes of that specific sub-fund.
- Work in progress – as a body corporate, the regulation of CCIVs has been built into the current regulatory framework of the Corporations Act 2001 (Cth). Consequently, given that CCIVs are a new type of company, this will invariably result in some initial issues and a number of matters requiring further consideration and amendments.
- Listing on the ASX – the ASX Listing Rules have been amended to accommodate the listing of a CCIV sub-fund. Initially, only CCIVs with a single sub-fund will be eligible for inclusion in the official list of ASX, however this restriction is expected to be temporary and will be considered further once regulators have had an opportunity to review the CCIV regime in operation.
- Further structuring considerations – An ‘indivisible asset’ cannot be held by more than one sub-fund. This means that further structuring considerations will be required for fund managers intending to adopt CCIV structures for investment into particular asset classes.
- Flow through taxation – the CCIV sub-fund trust will generally receive flow-through taxation treatment, meaning that investors will generally be taxed as if they had invested directly in the underlying assets. Further, investors in CCIVs will be deemed to be beneficiaries of a trust (i.e. sub-fund trusts) and income, exempt income and non-assessable non-exempt income will retain its character once it is received by the investor. That is, amounts attributed to members will not be treated for Australian tax purposes as legal form dividends paid by the CCIV, and will instead retain their original source and character and be taxed as such.
- Fixed entitlement to income and capital – an investors’ entitlement to income and capital is fixed and determined by calculations in the provisions.
- Concessionary withholding rates – where a sub-fund trust is a Managed Investment Trust (MIT) and also a ‘Withholding MIT’, distributions of income (excluding dividends, interest and royalties) to foreign beneficiaries in an exchange of information country may be subject to a concessional withholding tax rate of 15%. There are specific exclusions which can apply.
- Deemed capital treatment – where a sub-fund trust is a MIT, it can elect to treat certain assets (i.e. shares, units in a unit trust and land) as being capital gains tax (CGT) assets. Treating assets solely as CGT assets may result in more favourable tax outcomes (for example, certain Australian resident beneficiaries will be eligible to apply the CGT discount and foreign residents will be able to disregard capital gains realised on assets that are not ‘Taxable Australian Property’).
- Rollovers – there are currently no specific income tax rollovers or concessions available to existing structures (or their investors) seeking to convert into a CCIV. Existing rollovers would need to be considered and may not be appropriate.
- Tax losses – there are currently no tax or capital loss transfer rules meaning if existing structures did want to convert into a CCIV, their tax and capital losses would remain trapped in the old structure or cancelled on winding up of the vehicle.
- Trust income - the new regime includes a definition of trust income for tax purposes which is based on the accounting profit as determined by the relevant financial reports of the sub-fund trust. This definition could result in the trustee being liable to tax where there is an accounting loss, but the sub-fund trust has taxable income. In other words, some of the flexibilities that are inherent in a trust deed for general law trusts will not exist for a CCIV deemed to be a trust.
- Compliance – as each sub-fund trust is a separate tax entity, each require separate tax file numbers, Australian Business Numbers and GST registrations (where they are required to be registered).
- Duty and land tax – there is currently no guidance on the treatment of these vehicles from a duty or land tax perspective from any of the State or Territory revenue authorities.