A key recommendation of the 2009 Johnson Report (Australian Financial Centre Forum’s Australia as a Financial Centre report) on what we need to do to promote Australia as a financial services centre was the introduction of a wider range of collective investment vehicles (CIVs).
Industry participants are all too familiar with the fact that Australian fund managers manage less than 5% of the $2.5 trillion of assets under management for offshore investors. This percentage will not materially grow until Australian managers can offer investment structures that are commonly used and well understood by offshore investors.
Despite one of the key recommendations of the Johnson Report having bipartisan support, it is frustrating for industry participants to be still awaiting alternative CIVs to be developed.
The development of the Asia Region Funds Passport, which is due to start next year, adds further urgency to the development of such structures.
This is because Australian fund managers will not be able to take full advantage of the passport if the only Australian vehicle that can be offered to investors in participating jurisdictions is an Australian managed investment scheme.
It is currently too difficult for Australian fund managers to compete with proven investment structures in other jurisdictions when the only viable investment structure they can offer is an Australian managed investment scheme. Managed investment schemes with a single responsible entity are unique to Australia.
Even those investors familiar with unit trusts are confused as to why an Australian managed investment scheme does not have a separate independent trustee. The absence of legislation providing that a unit holder’s liability is limited to the amount of their investment provides further concern. The complexity of the current withholding tax regime for offshore investors adds another barrier.
What type of CIVs?
To be internationally competitive, the current Australian regime needs to be developed to be flexible enough to accommodate different types of CIVs. The introduction of an open-ended investment company with variable capital should be prioritised. Such corporate vehicles are the prevailing investment vehicle used in other key jurisdictions such as Luxembourg and the United Kingdom. Australia should adopt key features of comparable structures so our vehicles are familiar to offshore investors.
Limited partnership CIVs would also be welcomed, particularly by wholesale investors who frequently use limited partnership structures. The CIVs should be available for both domestic and foreign investors to avoid the cost of setting up duplicate structures for different investor bases.
It will also be important that there is an effective transition for existing managed investment schemes to roll over into new CIV structures. This will manage the continuing increase in numbers of legacy schemes.
CIVs in other jurisdictions have a management company or authorised corporate director in the context of corporate CIVs and general partnerships in the context of limited partners (management entity) to undertake the management of the CIV and a separate depository to hold the assets of the CIV and take an oversight function.
We anticipate that the regulatory regime for corporate CIVs and limited partnerships would be aligned with that for managed investment schemes. For instance, the management entity would need to hold the requisite Australian financial services licence with authorisations and conditions aligned to that currently required for a responsible entity.
The creation of a CIV as a separate legal entity (distinct from the management entity and members) will remove many of the complexities and uncertainties created by the current interaction of our trust law with our insolvency law.
Currently, if a responsible entity becomes insolvent, an incoming responsible entity must step into the insolvent responsible entity’s shoes and take on the contractual obligations of contracts the entity entered into on behalf of the members of the scheme.
This has acted as a disincentive for responsible entities to take on the role of an insolvent responsible entity. This issue does not arise for a corporate CIV as the contracts would be entered into by the CIV.
To be internationally competitive, the corporate CIV should also permit an umbrella fund structure. Ideally, the umbrella structure would provide for different sub-funds with different underlying investment strategies as well as different classes to provide for different currencies and hedged/unhedged classes to be offered.
To be effective, the umbrella fund structure would need to have the benefit of segregation of assets and liabilities between sub-funds so these sub-funds were separately managed, charged, accounted for and assessed for tax.
The draft report from the Productivity Commission on the Barriers to Growth in Services Exports issued on 12 August 2015, and covering financial services, has recommended the Government should continue to facilitate the development of a range of CIVs as part of the Tax White Paper process.
Whilst we support the development of the corporate CIV being fast-tracked, there are complex tax issues to consider in the development of alternative CIV structures. Accordingly, we are hopeful that the Tax White Paper process may be an opportunity to look more holistically at the appropriate tax regime for offshore investors investing in Australian CIVs.