Corporate Collective Investment Vehicle – draft tax law released

1 September 2021

Deeming the possible?

Just as the wrong train can sometimes take us to the right destination, deemed small steps can sometimes yield a huge leap forward. The release of draft legislation last week does this, leaping CCIVs towards the announced start date of 1 July 2022.

In brief

On 27 August 2021, the Government released revised draft tax legislation for the proposed Corporate Collective Investment Vehicle (CCIV), over two and a half years since the previous draft in 2019.  To complement this, draft legislation was also released in relation to the proposed regulatory framework for the CCIV. 

The policy driver informs the design criteria behind the CCIV - that is, to export financial services and import capital. In a nutshell, we need investment vehicles that foreign investors are familiar with. And for retail investors in our region, we need a special kind of investment company to compete with vehicles like the Luxembourg SICAV, the UK OEIC and the Singapore SVACC. So how hard might it be to copy?

The CCIV has been challenging because of two compounding contradictions. First, the CCIV must be a single legal form company that paradoxically comprises ‘single responsible entity’ sub-funds, each with segregated assets and liabilities. Second, the CCIV must ‘flow through’ franking credits, discount capital gains and foreign income tax offsets to investors, which fundamentally contravenes our company tax rules, which are based on legal form. 

In competing markets, the first contradiction was overcome by enacting laws to deem the desired outcome. Treasury has wisely followed this approach and, in a leap forward, has kept going for the second. Accordingly, the draft legislation proposes that each sub-fund is deemed to be a separate (unit) trust that is a ‘trust estate’ subject to the (Division 6) trust tax rules. Each sub-fund may then satisfy modified Managed Investment Trust (MIT) criteria to be eligible to qualify for deemed Attribution MIT (AMIT) tax treatment. 

Relevantly, this concept of deeming is not new. Existing provisions deem certain limited partnerships to be a company and the ‘foreign hybrid’ provisions may revert partnership flow through tax treatment. Hence Treasury has commendably followed this route to ‘deem’ the desired outcome.

As currently proposed, the draft legislation broadly aims to enable each sub-fund of a CCIV to operate on an equivalent basis to a managed fund with a single responsible entity, under similar disclosure and investor protection rules applicable for ‘umbrella’ fund arrangements. Importantly, sub-fund cross investment, both within the one CCIV and between CCIVs, is contemplated. As with other markets, rules to mitigate conflicts of interest are foreshadowed.

The future of fund passporting?

The next challenge may invoke the principle of mutual recognition behind the Asia Region Funds Passport: reciprocity. 

Foreign fund managers may, dare we say it, deem foreign domiciled CCIVs to be less competitive in Australia, for lack of the flow through tax treatment afforded to the CCIV. It remains to be seen if foreign markets consequently resist the distribution of the CCIV unless foreign domiciled funds can obtain (or be deemed) tax flow through treatment to Australian investors, to ‘level the playing field’.

Accordingly, will the future of fund passporting require navigation of a further paradox on tax flow through treatment, that we may be deemed if we do, and deemed if we don’t?

In detail

Based on the proposed regulatory regime, a CCIV will be a registered company under the Corporations Act 2001 that is limited by shares and satisfies certain regulatory requirements. A CCIV should have at least one sub-fund, and the assets and liabilities of each sub-fund are segregated from the assets and liabilities of other sub-funds.

For tax purposes, it is proposed that each CCIV sub-fund (a “CCIV sub-fund trust”) will be deemed to be a unit trust with the CCIV as trustee and the members of the sub-fund as beneficiaries. In this way, a CCIV sub-fund trust can qualify as an AMIT and therefore, obtain all the benefits and obligations of being an AMIT. For example, AMIT ‘fund payments’ have a concessional rate of non-resident tax withholding on certain Australian sourced income components. 

The following table discusses some of the key tax features of the proposed regime (including discussion of the tax related points raised above).

Key features Observations
Deeming of a CCIV sub-fund trust

A CCIV sub-fund trust is deemed to be a unit trust with the following features:

  • shares of a CCIV sub-fund trust are taken to be units in the trust;
  • the CCIV is the trustee of a sub-fund trust (or sub-fund trusts if more than one)
  • rights, obligations and other characteristics attached to a unit in the trust are taken to be the same, or as nearly as practicable, as the rights, obligations and other characteristics attaching to the share that is taken to be that unit
  • a beneficiary of the CCIV sub-fund trust is taken to have a fixed entitlement to a share of the income and the capital of the trust;
  • a beneficiary of the sub-fund trust is taken to be presently entitled to a share of the income of the trust estate so that in most cases the CCIV is not subject to tax, and
  • a beneficiary of the sub-fund trust is taken to have an individual interest in the exempt income or non-assessable non-exempt income of the trust.
The deeming rule applies for all income tax purposes unless specifically carved out. This rule simplifies the drafting as it removes anomalies arising from a CCIV being legally a company.
Treatment as an AMIT

A CCIV sub-fund trust is treated as an AMIT where the AMIT eligibility requirements are met with the following modifications:

  • the CCIV is not required to be a managed investment scheme (MIS)
  • the widely held test is therefore modified to remove the MIS requirement
  • a sub-fund must be used for collective investment by pooling member contributions as consideration for a return on those investments
  • the CCIV by virtue of satisfying regulatory requirements automatically has clearly defined rights, and
  • the irrevocable election to be an AMIT is removed.

As a consequence of qualifying as an AMIT, the CCIV sub-fund trust will have a number of attributes including:

  • full ‘flow through’ attribution of taxable income to investors (otherwise CCIV taxed)
  • ability to treat certain tax adjustments as timing differences (unders and overs)
  • ability to elect deemed capital gains tax treatment for certain ‘covered’ assets
  • cost base increases to mitigate double taxation of investors; available to beneficiaries, and
  • entitlement to the same double tax treaty benefits as an AMIT. 
The benefits and obligations of an AMIT are essentially replicated for CCIV sub-fund trusts.
Implications of failure to meet requirements to be an AMIT

Where a CCIV sub-fund trust does not qualify as an AMIT it will be treated as either a:

  • flow through trust (subject to ‘present entitlement’ of investors to trust income), or
  • deemed company (that is, it will be a public trading trust if it carries on or controls a trading business).
In the previous draft tax framework for CCIVs, failure by one sub-fund to qualify as an AMIT would have rendered it a company subject to the corporate rate of tax with no ability to frank distributions paid to investors.   This is a welcome change.
Dealings between sub-funds

As each CCIV sub-fund trust is deemed to be a separate tax entity, transactions between CCIV sub-fund trusts (within the same CCIV) will be recognised for tax purposes as if they are conducted between separate tax entities.

In addition, CCIV sub-fund trusts are able to invest in another CCIV sub-fund trust where they are within the same CCIV (i.e. cross investment).

This provides additional flexibility for CCIV sub-fund trusts and is consistent with other comparable collective investment vehicles offshore.
Discounting of capital gains at CCIV level
Under the previous version of the draft tax framework for CCIVs, a CCIV sub-fund was not entitled to discount capital gains consistent with the treatment for companies.  However, under the character flow through treatment, if the sub-fund received an amount which qualifies as a discount capital gain, the benefit of the discount could be passed on to investors. Discount capital gains is applied at the sub-fund level as per AMITs. If not, character flow through would permit the investor to apply the discount where eligible.
Rollover relief and restructures
Under the previous version of the draft tax framework, restructuring relief was provided to allow AMITs to transfer assets, losses and elections to a CCIV.  These provisions have been removed in the latest draft. Not mentioned in current draft. Rollovers would be expected to assist transitions to CCIVs.
Tax consolidation
A CCIV sub-trust cannot be a member of a tax consolidated group. Consistent with a CCIV being ‘flow through’ for income tax purposes.
A CCIV sub-fund trust is an entity as prescribed in the GST Act. This is to ensure the GST Act operates as intended.
What’s changed from the previous draft?

Some notable points of comparison are summarised in the table below. Key issues of concern from the earlier draft have been addressed while others have no longer been mentioned.

Issue 2019 draft 2021 draft

Catastrophic outcome if AMIT eligibility tests failed?

Yes. Double taxation. CCIV sub-fund taxed as a company and dividends unfrankable.

No. CCIV sub-fund trust can maintain tax ‘flow through’ status (unless a ‘public trading trust’).
Proposal to lower the standard to incur penalties for tax adjustments (unders and overs)? Yes. Threshold lowered to include ‘lack of reasonable care’, as proposed for AMITs. No. A summary of key changes provided by Treasury indicates this proposal shall not proceed.
Rollover relief to switch into CCIV? Acknowledgement that rollovers boost CCIV adoption. Not mentioned.
CGT discount denied at fund level? Yes, in line with proposal removal for MITs/AMITs. Not mentioned.
Application of withholding tax? Prescribed minimum level of investment management in AU to qualify as a “Withholding CCIV”. All sub-funds must pass the test.  AMIT withholding rules apply.  Mechanics to be reviewed further.
Trust loss recoupment rules apply to carried forward capital losses? No. Current year loss position less clear. No. Rules for trusts apply to a CCIV sub-fund trust and no exception noted. 
CCIV a qualified investor for widely held status of fund it invests in? Yes. Not mentioned.
New name? ‘Attribution Investment Vehicle’  ‘CCIV sub-fund trust’
Independent depositary required? Yes. No.

The takeaway

The latest draft tax legislation represents a leap forward for the CCIV regime towards a promised 1 July 2022 start date. Treasury has commendably addressed the changes needed from a tax perspective to bring to market a globally competitive collective investment vehicle. In response, Australian fund managers now have an opportunity to bring to life the policy intent, by expanding the cross border distribution of CCIVs and growing our financial services sector. 

Consultation in relation to the draft legislation, both in relation to some of the tax issues discussed above, and regulatory matters in relation to the corporate structure of the CCIV, is ongoing with submissions due to Treasury by 24 September 2021

Contact us

Grahame Roach

Partner, Financial Services, PwC Australia

Tel: +61 2 8266 7327

Sam Lee

Partner, PwC Australia

Tel: +61 416 019 542

Simon Riordan

Principal, PwC Australia

Tel: +61 (2) 8266 7351

Liam Collins

Partner, Financial Services Leader - Financial Advisory, PwC Australia

Tel: +61 3 8603 3119

Marco Feltrin

Partner, Tax, PwC Australia

Tel: +61 (3) 8603 6796

Stephanie Lam

Partner, Financial Services, PwC Australia

Tel: +61 423 147 529