The CCIV and Tax. Australia has a new corporate entity from the 1st of July that is more attractive to overseas investors and that foreign investors are more familiar with.
Each CCIV will be an Australian registered company, limited by shares that meets the regulatory requirements of the Corporations Act 2001.
While not everything is bolted down from a taxation point of view, especially with transitional pathways for existing entities, duty and land tax treatment, tax rollovers or concessions for existing structures, tax losses and trust profits, there are some things we can detail here.
The main reason the government pushed for the finalisation Corporate Collective Investment Vehicle (CCIV) regime was for the encouragement of foreign investment and to enhance the competitiveness of Australia’s funds management sector
CCIVs aim to be legal structures that are more recognisable to foreign investors than the typical trust-based managed investment scheme that operates in Australia.
The CCIV regime is designed to boost overseas investment in Australia and provide economies of scale for both foreign and domestic investors, which will result in lower investment costs.
A CCIV is an investment vehicle that has a public company structure and is limited by shares.
It operates like an umbrella fund with sub-funds underneath it holding various asset types.
A CCIV must have a corporate director, which is an Australian public company that holds the relevant Australian Financial Services Licence (AFSL).
This results in a company structure supporting ‘single responsible entity’ sub-funds.
Each sub-fund has assets and liabilities segregated, and for tax purposes, is treated as a separate entity.
A sub-fund can pass on franking credits, discounted capital gains and foreign income tax offsets to investors.
1) Alignment with existing AMIT tax regime
One of the prime objectives of the tax treatment of the CCIV was to align it to the existing AMIT tax regime. AMIT stands for Attribution Managed Investment Trusts. This means that where a sub-fund is deemed to be an MIT and Withholding MIT income distributions to foreign beneficiaries may be subject to the concessional 15% withholding tax rate.
In addition, if a sub-fund is deemed to be an MIT, the sub-fund could elect to treat the shares, units, land or property sitting in the sub-fund as assets as being assets subject to CGT or capital gains tax.
2) A Sub-fund is deemed to be a unit-trust
Under each CCIV, sub-funds are segregated investment entities. These sub-funds, with their segregated assets and liabilities, are treated like existing unit trusts. The members or investors in the CCIV or the relevant sub-fund are treated as the beneficiaries of the CCIV sub-fund trust. This makes the CCIV appear to be the trustee of the sub-fund.
To summarise, then, for the purposes of tax law, a trust relationship is deemed to exist between a CCIV, the related business, the assets and liabilities referable to a particular sub-fund, and the members of the CCIV, unless this relationship is expressly excluded.
3) A CCIV is not required to be an MIS or managed investment scheme.
While a sub-fund has to be used to aggregate investment through pooling contributions from members, the CCIV satisfies regulatory requirements, and the “widely held test” has removed the MIS requirement.
4) “Flow through” Tax treatment
From an Australian income tax perspective, CCIVs will generally achieve flow-through treatment. What this means is that the investors will be taxed in a manner similar to the situation where they invested directly in the underlying assets.
This means that the CCIV investors are taxed on their proportionate share of the sub-fund’s taxable income. Thus amounts attributed for distribution to members will not be treated as dividends paid by the CCIV, and they will retain their original character and source, and they will be taxed in that manner. This is despite the fact that the CCIV is a corporate legal entity that is able to pay a dividend.
As well as transacting with each other, they can also invest in each other. Many off-shore collective investment entities and vehicles also work this way.
5) Sub-fund dealing
While sub-funds are not separate legal entities, they can get an ABN number and register for GST. That means they are thus deemed as separate tax entities. They are permitted to transact and deal with each other as if the transactions were being made between any other tax entities. While they cannot be part of a consolidated tax group, the capital gains benefits can be passed on.
6) Foreign Investor-Friendly
For the Australian Government, one of the main driving forces behind the CCIV legislation was the goal of having an Australian investment entity that was more attractive to foreign investors than the existing Australian structures.
Up until the establishment of the CCIV regime, Australian investment entities were predominantly based on trust-based regimes. Most jurisdictions worldwide do not operate or widely use trust regimes, so foreign investors were cautious as they were not used to investing this way.
For this reason, in the past, foreign investors have often decided not to invest via a trust-based regime.
As a result, investors from most jurisdictions faced major challenges in investing in Australia because they did not understand the Australian investment vehicles.
7) Items being discussed
In this article from the Financial Services Council (FSC) they address some of the issues that are outstanding in terms of tax. 1) To be or not to be a trust. 2) Tax Treaty issues 3) To flow or not to flow.
To learn more, request details about our CCIV Creation Package midway down this page.