Important points
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The government has published a bill to amend the proposed corporate collective investment vehicle (CCIV) Regime.
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The CCIV is the government’s first tranche to introduce collective investment schemes that are legal entities but not trusts with legal status.
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A CCIV is a company that is effectively treated as a trust for all tax purposes.
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After various attempts, the government seems to have succeeded in finding a regulation under which collective investment schemes are treated equally for tax purposes regardless of their legal form.
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There are significant changes to the Corporations Act that are also being proposed to make the CCIV regime work.
background
As indicated in the 2021-22 federal budget, the government has approved the proposed corporate collective investment vehicle (CCIV) Regulation with the publication of an exposure draft (ED) the proposed tax rules for a CCIV. This is the third version of the draft law to be published, with previous exposure drafts published in December 2017 and February 2019.
The CCIV is the government’s first tranche in the introduction of collective investment vehicles (CIVs) that are not legal trusts (the current form of CIV used in Australia). This is in line with the view that foreign investors in certain countries are less familiar with trusts.
What is a CCIV
A CCIV is a company registered under the Corporations Act. A draft containing the regulatory framework was published together with the tax ED. While this executive summary only looks at the proposed tax framework for a CCIV, some important regulatory requirements are:
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A CCIV is structured as an umbrella vehicle with at least one sub-fund.
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All assets and liabilities that make up the investment business of a CCIV must be allocated to a sub-fund and kept separate from other sub-funds.
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Each sub-fund does not have its own legal personality (the only legal person is the CCIV itself).
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The CCIV has a corporate director who must be a public company with a corresponding AFSL.
Tax treatment of a CCIV
Treat each sub-fund as a trust
Regardless of whether a CCIV is a company, it is considered a trust for tax purposes. In summary:
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Each CCIV Sub-Fund is treated as a separate mutual fund.
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The shares allotted to a sub-fund are treated as shares in the trust.
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The CCIV is treated as the trustee of each individual trust (ie sub-fund).
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The members of the CCIV are treated as beneficiaries of each relevant trust.
Based on this view, tax law applies to the CCIV on the same basis as it does to a trust (including the international tax treaty law, GST, etc.). That is, instead of the CCIV being taxed as a company, with distributions in the hands of shareholders taxed as dividends, any deemed trust is treated as a flow-through business, with taxes paid at the investor level (as if they were beneficiaries) . a trust).
Qualification as AMIT
As each sub-fund is treated as a separate trust for tax purposes, tax law is applied separately to each sub-fund. This means that it must be determined whether a sub-fund qualifies as an AMIT for tax purposes. The requirements for qualifying as an AMIT are basically the same as for a real trust. However, since a CCIV is legally a company, a sub-fund can never meet any of the AMIT requirements as it must be a managed mutual fund. Instead, the MIS definition has effectively been replaced with a requirement that a sub-fund must be used for collective investments by pooling members’ contributions in return for the return on those investments.
If a sub-fund meets the requirements for the allocation of managed investment funds (AMIT), it is automatically treated as AMIT for tax purposes. Unlike trusts, the CCIV has no choice. If a Sub-Fund qualifies as AMIT, it will apply AMIT tax treatment, including:
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Attribution – The CCIV allocates amounts of taxable income, tax-exempt income, non-taxable non-tax-exempt income and tax offsets to the investors of each sub-fund on a fair and equitable basis. Members are taxed as if they had derived the attributed amounts directly.
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Bottoms and tops – There is an under and overrun rule that enables each sub-fund to carry forward differences that have been identified in the amounts attributed and attributable.
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Firm trust – Each sub-fund is viewed as a permanent trust.
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MIT retention – MIT’s reduced withholding tax system also applies to CCIVs.
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Adjustments to the cost base – Investors increase the cost base of their shares in the CCIV for amounts that are attributed but not distributed (and lower their cost base if the amount distributed exceeds the amount allotted).
A very welcome change is that, unlike previous versions of the ED, it does not propose changes to the way the current AMIT rules work. In previous drafts, for example, it was proposed to lower the threshold above which penalties can be imposed for under and overrun. This is not suggested in the current ED.
Also note that there are discounted rules that allow the CCIV to continue to be treated as an AMIT if the failure to meet these requirements is due to temporary circumstances beyond the control of the CCIV. This treatment corresponds to the concession currently in place for AMITs.
Treatment that does not meet AMIT conditions
If a sub-fund does not qualify as an AMIT, it will be treated as a non-AMIT trust. This is a major change from previous versions of the proposed CCIV scheme. It was originally proposed that a sub-fund that does not meet the AMIT eligibility requirements in a particular year should be taxed as a company with no postage paid dividends. This made the CCIV regime unattractive. The current proposal to treat a CCIV as a trust for tax purposes is a very welcome change and puts the CCIV on a par with a trust CIV.
diploma
The ED is a huge improvement over previous versions of the proposed CCIV scheme. The rules are much simpler and more focused on aligning the tax treatment of CIVs regardless of their legal form.
The government has also listened to industry suggestions. The decision to treat a CCIV as a trust for tax purposes, whether or not it qualifies as an AMIT, is a major improvement and removes one of the main obstacles to the previously proposed rules. Likewise, the decision not to tinker with the existing AMIT rules, especially with regard to falling below and exceeding them, is a welcome improvement.
The exposure draft can be submitted until September 24, 2021.