9 January 2018
On 20 December last year the government released the second component of the legislation to create a transparent tax regime for corporate collective investment vehicles, to mirror the existing regime for passive income derived through unit trusts. The December Exposure Draft (ED) provides the tax component of the regime, developing an earlier Exposure Draft which had set out the regulatory framework.
The impetus for this measure was the 2009 report Australia as a Financial Centre - Building on our Strengths issued by the Australian Financial Centre Forum (the Report) which argued, "the lack of widespread use or recognition of unit trusts in the region contributes to Australian based funds management companies typically using collective investment vehicles that are established and administered offshore ..." and noted "uncertainty [about] the extent to which funds structured as unit trusts can benefit under some of Australia’s double tax treaties." Since "corporate [and] limited partnership structures ... are more familiar legal structures for many foreign investors" the solution in the Report was to recommend a flow-through tax regime for certain kinds of companies.
In general terms, the legislation is meant to work in the following steps:
- the existing tax rules which currently apply to Attribution Managed Investment Trusts (AMIT) will be expanded to include Attribution Corporate Collective Investment Vehicles (ACCIV). AMITs and ACCIVs will collectively be referred to as Attribution Investment Vehicles (AIV). Note that this will result in some minor compliance changes for AMITs (e.g. an AMMA Statement will become an AIVMA Statement);
- companies which are ACCIVs will not be liable to corporate tax;
- investors in the ACCIV will be liable to pay tax on amounts attributed to them (and not on dividends received from the company);
- foreign investors in an ACCIV will be liable to withholding tax on amounts attributed and distributed to them in the same way as investors in an AMIT;
- amounts attributed to investors will retain the character and source they had in the hands of the company;
- the rules for calculating the amounts to be attributed to investors in an ACCIV will mirror the current regime for investors in AMITs - there will be a potential penalty where the company earns non-arm's-length income; an ACCIV is prohibited from engaging in trading activities; an ACCIV can elect CGT-only treatment for gains and losses on many types of assets; the unders-and-overs regime will extend to ACCIVs (note that penalties for unders and overs will be amended so as to apply for failure to take reasonable care); cost base adjustments will be made to shares held by investors for amounts attributed but not distributed and for distributions in excess of tax law income; CGT discount can pass through an ACCIV; and so on;
- the rules will only afford this special treatment to (investors in) companies which meet new regulatory requirements in the Corporations Act and additional tax requirements; such as being a tax resident, meeting financial services licensing requirements, being widely-held (defined differently for companies with retail and wholesale investors) and not being closely held.
Clearly, the government hopes that this regime will be attractive to a foreign audience. New funds may be established in corporate form rather than as trusts, and a new CGT rollover has been provided to allow existing AMITs to change to ACCIVs without incurring a tax cost. The argument is, the funds management industry will now be largely indifferent between using a trust and company, at least so far as tax is concerned.
But there must be some doubt whether the ACCIV is going to prove attractive in 2018. First, there is a potential downside to conducting investment activities through an ACCIV which does not exist for trusts. Where a company fails for some reason to meet the ACCIV requirements in a year, it becomes a taxpayer again and so will have to pay corporate tax on its taxable income for that year. However, the company does not re-enter the imputation system and so distributions (including distributions of franked dividends the company received) that it pays to investors will be unfranked, even though the company has already paid tax on that income. On the other hand, a trust which fails to meet the AMIT requirements in a year may still retain its flow through status. Even where the trust does lose its flow through status (and is effectively taxed as a company), the trust enters the imputation system so that distributions can be franked. This difference is a deliberate policy choice "intended to be a disincentive for funds registering as a CCIV, without ever having the intention of electing into the ACCIV tax regime" but it will affect both ACCIVs which encounter an unexpected problem as well as companies which were spurious from the start (assuming this was ever a realistic likelihood).
Secondly, our experience leads us to be a little sceptical that foreign investors still find the 'trust' label off-putting, even if they did in 2009.
The ED is open for comment until 2 February, 2018.
Director, Head of Real Estate
Professor Graeme Cooper