Random thoughts on CCIVs

It’s early days.

Not many people have heard about CCIVs.

And if they have, it seems something that is not really relative to what they are doing now. Especially incumbents that support the funds’ management business.

The Corporate Collective Investment Vehicle is a new framework for the regulation of financial services provided by the CCIV and its corporate director, and it encompasses many licensing and disclosure requirements.

Australia needed the CCIV to lift overseas investors’ share of our domestic fund’s management business. At the present level of 4 to 5%, it was of minimal size compared to Singapore’s at 80%.

The letters CCIV represent the following:

C = Corporate — This means the entity is an ASIC-regulated entity like a company or a corporation. A company is a business structure formed specifically to perform activities, such as running an enterprise or holding assets.

C = Collective — This means that investors are gathered or collected to invest in collective assets owned by the fund, usually called a portfolio. Typically they are managed by a fund manager.

I = Investment — Means the activity that everyone is assembled for is an investment.

V = Vehicle — Is the entity that is used to manage the investment and effectively house the investors and the assets they have invested in. Effectively it is an easier way to get your own Investment Company!

Looking at some of the benefits so you can gain a good picture as to why it came into existence.

Foreign Investment

  • Most countries work hard to be attractive and easily acceptable to foreign investment. Australia was in a position where it only managed to attract around 4% of the funds in the fund’s management industry from overseas. This compares to around 80% in Singapore. Singapore further enhanced its attractiveness to foreign investment a couple of years ago by introducing its own CCIV-type structure. In the space of two short years, nearly 400 of these umbrella-type funds are now in operation. A large percentage are in the family office area.
  • The CCIV has been purpose-built to improve Australia’s position as an investment destination.
  • The key driver behind introducing the CCIV was to stimulate foreign investment in the Australian funds’ management industry. 
  • Global familiarity. Currently, Australia’s fund management sector is one of the largest and most sophisticated globally, but it is largely domestically focused. 
  • The trust fund structure has been unpopular and unfamiliar to overseas investment resulting in minimal overseas investment in Australian opportunities. 

Structure

  • CCIVs will have the legal form of a company limited by shares with most of the powers, rights, duties and characteristics. As a type of company, a CCIV has the legal capacity and powers of an individual and a body corporate.
  • A CCIV’s investors own shares in the company rather than units as in a unit trust. The shareholders have the right to sell their shares in the manner that the CCIV provides.
  • CCIVs allow appointed investment managers to build bespoke global portfolios. These fund structures will enable a legacy to be created that can be passed down through generations.
  • 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.

Taxation

  • Unlike an ordinary company, the CCIV is eligible for 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.
  • A security in a CCIV can be quoted on a financial market or settled using a financial market infrastructure (subject to that market’s rules).
  • This means that Foreign CCIV investors are taxed on their proportionate share of the sub-fund’s taxable income. 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.
  • This umbrella company structure supports the creation of ‘single responsible entity’ sub-funds. Each sub-fund has segregated assets and liabilities and is treated as a separate entity for tax purposes. The CCIV can pass on franking credits, discounted capital gains and foreign income tax offsets to investors.
  • 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.

Regulatory Licensing

  • AFSL license is not required for your existing company, but regulatory coverage is achieved by having a Corporate Director as the sole director on the CCIV. The corporate director’s AFSL covers financial services provided by the CCIV, and accordingly, the CCIV is exempt from the requirement to hold an AFSL itself.

CCIV Digitisation and Tokenisation Potential

  • Since the beginning of tokenisation, there has been a conflict with the regulators worldwide. Disregarding the argument “if something is a security token or not”, we still need legally accepted corporate structures to affordably house and legitimise the offerings. This has been difficult with security tokens because the cost and lack of operational ease for existing trust-based structures was a handicap to acceptable regulatory raises.
  • Now, the fractionalisation of land, buildings and other assets is much easier under the CCIV structure, including the issue of Tokens and NFTs, as it is very accommodating, affordable and future-paced. The issue with attempts to tokenise assets was that there was no underlying regulated structure supporting the tokenisation easily and compliantly.
  • Whether a fractionalised asset portion is a share, unit, token, NFT or coin is of less consequence when it is backed by a regulated investment offering.
  • Crowdfunding held a lot of promise in the early days, but as country, after country forced inefficient and expensive licensing regimes upon people that only wanted to raise, say $100,000 to $300,000 for their start-up, we saw crowdfunding platforms become more like mini-IPO services for raised of $1 million and upwards.
  • The reduced cost structure of CCIVs and the use of a Corporate Director instead of a regulated platform for the operational fundraising entity that costs between $50,000 and $100,000 a month means we may finally be getting a framework that can truly work for ventures that only need a couple of hundred thousand dollars.
  • This type of raise can be handled by a sub-fund in a CCIV.

Sub-funds

  • Each sub-fund is segregated.
  • Each sub-fund is not a separate legal entity, but the assets of each sub-fund are strictly segregated from all other parts of the CCIV’s business and can only be applied for specific purposes (e.g., meeting liabilities of that particular sub-fund). This protects investors in a specific sub-fund of a CCIV by quarantining the business of that sub-fund from the business of all the other sub-funds of the CCIV. 
  • This is achieved by the assets and liabilities of each sub-fund which are strictly segregated from the assets and liabilities of the other sub-funds of the CCIV, including in an external administration context.
  • The sub-fund structure enables a single CCIV to offer multiple products and investment strategies, including facilitating appropriate cross-investments between sub-funds within a CCIV, enabling a CCIV to utilise funds management strategies such as hedge or master-feeder structures. 

Retail and Wholesale Investors

  • Retail investors are the reason many regulations exist. They need to be protected. CCIVs that are Retail only are subject to a regulatory framework that encompasses additional regulatory protections deemed necessary for retail investors.
  • There is a much lighter-touch regulatory approach to CCIVs dealing with wholesale investors only.
  • Notification must be given to ASIC as to whether a CCIV is retail or wholesale. A CCIV that is not a retail CCIV is a wholesale CCIV.
  • Just one of the following three tests will be necessary to satisfy the regulator if the CCIV is retail: 
    • if at least one member of the CCIV is a ‘protected retail client’. A person is a “protected retail client” if as a retail client, they acquire securities in the CCIV, unless the person is ‘associated’ with the CCIV, or where the person acquires the security under the small-scale offering personal offer exemption;
    • at least one person is a ‘protected client under a custodial arrangement; 
    • or at least one member is a ‘protected member of a passport fund’

So there you have some random thoughts on CCIVs.

I have borrowed some of the text from other articles I have written on Medium, CCIV.INFO, Raiseworth.com and on LinkedIn: CCIV The new Australian Investment Vehicle …. https://www.linkedin.com/posts/paulniederer_cciv-the-new-australian-investment-vehicle-activity-6954675496500572160-nDXF

If you want to know more, please visit https://raiseworth.com/