Budget announcements signal boost for the investment fund industry

The recent Federal Budget included a number of proposed changes that, if legislated following consultation periods, may provide a significant boost for the local investment management industry and facilitate smooth access to the industry for foreign managers.

Review to increase the global competitiveness of the Australian venture capital market 

In the new Digital Economy Strategy, the Federal Government has committed to undertaking a review of the tax incentives granted to the Australian venture capital market to ensure current arrangements are fit-for-purpose and can compete with other such incentives on a global stage.

While details are slim at this stage, the public consultation, which will include Venture Capital Limited Partnership (VCLP), Early Stage Venture Capital Limited Partnership (ESVCLP) and Australian Venture Capital Fund of Fund (AFOF) structures, is expected to commence later this year, and Corrs intends to fully engage in this process. We welcome any proposed update to the outdated VCLP and ESVCLP criteria and thresholds and look forward to the introduction of more competitive tax incentives to ensure the domestic venture capital industry can compete for investors in the global market. The VCLP, ESVCLP and AFOF structures are commonly used for investment into the venture capital and private equity asset class, and the reform should increase acceptance of such vehicles by local and foreign investors and general partners.

Easing of licencing regime for foreign financial service providers

ASIC has also signalled a potential relaxation of the strict requirement for foreign fund managers, foreign investment managers, foreign asset managers, offshore investment vehicles, foreign banks and foreign brokers, who wish to conduct financial services activities in Australia to have a foreign or full Australian financial services (AFS) licence by 31 March 2022 (or rely on the limited ‘funds management relief’ instrument).  This will potentially benefit up to 800 foreign firms, subject to the outcome of the consultation process.

The government will consult to consider reinstating ’sufficient equivalence’ relief for foreign financial services providers that are licensed and regulated in jurisdictions with comparable financial service rules and obligations, and/or continuing the ‘limited connection relief’ past 31 March 2022 for foreign financial services providers that have a limited connection to Australia. This would potentially relieve them from the need for an AFS licence for financial services provided to Australian wholesale clients. They also contemplate ‘fast-tracking’ the application process for foreign financial service providers that fall outside of the categories that are granted relief.

These changes increase the number of foreign financial services providers that would be able to operate in in Australia and market funds to institutional investors and other wholesale clients in Australia.

Corporate collective investment vehicle available from 1 July 2022

The Federal Treasurer has committed to facilitate industry’s use of a ‘corporate collective investment vehicle’ fund structure (CCIV) from 1 July 2022. The traditional investment structure used in Australia involves a unit trust (managed investment trust), which is less familiar to overseas investors that are accustomed to corporate funds with more readily understood limited liability protection for investors.

The new structure will offer investors the benefit of limited liability akin to investing in a regular company. Like a typical registered unit trust, a qualifying corporate collective investment vehicle will enjoy tax transparency, allowing tax to be payable solely at the investor level. CCIVs will also be required to meet similar eligibility criteria as managed investment trusts.

The additional flexibility should assist local fund managers in sourcing additional offshore capital and enhance the ability of managers to compete with foreign firms.

This internationally recognised structure will likely shortly be rolled out and it is hoped that the proposed CCIV will be accepted as a fully transparent vehicle in core foreign investor markets (unlike the opaque status of the US limited liability company in certain jurisdictions.

A future expected change is that a ‘limited partnership’ collective investment vehicle fund structure (LPCIV) (in addition to the existing incorporated limited partnership structure used in the venture capital sector) will also be introduced to provide foreign investors with a familiar limited partnership structure regardless of the asset class. 

Corporate tax residency review for trusts and incorporated limited partnership and changes to TOFA Rules

The review of corporate tax residency has been extended to include the residency of trusts and limited partnerships. This may have important consequences for fund managers. 

Amendments to the taxation of financial arrangements (TOFA) rules will allow the use of hedging rules on a portfolio basis. This should ensure a clearer tax outcome for both foreign and domestic investors in hedged funds.

In the same vein, other amendments to the TOFA rules will ensure that investors in funds, unless elected otherwise, are not subjected to unrealised tax on foreign exchange gains and losses.

While the Budget proposals are yet to undergo consultation periods, the steps set out by the Treasurer are positive in providing a boost for the local investment management industry. It is also expected to increase access to the industry for foreign managers and it will be interesting to see how this evolves.