Australian Taxation Office issues guidance on new corporate collective investment vehicle regime
Jock McCormack of DLA Piper Australia provides an update after the issuance of a draft ruling on the operation of a new investment vehicle that is governed by trust taxation rules
On November 1 2023, the Australian Taxation Office (ATO) issued its first formal guidance on the new Australian corporate collective investment vehicle (CCIV) regime by way of Draft Law Companion Ruling 2023/D1.
The draft ruling outlines the operation of the CCIV regime, particularly the deeming principle and its effect on the tax treatment of the key stakeholders/participants, including the CCIV, a CCIV sub-fund trust, and the investors.
The Corporate Collective Investment Vehicle Framework and Other Measures Bill 2022 established the CCIV regime from 1 July 2022, which is now set out in Subdivision 195-C of the Income Tax Assessment Act 1997.
The CCIV regime explained
Briefly, under the new CCIV regime, an eligible CCIV is a company limited by shares but which (including sub-funds) is deemed as having a trust relationship and governed by the broader trust (including Division 6 of the Income Tax Assessment Act 1936) taxation rules (the deeming principle). The purpose of the regime is to provide eligible CCIVs with the same tax treatment as attribution managed investment trusts.
The deeming principle deems a trust relationship to exist between the CCIV, the business, assets and liabilities referrable to a particular sub-fund, and the relevant class of members. The principle operates for the purposes of all taxation rules (unless expressly excluded). Importantly, the relevant members of the CCIV are treated as beneficiaries of the relevant CCIV sub-fund trust. Furthermore, the flow-through tax treatment ensures that amounts derived and attributed to members/beneficiaries retain the character they had in the hands of the trustee of the relevant CCIV sub-fund trust.
The adoption of trust principles should be noted throughout the new CCIV regime, including for double tax treaty purposes.
The objective is to leverage the existing trust taxation framework and existing flow-through regime.
The CCIV is a company vehicle limited by shares; however, it is effectively treated as a trust where eligible for taxation purposes, and it is intended to be a viable alternative investment vehicle to the existing trust-based managed investment schemes (MITs).
Members of each CCIV sub-fund trust are generally taken to have a vested and indefeasible interest in a share of the income and capital of the trust (akin to present entitlement).
A distinction is made between retail and wholesale CCIVs for purposes of determining the income of the trust estate.
This regime links into withholding tax concessions for MITs, withholding MITs, and related vehicles.
A CCIV sub-fund does not have a separate legal personality.
The tax policy objective is to ensure that members/beneficiaries secure flow-through status of income entitlements, including by way of deeming the trust relationship.
The deeming rule provides a concessional mechanism for determining when a beneficiary is taken to be “presently entitled” to a share of the trust income for an income year.
Although not dealt with in the draft ruling, Australian double tax treaties are, in principle, prioritised where any inconsistency arises with the domestic Australian tax rules. However, the CCIV provisions clarify that the deeming principle has priority in these circumstances, giving rise to the current double tax treaty protection and recognition issues. Accordingly, these treaty recognition issues will need to be addressed on a treaty-by-treaty (and/or case-by-case) basis, including by reference to case law, OECD guidance, and the overlay of the Multilateral Instrument.
The ATO draft ruling discusses important limits on the deeming principle related to capital returns and the resettlement concept, and provides guidance on goods and services tax, and related issues.
It is important to note that the CCIV regime is integral to the Asia Region Funds Passport, which is a multilateral framework to facilitate the cross-border marketing of managed funds across participating jurisdictions in the region, including Australia, New Zealand, Japan, South Korea, and Thailand.
Next steps for the draft ruling
The ATO has invited comments on the draft ruling on or before December 15 2023 and it is expected that the ruling will be finalised shortly thereafter.