- What is a corporate collective investment vehicle?
- The deeming principle
- CCIV Sub Fund Trusts as Separate Entities
- Beneficiary’s present entitlement in CCIV sub fund trusts
- How to determine a beneficiary’s share in a CCIV sub fund trust
- How to determine income for a CCIV sub fund trust
- Taxation of cciv sub fund trusts and amit eligibility
- GST Liability Under the CCIV Tax Framework
- CCIV Registration on Australian Business Register
What is a corporate collective investment vehicle?
A Corporate Collective Investment Vehicle (CCIV) is a newly introduced type of company structure in Australia that serves as a vehicle for collective investments. It was established under the Corporate Collective Investment Vehicle Framework and Other Measures Act 2022, and its regulatory framework came into effect on July 1, 2022.
CCIV is specifically designed for funds management. It differs from traditional managed investment schemes, which are often structured as unit trusts. The key feature of a CCIV is that it is registered and regulated by the Australian Securities & Investments Commission (ASIC), providing a formal and structured framework for collective investments.
A CCIV operates as an umbrella investment vehicle, meaning it can include one or more sub funds within it. Each of these sub funds has its own set of assets and liabilities, which are separate and distinct from those of other sub funds within the same CCIV. Importantly, all these sub funds are managed under the governance of a single corporate director.
The CCIV regulatory framework aims to allow members to receive income from a CCIV through a concept called attribution and flow through using the Attribution Managed Investment Trust (AMIT) regime.
To make this work, Subdivision 195 C introduces a deeming principle, essentially creating a legal fiction. This fictional idea treats the CCIV and its members as if they have a trust relationship for tax purposes, as required by taxation laws.
The deeming principle
The deeming principle essentially creates a legal relationship between three key entities: a CCIV, the assets and activities of its sub funds (investment groups within the CCIV), and a specific class of members who invest in these sub funds.
This deeming principle applies to all taxation laws, with one crucial exception: when it is explicitly excluded.
In simpler terms, this means that the deeming principle takes precedence over regular tax laws when determining how CCIVs and their members are treated for tax purposes. It’s like a special rule that comes first in taxation matters.
The dealings of a CCIV with other entities, often referred to as third parties, is influenced by this deeming principle.
These third parties may need to acknowledge the trust relationship established by the deeming principle under tax laws when it is necessary to do so.
Internal CCIV Dealings
Within a CCIV, there may be internal transactions or dealings. However, these internal dealings are typically not considered for tax purposes unless they are explicitly allowed within the CCIV’s regulatory framework.
The deeming principle only steps in to acknowledge these internal dealings for tax purposes when the CCIV’s rules permit them. An example could be cross investment, where specific tax provisions within the CCIV’s framework might apply.
External CCIV Dealings
On the other hand, when CCIVs interact with one another as separate entities, these dealings are treated as regular legal transactions. This means that if one CCIV sub fund trust engages in transactions with a sub fund trust from another CCIV, these dealings are recognised and treated as taxable events.
This recognition aligns with the legal framework that views each CCIV as a distinct entity.
Exclusion from the Foreign Acquisitions and Takeovers Act 1975
The deeming principle has an important exception. It does not apply to the Foreign Acquisitions and Takeovers Act 1975, including any legislative instruments created under that Act.
This exception is significant because it acknowledges that the Foreign Acquisitions and Takeovers Act 1975 operates under a unique dual administrative model. This model treats the CCIV as a company and its members as shareholders, distinct from the trust based treatment applied under the deeming principle.
In a nutshell we can say that:
- The assets, liabilities, and business linked to a sub fund are treated as if they belong to a separate unit trust, known as a CCIV sub fund trust.
- The CCIV itself is treated as the trustee of this CCIV sub fund trust.
- The members within the CCIV are regarded as beneficiaries of this CCIV sub fund trust.
This approach ensures that the CCIV tax regime provides similar tax outcomes for CCIV members as those enjoyed by members AMITs.
Additionally, it supports the strict separation of assets and liabilities related to each sub fund.
CCIV sub fund trusts as separate entities
As per laws, each sub fund within a CCIV as an individual entity for tax purposes. This means that, for all matters related to tax law (unless explicitly stated otherwise), each sub fund is considered a separate unit trust and is called a CCIV sub fund trust.
What Constitutes a Trust Entity
For tax purposes, a trust is seen as a distinct entity separate from the CCIV. This separation means that all relevant income tax laws and tax attributes apply to each CCIV sub fund trust.
In practical terms, this requires each CCIV sub fund trust to have its own unique Australian Business Number (ABN) and Tax File Number (TFN).
Separation of Assets and Liabilities
The deeming principle also supports the strict separation of assets and liabilities related to each sub fund, as defined within the CCIV regulatory framework.
This separation is crucial for tax purposes. It ensures that the assets, liabilities, and business activities connected to a specific sub fund are isolated within the entity.
To put it simply, it’s like having a distinct financial container for each sub fund. These assets, liabilities, and business activities collectively form a trust estate, held in trust for the benefit of the relevant beneficiaries of the CCIV sub fund trust.
CCIV as Trustee
The deeming principle designates the CCIV as the trustee of the CCIV sub fund trust for all taxation purposes, unless explicitly stated otherwise.
This trustee role is assumed because, under the CCIV regulatory framework, the CCIV has legal ownership of the assets, obligations for the liabilities, and conducts the business activities linked to each of its sub funds.
As a deemed trustee, the CCIV manages the property associated with a sub fund in trust for the class of members who have an interest in that specific sub fund.
Multiple Sub Funds and Trustee Responsibilities
If a CCIV has multiple sub funds, the CCIV is treated as the trustee of each individual CCIV sub fund trust. In essence, this means that the CCIV takes on the role of a different tax entity when acting as the trustee for each trust.
It has distinct responsibilities and obligations under taxation law for each CCIV sub fund trust.
Beneficiary’s present entitlement in CCIV sub fund trusts
In the context of a CCIV sub fund trust, a beneficiary is considered presently entitled if they have a right to receive a share of the trust’s income.
This entitlement is determined based on whether the beneficiary can expect to receive income through dividends declared during the income year or within three months after the end of the income year.
Ensuring Present Entitlement
If the CCIV trustee distributes income by declaring dividends from the sub fund’s profits, beneficiaries are regarded as presently entitled to a portion of the sub fund’s income for that year.
It’s important to note that dividends related to past profits or capital do not affect present entitlement determination.
Dividends Declared as Payable
To meet the requirement, dividends must be declared as payable to the beneficiary, even if they aren’t immediately paid in cash.
If any amount is handled on behalf of the beneficiary or according to their instructions, it’s still considered declared as payable.
CCIV trustees are obligated to provide written notices to investor beneficiaries within three months after the end of the income year.
These notices inform beneficiaries whether they are presently entitled to a share of the sub fund’s income, how much, and also detail the dividends and their relation to the sub fund’s accounting profit.
Failing to comply with these requirements could result in legal consequences, constituting an offence.
CCIV trustees have a three month window after the end of the income year to declare dividends, allowing for administrative flexibility.
How to determine a beneficiary’s share in a CCIV sub fund trust
Section 195 120 provides a method for figuring out how much of the income and capital in a CCIV sub fund trust belongs to a beneficiary. This calculation is based on a percentage obtained from a specific formula.
This formula takes into account various legal aspects connected to the beneficiary’s ownership of shares in the CCIV that are associated with that particular sub fund. It also considers different types of shares, like regular or preferred shares, each of which may have different rights.
Calculating a Beneficiary's Share of Income
For income entitlement, we use this formula:
(Beneficiary Dividends / Total Dividends) x 100
- Beneficiary Dividends: This is the total amount of dividends that the beneficiary has the right to receive because of the shares they own, which are linked to the CCIV sub fund.
- Total Dividends: This is the sum of all dividends paid on all shares that are currently in circulation and tied to the CCIV sub fund.
Calculating a Beneficiary's Share of Capital Distribution
When it comes to capital distribution, we use this formula:
(Beneficiary Capital Distribution / Total Capital Distribution) x 100
- Beneficiary Capital Distribution: This represents the amount of capital distribution that the beneficiary is entitled to receive based on the shares they hold, specifically associated with the CCIV sub fund.
- Total Capital Distribution: This covers the total amount of capital distribution paid on all shares currently in circulation and related to the CCIV sub fund.
These calculations ensure that beneficiaries in a CCIV sub fund trust get their fair share of both income and capital based on their share ownership. The type of shares they have and the total distributions made within that sub fund are taken into account.
How to determine income for a CCIV sub fund trust
Determining income for a CCIV sub fund trust is important for tax purposes and ensures that the rules are applied consistently, regardless of whether the CCIV is classified as a retail or non retail (wholesale) CCIV.
The classification may change during the financial or income year.
For a Retail CCIV Sub Fund
For a sub fund within a retail CCIV, the income of the trust for an income year is simply the accounting profits for that specific income year. These accounting profits are taken from the financial report of the relevant CCIV sub fund, which must be prepared in accordance with accounting standards applicable for that income year.
For a Wholesale CCIV Sub Fund
Similarly, for a sub fund within a wholesale CCIV, the income of the trust for an income year is also based on the sub fund’s accounting profits for that income year.
However, these profits are calculated as if the wholesale CCIV had been classified as a retail CCIV at the end of the year. In other words, it considers how the financial reports for that sub fund would have been prepared if the CCIV were treated as a retail CCIV.
Sub Fund in an Accounting Loss Position
If a sub fund is in a position where it has incurred accounting losses (i.e., it has negative profits), then the income of the trust for tax purposes is considered zero. In simpler terms, if the sub fund is operating at a loss according to its financial reports, there is no taxable income to report for that period.
Taxation of CCIV sub fund trusts and AMIT eligibility
CCIV sub fund trusts are not excluded from the tax system; they are subject to taxation laws like any other entities.
The way CCIV sub fund trusts are taxed depends on whether they meet specific criteria:
- AMIT Taxation: If a CCIV sub fund trust meets the modified AMIT eligibility criteria, it is treated as an AMIT for tax purposes. This means it follows the attribution flow through tax regime, allowing members to receive income directly.
- General Trust Provisions: If a CCIV sub fund trust does not meet the AMIT eligibility criteria, it is taxed according to the general trust provisions found in the tax law. This could result in different tax treatment compared to AMITs.
It’s essential to understand that the tax treatment of CCIV sub fund trusts under the CCIV tax regime may not necessarily mirror the tax outcomes of trusts governed by the AMIT rules or general trust provisions.
Various factors, including the CCIV’s qualification as an AMIT, can lead to differences in tax treatment.
AMIT Eligibility Criteria
- MIT Status: The trust must qualify as a MIT under Division 275. This involves meeting conditions like being an Australian resident during the income year, not engaging in a trading business, and complying with certain ownership requirements.
- Clearly Defined Rights: The trust must have clearly defined rights regarding income and capital distribution.
- Irrevocable Choice: The trustee must make an irrevocable choice to be treated as an AMIT for a particular income year.
Modification for Clearly Defined Rights
One of the criteria for AMIT eligibility is having clearly defined rights to income and capital. However, for CCIV sub fund trusts, this requirement is modified. This modification stems from the fact that CCIVs inherently have clearly defined rights due to their registration under the Corporations Act 2001. Therefore, when determining if a CCIV sub fund trust qualifies as an AMIT, you can disregard the typical requirement related to clearly defined rights.
Automatic AMIT Treatment
A significant difference between CCIV sub fund trusts and traditional MITs lies in the process of being recognised as AMITs. In the case of standard MITs, the trustee has the option to make an irrevocable choice to be treated as an AMIT for a specific income year.
However, CCIV sub fund trusts are treated differently. If they meet the other eligibility conditions (as modified), they are automatically considered as AMITs for tax purposes. In simple terms, CCIV sub fund trusts do not need to go through the process of making an irrevocable choice; they are automatically granted AMIT status.
This modification is intended to simplify the application of tax laws for CCIV sub fund trusts and streamline their tax treatment.
Consequences of Not Being an AMIT
In cases where a CCIV sub fund trust falls short of meeting the AMIT requirements, there are specific tax consequences to consider:
- Temporary Circumstances: If the trust’s failure to meet AMIT requirements is due to temporary and uncontrollable circumstances, it still has the opportunity to be treated as an AMIT for that particular income year.
- Engaging in a Trading Business: If the CCIV sub fund trust is involved in carrying on or controlling a trading business, either directly or indirectly, during the income year, it will be subject to taxation as a trading trust.
- No Trading Business Involvement: In situations where the trust is not engaged in a trading business during the income year, it will be taxed as a regular trust under the general trust provisions as per laws.
It’s important to note that the application of the general trust tax framework to CCIV sub fund trusts aligns with the established practises for AMITs.
This emphasises that the corporate tax system does not apply to CCIVs in their legal structure or to the individual sub funds within CCIVs.
The specific tax treatment depends on whether CCIV sub fund trusts meet the precise eligibility criteria for AMIT status.
GST liability under the CCIV tax framework
The CCIV tax framework extends its implications to Goods and Services Tax (GST) matters, establishing a deemed trust relationship for GST purposes.
Supplies by Corporate Director: The corporate director must assess the nature of its supplies and acquisitions. When it supplies goods or services in its own capacity (as a public company), it incurs GST liability.
However, when it makes acquisitions from third parties in its role as a corporate director, the acquisition is attributed to the CCIV sub fund trusts, relieving the corporate director from GST liability.
Issue of Shares in a CCIV: When a CCIV issues shares associated with a sub fund, this issuance is treated as the supply of units by the CCIV sub fund trust for tax purposes. If the CCIV sub fund trust is registered or required to be registered for GST, this supply is categorised as an input taxed financial supply.
In certain cases, it may be GST free when provided to a non resident for use outside the indirect tax zone.
Other Supplies by a CCIV Sub Fund Trust: CCIV sub fund trusts may engage in other supplies, such as selling assets like real property. GST liability for these supplies follows the general GST rules, treating each CCIV sub fund trust as a separate entity.
Acquisitions and Input Tax Credits
In the context of GST, CCIV sub fund trusts can make acquisitions of goods and services from:
- The corporate director, when acting in its own capacity.
- Other entities, via the corporate director acting in its capacity as a corporate director of the CCIV for each CCIV sub fund trust.
Depending on the nature of these acquisitions, CCIV sub fund trusts may be entitled to input tax credits or reduced input tax credits. However, if the corporate director makes acquisitions for a CCIV sub fund trust, it won’t be eligible for input tax credits.
Tax Invoices for CCIV Sub Fund Trusts
Tax invoices issued to CCIV sub fund trusts must contain sufficient information to identify the recipient’s identity or ABN if the total price exceeds $1,000. This means that:
- For acquisitions made by a single CCIV sub fund trust, the tax invoice should specify the identity or ABN of that specific trust before attributing the input tax credit.
- For acquisitions made by multiple CCIV sub fund trusts, the tax invoice should identify the identity or ABN of each individual trust.
CCIV registration on australian business register
If a CCIV sub fund trust has obtained an ABN, the Australian Business Registrar must create a record in the ABR. This record indicates that the trust is considered to exist for tax purposes.
It also includes essential details such as the sub fund’s Australian Registered Fund Number (ARFN) as defined in the Corporations Act 2001.
Accuracy Requirement: Under section 195 140(2), the Australian Business Registrar is obligated to take reasonable measures to ensure that the information entered into the Register is accurate.
Advantages of CCIVs
CCIVs draw from characteristics found in similar investment vehicle regimes worldwide. This international alignment makes CCIVs more attractive to global investors who may not be familiar with Australia’s conventional unit trust structure. This increased recognition enhances competitiveness on the global stage.
Although CCIV sub funds are not considered separate legal entities, they benefit from strict segregation of assets and liabilities. Each sub fund’s assets are legally ring fenced for its specific purposes, providing clarity and safeguarding against cross contamination.
Flow Through Taxation
One of the standout advantages of CCIVs is their flow through taxation structure. Income earned by CCIV sub funds retains its character when distributed to investors. This means investors are taxed as if they directly hold the trust’s underlying assets. However, this is subject to standard tax rules.
CCIVs ensure that investors have clear and vested interests in sub fund income and capital. This clarity is valuable for utilising trust losses and navigating franking credit provisions.
Concessional Withholding Rates
CCIVs that qualify as Managed Investment Trusts (MITs) may offer reduced withholding tax rates of 15% on certain types of income distributions to investors residing in countries with Exchange of Information Agreements with Australia.
Capital Account Election
MIT qualified CCIV sub funds can make an election to treat certain assets as held on capital account. This choice can result in more favourable tax treatment for investors in situations involving capital gains.
Disadvantages of CCIVs
Transitioning existing fund structures to CCIVs may not be smooth, potentially resulting in income tax implications. While some Capital Gains Tax (CGT) roll over provisions may apply in specific cases, there is no blanket relief.
CCIVs do not currently have provisions for transferring existing revenue or capital losses from previous structures. Entities converting to CCIVs may forfeit their existing tax or capital losses.
Under the CCIV regime, income for sub fund trusts is primarily determined based on accounting profit. This limited flexibility could lead to unintended and unfavourable tax consequences concerning income earned by sub funds.
Duty and Land Tax Uncertainties
State guidance on the treatment of CCIV entities for duty and land tax purposes remains unclear, creating uncertainty in these areas.
Thus, CCIVs offer compelling advantages, they also come with notable limitations.
Ultimately, the decision to utilise CCIVs as an investment vehicle should be made with a clear understanding of these pros and cons, tailored to specific investment goals and circumstances.
This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.