Aleks VickovichWealth editor
Mar 30, 2022 – 5.00am
With $29 billion in unexpected tax cuts and much-anticipated boosts to childcare and aged care announced in the 2021-22 federal budget in May last year, headlines were understandably focused on the big-ticket spending items amid the still-raging COVID-19 pandemic.
So, you’d be forgiven for not noticing a short and obscure measure under “corporate tax” in the Treasury section of Budget Paper No. 2 – especially since it came with the very modest price tag (by federal budget standards) of $2.6 million over two years.
“The Government will finalise the corporate collective investment vehicles (CCIV) [policy] implementing a new suite of collective investment vehicles announced in the 2016-17 Budget, with a revised commencement date of July 1, 2022,” the budget documents announced.
It might have received limited fanfare at the time, and suffer from a wonky title that hardly rolls off the tongue. But 12 months on, the CCIV regime is exciting investment industry insiders about the potential it could have for innovation. And that could mean a raft of new and potentially lucrative items to include within a diversified portfolio.
The policy, which was legislated by the Morrison government in February, introduced the CCIV as a new legal structure in Australia that more closely resembles common structures used overseas in markets such as the US, Britain, Europe and Singapore.
Traditionally, Australia’s unlisted investment funds have adopted a unit trust structure – making them more similar technically to a family trust than a company or business. But the CCIV is more of a corporate structure, with, for example, a board of directors and more clearly defined rights for investors.
“This is a welcome and overdue development,” said KPMG tax partner Natalie Raju after the CCIV law was passed by Parliament in February – 12 years after it was first recommended by the Johnson report into Australia’s ability to become a global financial centre.
“For many years, the Australian funds management industry has been hampered by the lack of an investment vehicle which is familiar to overseas investors.”
Imports and exports
The idea is that if the local industry adopted the CCIV structure when building investment products, it would improve the outlook for those Australian products to be exported to foreign markets.
But while this might excite politicians, economists and executives, it is the import side of the equation that should excite regular investors, says Chris Donohoe, chief executive of investment industry infrastructure firm APIR.
“There is potentially a big win out of this for consumers and financial advisers,” Donohoe tells AFR Smart Investor. “There is the potential to offer a whole range of products that we’ve never seen [in Australia] before – from different managers into different segments that for whatever reason aren’t traded much down here.”
Having issued identification codes to 30,000 investment and superannuation funds in Australia since 1993 (of which about half are still active products), APIR is uniquely placed to assess the kinds of investment strategies and styles that are popular across the funds management landscape.
Donohoe says that Australian equities funds still dominate, although global equities and fixed income funds have also become staples of the local market, alongside a growing number that describe themselves as “ethical” or “sustainable”.
But there are still relatively few retail funds that give investors exposure to investments such as unlisted infrastructure, real estate and private equity assets located offshore.
The “antiquated” use of trusts may have been an obstacle for some foreign fund managers to set up shop in Australia, Donohoe says. The CCIV regime removes that roadblock and may attract providers of these more specialised asset classes – which have traditionally been hard to reach even for wealthy wholesale investors.
In addition to the diversification benefits, CCIVs can be listed, Donohoe says, meaning ease of access for investors who are accustomed to buying and selling shares and funds via a retail trading platform or smartphone.
The Australian Securities Exchange in February issued a consultation paper explaining it wants to grow the number of CCIVs quoted on the public market, also well as unlisted vehicles distributed via its mFund service.
Finally, CCIVs have the ability to lower costs paid by unitholders and investors. By encouraging more foreign providers to enter the Australian market, the regime would boost competition, thereby putting downward pressure on fees.
But there are also two specific ways in which CCIVs could change the economics for local managed fund customers, according to the Financial Services Council (FSC), which has long championed the policy.
The first is that export of Australian funds to foreign markets would expand the scale achieved by local providers, helping to gain cost efficiencies in accessing their underlying assets.
Second, CCIVs allow a single legal structure to operate numerous sub-funds, avoiding much of the duplication in the existing system of trusts.
These efficiencies could be passed on to investors in the form of lower fees.
“If successive governments build on the foundations set in the 2021 Budget, the CCIV regime is likely to reduce costs for retail investors,” says FSC acting chief executive Blake Briggs. “Over time, CCIVs have the potential to become the preferred funds management vehicle in Australia.”
Discrepancies remain
Despite the enthusiasm, it is important to note that the government will not mandate take-up of CCIVs. Instead, the prevalence of these structures will depend on demand from fund managers choosing to use them.
And, as KPMG’s Raju explains, there are some “discrepancies” between the CCIV and trust regimes that create a technical challenge.
The most common is that converting an existing investment trust to a CCIV would trigger a “tax event”, either for fund issuer or the end investor. This may result in a “significant impediment to transition”, says Raju, concluding “the CCIV does not start from a completely level playing field”.
But Treasury has said it may look to address this tax issue by amendment down the track. Regardless of the tax implications, the cost reduction and asset diversification benefits of CCIVs may outweigh those for some investors.
Aleks Vickovich is the wealth editor. He writes about financial advice, funds management, superannuation and banking, with a special interest in the next generation of investors. Connect with Aleks on Twitter. Email Aleks at aleks.vickovich@afr.com