Review of Tax Arrangements Applying to Collective Investment Vehicles (incorporating a review into the Investor Manager Regime and the Venture Capital Limited Partner Regime)

The review of tax arrangements applying to Collective Investment Vehicles commenced with a Government announcement on 11 May 2010. The Terms of Reference were completed over the course of three separate reports including a report on the Investor Manager Regime and the Venture Capital Limited Partner Regime.  On 4 June 2015, the Government announced the release of the Board’s final report  on the Review of Tax Arrangements Applying to Collective Investment Vehicles to conclude their review.

Background

On 11 May 2010, the then Assistant Treasurer and the then Minister for Financial Services, Superannuation and Corporate Law announced that the Government would ask the Board of Taxation to review the tax treatment of collective investment vehicles (CIV), having regard to the new managed investment trust (MIT) tax framework and including whether a broader range of tax flow-through vehicles should be permitted. As part of the review, the Board also examined the treatment of Venture Capital Limited Partnership vehicles.

This review arises from the report of the Australian Financial Centre Forum (AFCF) (the Johnson Report), released by the Government in January 2010, which recommended “that the Treasurer request the Board of Taxation to review the scope for providing a broader range of tax flow through collective investment vehicles” (Recommendation 3.3).

Terms of Reference

On 12 July 2010 the then Assistant Treasurer and the then Minister for Financial Services, Superannuation and Corporate Law announced the terms of reference for the Board’s review. The Board was asked to examine and report on the tax treatment of CIVs, having regard to the MIT tax framework and including whether a broader range of tax flow-through CIVs (such as corporate CIVs) should be permitted. The review had regard to the following broad principles:

• CIVs in this context are widely held investment vehicles (with typically long term portfolio investors) that undertake primarily passive investment activities, consistent with the eligible investment rules in Division 6C of the Income Tax Assessment Act 1936.
• The tax treatment of a CIV should be determined by the nature of its investment activities rather than the structure of the entity through which the funds are pooled.
• The tax outcomes for investors in a CIV should be broadly consistent with the tax outcomes of direct investment, other than flow through of losses (subject to limited special rules for their utilisation).

As part of the review, the Board was asked to examine the effectiveness of the special tax treatment accorded under the Venture Capital Limited Partnership regime in a way that recognises its policy objectives. In making its recommendations, the Board was asked to consider:

• the nature and extent of, and the reasons for, any impediments to investment into Australia by foreign investors through CIVs;
• the benefits of extending tax flow-through treatment for CIVs, including the degree to which a non-trust CIV would enhance industry’s ability to attract foreign funds under management in Australia;
• whether there are critical design features that would improve certainty and simplicity and enable better harmonisation, consistency and coherence across the various CIV regimes, including by rationalisation of the regimes where possible.

The Board was also asked to examine and report on the design of an IMR for investments by foreign residents managed in Australia. The Government asked the Treasury to consult on issues relating to the taxation of conduit income of managed funds as recommended in Australia’s Future Tax System review (Assistant Treasurer’s Media Release No 92 of 11 May 2010 ).

The Board’s recommendations should seek to enhance Australia’s status as a leading regional financial centre and support growth and employment in the Australian managed funds industry while maintaining the integrity of the tax system and revenue neutral or near revenue neutral outcomes.

The Board was asked to report to the Assistant Treasurer by 31 December 2011.

Discussion Paper, Consultations & Submissions – Collective Investment Vehicles

On 17 December 2010, the Board of Taxation released its discussion paper on the review of the tax arrangements applying to Collective Investment Vehicles. The Chairman of the Board of Taxation announced the release of the discussion paper via a press release. The Board developed this discussion paper to facilitate stakeholder consultation.

To assist in the Review process, the Board conducted consultation meetings on 2 February 2011 in Melbourne and 4 February 2011 in Sydney. The consultation meetings were attended by representatives from taxation professional bodies, major law and accounting firms, various major corporations and business associations.

The Board requested written submissions on its review by 28 February 2011. All submissions received were acknowledged. Copies of public submissions made to the Board are available below.

Design of a foreign managed funds Investment Manager Regime

On 16 December 2011, the Minister for Financial Services & Superannuation announced that the Government will implement an investment manager regime (IMR) for foreign managed funds broadly in line with that recommended by the Board in its report on the review of an IMR as it relates to foreign managed funds. The Government’s response to the Board’s recommendations was welcomed by the then Chairman of the Board of Taxation, Mr Chris Jordan AO.

The Board’s review of an IMR for foreign managed funds is one aspect of its broader review of the tax arrangements applying to collective investment vehicles (CIVs). The Assistant Treasurer requested that the reporting date for this aspect be brought forward to 30 September 2011.

The Board made 12 recommendations in relation to the introduction of an IMR for foreign managed funds. In framing its recommendations the Board consulted with industry and tax practitioners. The Board believes that the introduction of an IMR for foreign managed funds should assist in removing tax related impediments to international investment into Australia by foreign managed funds and impediments to the use of Australian intermediaries by these funds.

Review of the Venture Capital Limited Partnership regime

On 18 February 2013, the Deputy Prime Minister and Treasurer and the Minister for Industry and Innovation jointly announced the release of the Venture Australia package, which contains the Government’s response to the Board of Taxation’s report on its review of taxation arrangements under the Venture Capital Limited Partnership regime, and the Government’s response to the review into venture capital and entrepreneurial skills. Details of the Government’s response to the Board’s report are set out as an attachment to the announcement from the Assistant Treasurer and Minister Assisting for Deregulation on 18 February 2013.

The Board made three recommendations in relation to the taxation arrangements under the VCLP regimes, with a series of sub-recommendations. The Government has accepted all three recommendations, with one sub-recommendation accepted in principle. The Government’s response to the Board’s recommendations was welcomed by the Chair of the Board of Taxation, Mrs Teresa Dyson.

On 14 December 2013 the Government announced that it would not proceed with a range of measures announced but unenacted. The Venture Capital Limited Partnership regime recommendations as outlined by the Board and initially accepted by the Government were included in the measures abandoned by the Government.

As part of the National Innovation and Science Agenda new arrangements for Venture Capital Limited Partnerships apply from 1 July 2016. The reforms took into consideration recent reviews, including by the Board of Taxation (2011), and the Treasury and the Department of Industry, Innovation, Science, Research and Tertiary Education (2012), and were finalized in consultation with industry stakeholders. The Tax Laws Amendment (Tax Incentives for Innovation) Act 2016 received Royal ascent on 5 May 2016.

Review of the tax arrangements applying to Collective Investment Vehicles

The Board completed its review of the tax arrangements applying to CIVs and provided its report to the Assistant Treasurer in December 2011. In preparing its report the Board took into account the various submissions to the review and discussions with stakeholders and its expert panel. This report follows the Board’s earlier completion of the Venture Capital Limited Partnership component of this review in June 2011, and the completion of the IMR for foreign managed funds component of this review in August 2011.

On 4 June 2015 the Government announced the release of the report together with a number of other Board of Taxation reports.

While there was no formal announcement from the Government as to their position on the report, in the 2016-17 Budget the Government announced measures regarding changes to CIV’s, with Budget Paper No. 2 stating “The new CIVs will be required to meet similar eligibility criteria as managed investment trusts, such as being widely held and engaging in primarily passive investment. Investors in these new CIVs will generally be taxed as if they had invested directly.’ These changes were Board recommendations but the Board recommended against the adoption of the MIT tax regime, as it taxes all CIVs as Trusts (see recommendation 2 of the report).

Further information on this review can be obtained from the Board of Taxation Secretariat on (02) 6263 4366 or at Taxboard@treasury.gov.au.

Submissions received