House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Assistant Treasurer and Minister for Financial Services and Superannuation, the Hon Bill Shorten MP)

Chapter 2 Amendments to operation of common funds, drawing down, and imposition, of fees

Outline of chapter

2.1 The Bill provides for an administrative process for ASIC to approve payment of an annual management fee or a common fund administration fee drawn down from either the income or the capital of a charitable estate. The Bill also addresses other issues, such as the relationship between Chapter 5D and Chapter 5C, the interaction of fee regulation provisions and the regulation of related party transactions.

Context of amendments

2.2 Chapter 5D does not apply to common funds which are also registered managed investment schemes given that there is already a legislative regime applying to such funds in the form of Chapter 5C.

Summary of new law

2.3 The Bill addresses:

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the relationship between common funds and registered schemes;

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arm's length transactions;

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inconsistency in fee regulation provisions in the Act;

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drawing down of fees from income or capital;

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allowing trustee companies to charge a reasonable fee for tax returns; and

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transition of charging of fees to the national scheme.

Comparison of key features of new law and current law

Detailed explanation of new law

Common funds and registered schemes

2.4 In some cases, a trustee company common fund (which is normally regulated under Chapter 5D) is also a 'managed investment scheme' or MIS as defined in section 9 of the Act (these are normally regulated under Chapter 5C of the Corporations Act). This is explicitly acknowledged by a note to subsection 601SCA(2) of the Corporations Act. If investments in common funds are offered to the public, trustee companies must comply with the managed investment scheme requirements in Chapter 5C and Part 7.9 (financial product disclosure and other provisions relating to issue, sale and purchase of financial products) of the Corporations Act.

2.5 To provide certainty in relation to a common fund that is also a registered scheme (noting that Chapter 5D was passed after Chapter 5C), where a provision of Chapter 5D (or a regulation or other instrument made for the purposes of that chapter) is inconsistent with any of the following (a registered scheme provision ):

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a provision of Chapter 5C or a regulation or other instrument made for the purposes of that Chapter; or

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a provision of Part 7.9 of Chapter 7 or a regulation or other instrument made for the purposes of that Chapter;

the registered scheme provision prevails to the extent of the inconsistency.

[Schedule 1, item 7, section 601SCAA]

Arm's length transactions

2.6 Regulation 5D.2.09 of the Corporations Regulations 2001 (regulations) provides that licensed trustee companies are not able to give a financial benefit in relation to a common fund to a related party unless such benefit would be assessed as a reasonable arm's length transaction; or if such financial benefit was done on terms less favourable than an arm's length transaction.

2.7 This regulation is more appropriately located with other relevant provisions in the Corporations Act. Accordingly, a similar provision is inserted into Chapter 5D. [Schedule 1, item 8, section 601SCD]

2.8 Failure to comply with subsection 601SCD(1) is an offence. The maximum penalty is 2000 penalty units or imprisonment for 5 years, or both. The penalty is commensurate with the seriousness of non-arm's length dealings with related parties under the Corporations Act generally. 'Penalty unit' is defined in section 4AA of the Crimes Act 1914 . [Schedule 1, item 35, Schedule 3 to the Corporations Act, table item 173EA]

Relationship between fee regulation provisions in the Act

2.9 Under section 601TAB of the Corporations Act, if a licensed trustee company continues to provide traditional trustee company services to a client and the fees that it will charge change, the company must within 21 days of the change in fees taking effect notify the client of the change. In practice, the operation of this provision may be unclear given that in most situations trustee company fees will be fixed and not able to be increased (at any rate unilaterally by the trustee company). A note is inserted into section 601TAB which states that there are other provisions in Chapter 5D and in the regulations which limit the ability of a licensed trustee company to increase fees. This amendment does not prevent a licensed trustee company from reducing fees for current clients below the statutory limit. [Schedule 1, item 9, subsection 601TAB]

Example 1.1

Where a trustee company initially charges a fee that is below its published schedule of fees when the service commenced, it would have the ability to later increase the fee up to the level in that published schedule, but would be obliged to write to the client in terms of 601TAB(1).

Example 1.2

If, after commencing a service, a trustee company reduces its actual fee (which initially could not be more than its published fee when it commenced the service), it would need to write to the client advising of the reduction.

Amendment of drawing down of fees from income or capital

2.10 When a licensed trustee company charges an annual management fee under section 601TDD or a common fund administration fee under 601TDE or 601TDI, the fee should be able to be drawn from either income or capital.

2.11 At present, if a licensed trustee company charges an annual management fee or a common fund administration fee in respect of a charitable trust, under subsection 601TBE(3) such fees can only be drawn from the income of the estate or the common fund. This provision was based on precedents in State legislation. The TCA has argued that, for such trusts, there should ideally be the ability to draw management fees and common fund administration fees (in appropriate proportions) from the income and/or capital of the fund, rather than from just the income.

2.12 An example is where the operation of a common fund by the licensed trustee is affected by a decrease of the return on investments because of factors beyond the control of the company such as a global financial crisis. This example does not limit the circumstances in which ASIC could exercise its discretion.

2.13 ASIC may, on application in writing by a licensed trustee company approve payment of a proposed fee out of the capital of the relevant estate, if ASIC is satisfied that two conditions have been met. The purpose of the conditions is to help ensure that the capital of the trust or estate is not eroded:

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The payment of the fee will not significantly affect the capital of the relevant estate or charitable trust; and

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The fee is a fair reflection of the work and expertise required to perform the estate management function

[Schedule 1, items 10 and 11, subsections 601TBE(3) and (4)]

Allowing trustee companies to charge a reasonable fee for tax returns

2.14 Licensed trustee companies should be permitted to charge a reasonable fee for tax return preparation on behalf of any trust or estate under its management.

2.15 The TCA is concerned that, under the legislation as passed, a trustee company would no longer be authorised to charge a fee for tax return preparation unless it was performing an estate management function as trustee or manager of a charitable trust. This is because the legislation allows a trustee company to charge a fee for tax return preparation when it is performing an estate management function as trustee or manager of a charitable trust (sections 601TDF and 601TDJ), but not under other circumstances. The TCA points out that, at common law, a trustee company cannot charge for preparing a tax return without the express consent of the client. However this position was generally reversed under the former State legislation.

2.16 This proposed amendment needs to have retrospective effect to link into the current financial year, so as to streamline business systems within licensed trustee companies. It is not expected to cause detriment to stakeholders of trustee companies, because it reinstates the former law, and will benefit the companies by providing certainty. [Schedule 1, item 12, section 601TCB]