House of Representatives

Explanatory Memorandum

(Circulated by authority of the Assistant Treasurer, Minister for Housing and Minister for Homelessness, Social and Community Housing, the Hon Michael Sukkar MP)

Chapter 13: CCIVs - Tax framework

Outline of chapter

13.1 Schedule 5 to the Bill amends the taxation law to specify the tax treatment for the CCIV regime. The amendments give effect to the core CCIV tax framework with the objective that the general tax treatment of CCIVs and their members aligns with the existing tax treatment of AMITs (and their members).

13.2 The CCIV tax framework achieves this objective by leveraging the existing trust taxation framework and the existing attribution flow-through regime (i.e., the new tax system for MITs, or the AMIT regime), rather than by creating a new bespoke tax regime.

13.3 Where a CCIV meets the AMIT eligibility criteria in respect of a sub-fund (which is a part of the CCIV), then the CCIV will be able to attribute amounts of assessable income, exempt income, non-assessable non-exempt income, and tax offsets derived or received by the CCIV to the relevant class of members of the CCIV. Those amounts will retain that character and be recognised (and taxed) in the hands of each member.

13.4 Where a CCIV does not satisfy the AMIT eligibility criteria in respect of a sub-fund for a particular income year, then the CCIV tax treatment will generally default to the general trust taxation framework for that year.

13.5 All legislative references in this Chapter are to the ITAA 1997 unless otherwise stated.

Context of amendments

Overview of the CCIV structure

13.6 As explained in Chapter 1, a CCIV is a new form of collective investment vehicle, intended to broaden the suite of investment vehicles available to Australian fund managers. The key policy objective is to increase the competitiveness of Australia's managed fund industry through the introduction of an internationally recognisable investment structure.

13.7 A CCIV is a company used for collective investment. Investors may pool their funds in a CCIV and have them managed by a professional funds manager. Investors hold shares in the CCIV that are referrable to a sub-fund.

13.8 A CCIV is intended to be a viable alternative investment vehicle to the existing trust-based MIS that is governed by Chapter 5C of the Corporations Act. The CCIV tax regime has been designed to align with the existing AMIT regime, such that the tax outcomes for an investor in a sub-fund of a CCIV are intended to be the same as an investor in an AMIT.

13.9 To achieve this outcome, the CCIV tax regime uses the same attribution flow-through tax regime that applies to AMITs. To gain access to the AMIT regime, sub-funds of a CCIV must meet the AMIT eligibility criteria. In this regard, sub-funds of a CCIV can generally be considered an attribution investment vehicle for tax purposes.

13.10 Schedule 5 to the Bill and Chapter 13 of this explanatory memorandum outline the tax framework for the CCIV regime. They should be read in conjunction with the regulatory framework for the CCIV regime set out in Schedules 1 to 4 to the Bill and Chapters 1 to 12 of this explanatory memorandum.

Summary of new law

13.11 Schedule 5 to the Bill amends the taxation law to create a new Subdivision 195-C which sets out the tax treatment for a CCIV.

13.12 As explained in Chapters 1 and 2 above, a CCIV is a new type of company limited by shares. A CCIV must have at least one sub-fund - being all or part of the CCIV's business that is registered with ASIC as a sub-fund. However, for tax purposes, under Subdivision 195-C, a principle is being introduced to deem a trust relationship to exist between a CCIV, the business, assets and liabilities referable to a sub-fund, and the relevant class of members. This deeming operates for the purposes of all taxation laws (unless expressly excluded).

13.13 This has the effect that:

•

the assets, liabilities and business referable to a sub-fund are treated as a separate unit trust (to be known as a 'CCIV sub-fund trust');

•

the CCIV is treated as the trustee of the CCIV sub-fund trust (the 'CCIV trustee'); and

•

the relevant members of the CCIV are treated as beneficiaries of the CCIV sub-fund trust.

13.14 As a result of this deeming principle, the taxation laws apply to the CCIV trustee, the CCIV sub-fund trust and its beneficiaries, rather than to the CCIV as a company and its members as shareholders.

13.15 Where a CCIV sub-fund trust meets the AMIT eligibility criteria, it is taxed as an AMIT under the attribution flow-through tax regime in Division 276. Schedule 5 to the Bill modifies the AMIT eligibility for CCIVs to ensure that only the relevant criteria apply when determining a CCIV sub-fund trust's eligibility.

13.16 For income tax purposes, the attribution flow-through tax regime ensures that amounts derived or received by a CCIV sub-fund trust that are attributed to members retain the character they had in the hands of the trustee of the CCIV sub-fund trust.

13.17 The trustee of a CCIV sub-fund trust must attribute amounts of a particular character to members on a fair and reasonable basis in accordance with the members' rights attaching to their units in the CCIV sub-fund trust. A CCIV sub-fund trust that is taxed as an AMIT is deemed to be and operates as a fixed trust.

13.18 A CCIV sub-fund trust that is taxed as an AMIT is also able to use the 'unders' and 'overs' regime in the same way that an AMIT can to reconcile a variance in calculating trust components of particular characters for an income tax year in the income year that the variance is discovered.

13.19 Where a CCIV sub-fund trust fails to meet the AMIT eligibility criteria, the CCIV sub-fund trust will be taxed in accordance with general trust provisions, which is consistent with the current outcomes for AMITs. Schedule 5 to the Bill provides for additional deeming rules to ensure that a CCIV sub-fund trust can properly apply the existing general trust provisions, including where the trust is taxed as a public trading trust under Division 6C of Part III of the ITAA 1936.

Comparison of key features of new law and current law

Detailed explanation of new law

What is a CCIV?

13.20 As set out in Chapters 1 and 2, a company may be registered as a CCIV if it meets certain basic registration requirements, including that on registration it will have at least one sub-fund (which must have at least one member). The CCIV regulatory framework utilises a company structure limited by shares so that it is recognisable to offshore investors and fund managers.

13.21 A CCIV is an umbrella vehicle that is comprised of one or more sub-funds. Each sub-fund may offer investors a different investment strategy. A CCIV generally does not have any company officers (other than the corporate director) or employees.

13.22 The corporate director must be a public company that holds an AFSL authorising it to operate the CCIV. A CCIV is a company used for collective investment.

13.23 As a CCIV is a type of company, it has the legal capacity and powers of an individual and a body corporate, including the power to enter into contracts and issue and cancel shares in the company.

Status of a sub-fund

13.24 Schedules 1 to 4 to the Bill establishes the status and nature of sub-funds of a CCIV as part of the CCIV regulatory framework.

13.25 Chapters 1 to 12 of this explanatory memorandum provides detailed explanation of the relevant features and requirements for sub-funds.

13.26 A sub-fund does not have separate legal personality. A sub-fund is all or part of the CCIV's business that is registered as a sub-fund by ASIC. The money, property and liabilities of the CCIV are allocated to each sub-fund of the CCIV (as assets and liabilities of each sub-fund). Each sub-fund (including its allocated assets and liabilities) is strictly segregated from all other sub-funds.

13.27 As a company with legal personality, the CCIV is the legal entity who owns of all the assets, owes all the liabilities and carries on the business of each sub-fund.

Members of a CCIV

13.28 A person is a member of a sub-fund if they hold shares in the CCIV referable to a sub-fund.

13.29 Members have rights, obligations and other characteristics attaching to their shares in the CCIV that are referable to a sub-fund. Generally, this bundle of rights relate to voting and entitlements to dividend and capital distributions from the CCIV that are referable to the sub-fund.

Deeming principle for tax law purposes

13.30 The CCIV regulatory framework sets up the legal status of CCIVs and sub-funds. However, the tax policy outcome that is being sought is to ensure that members can achieve attribution and flow-through of income from a CCIV through the AMIT regime. Therefore, a deeming principle is established to create a statutory fiction to treat the CCIV and its members as having a trust relationship for the purpose of applying the taxation laws. [Schedule 5 to the Bill, item 1; section 195-100]

13.31 Subdivision 195-C deems a trust relationship to exist between a CCIV, the business, assets and liabilities referable to a sub-fund, and the relevant class of members, for the purposes of all taxation laws, unless expressly excluded.

13.32 This has the effect that:

•

the assets, liabilities and business referable to a sub-fund are treated as a separate unit trust (known as a 'CCIV sub-fund trust');

•

the CCIV is treated as the trustee of the CCIV sub-fund trust; and

•

the relevant class of members of the CCIV are treated as beneficiaries of the CCIV sub-fund trust.

[Schedule 5 to the Bill, item 1; subsection 195-110(1)]

13.33 This approach ensures that the CCIV tax regime achieves equivalent tax outcomes for members of a CCIV to that of members of AMITs. The approach also supports the strict segregation of assets and liabilities referable to a sub-fund under the CCIV regulatory framework.

CCIV sub-fund trust

13.34 The deeming principle is required because sub-funds do not have legal personality and are not themselves tax law entities. It is necessary and appropriate for the tax laws to apply to the CCIV separately in respect of each sub-fund so therefore, the statutory fiction requires recognising the sub-funds as separate entities for tax purposes.

13.35 This means that for all tax law purposes (unless expressly excluded), each sub-fund is taken to exist as a separate unit trust (known as a CCIV sub-fund trust). [Schedule 5 to the Bill, item 1; subsections 195-110(2) and 195-115(1)]

13.36 The deeming principle also supports the strict segregation of the assets and liabilities referable to a sub-fund that is established by the CCIV regulatory framework. For tax purposes, the CCIV sub-fund trust ensures that the assets, liabilities and business that is referable to a sub-fund is ring-fenced within the entity.

13.37 The assets, liabilities and business that is referable to a sub-fund will constitute a trust estate, which is essentially the trust property which is held on trust for the benefit of the relevant beneficiaries of the CCIV sub-fund trust.

13.38 A CCIV sub-fund trust is a trust under section 960-100 and is therefore a separate entity to the CCIV for the purposes of the tax law. This means that all the relevant income tax laws and tax attributes apply to a CCIV sub-fund trust. This includes the requirements to have a separate ABN and TFN in relation to each CCIV sub-fund trust. [Schedule 5 to the Bill, item 1; subsection 195-110(2)]

13.39 If a CCIV has multiple sub-funds, each sub-fund is deemed to be a separate and distinct CCIV sub-fund trust.

CCIV as trustee of the sub-fund trust

13.40 The deeming principle treats the CCIV as the trustee of the CCIV sub-fund trust for the purposes of all taxation laws, unless expressly excluded.

13.41 This is because under the regulatory framework, the CCIV is the legal owner of the assets, owes the liabilities and carries on the business referable to each of its sub-funds.

13.42 As deemed trustee, the CCIV holds the property referable to a sub-fund on trust for the class of members that have an interest in that sub-fund.

13.43 If a CCIV has multiple sub-funds, the CCIV is taken to be the trustee of each of the CCIV sub-fund trusts. As a result of this, the CCIV is treated as if it were a different tax entity in its capacity as trustee of each trust, with separate responsibility to meet the obligations of a trustee under the taxation law in respect of each CCIV sub-fund trust.

13.44 This supports the alignment of the CCIV tax regime with the segregation of sub-funds that is required under the CCIV regulatory framework.

13.45 However, nothing in the tax law operates to establish a trust outside of the boundaries of the taxation system.

Members as beneficiaries of the sub-fund trust

13.46 The deeming principle treats the members who hold shares in the CCIV that are referable to a sub-fund as the beneficiaries of the CCIV sub-fund trust.

13.47 In addition, the deeming rule is extended to treat the member's shares that are referable to the sub-fund to be units in the CCIV sub-fund trust (which is taken to be a unit trust). [Schedule 5 to the Bill, item 1; subsections 195-115(1) and (2)]

13.48 The deeming rule also imports the rights, obligations and other characteristics relating to the member's shares and connects them to the member's units in the CCIV sub-fund trust. [Schedule 5 to the Bill, item 1, subsection 195-115(3)]

13.49 For example, if the shares in a CCIV sub-fund are listed on an approved stock exchange, under the deeming rule, this characteristic of the share is deemed to be part of the unit in the deemed CCIV sub-fund trust.

13.50 This treatment ensures that members of a CCIV, holding interests that are referable to a sub-fund, achieve the same tax outcome as members in an ordinary AMIT through the AMIT regime.

Deeming rule for a beneficiary's fixed entitlement to income and capital of the CCIV sub-fund trust

13.51 The deeming rule sets out the method to determine a beneficiary's deemed fixed entitlement to a share of the income and capital of a CCIV sub-fund trust, based on the percentage calculated in the statutory formula provided in the law. [Schedule 5 to the Bill, item 1; subsections 195-120(1) to (3)]

13.52 The formula provided relies on a number of legal form concepts which can be ascertained from the dividend rights and capital distribution rights relating to the beneficiary's legal form shareholding in the CCIV which is referable to that particular sub-fund.

13.53 The formula caters for different classes of shares which can give rise to different rights. One example is ordinary shares as compared to preferential shares.

Operation of the deeming rule for all taxation laws

13.54 The deeming principle operates for the purposes of all taxation laws unless they are specifically carved out. This deeming applies to the exclusion of the taxation laws as they would otherwise apply to the CCIV and the members of the CCIV. [Schedule 5 to the Bill, item 1; subsection 195-105(1)]

13.55 This rule is intended to operate as a priority rule for the operation of Subdivision 195-C and the deeming principle for CCIVs. Under this rule, the deeming principle overrides how the existing taxation laws would ordinarily treat a CCIV (as a company) and its members (as shareholders in a company).

13.56 This rule ensures that the deemed trust relationship and tax status of the trustee, trust and beneficiaries are given effect throughout the operation of all tax laws, unless expressly excluded.

Dealings with third parties

13.57 The law requires that for tax purposes, other entities (that is, third parties) dealing with a CCIV may be affected by the deeming principle. These entities may need to recognise the trust relationship established by the deeming principle (that is, between the CCIV sub-fund trust, the CCIV trustee and member beneficiaries) under the taxation laws where it is necessary to do so. [Schedule 5 to the Bill, item 1; subsection 195-105(2)]

Dealings between sub-funds

13.58 Under the CCIV regulatory framework, dealings between sub-funds could arise that are either:

•

specifically recognised internal dealings within a CCIV; or

•

external dealings between two CCIVs.

Internal dealings within a CCIV

13.59 Internal-CCIV dealings are not facilitated for tax purposes, other than where such dealings are specifically provided for under the regulatory framework (e.g., for cross-investment). Where specifically provided for under Schedules 1 to 4 to the Bill, the deeming principle operates to recognise these dealings for tax purposes.

External dealings between two CCIVs

13.60 From a legal perspective, dealings that are occurring between two separate CCIVs would be ordinary legal transactions occurring between separate parties.

13.61 Accordingly, external dealings between two CCIVs would also be recognised for taxation purposes where one CCIV sub-fund trust transacts with a CCIV sub-fund trust of a separate CCIV.

AMIT eligibility criteria

13.62 Where a CCIV sub-fund trust meets the AMIT eligibility criteria, it will be treated as an AMIT under the Division 276 attribution flow-through tax regime and throughout the income tax law.

13.63 Broadly, a trust must satisfy the following criteria to be recognised as an AMIT under Division 276:

•

the trust must be a MIT under Division 275 in relation to an income year which broadly requires the following key criteria to be met:

-

the trust is an Australian resident during the income year or the central management and control of the trust was in Australia;

-

the trust does not carry on or control a trading business in relation to the income year;

-

the trust satisfies the widely held requirements and closely held restrictions in relation to the income year;

•

the rights to the income and capital of the trust are clearly defined; and

•

the trustee has made an irrevocable choice to be an AMIT in an income year.

Modifications to the MIT and AMIT criteria for CCIVs

13.64 The law alters the existing MIT and AMIT criteria in Divisions 275 and 276 to ensure that a CCIV sub-fund trust is capable of meeting the criteria and can be treated as an AMIT. [Schedule 5 to the Bill, item 1; subsections 195-130(1) and 195-135(1)]

13.65 A CCIV sub-fund trust must satisfy all requirements for determining AMIT eligibility as specified in Divisions 275 and 276, subject to the following modifications.

•

Generally, a trust is required to be a MIS (within the meaning of section 9 of the Corporations Act) to satisfy MIT and AMIT requirements. However, a CCIV and its sub-funds are required to be registered under Chapter 8B of the Corporations Act. Furthermore, a body corporate (which a CCIV is in its actual legal form) is not able to be a MIS. Therefore, a CCIV sub-fund trust does not need to be a MIS. [Schedule 5 to the Bill, item 1; subsections 195-130(3), (5) and (6)]

•

The law makes modifications in relation to the widely held requirements to replicate the existing test but remove the MIS requirement. [Schedule 5 to the Bill, item 1; subsection 195-130(4)]

•

In the absence of the MIS requirement, a new requirement has been created for a CCIV sub-fund trust, which replicates the substantive conditions of being a MIS in the Corporations Act. For example, the rule requires that a sub-fund (in its legal capacity) must be used for collective investment by pooling contributions of members as consideration for a return on those investments. [Schedule 5 to the Bill, item 1; subsection 195-130(2)]

13.66 Some of these requirements equally apply to the CCIV sub-fund trust's ability to be a 'withholding MIT' under section 12-383 in Schedule 1 to the TAA 1953.

13.67 A CCIV, by virtue of satisfying the regulatory requirements upon registration under the Corporations Act, will have clearly defined rights. Therefore, when assessing AMIT eligibility for a CCIV sub-fund trust, paragraph 276-10(1)(b) (and therefore section 276-15) is disregarded. [Schedule 5 to the Bill, item 1; paragraph 195-135(2)(a)]

13.68 The AMIT rules allow for the trustee of a MIT to make an irrevocable choice to elect to be an AMIT. For the purposes of determining a CCIV sub-fund trust's eligibility to be an AMIT, the ability to make this irrevocable choice has been removed. A CCIV sub-fund trust that satisfies the other conditions to be an AMIT (as modified) will automatically be treated as an AMIT. [Schedule 5 to the Bill, item 1; paragraph 195-135(2)(b)]

13.69 This has been done to simplify the application of trust tax law regimes for a CCIV sub-fund trust. Therefore, if a CCIV sub-fund trust meets the AMIT criteria, it does not have the option to choose whether to be an AMIT; it will automatically be treated as an AMIT for tax purposes.

Omitting the choice to adopt the AMIT multi-class rule

13.70 The AMIT rules allow for the trustee of a multi-class AMIT to make a choice to treat each class of membership interests as being a separate AMIT, and therefore apply the attribution regime separately to each class.

13.71 This means that each class will effectively be treated as a separate trust with separate property and the trustee will need to calculate the taxable income for an income year separately for each class. The AMIT multi-class rule can result in compliance cost savings as there is no need to set up separate trusts to cater for different investment strategies.

13.72 The choice to adopt the AMIT multi-class rule has been omitted where a CCIV sub-fund trust is an AMIT. [Schedule 5 to the Bill, item 1; subsection 195-135(3)]

13.73 The CCIV tax framework provides each sub-fund with its own distinct tax entity status under the deeming rules in Subdivision 195-C. As a result, the policy outcome of the AMIT multi-class rule has already been achieved in the CCIV tax framework (albeit through a different mechanism), such that there is no further requirement for the AMIT multi-class rule for CCIVs.

13.74 The CCIV regulatory framework ensures that the assets and liabilities of each sub-fund are strictly segregated. A CCIV can register multiple sub-funds to ensure that member tax outcomes are quarantined amongst sub-funds for a CCIV, with the effect that the AMIT multi-class rule is not required.

13.75 The CCIV regulatory framework allows for multiple classes of shares to be referable to the same sub-fund. Shares will form a class if all of the rights attaching to the shares are the same. Different share rights can be provided for different classes of shares.

13.76 Section 195-120 of the CCIV tax framework (as outlined above) caters for multiple classes of shares in a sub-fund by deeming the member's fixed entitlements to income and capital distributions of the trust based on the rights attaching to the shares. Therefore, the members of different classes of shares will be allocated their income and capital of the trust based on their respective entitlements.

13.77 The choice to adopt the AMIT multi-class rule has been omitted to avoid any potential conflict with the operation of section 195-120.

CCIV key features when it is an attribution investment vehicle

13.78 Under the attribution flow-through taxation model in Division 276, an attribution CCIV sub-fund trust (that is, when it meets the AMIT eligibility criteria and is therefore treated as an AMIT) has all of the following features:

•

each attribution CCIV sub-fund trust is deemed to have fixed trust status, because sub-fund members (i.e., the beneficiaries) have clear and defined rights to the income of the CCIV sub-fund trust;

•

for income tax purposes, the attribution CCIV sub-fund trust is able to attribute amounts of assessable income, exempt income, non assessable non-exempt income and tax offsets to members on a fair and reasonable basis;

•

the attribution CCIV sub-fund trust can use the 'unders' and 'overs' regime to reconcile a variance between the amounts attributed to members of the CCIV sub-fund trust for an income year, and the amounts that should have been attributed in the same way that an AMIT can; and

•

in circumstances where the amount of assessable income attributed to a member differs from the amount of money actually paid in an income year, adjust the CGT cost base of the member's interest to ensure that assessable member income is only taxed once.

13.79 In addition:

•

attribution CCIV sub-fund trusts can elect into deemed capital account treatment;

•

the CCIV as trustee is responsible for the obligations of a trustee under the AMIT regime, and will be liable to pay income tax in certain circumstances; and

•

the non-arm's length income rule in Subdivision 275-L for MITs also applies to a CCIV sub-fund trust.

13.80 The withholding tax provisions apply to attribution CCIV sub-fund trusts and their members in the same way that they apply to AMITs, notwithstanding that the CCIV is a corporate entity and pays a legal form dividend.

13.81 The 'character flow-through' model ensures that amounts derived or received by the attribution CCIV sub-fund trust that are attributed to members retain the character they had in the hands of the attribution CCIV sub-fund trust for income tax purposes.

13.82 Therefore, amounts derived or received by the attribution CCIV sub-fund trust that are attributed to members will retain their original character and will not be treated as a dividend unless the amount had the character of a dividend when it was derived or received by the attribution CCIV sub-fund trust.

13.83 This ensures that amounts attributed by an attribution CCIV sub-fund trust will not be treated as a distribution of a dividend for treaty purposes (unless the underlying character of the income is a dividend). Further details on the interaction with Australia's tax treaties is set out below.

Temporary circumstances - AMIT safe harbour rule

13.84 Under the existing AMIT rules, if an attribution CCIV sub-fund trust fails to meet the AMIT requirements under the general test due to temporary circumstances that are outside the control of the trust, it can continue to be treated as an AMIT in relation to the income year if it is fair and reasonable to do so.

13.85 In determining what is fair and reasonable, the trust must consider the factors listed in section 275-55. The factors listed are broad in nature and cater for a wide range of circumstances which are outside the control of the trustee.

13.86 This treatment is consistent with the application of the existing tax law to AMITs.

Outcomes for when a CCIV sub-fund trust fails to be an AMIT

13.87 Outside of the temporary circumstances, if a CCIV sub-fund trust does not satisfy the AMIT eligibility requirements in a particular income year, it will be taxed as either:

•

a Division 6 CCIV sub-fund trust under the general trust provisions in Division 6 of Part III of the ITAA 1936, unless the CCIV sub-fund trust fails the AMIT requirements by reason of being a trading trust under Division 6C of Part III of the ITAA 1936 in relation to the income year; or

•

a Division 6C CCIV sub-fund trust (i.e., as a trading trust) under Division 6C of Part III of the ITAA 1936 if at any time in the income year it carries on or controls (directly or indirectly) a trading business.

13.88 This is consistent with the current treatment for existing AMITs. This clarifies that the corporate tax system does not apply to a CCIV in their legal form or to sub-funds of a CCIV.

Deeming rule for when a beneficiary is presently entitled to income of a Division 6 CCIV sub-fund trust

13.89 The beneficiaries of a Division 6 CCIV sub-fund trust are taxed on their share of the net income of the trust (essentially the taxable income of the trust). The trustee of the CCIV sub-fund trust is taxed on any of the remaining net income not attributed to a beneficiary. A beneficiary's share is determined by reference to their present entitlement to a share of the income of the trust as a portion of the total income of the trust.

13.90 The calculation of the beneficiary's share of the net income of the trust to which they are presently entitled is calculated as follows:

Share of net income = [Share of income of the trust ÷ Total income of the trust] × net income


13.91 Because a CCIV is a legal form company that pays dividends to members as shareholders, the deeming rule provides a mechanism for translating corporate law concepts into trust concepts, that is, working out the income of the CCIV sub-fund trust and how a member can be presently entitled to a share of that income.

How to work out the income of a CCIV sub-fund trust

13.92 The CCIV tax rules set out how the income of a CCIV sub-fund trust (that is, the 'income of the trust' or 'trust income') for an income year is to be determined. The relevant test to be applied depends on whether a CCIV is a retail or non-retail CCIV (i.e., a wholesale CCIV).

13.93 Under the regulatory framework, a retail CCIV must prepare financial reports for each sub-fund of the CCIV for each financial year.

13.94 For a sub-fund of a retail CCIV, the income of the trust for an income year is equal to the sub-fund's accounting profits for that income year. This amount must be taken from the financial report of the relevant CCIV sub-fund as prepared in accordance with accounting standards for that income year. [Schedule 5 to the Bill, item 1; subsections 195-123(1) and (2)]

13.95 Similarly, for a sub-fund of a wholesale CCIV, the income of the trust for an income year is equal to the sub-fund's accounting profits for that income year as if the wholesale CCIV had been a retail CCIV at year end and prepared financial reports for that sub-fund in accordance with accounting standards. [Schedule 5 to the Bill, item 1; subsections 195-123(1) and (3)]

13.96 This is necessary because the CCIV's registration type can change during the financial year (and/or income year). Consistent with the regulatory framework, wholesale CCIVs are required to keep financial records. The tax law requires that the profit calculation for the financial/income year for a sub-fund of a CCIV must be consistently applied regardless of whether the CCIV is wholesale CCIV or a retail CCIV.

13.97 If a sub-fund is in an accounting loss position, then the income of the trust is nil. [Schedule 5 to the Bill, item 1; subsection 195-123(4)]

Determining present entitlement to income of a CCIV sub-fund trust

13.98 The deeming rule provides a mechanism for determining when a beneficiary is taken to be presently entitled to a share of the trust income for an income year. This occurs if the trust income (that is, the sub-fund's current year accounting profits) was or is payable to the beneficiary by way of one or more dividends declared during the income year or within three months after the end of an income year. [Schedule 5 to the Bill, item 1; subsections 195-125(1) and (2)]

13.99 This deeming rule ensures that if the CCIV trustee distributes income to beneficiaries (by declaring one or more dividends to its shareholders sourced from the sub-fund's current year accounting profits), the beneficiaries are taken to be presently entitled to a share of income of the CCIV sub-fund trust for that income year.

13.100 To the extent that a dividend relates to profits from previous income years or capital (corpus), the dividend is not relevant for determining present entitlement.

13.101 If there are accounting profits (i.e. the income of the trust) for the income year which are not reflected in the dividends declared for the income year, then for this proportion of the income of the trust, no beneficiary will be presently entitled. This will mean for this share of the income, section 99 or 99A of Part III of the ITAA 1936 may apply.

13.102 If the sub-fund has an accounting loss, and there has been a dividend that has been declared, then for tax purposes, this distribution would be taken to have been paid out of the corpus of the trust. CGT events may be relevant in assessing the income tax consequences of these distributions.

13.103 The law requires that dividends be declared as payable to the beneficiary. This means that the dividend is not required to be paid, but that the beneficiary has a legal entitlement to payment of the dividend.

13.104 Where an amount has been applied or dealt with in any way on behalf of the beneficiary or as directed by them, the law treats these amounts as having been declared as payable to the beneficiary. [Schedule 5 to the Bill, item 1, subsection 195-125(4)]

13.105 For example, this covers where dividends (and therefore trust distributions) are reinvested back into the trust.

Three months post year end to determine present entitlement to income of the trust

13.106 For legal form trusts, the trust income to which beneficiaries are presently entitled generally has to be determined by the last day of the income year, or such earlier date provided for by the trust deed.

13.107 In recognition that the CCIV is a legal form company where the sub-fund is deemed to be a trust for tax law purposes, the law provides the CCIV trustee with additional time (to the end of three months after the end of the income year) to declare a dividend.

13.108 The CCIV trustee has up to three months after the end of the income year to close their financial accounts for reporting purposes and declare any dividends distributing profits from that year in order to make the beneficiaries presently entitled to the income of the trust for that particular income year.

Beneficiary present entitlement statement

13.109 The law requires that the CCIV trustee must give the beneficiaries a written notice in the approved form within three months after the end of the income year notifying them of the following matters:

•

whether the beneficiary is presently entitled to a share of the income of the CCIV sub-fund trust as calculated under the income tax law and if so, the amount;

•

for each dividend that was declared during or within three months after the income year:

-

the amount of the dividends; and

-

how much of the dividends consist of any of the sub-fund's accounting profit for that income year.

[Schedule 5 to the Bill, item 1; subsection 195-125(3)]

13.110 The notice provides clarity for investor beneficiaries on their income tax position based on their interests in the CCIV sub-fund trust.

13.111 The Commissioner has the discretion to defer the time by which the statement must be given. However, the deferral of time does not extend to the requirement that dividends must be declared by the end of the three month period. This timeframe cannot be extended by the Commissioner.

Deeming rule for when a beneficiary has an interest in the exempt income or non-assessable non-exempt income of the CCIV sub-fund trust

13.112 The CCIV income tax rules also deem a beneficiary to have an individual interest in the exempt income or non-assessable non-exempt income (that is, tax preferred income) of the CCIV sub-fund trust. [Schedule 5 to the Bill, item 1; subsections 195-127(1) and (2)]

13.113 The law makes it explicitly clear that a beneficiary of the CCIV sub-fund trust can only be presently entitled to a share of income or have an individual interest in the exempt income or the non-assessable non-exempt income of the trust under Subdivision 195-C. [Schedule 5 to the Bill, item 1; subsections 195-125(5) and 195-127(3)]

13.114 This is intended to ensure that only these rules in sections 195-125 and 195-127 can operate to determine a beneficiary's present entitlement to, or individual interest in, the trust income of a CCIV sub-fund trust.

Interactions with other taxation laws

13.115 The deeming principle has effect for the purposes of all taxation laws unless expressly excluded. Under section 995-1, taxation laws are laws that the Commissioner has general administration of. Foreign Acquisitions and Takeovers Act 1975

13.116 The deeming rule does not extend to the Commissioner's limited administration of the Foreign Acquisitions and Takeovers Act 1975 and instruments made under this Act. [Schedule 5 to the Bill, item 1; subsection 195-105(3)]

13.117 This legislation operates under a dual administrative model. This recognises the legal form of the CCIV as a company and the members as shareholders which is necessary to ensure it continues to operate as intended. International Tax Agreements Act 1953

13.118 The International Tax Agreements Act 1953 is a taxation law for the purposes of the deeming principle.

13.119 Schedule 5 to the Bill also includes amendments to ensure that the deeming principle interacts appropriately with the priority rule contained in the International Tax Agreements Act 1953, which prioritises the provisions of that Act over the ITAA 1997 and ITAA 1936 to the extent of an inconsistency.

13.120 The amendments clarify that the priority rule in the International Tax Agreements Act 1953 is subject to the deeming principle. [Schedule 5 to the Bill, items 5 and 6; subsections 4(2) and (3) of the International Tax Agreements Act 1953]

13.121 Any inconsistency that may arise between the provisions of the International Tax Agreements Act 1953 and the deeming principle are to be resolved in favour of the deeming principle. This includes the provisions of any double taxation agreement that is given force of law in Australia by the International Tax Agreements Act 1953.

13.122 A similar priority rule already applies in respect of Part IVA of the ITAA 1936. However, the types of inconsistencies that may arise under the respective rules are different. This is because a taxpayer's tax can be directly adjusted through Part IVA, while the deeming principle essentially applies at the definitional level.

13.123 Existing taxing rights under a double taxation agreement will be applied on the basis that this new type of company (in legal form) under Australian company law is, for the purposes of the double taxation agreement, treated as a trust.

13.124 This means that after the deeming principle is applied in respect of a CCIV, the International Tax Agreements Act 1953 is then applied in respect of the deemed state of affairs to determine the tax positions of any affected entities. Where Part IVA also applies, it continues to have priority over the provisions of the International Tax Agreements Act 1953.

13.125 The purpose of this approach is to remove any ambiguity regarding the interaction between the two rules and ensures double taxation agreements apply to, or in respect of:

•

the CCIV sub-fund trust;

•

the CCIV as trustee; and

•

the members of the CCIV as beneficiaries of each CCIV sub-fund trust.

This is the case despite the legal form of a CCIV, its shareholders or any of the distributions made by the CCIV.

13.126 Prioritising the deeming principle in this way ensures that a CCIV sub-fund trust and its beneficiaries are eligible for the same treatment, and are able to access the same benefits, as an AMIT under Australia's double taxation agreements. For example, income or gains derived by a CCIV sub-fund trust that are attributed to members will retain their character, and be subject to any applicable treaty arrangements, including withholding rates for interest, dividends or royalties.

13.127 Similarly, Australia would not exercise a taxing right allocated to it under a provision of a double taxation agreement to the extent it was exercisable in respect of a CCIV solely because it is a legal form company. For example, Australian dividend withholding tax would not be automatically imposed on all income distributions by a CCIV to its non-resident members.

Example 13.1

ADHP Investments CCIV has one sub-fund - sub-fund A, through which it derives $1 million of income in an income year. This income is comprised of $500,000 of interest, $300,000 of royalties and $200,000 of dividends.

ADHP Investments CCIV distributes $1,000, comprised of the same proportions, to a member who is a resident of a country with which Australia has double taxation agreement.

Applying the priority rule and deeming principle, for treaty purposes, the distribution is not recognised as a $1,000 dividend payment by ADHP Investments CCIV to the member. Instead, the income derived by ADHP Investments CCIV retains its character in the hands of the member, meaning that they receive $500 of interest, $300 of royalties and $200 of dividends. These amounts are subject to any applicable treaty arrangements, including the withholding rates for interest, royalties and dividends.

Tax consolidation regime in Division 703

13.128 CCIV entities (both a legal form CCIV company and a deemed CCIV sub-fund trust) are specifically excluded from being a member of a consolidated group or consolidatable group under section 703-20. This is because the CCIV is a new collective investment vehicle that is not intended to engage in active trading businesses. [Schedule 5 to the Bill, items 2 to 4; table item 4 and 8 in subsection 703-20(2) and subsection 703-20(3)] A New Tax System (Goods and Services Tax) Act 1999

13.129 The GST Act is a 'taxation law' (as defined under section 995-1) for the purposes of the deeming provision.

13.130 Section 184-1 of the GST Act prescribes a trust to be an 'entity' for GST purposes. A CCIV sub-fund trust as a deemed trust is therefore considered an entity for the purposes of the GST Act.

13.131 To determine whether a CCIV is required to be registered for GST in relation to a particular CCIV sub-fund trust, a CCIV needs to separately ascertain if the CCIV sub-fund trust is carrying on an enterprise and the GST turnover in relation to that CCIV sub-fund trust.

13.132 Under section 184-1 of the GST Act, a trustee acting in different capacities is taken to be a different entity in each of those capacities. Therefore, where more than one CCIV sub-fund trust is required to be registered for GST, the CCIV will register in relation to each relevant CCIV sub-fund trust.

ABN registrations and publication of information

13.133 The law includes amendments to facilitate the ABN registration of CCIVs and sub-funds and the accompanying publication of information on the Australian Business Register. Under the existing tax law, a CCIV, in its capacity as a company, can but is not required to apply for an ABN. This is because for tax purposes, the CCIV is essentially a nominee company operating only as a corporate trustee with no employees and undertaking no transactions other than those in its capacity as trustee of one more sub-funds, each of which is a separate entity for tax purposes. [Schedule 5 to the Bill, items 1 and 7, section 195-140 and paragraph 26(3)(g) of the A New Tax System (Australian Business Number) Act 1999]

13.134 The law also includes consequential amendments affecting the Australian Business Registrar by replacing the term with the Registrar as part of the broader registries modernisation amendments. [Schedule 5 to the Bill, items 15 to 18, section 195-140 and subsection 995-1(1)]

Consequential amendments

13.135 Schedule 5 to the Bill makes a number of consequential amendments to:

•

insert AMITs and CCIVs into the list of income tax paying entities; and

•

insert several new definitions in section 995-1 in relation to the CCIV and the relevant entities being recognised for tax laws under the deeming principle.

[Schedule 5 to the Bill, items 5 to 9, sections 9-1, 9-5 and subsection 995-1(1)]

Application, and transitional provisions

13.136 The provisions implementing the CCIV tax regime apply from 1 July 2022.

13.137 The consequential amendments to replace the Australian Business Registrar with the Registrar apply to a CCIV sub-fund trust that has an ABN, even if the trust began to have an ABN before the commencement of this provision. [Schedule 5 to the Bill, item 19]