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 5: CCIVs - Financial records and reporting

Outline of chapter

5.1 Division 4 of Part 8B.4 sets out the rules for how financial reports and audits are to be prepared and conducted for CCIVs and their sub-funds.

5.2 Division 5 of Part 8B.4 outlines how particular provisions in the existing law about updating ASIC information for companies and registered schemes apply to CCIVs.

Context of amendments

5.3 Chapter 2M of the Corporations Act sets out the requirements for financial records, financial and directors' reports, and audits.

5.4 Generally, the existing requirements in Chapter 2M apply to a company or other entity as a whole. Given a CCIV's business is segregated into different sub-funds, the financial record-keeping and reporting requirements are tailored to apply at the sub-fund level. This ensures appropriate information is maintained in respect of each sub-fund and made available to members as relevant - providing appropriate transparency over the financial affairs of each sub-fund.

5.5 Consistent with the arrangements for MISs, only retail CCIVs are required to prepare financial reports that comply the relevant requirements in Chapter 2M (as modified by Part 8B.4). Wholesale CCIVs may prepare financial reports, even though they are not required to do so under the new law.

5.6 Also consistent with the arrangements for registered schemes, retail CCIVs must prepare financial reports for each sub-fund. The new law does not require a financial report to be prepared or consolidated for the whole CCIV. However, retail CCIVs may prepare a whole-of-CCIV report even though they are not required to do so under the new law.

5.7 For retail CCIVs, adjustments to auditing requirements, especially for auditor independence, are made to account for the range of relationships and potential conflicts of interest between an auditor of a CCIV's sub-fund and the CCIV or its corporate director.

Summary of new law

5.8 Subdivision A of Division 4 of Part 8B.4 sets out generally how Chapter 2M applies to CCIVs. The rules apply to a retail CCIV as if it is a company or a disclosing entity (where relevant) and as though references to 'director' or 'directors' are references to the corporate director of the CCIV.

5.9 With the exception of Part 2M.2, about keeping financial records, Chapter 2M does not apply to wholesale CCIVs. Part 2M.2 applies to a wholesale CCIV as if references to 'director' or 'directors' were references to the corporate director of the CCIV.

5.10 Subdivision B provides that a CCIV's obligation to keep financial records extends to keeping financial records for its sub-funds.

5.11 Subdivision C governs what kind of financial reporting requirements apply to a retail CCIV and its sub-funds, what should be contained in those reports, and how auditing and auditor's reports (Division 3 of Part 2M.3) apply to CCIVs and sub-funds.

5.12 Financial reporting requirements generally apply to retail CCIVs in respect of each sub-fund. That is, a retail CCIV is required to prepare an annual financial report and directors' report for each sub-fund. A retail CCIV must also prepare half-year financial and directors' reports for those sub-funds with enhanced disclosure (ED) securities on issue. Auditing requirements also apply to the retail CCIV's financial reports at the sub-fund level.

5.13 Subdivision D adapts the provisions for financial reporting to the members of each sub-fund of a retail CCIV. It also sets out amendments for reporting requirements for retail CCIVs that are debenture issuers.

5.14 Subdivision E applies the requirement to re-lodge amended financial statements with ASIC to sub-funds.

5.15 Subdivision F deals with the appointment and removal of auditors for retail CCIVs. Where there is a relationship between the auditor and the CCIV or a corporate director (including current and former corporate directors, directors of the corporate director, and persons involved in the management of either), a conflict of interest situation may arise. The rules for appointment, removal and fees of auditors of a retail CCIV are adapted from those for MISs.

5.16 Subdivision G sets out the liability of directors of the corporate director of a retail or wholesale CCIV for contraventions of Chapter 2M.

5.17 Division 5 of Part 8B.4 disapplies provisions about solvency resolutions (Part 2N.3 and section 348C of the Corporations Act) to CCIVs. This is in line with arrangements for MISs.

Comparison of key features of new law and current law

Detailed explanation of new law

How the rules in Chapter 2M apply to CCIVs

5.18 Division 4 of Part 8B.4 modifies the application of Chapter 2M so that the reporting requirements in Chapter 2M generally apply to retail CCIVs in the same way as they apply to registered schemes. [Schedule 1, item 4, section 1232(1); Schedule 2, item 109, note to Part 2M.1]

5.19 Division 4 of Part 8B.4 sets out how financial reporting applies to retail CCIVs at the sub-fund level. A retail CCIV that is a disclosing entity ^[4] will also be subject to the additional disclosure requirements that apply to disclosing entities, such as the requirement for half-yearly financial reports. Only the rules about financial records in Part 2M.2 apply to wholesale CCIVs. [Schedule 1, item 4, sections 1232(2) and (3)]

Financial records

5.20 The obligation to keep written financial records in line with Part 2M.2 applies to retail and wholesale CCIVs and each sub-fund of a CCIV. A CCIV must keep written financial records that:

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record and explain the transactions relating to the sub-fund and the performance of the sub-fund;

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would enable accurate financial statements to be prepared and audited for the sub-fund; and

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comply with any further requirements prescribed in regulations in respect of the financial records for each sub-fund.

[Schedule 1, item 4, section 1232A; Schedule 2, item 110, notes to subsection 286(1)]

5.21 The capacity to prescribe further requirements in regulations is appropriate to ensure matters of technical specificity may be contained in subordinate legislation (such as prescriptive matters that should be recorded in respect of cross-investment within a CCIV). These further requirements may apply to retail or wholesale CCIVs (or both). Any regulations relating to financial record keeping requirements placed on CCIVs made would be subject to parliamentary scrutiny and disallowance.

5.22 The obligations relating to financial records apply as though the sub-fund were the CCIV. This includes:

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the language requirements for the records;

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the physical format of the records; and

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where the records may be kept.

5.23 The corporate director is also entitled, as the director of the CCIV, to access the records under section 290. [Schedule 1, item 4, section 1232B; Schedule 2, item 111, note to subsection 290(1)]

Financial reporting

Annual financial reports and directors' reports

5.24 A retail CCIV is required to prepare a financial report and a directors' report for each financial year, for each of its sub-funds. The annual reporting requirements in Division 1 of Part 2M.3 apply to retail CCIVs, with some modifications tailored to the CCIV structure and to reflect that CCIV reporting occurs at the sub-fund level. [Schedule 1, item 4, section 1232C; Schedule 2, items 112 to 113, note to Division 1 of Part 2M.3 and notes to subsection 292(1)]

5.25 The annual financial report for each sub-fund must contain:

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financial statements for the year;

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the notes to the financial statements; and

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the directors' declaration about the statements and notes.

[Schedule 1, item 4, subsections 1232D(1) and (2); Schedule 2, item 114, note to section 295(5)]

5.26 Regulations may prescribe further requirements for the financial reports for a sub-fund of a retail CCIV. The capacity to prescribe these matters in regulations is appropriate to ensure matters of technical specificity may be contained in subordinate legislation (such as prescriptive content requirements in relation to cross-investment within a CCIV). Any regulations relating to financial reporting requirements placed on CCIVs made would be subject to parliamentary scrutiny and disallowance. [Schedule 1, item 4, section 1232D(3)]

5.27 The directors' report for each sub-fund of a retail CCIV must contain similar information as required for companies under sections 298, 299 and 300 of the Corporations Act, modified to reflect the CCIV structure. This includes disclosing the name of each officer of the CCIV and each officer of the corporate director of the CCIV, at any time during the financial year or since the end of the financial year, and for how long they were an officer of the CCIV or the corporate director. Additionally, the CCIV must provide the name of each corporate director of the CCIV during the financial year, and each director of a company that has been the corporate director of the CCIV at any time during the financial year or since the end of the financial year. [Schedule 1, item 4, sections 1232C and 1232E; Schedule 2, items 115 to 116, notes to sections 298(2) and 300(1)]

5.28 This extension of the usual disclosure requirements reflects the unique corporate structure of a CCIV and ensures that there is full and proper disclosure of the individuals involved in a retail CCIV's decision-making.

5.29 The directors' report for each sub-fund of a retail CCIV must also contain the information required for registered schemes in subsection 300(13), including the fees paid to the corporate director and its associates out of the CCIV's assets during the financial year. [Schedule 1, item 4, section 1232E(3); Schedule 2, item 117, note to section 300(13)]

5.30 The directors' report for each sub-fund of a listed retail CCIV must contain similar information as required for listed companies under sections 299A and 300, including the relevant interests of each director of the corporate director in the shares in the CCIV. However, some content that must be provided in relation to other listed companies under section 300A is not required for CCIVs. [Schedule 1, item 4, subsections 1232E(2) and (4)]

Half-year reporting

5.31 A retail CCIV with any sub-funds that have ED securities referable to them must prepare a half-year directors' report and half-year financial report for each of those sub-funds. As with the annual reporting requirements, the half-year reporting requirements set out in Division 2 of Part 2M.3 are tailored to the CCIV structure and to reflect that CCIV reporting occurs at the sub-fund level. The directors' report must include information about the directors of the corporate director of the CCIV as well as about the corporate director of the CCIV. [Schedule 1, item 4, section 1232F; Schedule 2, items 118 to 119, notes to sections 302 and 303(5)]

5.32 The half-yearly directors' reports must disclose the name of each corporate director of the CCIV at any time during the half year or since the end of the half year, and for how long they were the corporate director of the CCIV. The CCIV must provide the name of each director of a company that has been the corporate director of the CCIV at any time during the half year or since the end of the half year. [Schedule 1, item 4, section 1232F(6); Schedule 2, items 120 to 121, notes to sections 306(1) and (3)]

Auditing and audit reports

5.33 The audit and auditor's report requirements in Division 3 of Part 2M.3 of the Corporations Act generally apply to retail CCIVs in the same way as for other companies, subject to modifications to apply them at the sub-fund level. As such, these provisions, including in relation to the retention of audit papers, the independence of the auditor and the powers of the auditor, apply to the audit of a sub-fund. Applying the audit and auditor's report provisions in this way ensures that there is appropriate oversight of the financial reports at the sub-fund level. [Schedule 1, item 4, section 1232G; Schedule 2, item 122, note to Division 3 of Part 2M.3]

5.34 When auditing a sub-fund, the auditor must form an opinion about whether the CCIV has kept sufficient financial records to enable a financial report to be prepared and audited for the sub-fund, as well as kept other records and registers relating to the sub-fund as required by the Corporations Act. [Schedule 1, item 4, section 1232G(3); Schedule 2, item 123, note to section 307]

5.35 Provisions in the Corporations Act dealing with registration, independence, and other requirements for auditors apply in the normal way to auditors of a retail CCIV's sub-funds.

5.36 To ensure that there is clarity about when an auditor or audit company has a conflict of interest with a retail CCIV, the application rule that otherwise applies to Chapter 2M (see paragraph 5.18) does not apply for the purposes of subsection 324CD(2). [Schedule 1, item 4, section 1232N; Schedule 2, item 132, note to section 324CD(2)]

5.37 Instead, when determining whether there is a conflict of interest situation between a retail CCIV and an auditor, the standard test is expanded to include consideration of the relationship between the auditor, audit firm or company, any current or former member of the firm or company, or an audit company's current or former management (including directors) and:

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the current or former corporate director;

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a current or former director of the corporate director;

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a person currently or formerly involved in the management of the CCIV; or

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a person currently or formerly involved in the management of the corporate director.

[Schedule 1, item 4, section 1232N; Schedule 2, item 132, note to section 324CD(2)]

5.38 The auditor independence requirements in the Corporations Act are similarly extended to require consideration of the relationship between the auditor or audit firm and the corporate director of the audited CCIV (as an audited body). [Schedule 1, item 4, section 1232P; Schedule 2, item 133, note to Subdivision B of Division 3 of Part 2M.4]

5.39 The new law modifies the application of subsection 324CH(3) and sections 324CI, 324CJ and 324CK to ensure that certain auditor independence rules that apply to listed entities do not apply to listed retail CCIVs in the same way that they do not apply to listed registered schemes. This is to ensure broad consistency between auditor rules for listed retail CCIVs and listed registered schemes. [Schedule 1, item 4, paragraph 1232P(b)]

5.40 The new law also extends section 324CL of the Corporations Act, which determines who is an officer for the purposes of establishing whether an auditor is independent, to the officers of the corporate director of the CCIV. [Schedule 1, item 4, section 1232Q; Schedule 2, item 134, note to subsection 324CL(1)]

5.41 The rules in Division 7 of Part 2M.4 concerning appointment, removal and fees of auditors for registered schemes apply to retail CCIVs as though a retail CCIV were a registered scheme and the CCIV's corporate director was the responsible entity for the scheme. Division 7 is applied instead of Division 6 of Part 2M.4 (which provides for the appointment, removal and fees for auditors for companies) so that there is regulatory alignment between the requirements for registered schemes and retail CCIVs. [Schedule 1, item 4, section 1232R; Schedule 2, items 135 and 136, notes to Division 6 and Division 7 of Part 2M.4]

5.42 If an auditor, in the course of an audit, considers that there are circumstances that give rise to a significant contravention of the Corporations Act the auditor must notify ASIC. When determining whether a significant contravention has occurred, the auditor must consider the effect of the contravention on the overall financial position of the CCIV, sub-fund or both, as well as the adequacy of information available about their overall financial position. [Schedule 1, item 4, section 1232G(4); Schedule 2, item 124, note to section 311(4)]

Financial reporting to members

5.43 The requirement to provide annual financial reports to members under Division 4 of Part 2M.3 of the Corporations Act applies to retail CCIVs in respect of each sub-fund of the CCIV, with modifications to account for reporting in relation to each sub-fund. References to 'members' in this Division are treated as if they are references to members of the sub-fund. [Schedule 1, item 4, section 1232H; Schedule 2, items 125 to 126, notes to Division 4 of Part 2M.4 and section 314(1)]

5.44 A retail CCIV must report to the members of each of its sub-funds within three months after the end of the financial year. [Schedule 1, item 4, section 1232J; Schedule 2, item 127, note to section 315(3)]

5.45 The Corporations Act also sets out reporting requirements that apply to a company that issues debentures. These require that the issuer of debentures provide and make available certain reports to the trustee for debenture holders or the debenture holders. If a retail CCIV issues debentures, the modifications that apply to financial reports, directors' reports and auditor's reports also apply in relation to the CCIV's reporting in relation to its debentures. [Schedule 1, item 4, section 1232L; Schedule 2, item 129, note to section 318(1)]

5.46 A CCIV is not required to hold an annual general meeting and the requirement to consider reports for financial records at an annual general meeting does not apply to CCIVs. [Schedule 1, item 4, section 1232K; Schedule 2, item 128, note to section 317(1)]

Liability

5.47 A corporate director of a CCIV and the natural person directors of the corporate director are each deemed to be directors of the CCIV for the purposes of placing liability for failing to take all reasonable steps to comply with certain requirements under Chapter 2M. This also applies to the corporate director of a wholesale CCIV, and its natural person directors, to the extent that they fail to take all reasonable steps to comply with Part 2M.2 of the Corporations Act, as modified by Division 4 of Part 8B.4. [Schedule 1, item 4, section 1232T; Schedule 2, items 137 to 139, notes to subsections 344(1) and (2)]

Lodging amended reports with ASIC

5.48 If there is an amendment to the financial report of a sub-fund of a retail CCIV after that report has been lodged with ASIC, then the CCIV must lodge the amended report with ASIC and provide a copy to any member of that sub-fund who requests one. [Schedule 1, item 4, section 1232M; Schedule 2, items 130 and 131, note 2 to section 322(3)]

5.49 If the amendment is a material one, then the CCIV must notify the members of that sub-fund as soon as is practicable of the nature of the amendment and their right to obtain a copy of the amended report. [Schedule 1, item 4, section 1232M]

Solvency resolutions

5.50 The requirements concerning solvency resolutions contained in Parts 2N.3 and 2N.4 of the Corporations Act do not apply to CCIVs or sub-funds. This ensures consistency of treatment between MISs and CCIVs. [Schedule 1, item 4, section 1232U; Schedule 2, items 140 and 141, notes to Part 2N.3 and section 348C(1)]