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)

Glossary

This Explanatory Memorandum uses the following abbreviations and acronyms.

General outline and financial impact

Schedules 1 to 5 - Corporate Collective Investment Vehicles

Outline

Schedules 1 to 5 to the Bill establish the regulatory and tax frameworks CCIVs.

Schedules 1 to 4 to the Bill amend corporate and financial services law to establish a CCIV as a new type of a company limited by shares that is used for funds management. A CCIV is an umbrella vehicle that is comprised of one or more sub-funds and is operated by its single corporate director.

Schedule 5 to the Bill amends the taxation law to specify the tax treatment for the CCIV. The amendments give effect to the core CCIV tax framework to ensure that the CCIV is taxed on a flow-through basis, with the objective that the general tax treatment of CCIVs and their members align with the existing tax treatment of AMITs (and their members).

Date of effect

Schedules 1, 2, 3 and 5 to the Bill will commence on 1 July 2022.

Schedule 4 to the Bill commences on 1 July 2022 only if the Corporations Amendment (Meetings and Documents) Act 2021 has commenced prior to that date, otherwise it will not commence.

Proposal announced

The intention to create a CCIV regime was first announced in the 2016-17 Budget as part of the Ten Year Enterprise Tax Plan.

In May 2021 the Government announced the project would apply with a start date of 1 July 2022. Schedules 1 to 5 to the Bill fully implement the measure included in the 2021-22 Budget.

Financial impact

This measure is estimated to result in an unquantifiable impact on receipts over the forward estimates period.

Regulation impact statement

The measures detailed in Schedules 1 to 5 to the Bill are estimated to result in a total average annual regulatory cost of $1.2 million.

The Regulation Impact Statement covering the amendments in Schedules 1 to 5 to the Bill has been included in Attachment 1.

Human rights implications

Schedules 1 to 4 to the Bill engage, or may engage, human rights. See Statement of Compatibility with Human Rights - Chapter 19.

Schedule 5 to the Bill does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 19.

Compliance cost impact

Compliance costs will be low to medium and be similar to current investment entities in the market.

Schedule 6 - Extension of temporary loss carry back

Outline

Schedule 6 to the Bill amends the income tax law to extend the loss carry back rules by 12 months, allowing eligible corporate tax entities to claim a loss carry back tax offset in the 2022-23 income year.

Date of effect

The measure in Schedule 6 to the Bill will apply to assessments made in the 2020-21 income year, in the 2021-22 income year and in the 2022-23 income year.

Proposal announced

Schedule 6 to the Bill fully implements the measure Temporary loss carry back extension from the 2021-22 Budget.

Financial impact

All figures in this table represent amounts in $[m].

This measure is estimated to have the following receipts impact over the forward estimates period.

Human rights implications

Schedule 6 to the Bill does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 19.

Compliance cost impact

Low.

Schedule 7 - Deductible gift recipients

Outline

Schedule 7 to the Bill amends the ITAA 1997 to:

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specifically list the Greek Orthodox Community of New South Wales Ltd, Australian Associated Press Ltd, Virtual War Memorial Limited and SU Australia Ministries Limited as deductible gift recipients;

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extend the deductible gift recipient specific listings of Cambridge Australia Scholarships Limited and Foundation 1901 Limited; and

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remove the deductible gift recipient specific listing of the East African Fund Limited (with the fund remaining endorsed as a deductible gift recipient under another category).

Date of effect

The amendments apply to gifts made on or after 1 July 2019 to the Greek Orthodox Community of New South Wales Ltd.

The amendments apply to gifts made on or after 1 July 2021 and before 1 July 2026 to Australian Associated Press Ltd and Virtual War Memorial Limited.

The amendments apply to gifts made on or after 1 July 2021 and before 1 July 2023 to SU Australia Ministries Limited.

The amendments extend the period of the listing of Cambridge Australia Scholarships Limited so that it applies to gifts made on or after 1 July 2021 and before 1 July 2026.

The amendments extend the period of the listing of Foundation 1901 Limited so that it applies to gifts made on or after 1 September 2021 and before 1 September 2026.

The amendments to remove the deductible gift recipient listing of the East African Fund Limited take effect on the first day of the quarter following Royal Assent.

Proposal announced

Schedule 7 to the Bill fully implements the measure Philanthropy - updates to the list of specifically listed deductible gift recipients from the 2021-22 Budget; and partially implements the measure Philanthropy - updates to the list of specifically listed deductible gift recipients from the 2019-20 Mid Year Economic and Fiscal Outlook.

Financial impact

The specific listing of the Greek Orthodox Community of New South Wales Ltd was part of the 2019-20 Mid-Year Economic and Fiscal Outlook measure Philanthropy - updates to the list of specifically listed deductible gift recipients. The measure was estimated to have a total cost to revenue of $0.7 million from 2018-19 to 2022-23.

Specifically listing SU Australia Ministries Limited, Australian Associated Press Ltd, Virtual War Memorial Limited, and extending the specific listings of Cambridge Australia Scholarships Limited and Foundation 1901 Limited, and removing the specific listing of the East African Fund Limited were part of the 2021-22 Budget measure Philanthropy - updates to the list of specifically listed deductible gift recipients. The measure was estimated to decrease receipts by $7.5 million from 2020-21 to 2024-25.

Human rights implications

Schedule 7 to the Bill does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 19.

Compliance cost impact

Not applicable.

Schedule 8 - Minor and technical amendments Spring 2021

Outline

Schedule 8 to the Bill makes a number of miscellaneous and technical amendments to various laws in the Treasury portfolio. The amendments are part of the Government's ongoing commitment to the care and maintenance of Treasury portfolio legislation.

The amendments make minor and technical changes to correct typographical and numbering errors, repeal inoperative provisions, remove administrative inefficiencies, address unintended outcomes, and ensure that the law gives effect to the original policy intent.

Date of effect

Part 1 of Schedule 8 commences the day after the Bill receives the Royal Assent.

Part 2 of Schedule 8 commences on the first day of the next quarter after the Bill receives the Royal Assent.

Part 3 of Schedule 8 commences immediately after the commencement of Part 2 of Schedule 2 to the National Consumer Credit Protection Amendment (Mandatory Credit Reporting and Other Measures) Act 2021 being 1 July 2022.

Part 4 of Schedule 8 commences immediately after the commencement of item 143 of Schedule 4 to the Treasury Laws Amendment (2020 Measures No. 6) Act 2020.

Proposal announced

This measure was announced on 24 September 2021.

Financial impact

These amendments in Schedule 8 to the Bill are estimated to have a small but unquantifiable impact on receipts over the forward estimates period.

Human rights implications

Schedule 8 to the Bill does not raise any human rights implications. See Statement of Compatibility with Human Rights - Chapter 19.

Compliance cost impact

The amendments in Schedule 8 to the Bill are unlikely to have more than a minor impact on compliance costs.

Schedule 9 - Retirement income covenant

Outline

Schedule 9 to the Bill amends the SIS Act to insert a new covenant that requires trustees of RSEs to develop a retirement income strategy for beneficiaries who are retired or are approaching retirement.

Date of effect

The amendments in Schedule 9 to the Bill introducing a retirement income covenant commence on the day after Royal Assent. This commencement allows trustees to take steps to gather information to formulate their retirement income strategy that will be publicly available from 1 July 2022. Trustees will not be required to give effect to all components of their strategy by 1 July 2022 as implementation of the strategy will be an ongoing process.

Proposal announced

Schedule 9 to the Bill partially implements the measure More Choices for a Longer Life - comprehensive income products in retirement from the 2018-19 Budget.

Financial impact

Schedule 9 to the Bill was estimated to have a nil impact on receipts over the forward estimates at the time of the 2020-21 Budget.

Human rights implications

Schedule 9 to the Bill engages human rights but does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 19.

Compliance cost impact

The amendments in Schedule 9 to the Bill have an estimated average annual regulatory cost of $20.2 million.

Summary of regulation impact statement

Regulation impact on business

Impact

The amendments have an estimated average annual regulatory cost of $20.2 million.

Main points

The retirement income covenant will require trustees of RSEs to formulate, review regularly and give effect to a retirement income strategy for the retired members of their fund, and the members of their fund approaching retirement.

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The strategy is a governance document developed by the trustees that identifies and recognises the broad retirement income needs of the members of the fund; and presents a plan to build the RSE's capacity and capability to service those needs.

•

Administratively this would require trustees to analyse information related to their membership, formulate and develop a retirement income strategy, review and give effect to the strategy. This includes publishing a summary of the strategy on the website of the RSE.

•

It is anticipated that a requirement to develop a retirement income strategy would result in many trustees evaluating the products and assistance they offer to their members and investigating whether their product offerings can be improved to better meet the needs of their members.

Schedule 10 - Employee share schemes: Removing cessation of employment as a taxing point

Outline

Schedule 10 to the Bill amends the ITAA 1997 to remove cessation of employment as a taxing point for ESS interests which are subject to deferred taxation.

Date of effect

This measure will apply to ESS interests for which the ESS deferred taxing point occurs on or after the beginning of the financial year starting after Royal Assent, or if this Bill receives Royal Assent on 1 July-to ESS interests for which the ESS deferred taxing point occurs on or after that 1 July.

Proposal announced

Schedule 10 to the Bill partially implements the measure Employee Share Schemes - removing cessation of employment as a taxing point and reducing red tape from the 2021-22 Budget.

Financial impact

The measure is estimated to have the following impact on the underlying cash balance over the forward estimates period ($m):

Human rights implications

Schedule 10 to the Bill does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 19.

Compliance cost impact

Low.

Chapter 1: CCIVs - Introduction

Outline of chapter

1.1 Schedules 1 to 4 to the Bill amend corporate and financial services law to establish a CCIV as a new type of a company limited by shares that is used for funds management. A CCIV is an umbrella vehicle that is comprised of one or more sub-funds and is operated by its single corporate director.

1.2 Schedule 5 to the Bill amends the taxation law to specify the tax treatment for the newly established CCIV. The amendments give effect to the core CCIV tax framework to ensure that the CCIV is taxed on a flow-through basis, with the objective that the general tax treatment of CCIVs and their members align with the existing tax treatment of AMITs (and their members).

1.3 This Chapter of the explanatory memorandum discusses the policy context for CCIVs and provides an overview of the regulatory and tax frameworks.

1.4 All legislative references in this Chapters 1 to 12 are to the Corporations Act unless otherwise stated.

1.5 All legislative references in Chapter 13 are to the ITAA 1997 unless otherwise stated.

Context of amendments

History

1.6 In November 2009, the Australian Financial Centre Forum released the Australia as a Financial Centre: Building on our Strengths report (the Johnson report). The Johnson report made several policy recommendations aimed at increasing Australia's cross-border trade in financial services and improving the competitiveness and efficiency of the financial sector.

1.7 In relation to funds management, the Johnson report included recommendations to develop the ARFP regime, along with the establishment of a new collective investment vehicle with a corporate structure.

1.8 The ARFP provides a multilateral framework that allows eligible funds to be marketed across member countries, with limited extra regulatory requirements. The ARFP is intended to support the development of a regional managed funds industry through improved market access and regulatory harmonisation. The Government implemented legislative changes for the ARFP regime in mid-2018, and the program commenced in February 2019 (after Japan and Thailand enacted their respective legislative changes).

1.9 The Johnson report also identified Australia's need for a collective investment vehicle that provides flow-through tax treatment, maintains investor protection, and is more internationally recognisable than a MIS (Australia's current trust based collective investment vehicle). To address this gap, the report recommended that the Board of Taxation review the scope for providing a broader range of collective investment vehicles that would be subject to flow-through taxation.

1.10 The then Government accepted this recommendation and the subsequent Review of Tax Arrangements Applying to Collective Investment Vehicles was released by the Board of Taxation in December 2011. The review recommended the creation of new collective investment vehicles which provide tax neutral outcomes for investors. The report also recommended that overseas experience in offshore jurisdictions inform the design of the new collective investment vehicles.

1.11 In the 2016-17 Budget, as part of the Ten Year Enterprise Tax Plan, the Government announced it would introduce tax and regulatory frameworks for two new types of collective investment vehicles, the CCIV and a limited partnership collective investment vehicle.

1.12 In the 2021-22 Budget, the Government reconfirmed its commitment to establishing the CCIV regime and announced a commencement date of 1 July 2022 for the regime.

1.13 Schedules 1 to 5 to the Bill establish the regulatory and tax frameworks for CCIVs.

Policy objectives

1.14 In developing the regulatory framework for CCIVs, a key policy objective has been to increase the competitiveness of Australia's managed funds industry internationally to attract offshore investment.

1.15 In developing the tax framework for CCIVs, the policy objective has been to ensure that a CCIV is taxed on a flow-through basis, with the general tax treatment of CCIVs and their members aligned with the existing tax treatment of AMITs (and their members).

1.16 To this end, the Government has focused on ensuring the CCIVs framework would offer internationally recognisable investment products, flow-through tax treatment, commercial flexibility and strong investor protections.

1.17 Australian funds management is currently conducted through a MIS, which has a trust-based structure. While the Australian managed funds industry is well established, it is predominantly domestically focused. Many offshore investors perceive the MIS structure to be inappropriate for large-scale funds management. The limited range of vehicles that can be used for funds management reduces the ability for Australian funds management to engage competitively with financial centres that offer significant cross-border funds management through the use of corporate vehicles for collective investment, such as Europe, the United Kingdom and Singapore.

1.18 The Government has analysed the regulatory regimes of leading fund domiciles, target export markets, and major financial centres in our region. The regulatory framework draws on the features of other equivalent vehicles internationally. It has been developed to facilitate the competitiveness and commercial viability of CCIVs while ensuring integrity of Australia's investor protections and tax framework.

1.19 Like other international corporate collective vehicles, CCIVs will operate with a corporate structure, meaning they will have the legal form of a company limited by shares with most of the powers, rights, duties and characteristics of a company.

1.20 Aligning Australia's regulatory framework with well-developed international regimes can lower the barriers to entry for new fund managers seeking to operate in Australia. This can increase competition and allow Australian consumers greater product choice, including exposure to new asset classes.

1.21 The introduction of the CCIV regime is also intended to complement the ARFP as it will provide Australian fund managers with a vehicle that will be compliant with the requirements for the ARFP and is similar to the corporate funds already available in parts of Asia.

1.22 The legislation also contributes to the more general objective of global regulatory alignment. The introduction of the CCIV helps to create a cohesive regional managed funds industry and facilitate more efficient participation in the global marketplace.

Regulatory framework

1.23 The CCIV regulatory framework utilises a company structure limited by shares so that it is recognisable to offshore investors and fund managers.

1.24 As a company, a CCIV will generally be subject to the ordinary company rules under the Corporations Act unless otherwise specified. Features of the MIS regime have also been incorporated into the design of CCIVs to the extent that they are consistent with the policy objective. In doing so, regulatory parity is maintained (to the extent possible) between the existing MIS framework and the CCIV framework. This will ensure efficient operation of the domestic funds management industry and ease of adoption for fund managers wishing to establish a CCIV.

1.25 For example, a CCIV must have share capital but the CCIV can issue some or all of its shares as being redeemable at the member's option. This feature is similar to a member's right to withdraw from a registered scheme. Further, while other types of companies are required to appoint natural person directors, a CCIV must have a single corporate director, which is consistent with the OEIC model and also similar to the structure for MISs (which are operated by a corporate trustee).

1.26 The CCIV regulatory framework distinguishes between retail and wholesale CCIVs. It aligns with the retail investor protections of a registered scheme while also replicating elements of the flexibility and lighter touch regulatory approach applying to wholesale MISs. This reflects the higher degree of investor sophistication among wholesale investors and their capacity to negotiate bespoke contractual protections and assess investment risks.

Tax framework

1.27 The CCIV tax framework provides flow-through tax treatment for investors. It achieves this 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. The general intent is that the tax outcomes for an investor in a sub-fund of a CCIV be the same as an investor in an AMIT.

Summary of new law

Registration

Registration of a CCIV

1.28 A CCIV is a new type of company that is limited by shares and has as its director a public company with an AFSL authorising it to operate the business and conduct the affairs of the CCIV (the corporate director).

1.29 A company may be registered as a CCIV if it meets certain basic registration requirements, including that upon registration it will have at least one sub-fund (which must have at least one member). The registration requirements are broadly similar to those of other companies.

1.30 Upon registration, the persons identified in the application as the proposed corporate director and members of the CCIV assume those roles (subject to meeting the relevant requirements for the roles). The shares specified in the application form are taken to be issued to those members upon registration.

1.31 A CCIV may be either retail or wholesale, with retail CCIVs subject to a regulatory framework that encompasses additional regulatory protections necessary for retail investors. Wholesale CCIVs are subject to a more limited regulatory framework, reflecting the higher degree of investor sophistication among wholesale investors and capacity to negotiate bespoke arrangements with fund providers.

1.32 A CCIV will be a wholesale CCIV unless it has at least one investor that acquires securities in the CCIV as a 'retail client' (within the existing meaning in Chapter 7 of the Corporations Act) because securities in the CCIV were issued or transferred to them in circumstances that would have required a PDS be given to them. In this case, the whole CCIV is treated as a retail CCIV.

1.33 A retail CCIV with a single sub-fund, or a sub-fund of a retail CCIV (that has a single sub-fund) may be included in the official list of a prescribed financial market operated in Australia. Listing of a retail CCIV with more than one sub-fund, or of multiple sub-funds of a retail CCIV, will be considered further once the CCIV regime is operating.

1.34 These restrictions only apply to listing on a prescribed financial market operated in Australia. Nothing in the new law prevents a security in a CCIV from being quoted on a financial market or settled using financial market infrastructure, such as the ASX Quoted Assets Market, subject to the rules of the relevant market. The restrictions on listing do not affect the capacity for a security in a CCIV to be quoted (regardless of the number of sub-funds of that CCIV).

Registration of a sub-fund of a CCIV

1.35 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. The capacity to group these funds together under one umbrella vehicle supports funds managers to build capacity and economies of scale.

1.36 A sub-fund of a CCIV is all or part of the CCIV's business that is registered by ASIC as a sub-fund of the CCIV. A sub-fund is established on registration.

1.37 The initial sub-fund (or sub-funds) of the CCIV are registered by ASIC as part of the registration of the CCIV. Registration of a sub-fund of the CCIV after the registration of the CCIV itself is by a standalone process.

1.38 An ARFN is given to each sub-fund as part of the registration process. A sub-fund's name is the name specified in the record of the sub-fund's registration. A sub-fund's name is subject to naming requirements, including that it must have the CCIV's name at the start of its name.

Registers

1.39 Similar to a company and a registered scheme, a CCIV must maintain a register of its members that includes certain information (such as the details of the sub-fund that the members shares are referable to). If a CCIV is a member (for example, under cross-investment within a CCIV), then the CCIV's register of members must also identify the sub-fund to which the CCIV's membership relates.

Corporate governance

Governance rules

1.40 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.

1.41 Unlike other companies, a CCIV has a single corporate director. The corporate director is a public company with its own officers and employees. The new law includes provisions that allow the natural person officers of the corporate director to undertake certain activities for the CCIV, such as enter into a contract on behalf of the CCIV in certain circumstances.

1.42 Both retail and wholesale CCIVs must have a constitution. The constitution of a CCIV is enforceable as a statutory contract between:

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the CCIV and each member;

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the CCIV and the corporate director;

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the corporate director and each member; and

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a member and each other member.

1.43 The constitution of a retail CCIV must make adequate provision for certain matters (such as the establishment of sub-funds and the method by which member complaints are to be dealt with).

Officers of the CCIV

1.44 The CCIV must have as its sole director a public company that holds an AFSL authorising it to operate the business and conduct the affairs of a CCIV (the corporate director). The CCIV does not have any officers or employees other than the corporate director. The primary exception to this is any liquidator, administrator or receiver appointed to the CCIV, who is also an officer of the CCIV.

1.45 The corporate director of a CCIV has an obligation to operate the business and conduct the affairs of the CCIV. The corporate director must also perform the functions conferred on it by the CCIV's constitution and the Corporations Act.

1.46 The new law sets out the powers and obligations of the corporate director in relation to the CCIV and its members. The corporate director has certain duties and obligations that arise from its role as a director of a company, and others that are specific to CCIVs.

1.47 The corporate director of a CCIV, and the officers and employees of the corporate director of a retail CCIV, owe additional duties and obligations that reflect those that apply to the responsible entity of a registered scheme or the corporate trustee of a MIS (as relevant). Some of the additional duties owed by the corporate director of a wholesale CCIV may be expressly excluded under the CCIV's constitution. Overall, the duties for the corporate director of a CCIV are designed to provide investors in a CCIV comparable protections as investors in a MIS.

1.48 If there is any conflict between the duties that officers and employees of the corporate director owe to the CCIV and the duties they owe to the corporate director, the duties owed to the CCIV prevail. This approach ensures general parity between the MIS and CCIV regimes. In addition, if there is any conflict between the duties the corporate director owes to the CCIV and those it owes to the CCIV's members, the duties to members prevail.

1.49 For the purposes of determining certain liabilities, the corporate director of a retail CCIV is liable for the acts of its agents (and other persons taken to be its agents, such as the agents of the CCIV), even if those acts are fraudulent or outside the scope of its authority. This ensures parity with the existing model for registered schemes and ensures the corporate director is ultimately liable for all of the CCIV's operations.

Compliance plan

1.50 A retail CCIV must have a compliance plan and a compliance plan auditor (similar to the requirements for a compliance plan of a registered scheme).

1.51 The compliance plan must set out adequate measures to be applied by the corporate director in operating the CCIV to ensure compliance with the Corporations Act and the CCIV's constitution. This is the only basic content requirement for the compliance plan.

1.52 The corporate director must ensure at all times that the CCIV's compliance plan meets the legislative requirements for compliance plans. The corporate director must also comply with the compliance plan.

Member protection

1.53 Except in limited circumstances, a CCIV must obtain the approval of the members of each affected sub-fund if the CCIV wishes to give a financial benefit to a related party of the CCIV.

1.54 As for other companies, members of a CCIV may seek a remedy against a CCIV if its affairs (or the affairs of one or more sub-funds) are being conducted in a manner that is contrary to the interests of the members of the CCIV as a whole or one or more sub-funds of the CCIV. The grounds for an order by the Court are not exhaustive and include an order to modify or repeal the CCIV's constitution.

1.55 A member of a CCIV may bring, or intervene in, legal proceedings on behalf of the CCIV in certain circumstances.

1.56 The corporate director of a CCIV has civil liability to members of the CCIV for a contravention of Chapter 8B (regardless of whether the corporate director has been convicted of an offence or has had a civil penalty order made against it). This is consistent with the right of a member of a registered scheme to seek a remedy against the responsible entity of the scheme in similar circumstances.

Meetings

1.57 The corporate director (being a company with its own board of directors) may pass a resolution on behalf of the CCIV if the directors of the corporate director pass a resolution that expressly states it is on behalf of the corporate director and, if it is the corporate director of more than one CCIV, the CCIV to which the resolution applies.

1.58 A meeting of the members of the whole CCIV or a sub-fund of the CCIV may be called by the corporate director or by a member. The requirements for meetings of members of a CCIV are based on the requirements that apply to registered schemes.

1.59 Some modifications are made to account for a CCIV's corporate status. In particular, a member's voting power at a meeting (of either the CCIV or a sub-fund) is generally referable to the value of the shares the member holds in the CCIV.

Corporate contraventions

1.60 The corporate director of a CCIV is generally responsible for conduct of the CCIV. This reflects the fact that a CCIV does not have any employees and the corporate director is its only director. The new law includes bespoke rules that apply across all Commonwealth laws and to conduct that constitutes a contravention of a criminal offence or a civil penalty provision. These rules operate in place of Part 2.5 of the Criminal Code and any other attribution rules that would otherwise apply in relation to conduct undertaken by or in relation to a CCIV.

1.61 The consequences of contravening a criminal offence or civil penalty provision by a CCIV do not apply to the CCIV. A CCIV is not liable for any fine or penalty and may not be issued an infringement notice. However, if a CCIV is found to have committed an offence or contravened a civil penalty provision, then the corporate director of the CCIV at the time of the offence or contravention is also taken to have committed the offence or contravened the provision and is liable for any associated fine or penalty.

1.62 The new law does not apply to contraventions of State and Territory laws. However, if a CCIV contravenes a State or Territory law then ASIC, the CCIV or a member of the CCIV may apply to a Court for a compensation order to be made against the corporate director in respect of any loss or damage as a result of the contravention.

Shares and debentures

1.63 A CCIV may have a variable capital structure that provides flexibility for the issue, redemption or repurchase of its shares. Like many managed funds, some CCIVs or sub-fund(s) may be 'open-ended' - meaning that its share capital is not limited. It has broad flexibility to issue, redeem or repurchase shares. Other CCIVs or sub-fund(s) may be 'close-ended' (such as listed CCIVs or sub-funds) whose share capital is fixed or limited.

1.64 Many of the rules that apply to issuing or reducing share capital in an ordinary company do not apply to CCIVs given its variable capital nature.

1.65 A CCIV may issue shares and debentures, provided that each security is referable to only one sub-fund. The shares referable to one sub-fund form a class of shares, if it is not divided into two or more classes.

1.66 A member may have a right to redeem their shares if provided for by the CCIV. These are 'redeemable shares' (or 'redeemable preference shares' if preferences are also attached to those shares). A CCIV may redeem shares if the sub-fund to which the shares are referable is solvent. Unlike for ordinary companies, redemptions do not need to be paid out of profit or out of the proceeds of a new issue of shares. Retail CCIVs must comply with additional requirements (for example, any relevant requirements set out in its constitution).

1.67 A CCIV may distribute its income and capital to members by paying dividends. Each share in a class of shares has the same dividend rights unless provided for in the CCIV's constitution or by special resolution of the members of the sub-fund to which the shares are referable. A CCIV may pay a dividend on a share if the sub-fund to which the share is referable is solvent. The rules for the payment of dividends by ordinary companies do not apply to CCIVs (such as the rules regarding the payment of dividends if a company's assets exceed its liabilities).

1.68 A CCIV is generally permitted to engage in cross-investment between sub-funds of the CCIV. This involves a CCIV acquiring in respect of any of its sub-funds, one or more shares that are referable to another of its sub-funds. This approach aligns the CCIV framework with other international corporate collective vehicles and ensures that a CCIV can utilise funds management structures such as a master-feeder structure or a hedging structure.

1.69 A CCIV may reduce its share capital (for example, under a buy back) if it is authorised under the law or, in any case, if it is permitted in its constitution and the sub-fund to which the share(s) are referable is solvent.

Financial record-keeping and reporting

1.70 All CCIVs must keep written financial records that reflect its financial position and performance, and enable true and fair financial statements to be prepared.

1.71 Retail CCIVs must prepare financial reports and directors' reports for each sub-fund of the CCIV. Certain requirements in Chapter 2M of the Corporations Act have been adapted to CCIVs consistent with its nature and for consistency with the MIS regime. For example, directors' reports must include specific details about the corporate director and its directors, such as any benefits or interests of a director of the corporate director in the CCIV.

Operating a CCIV

1.72 A CCIV must have at least one sub-fund. Each part of the CCIV's business must be referable to one (and only one) sub-fund of the CCIV. The cumulative business of all of the sub-funds of the CCIV must constitute the entire business of the CCIV.

1.73 A sub-fund is established on registration by ASIC and is identifiable by its unique name and ARFN. A sub-fund does not have legal personality. Each security that is issued by a CCIV must be referable to a sub-fund.

1.74 Allocation rules set out how assets and liabilities of the CCIV are attributed to the CCIV's sub-fund(s). In the event that money (acquired in a single lump sum) or property acquired by the CCIV relates to the business of more than one sub-fund, the corporate director must determine the proportion of the money or property that is to be allocated to each sub-fund of the CCIV. The proportion that is allocated must be fair and reasonable in the circumstances. A single item of property that relates to the business of more than one sub-fund of the CCIV must be converted into money or other property that can be allocated among the sub-funds of the CCIV in accordance with the allocation rules.

1.75 Similar rules also apply to liabilities incurred by a CCIV.

External administration and deregistration

External administration

1.76 External administration applies on a sub-fund-by-sub-fund basis. This is achieved by applying translation rules to the existing external administration provisions in Chapter 5.

1.77 The translation rules ensure that the process for winding up a company in Chapter 5 applies in respect of a sub-fund of a CCIV. A CCIV cannot be wound up.

1.78 The new law also sets out the powers of a liquidator and corporate director when a sub-fund is being wound up. A liquidator only has the power to perform a function to the extent that it relates to the sub-fund that is being wound up. The corporate director continues to make all allocation determinations and exercise its normal powers for the sub-funds that are not being wound up.

1.79 In the arrangement and reconstruction provisions in Part 5.1, the consequence of applying the translation rules is that sub-funds may be rearranged within a CCIV or transferred between CCIVs. The new law also grants the Court additional powers to make orders in the CCIV context. This includes the power to make orders in relation to the assets and liabilities of a sub-fund.

1.80 In the receivership provisions, receivers are taken to be appointed to the property of each sub-fund separately. Receivers have special powers to challenge allocation determinations before the Court.

Deregistration

1.81 A sub-fund of a CCIV may be voluntarily deregistered on application by the CCIV, the corporate director or the liquidator of the sub-fund. ASIC or a Court may also initiate deregistration of a sub-fund in certain circumstances.

1.82 A CCIV must be deregistered by ASIC after the CCIV's last sub-fund has been deregistered. This is the only way a CCIV may be deregistered.

1.83 The consequences of deregistering a sub-fund or CCIV generally mirror the consequences of deregistering other types of companies under Chapter 5A. On deregistration, a sub-fund ceases to be established and a CCIV ceases to exist. Any assets of the sub-fund vest in the Commonwealth or ASIC. The books of the sub-fund or the CCIV must be retained for three years after deregistration.

Takeovers, compulsory acquisitions, continuous disclosure and fundraising

1.84 The acquisition of a relevant interest in a CCIV is not regulated by the procedural rules and obligations regarding takeovers, compulsory acquisitions and buy-outs in Chapters 6 to 6B of the Corporations Act, unless the acquisition relates to a relevant interest in issued voting shares in a listed CCIV. This is consistent with the application of these rules to listed registered schemes.

1.85 Similarly, the Takeovers Panel's jurisdiction only applies in relation to the affairs of a listed CCIV. This means that the Takeovers Panel has the power to intervene in the affairs of a listed CCIV, including in relation to a takeover of a listed CCIV.

1.86 Under the existing law, all CCIVs must comply with the rules around takeovers, compulsory acquisitions and buy-outs when it is proposing to acquire interests in another entity that is covered by the rules in Chapters 6 to 6B of the Corporations Act.

1.87 If a CCIV is a disclosing entity (listed or otherwise), then it must comply with the continuous disclosure requirements in Chapter 6CA of the Corporations Act in a manner consistent with a registered scheme that is a disclosing entity.

1.88 The fundraising rules in Chapter 6D of the Corporations Act do not apply to CCIVs. Instead, offers of securities in a CCIV are covered by the rules in Chapter 7 (explained further below).

Financial services and markets

1.89 The new law modifies the operation of Chapter 7 of the Corporations Act, which regulates financial services and markets. Key modifications are made to provisions that relate to assigning responsibility for conduct, financial services licensing and disclosure for financial products.

1.90 The corporate director of the CCIV is taken to provide any financial services that would otherwise be provided by a CCIV, with the exception of issuing securities in a CCIV, which is undertaken by the CCIV itself. The corporate director, therefore, is required to hold an AFSL that authorises it to provide the financial service of 'operating the business and conducting the affairs of a CCIV'. Financial services provided by a CCIV are covered by the corporate director's AFSL. A CCIV is always exempt from the requirement to hold an AFSL.

1.91 A PDS, rather than a prospectus, must be given to retail clients who acquire a security in a CCIV under Part 7.9 of the Corporations Act. Limited exceptions apply to the PDS requirements where a retail client is associated with a CCIV or corporate director, and in other circumstances as appropriate under Part 7.9 of the Corporations Act as modified by Part 8B.6.

1.92 Consistent with the application of the PDS regime to retail CCIVs, the design and distribution obligations in Part 7.8A of the Corporations Act also apply in relation to retail CCIVs. Similarly, ASIC's power to make product intervention orders under Part 7.9 of the Corporations Act applies in relation to retail CCIVs.

Asia Region Funds Passport regime

1.93 The provisions relating to the ARFP regime have been extended to cover CCIVs. The corporate director of a retail CCIV may lodge an application with ASIC to register a sub-fund of the CCIV as an Australian passport fund. If the conditions for registration are satisfied, the sub-fund then becomes an Australian passport fund and the corporate director becomes the operator of the fund.

Other amendments to corporations and financial services law

Amendments to Chapter 9 of the Corporations Act

1.94 Chapter 9 of the Corporations Act includes a number of miscellaneous provisions, including relating to registers, auditors, penalties and offences. Modifications to certain provisions in Chapter 9 ensure that these administrative provisions work appropriately in relation to CCIVs and corporate directors.

Amendments to the ASIC Act

1.95 Amendments to the ASIC Act ensure that the definition of financial services in the ASIC Act applies correctly, and that ASIC can exercise its powers and functions effectively in relation to CCIVs.

Subordinate legislation for the regulatory framework

1.96 Certain matters may be prescribed in regulations where provided for in Chapter 8B. Regulations may also modify the operation of Chapter 8B, or the Corporations Act, for its application to CCIVs. In addition, ASIC may make exemption orders and modification declarations in relation to specified parts of Chapter 8B.

Note: This diagram shows the regulatory framework as it applies to a retail CCIV. A wholesale CCIV is not required to have a compliance plan. The CCIV and the corporate director may each appoint agents and service providers to exercise their respective powers and function.

Tax framework

1.97 The CCIV tax framework outlined in Chapter 13 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).

1.98 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.

1.99 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.

1.100 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.

Objects and outline of new law

Outline of new Chapter 8B in the Corporations Act

1.101 Part 8B.1 of Chapter 8B sets out the objects of the new Chapter.

1.102 The objects of Chapter 8B are to establish a regulatory framework for forming and operating CCIVs in a way that is fair, efficient and competitive and, in conjunction with the financial services licensing framework in Chapter 7 of the Corporations Act, to promote confident and informed investors in CCIVs. [Schedule 1, item 4, section 1221]

1.103 Part 8B.2 of Chapter 8B sets out the registration requirements for a CCIV and a sub-fund of a CCIV. Part 8B.2 also sets out the rules for the register of the CCIV's members.

1.104 Part 8B.3 of Chapter 8B sets out the rules relating to the corporate governance of a CCIV. This includes the rules regarding:

•

governance of CCIVs (such as how a CCIV exercises company powers and the rules regarding a CCIV's constitution);

•

the officers and employees of the CCIV (including the core obligations for the corporate director of the CCIV and the rules relating to its replacement);

•

the officers, employees and auditors of the corporate director of the CCIV;

•

the compliance plan of a retail CCIV;

•

member protection (including related party transactions by retail CCIVs, rights and remedies for the member of a CCIV and the corporate director's civil liability to members);

•

meetings (including resolutions of a CCIV and meetings of the members of a CCIV (or a sub-fund of the CCIV)); and

•

corporate contraventions (including the rules for establishing civil and criminal liability under Commonwealth laws).

1.105 Divisions 1 to 3 of Part 8B.4 of Chapter 8B establish the rules for corporate financing of a CCIV. These Divisions outline the types of securities that CCIVs may issue and the circumstances when a CCIV is permitted to pay dividends. These Divisions also explain the requirements that must be satisfied before a CCIV may redeem its shares or reduce its share capital and set out the circumstances in which the sub-funds of the CCIV may cross-invest.

1.106 Divisions 4 and 5 of Part 8B.4 of Chapter 8B set out the rules for the maintenance of financial records by CCIVs and how financial reports and audits are to be prepared and conducted for sub-funds of CCIVs.

1.107 Part 8B.5 of Chapter 8B establishes the regulatory framework for operating the sub-funds of a CCIV and allocating the assets and liabilities to sub-funds.

1.108 Part 8B.6 of Chapter 8B outlines the process for winding up a sub-fund and how the other external administration processes apply in the CCIV context. It also outlines the process for deregistering a CCIV and sub-funds of a CCIV.

1.109 Part 8B.7 of Chapter 8B outlines the rules for control, financial services and disclosure. Divisions 1 to 3 of Part 8B.7 outline how the following Chapters of the Corporations Act apply to CCIVs:

•

Chapters 6 to 6B regarding takeovers, compulsory acquisitions and buy-outs;

•

Chapter 6C regarding information about ownership in listed entities;

•

Chapter 6CA regarding continuous disclosure; and

•

Chapter 6D regarding fundraising and disclosure.

1.110 Division 4 of Part 8B.7 modifies the operation of Chapter 7 for CCIVs and sets out how markets and financial services regulation apply to CCIVs and corporate directors - including the requirements for disclosure.

1.111 Part 8B.8 of Chapter 8B outlines consequential amendments to Chapter 9 of the Corporations Act. The new law modifies certain provisions, such as those relating to registers, to ensure that they operate appropriately in relation to CCIVs and their corporate directors.

1.112 Part 8B.9 of Chapter 8B allows ASIC to make exemption orders and modification declarations in relation to the application of specified parts of Chapter 8B. Regulations may also modify the operation of Chapter 8B, or any other provision of the Corporations Act in relation to its application to CCIVs.

Outline of Subdivision 195-C of the ITAA 1997

1.113 Subdivision 195-C of the ITAA 1997 provides that for taxation purposes, a trust relationship is deemed to exist between a CCIV, the business, assets and liabilities referable to a sub-fund and the relevant class of members.

1.114 Each sub-fund is treated as a separate unit trust (known as the 'CCIV sub-fund trust') with the CCIV as trustee and members of the CCIV as beneficiaries of the CCIV sub-fund trust, in accordance with their shareholding that is referable to the sub-fund.

1.115 Under the deeming principle, all taxation laws apply to the CCIV, sub-fund and members in their deemed capacities, unless expressly excluded.

1.116 Subdivision 195-C of the ITAA 1997 also does the following:

•

makes modifications to the AMIT criteria to ensure that only relevant criteria apply when determining a CCIV sub-fund trust's AMIT eligibility; and

•

makes amendments where a CCIV sub-fund trust fails to meet the modified AMIT eligibility criteria and is taxed in accordance with the general trust provisions.

Application and commencement

1.117 The amendments to corporate and financial services law and taxation law to give effect to the CCIV regime apply from 1 July 2022. [Section 2]

1.118 The contingent amendments to the Corporations Act made by Schedule 4 to the Bill also apply from 1 July 2022 if Schedule 2 to the Corporations Amendment (Meetings and Documents) Act 2021 has already commenced. Otherwise, it will not commence.

Chapter 2: CCIVs - Registration

Outline of chapter

2.1 Chapter 2 of this explanatory memorandum sets out the registration requirements for a CCIV and a sub-fund of a CCIV.

2.2 It sets out:

•

the requirements for registration as a CCIV;

•

how a CCIV is registered;

•

the rules for a CCIV's name;

•

the meaning of a retail CCIV and a wholesale CCIV;

•

the prohibition on listing for certain CCIVs; and

•

the restriction on changing company type.

2.3 In relation to the registration of a sub-fund of a CCIV, it sets out:

•

what a sub-fund of a CCIV is;

•

how a sub-fund of a CCIV is registered; and

•

the rules for a sub-fund's name.

2.4 Chapter 2 also sets out the rules for the CCIV's company register.

Context of amendments

2.5 The key feature of a CCIV is its corporate status: a CCIV is a company used for collective investment. Investors may pool their funds in a CCIV and have them managed by a professional fund manager. Previously, the most common vehicle available for this kind of collective investment was a trust-based MIS. MISs that offer interests to retail clients are registered schemes and are regulated under Chapter 5C of the Corporations Act.

2.6 The establishment of CCIVs brings the Australian regime for funds management into line with jurisdictions overseas, in particular the European Union's UCITS regime, the UK's OEIC regime, and various other regimes in the Asian region.

2.7 Several of the core features of a CCIV have been drawn from overseas regulatory precedents, including that a CCIV is a company limited by shares and the concept of a sub-fund of a CCIV.

2.8 In addition, parts of the regulatory framework for CCIVs have been drawn from the MIS regime in order to ensure general parity and consistency between the two regimes.

2.9 As with a MIS, a CCIV may either be retail or wholesale. Generally, a CCIV is a retail CCIV if it issues or has issued its securities to retail clients. Otherwise, it is a wholesale CCIV. Different regulatory requirements apply to retail and wholesale CCIVs to ensure an appropriate balance between regulation and investor protection for retail and wholesale clients.

2.10 However, unlike the MIS regime, which only requires the registration of retail MISs, all CCIVs must be registered as a company with ASIC.

Summary of new law

Registration of a CCIV

2.11 A CCIV is a new type of company that is limited by shares and has as its director a public company with an AFSL authorising it to operate the business and conduct the affairs of the CCIV.

2.12 A company may be registered as a CCIV if it meets certain basic registration requirements, including that upon registration it will have at least one sub-fund (which must have at least one member).

2.13 A CCIV is registered through the same process as other companies, although the application process reflects the unique corporate structure of a CCIV (for example, additional information must be provided in relation to the sub-fund or sub-funds that the CCIV proposes to have on registration). Some of the content that is required for other companies is not relevant in the CCIV context (such as the details of the company's secretary).

2.14 The application for registration must be accompanied by a notice stating whether the CCIV is to be a retail CCIV or a wholesale CCIV. If the CCIV is to be a retail CCIV, the application must also be accompanied by a copy of the CCIV's compliance plan.

2.15 Upon registration, the persons identified in the application as the proposed corporate director and members of the CCIV assume those roles. The shares specified in the application form are also taken to be issued to those members upon registration.

2.16 A CCIV's name is subject to special naming requirements - including requiring the expression "Corporate Collective Investment Vehicle" or the abbreviation "CCIV" at the end of its name.

2.17 A CCIV may be a retail CCIV or a wholesale CCIV. Retail CCIVs are subject to additional regulatory requirements that provide protections for retail clients. The new law sets out when a CCIV is a retail CCIV or a wholesale CCIV. A CCIV is a wholesale CCIV unless securities in the CCIV were issued to retail clients, or transferred to a retail client in circumstances that required that a PDS be given to that client. This will generally ensure that a CCIV with one or more retail clients (within the existing definitions in Chapter 7 of the Corporations Act) will be a retail CCIV.

2.18 A retail CCIV with one sub-fund, or a sub-fund of a retail CCIV (with only one sub-fund), may be included in the official list of a prescribed financial market operated in Australia. However, other CCIVs and sub-funds (being retail CCIVs with more than one sub-fund, wholesale CCIVs, and their sub-funds) are prohibited from being listed as such.

2.19 These restrictions do not affect the ability to quote a security in a CCIV on a financial market, such as the ASX Quoted Assets Market, subject to the rules of that financial market. A security in a CCIV (regardless of the number of its sub-funds) may be quoted on a financial market, subject to the relevant requirements of that market.

2.20 A CCIV may not change into another type of company. Another type of company may not change into a CCIV.

Registration of a sub-fund of a CCIV

2.21 A sub-fund of a CCIV is all or part of the CCIV's business that is registered by ASIC as a sub-fund of the CCIV. A sub-fund is established on registration.

2.22 The initial sub-fund or sub-funds of the CCIV are registered by ASIC as part of the registration of the CCIV. Registration of a sub-fund of the CCIV after the registration of the CCIV itself is by a standalone process.

2.23 This standalone process involves lodging an application with ASIC in the prescribed form that states the proposed name of the sub-fund, the name and ACN of the CCIV, the details of each person who consents to become a member of the sub-fund and certain information about the shares that each member will take up. This information aligns with the information required for registration of an initial sub-fund as part of the registration of the CCIV itself.

2.24 An ARFN is given to each sub-fund as part of the registration process.

2.25 A sub-fund's name is the name specified in the record of the sub-fund's registration. A sub-fund's name is subject to naming requirements, including that it must have the CCIV's name at the start of its name.

2.26 A sub-fund's name and ARFN must be identified on certain documents, including all public documents and negotiable instruments.

Registers

2.27 Similar to a company and a registered scheme, a CCIV must maintain a register of members including the details of the securities held by each member and which sub-fund of the CCIV each security is referable to. If a CCIV is a member (for example, under cross-investment within one CCIV), then the CCIV's register of members must identify the relevant sub-fund to which the membership relates.

Comparison of key features of new law and current law

Detailed explanation of new law

A new type of company

2.28 A CCIV is a company that is registered as a CCIV under the Corporations Act. Defining a CCIV in this way reflects the fact that registration as a CCIV is a voluntary election. [Schedule 2, items 5 and 9, definitions of 'CCIV' and 'corporate collective investment vehicle' in section 9]

2.29 As a CCIV is a new type of company, it is included separately in the table of types of companies that are registrable under the Corporations Act in subsection 112(1). [Schedule 1, items 1 to 3, table in subsection 112(1) and notes to subsection 112(1); Schedule 2, item 21, definition of 'public company' in section 9 of the Corporations Act]

Registering a CCIV

Basic registration requirements

2.30 A company may be registered as a CCIV if it meets certain basic requirements for registration, including that:

•

it is a company limited by shares;

•

it has a constitution;

•

the proposed director of the company is a public company that holds an AFSL authorising it to operate the business and conduct the affairs of the CCIV; and

•

upon registration, it will have at least one sub-fund (which will have at least one member).

[Schedule 1, item 4, section 1222]

2.31 In order to be registered as a CCIV, a notice about whether the CCIV is to be a retail or wholesale CCIV must also be lodged with the application for registration. If the CCIV will be a retail CCIV upon registration, it must also have a compliance plan. [Schedule 1, item 4, paragraphs 1222(f) and (g), and subsection 1222A(4)]

Process for registration

2.32 The ordinary process for applying to register a company, contained in section 117 of the Corporations Act, is modified for CCIVs. Consistent with subsection 117(4) of the Corporations Act, an application to register a CCIV must be in the prescribed form. [Schedule 1, item, 4, subsection 1222A(1); Schedule 2, item 40, note 2 to subsection 117(1)]

2.33 The application must include the information requirements for companies listed in subsection 117(2) of the Corporations Act, with the exception of the following information, which is not relevant for CCIVs:

•

the personal details and addresses of individual directors, as individuals may not be appointed as directors of a CCIV;

•

the personal details and address of the company secretary, as a CCIV must not appoint a company secretary; and

•

whether or not the company will have an ultimate holding company (and the details of the holding company).

[Schedule 1, item 4, subsection 1222A(2)]

2.34 The application must also include certain additional information, reflecting a CCIV's unique form as a company, including:

•

the name and registered office address of the public company that has consented, in writing, to be the CCIV's corporate director;

•

the proposed name of each sub-fund the CCIV proposes to establish on registration of the CCIV; and

•

for each proposed sub-fund, information regarding the shares being taken up by persons who have consented to become members of the CCIV.

[Schedule 1, item 4, subsection 1222A(3)]

2.35 The person making the application must have the written consents of the proposed corporate director and members of the CCIV which, after the CCIV is registered, must be given to the CCIV. The CCIV has an obligation to keep the consents. [Schedule 1, item 4, subsection 1222A(7)]

2.36 The application must be accompanied by a notice stating whether the CCIV is to be a retail CCIV or a wholesale CCIV and a copy of the CCIV's constitution. [Schedule 1, item 4, subsections 1222A(4) and (5)]

2.37 If the CCIV is to be a retail CCIV, then the application must also be accompanied by a copy of the compliance plan that has been signed by all the directors of the proposed corporate director. [Schedule 1, item 4, subsection 1222A(6)]

2.38 After receiving an application to register a company as a CCIV, ASIC may register the company under section 118 of the Corporations Act if the company meets the basic registration requirements explained above. [Schedule 1, item 4, section 1222C; Schedule 2, items 42 and 43, note 2 to subsection 118(1)]

2.39 A body may only be registered as a CCIV through this application process. There is no other way to register a CCIV. In particular, a body that is registered under State or Territory law may not be taken to be registered as a CCIV under section 5H of the Corporations Act. Allowing only one process for the registration of a CCIV enables ASIC to oversee the registration of all CCIVs. [Schedule 1, item 4, section 1222B]

2.40 Under the Government's Modernising Business Registers program, registration functions are progressively being transferred to the Australian Business Registry Services. The registration of a CCIV will be subject to this transfer as is the case for other company registrations.

Effect of registration

2.41 Upon registration, the persons proposed in the application to become the corporate director and members of the CCIV become those things. The shares specified in the application form are also taken to be issued to those members upon registration. [Schedule 1, item 4, section 1222D; Schedule 2, item 44, note to subsection 120(1)]

Special naming requirements for a CCIV's name

2.42 The naming requirements for the names of companies under Part 2B.6 of Chapter 2B of the Corporations Act generally apply to the name of a CCIV. However, there are some special requirements for a CCIV's name.

2.43 Even though a CCIV is a company limited by shares, it does not need to have the word "Limited" at the end of its name. Instead, it is required to have the expression "Corporate Collective Investment Vehicle" at the end of its name. Alternatively, the abbreviation "CCIV" can be used. [Schedule 1, item 4, sections 1222E and 1222F]

2.44 In the same way that a person is prohibited from carrying on a business using the words "Limited", "No Liability" or "Proprietary" in their name (or an abbreviation of these words) unless allowed or required to do so under law, a person is also prohibited from carrying on a business with "Corporate Collective Investment Vehicle" or "CCIV" in their name unless allowed or required to do so under law. [Schedule 1, item 4, section 1222G]

2.45 An application to change a CCIV's name may not be lodged with ASIC under section 157A of the Corporations Act while a sub-fund of the CCIV is in liquidation. [Schedule 1, item 4, section 1222H]

2.46 The naming requirements for a sub-fund's unique name are explained further in paragraphs 2.92 to 2.106.

Definition of a 'retail CCIV' and 'wholesale CCIV'

2.47 A CCIV is a retail CCIV if it satisfies the retail CCIV test or if it notifies ASIC that it is a retail CCIV. A CCIV is a wholesale CCIV if it is not a retail CCIV. [Schedule 1, item 4, section 1222J; Schedule 2, items 25 and 28, definitions of 'retail CCIV' and 'wholesale CCIV' in section 9 of the Corporations Act]

Retail CCIV test

2.48 Distinguishing between retail CCIVs and wholesale CCIVs is necessary as, unlike the MIS regime, all CCIVs must be registered irrespective of whether they are retail or wholesale. However, retail CCIVs are subject to additional regulatory requirements compared to wholesale CCIVs.

2.49 A CCIV meets the retail CCIV test if it has at least one member who is a 'protected retail client', a 'protected client under a custodial arrangement' or a 'protected member of a passport fund'. In this case, the CCIV as a whole is a retail CCIV. [Schedule 1, item 4, subsection 1222K(1)]

2.50 A person is a protected retail client if the person acquires a security issued by a CCIV as a retail client. The retail client may acquire the security by way of issue or a transfer if the transfer amounts to an off-market sale by a controller of the CCIV (as set out in subsection 1012C(5) of the Corporations Act), is a sale amounting to an indirect issue (subsection 1012C(6) of the Corporations Act) or is a sale amounting to an indirect off-market sale by a controller of the CCIV (subsection 1012C(8) of the Corporations Act). The definition of a retail client in existing section 761G of the Corporations Act excludes persons who acquire a product in connection with a business, professional investors and certain products of a particularly high value. [Schedule 1, item 4, paragraphs 1222K(2)(a) and (b)]

2.51 There are two categories of members that are always excluded from the definition of a protected retail client, namely:

•

persons 'associated' with the CCIV (see paragraph 9.38); and

•

persons that acquire the security by way of an issue that is part of a small scale personal offer (see paragraph 9.42).

[Schedule 1, item 4, paragraphs 1222K(2)(c) and (d)]

2.52 A person is a protected client under a custodial arrangement if the acquisition of the security occurs under a 'custodial arrangement', the person would have been a retail client if there was an 'equivalent direct acquisition', and the person is not associated with the CCIV. Refer to section 1012IA of the Corporations Act for the 'definition of a custodial arrangement' and 'equivalent direct acquisition'. [Schedule 1, item 4, subsection 1222K(3)]

2.53 It is expected that 'protected retail clients' and 'protected clients under a custodial arrangement' are less sophisticated clients who may not have the knowledge, resources or expertise to protect their own interests.

2.54 Finally, a person is a protected passport fund member if the sub-fund is an Australian passport fund and the person became a member after the sub-fund became an Australian passport fund or on the expectation that the sub-fund would become an Australian passport fund (see sections 9 and 1216B of the Corporations Act). [Schedule 1, item 4; subsection 1222K(4)]

2.55 A sub-fund of a CCIV with one or more protected passport fund members must remain an Australian passport fund under the Memorandum of Cooperation on the Establishment and Implementation of the ARFP.^[1] Only sub-funds of retail CCIVs are eligible to become Australian passport funds. It is for this reason that a CCIV with a protected passport fund member must remain a retail CCIV. See Chapter 10 of this explanatory memorandum for a discussion of how the ARFP regime applies to CCIVs.

2.56 The corporate director, a former corporate director or a related party of the current or a former corporate director are not protected passport fund members. These persons are considered to have greater knowledge than other passport fund members and are in a better position to protect their own interests. [Schedule 1, item 4, paragraph 1222K(4)(c)]

2.57 The carve-out for corporate directors and related parties is narrower than the carve-out for persons associated with the CCIV from the definition of a protected retail client or protected client under a custodial arrangement. This difference reflects the fact that only corporate directors and related parties are carved out from the special protections that apply when a registered scheme is an Australian passport fund in sections 1216A and 1216C of the Corporations Act.

2.58 The new law includes a power to make regulations that amend the circumstances where a person is a protected retail client, a protected client under a custodial arrangement or a protected passport fund member. This regulation-making power is necessary because minor amendments may need to be made to the definitions to take into account unforeseen circumstances or changes to the PDS regime (which is linked to the definition of a retail CCIV). It is envisaged that the regulation-making power will be used to deal with the same sorts of contingencies as the general regulation making power in Part 8B.9 of the new law (see Chapter 12 of this explanatory memorandum). [Schedule 1, item 4, subsection 1222K(5)]

Notification as a retail CCIV

2.59 A CCIV is a retail CCIV if the most recent notice lodged with ASIC states that the CCIV is, or wishes to be, a retail CCIV. This notice may have been provided at the time of applying to register the CCIV or when the CCIV wishes to change its status. [Schedule 1, item 4, subsection 1222L(1)]

2.60 A CCIV must state whether it intends to be a retail CCIV or a wholesale CCIV on registration. A wholesale CCIV or a retail CCIV can also provide a new notice to ASIC when its status changes.

Wholesale CCIVs changing their status

2.61 If a wholesale CCIV meets the retail CCIV test (see paragraphs 2.48 to 2.58), it must lodge a notice in the prescribed form within two business days of meeting the test. [Schedule 1, item 4, paragraph 1222L(2)(a) and subsections 1222L(3) and (4)]

2.62 All CCIVs that meet the retail CCIV test are retail CCIVs, irrespective of whether they lodge a notice. Nevertheless, a CCIV is required to notify ASIC that it has become a retail CCIV to ensure that ASIC is aware that the CCIV is now subject to the additional regulatory requirements that apply only to retail CCIVs. Notification of a CCIV's status to ASIC does not affect the obligations that apply to the CCIV.

2.63 A wholesale CCIV that fails to notify ASIC that it is a retail CCIV within two business days of meeting the retail CCIV test commits a strict liability offence punishable by a fine of up to 20 penalty units. See paragraph 2.71 for a discussion of why a strict liability offence is appropriate in this circumstance. [Schedule 1, item 4, subsections 1222L(3) to (5); Schedule 2, item 199, penalty for subsection 1222L(3) inserted into Schedule 3 to the Corporations Act]

2.64 Nevertheless, a CCIV has a defence if the CCIV did not know and could not reasonably have been expected to know that the CCIV had a protected retail client, a protected client under a custodial arrangement or a protected member of a passport fund. A defendant bears the evidential burden for this defence in respect of this knowledge. This offence-specific defence supplements the defence for mistake of fact in section 9.2 of the Criminal Code. [Schedule 1, item 4, subsection 1222L(6)]

2.65 This offence pursues the legitimate objective of aiding the oversight and enforcement of the CCIV regime by ASIC, as well as broader confidence in the proper operation of the CCIV regime. It is important that ASIC, third parties and investors are readily able to identify the status of a CCIV as retail or wholesale. This is of critical importance because retail CCIVs are subject to a regulatory framework that encompasses additional regulatory protections necessary for retail investors. Wholesale CCIVs are subject to a more limited regulatory framework, reflecting the higher degree of investor sophistication among wholesale investors and capacity to negotiate bespoke arrangements with fund providers.

2.66 A CCIV will be a wholesale CCIV unless securities in the CCIV were issued or transferred to a retail client in circumstances that would have required that a PDS be given to that client under Chapter 7 of the Corporations Act. This is intended to ensure that a CCIV with one or more retail clients (within the existing meaning the Corporations Act) will generally be a retail CCIV.

2.67 Whether or not a CCIV is retail or wholesale, with reference to the nature of its clients, is a matter that is peculiarly within the knowledge of the defendant (being the CCIV). It would be significantly more difficult and costly for the prosecution to disprove than for the defendant to establish the matter. Accordingly, this reversal of the burden of proof is appropriate.

2.68 A wholesale CCIV may voluntarily elect to become a retail CCIV even if it does not meet the retail CCIV test. One situation where a wholesale CCIV may wish to become a retail CCIV is where it wishes to apply for one of its sub-funds to become a passport fund. In order to become a retail CCIV, the wholesale CCIV needs to lodge a notice with ASIC. [Schedule 1, item 4, paragraph 1222L(2)(a))]

Retail CCIVs changing their status

2.69 A retail CCIV that ceases to meet the retail CCIV test may notify ASIC that it wishes to become a wholesale CCIV. It is not required to provide this notice. This recognises that some CCIVs that do not meet the retail CCIV test may wish to remain as retail CCIVs; for example, so that they can apply to become Australian passport funds or because they intend to market their interests to retail clients. [Schedule 1, item 4, paragraph 1222L(2)(b)]

2.70 Nevertheless, a CCIV must not notify ASIC that it is a wholesale CCIV if it meets the retail CCIV test. A CCIV which breaches this requirement commits a strict liability offence punishable by up to 20 penalty units. See paragraph 2.71 for a discussion of why a strict liability offence is appropriate in this circumstance. [Schedule 1, item 4, subsections 1222L(6) and (7); Schedule 2, item 199, penalty for subsection 1222L(7) inserted into Schedule 3 to the Corporations Act]

Strict liability offences

2.71 The strict liability offences in the notification provisions are appropriate as the integrity of the regulatory regime is threatened if ASIC is unaware of the true status of a fund. There are additional regulatory requirements that apply to retail CCIVs, primarily to ensure there are appropriate protections in place for retail investors, and ASIC's ability to enforce those requirements is hampered if it does not know whether a CCIV is a retail CCIV or a wholesale CCIV. For these reasons, the imposition of a strict liability offence is consistent with the Guide to Framing Commonwealth Offences.

Application of the CCIV regulatory framework to retail CCIVs and wholesale CCIVs

2.72 The distinction between retail CCIVs and wholesale CCIVs is an important one. This is because retail CCIVs are subject to the full regulatory framework in Chapter 8B, whereas wholesale CCIVs are subject to fewer requirements. This follows the regulatory approach for MISs, where retail MISs - that is, registered schemes - are subject to the full regulatory requirements. However, unlike the MIS regime, all CCIVs (including wholesale CCIVs) are required to be registered under the Corporations Act.

2.73 The table below sets out the key differences in the way retail and wholesale CCIVs are regulated (which reflects similar guidance included in the new law). [Schedule 1, item 4, section 1222M]

Listing of a CCIV or a sub-fund

2.74 A retail CCIV with a single sub-fund, or a sub-fund of a retail CCIV (with a single sub-fund), may be included in the official list of a prescribed financial market operated in the Australian jurisdiction. However, other CCIVs and sub-funds (being retail CCIVs with more than one sub-fund, wholesale CCIVs, and their sub-funds) are prohibited from being listed as such. [Schedule 1, item 4, section 1222N]

2.75 If a retail CCIV or its sub-fund is listed, then the rules that apply to listed entities in the Corporations Act apply in respect of that CCIV (and sub-fund). A retail CCIV will be a 'listed' within the meaning in section 9 if it, or its only sub-fund, is included in the official list of a prescribed financial market in Australia. Similarly, a sub-fund will be 'listed' within the meaning of the Corporations Act if it (or the CCIV) is included in this list. [Schedule 2, item 16, definition of 'listed' in section 9 of the Corporations Act]

2.76 These restrictions do not affect the ability to quote a security in a CCIV on a financial market, such as the ASX Quoted Assets Market, subject to meeting the market's quoting rules. A security in a CCIV (regardless of the number of its sub-funds) may be quoted on a financial market, subject to the relevant requirements of that market.

Prohibition on changing company type

2.77 Part 2B.7 of the Corporations Act does not apply to a CCIV. This means that a CCIV may not change company type into another type of company. This also means that another type of company may not change company type into a CCIV. [Schedule 1, item 4, section 1222P]

Registering a sub-fund of a CCIV

Meaning and nature of a sub-fund

2.78 A sub-fund of a CCIV is all or part of the business of the CCIV that is registered by ASIC as a sub-fund of the CCIV. It is established on registration by ASIC (explained further below). [Schedule 1, item 4, subsection 1222Q(1), section 1222T]

2.79 A sub-fund does not have legal personality. [Schedule 1, item 4, subsection 1222Q(2)]

2.80 This means that a sub-fund cannot enter into contracts, cannot sue or be sued in its own name, and cannot acquire, hold or dispose of assets or liabilities in its own name. It is the CCIV itself which has legal personality with the power to do all of this (and it must identify the relevant sub-funds when doing so - explained further below). A sub-fund is a distinct and protected part of the CCIV's business. It is strictly segregated from any other sub-fund of the CCIV.

2.81 Despite the fact that a sub-fund does not hold assets or incur liabilities in its own name, assets and liabilities of the CCIV are allocated to each sub-fund of the CCIV in accordance with the allocation rules (see Chapter 6 of this explanatory memorandum).

2.82 Further, despite a sub-fund not being able to enter into agreements, or sue and be sued in its own name, member and third party rights and obligations may accrue against the assets and liabilities of the sub-fund.

2.83 A person is a member of a sub-fund if the person is a member of a CCIV and holds one or more shares that are referable to that sub-fund. The meaning of 'referable' in relation to a share of a CCIV is explained further in paragraph 4.17. [Schedule 1, item 4, subsection 1222Q(3); Schedule 2, items 17, 22 and 28, definitions of 'member', 'referable' and 'sub-fund']

Registering a sub-fund of the CCIV

2.84 Sub-funds are subject to a streamlined registration process.

2.85 The initial sub-fund(s) of a CCIV are registered by ASIC as part of the registration of the CCIV itself (see discussion in paragraphs 2.30 to 2.41 above). ASIC may register the initial sub-fund(s) of the CCIV if it registers the CCIV and if the sub-fund's proposed name has been provided in the application to register the CCIV. ASIC must register at least one sub-fund if it registers the CCIV. [Schedule 1, item 4, section 1222R, subsection 1222S(1)]

2.86 Once a CCIV has been registered, ASIC may register further sub-funds of the CCIV upon receiving an application from the CCIV. The application must be in the prescribed form and include:

•

the proposed name of the sub-fund;

•

the name and ACN of the CCIV;

•

the name and address of each person who consents to become a member of the sub-fund; and

•

certain information about the shares that will be referable to the sub-fund that each member will take up.

[Schedule 1, item 4, subsection 1222S(2), section 1222U]

2.87 The information about the initial membership of the sub-fund and the shares that are referable to it is the same type of information that is required upon registration of the initial sub-fund(s) of the CCIV as part of the application for registration of the CCIV itself. It reflects the fact that the new sub-fund would be a discrete part of the CCIV's business.

2.88 If ASIC registers a sub-fund, whether as part of the initial registration of a CCIV or subsequently, it must give the sub-fund an ARFN and keep a record of the registration. [Schedule 1, item 4, subsections 1222S(3) and (4)]

2.89 Similar to the records of registration of companies under section 118(2) of the Corporations Act, subsections 1274(2) and (5) of the Corporations Act apply to the record as if the records were documents lodged with ASIC. This allows a person to, among other things, inspect the records and use the record as evidence in legal proceedings.

2.90 Under the Government's Modernising Business Registers program, registration functions are progressively being transferred to the Australian Business Registry Services. The registration of a sub-fund of a CCIV will be subject to this transfer, consistent with the process for registration of the CCIV (see paragraph 2.40 above).

The significance of separate registration of sub-funds

2.91 The separate registration of each sub-fund of a CCIV helps to ensure the business of the sub-fund is protected from the business of other sub-funds of the CCIV. In effect, a sub-fund does not come into being until the day it is registered and given a unique name and identifier - its ARFN - by ASIC. This supports the clear identification (and segregation) of the assets and liabilities of each sub-fund of a CCIV and ensures counterparties are always be able to identify the part of the business of a CCIV they are transacting with. This is further supported by the requirement to identify the sub-fund on documents that relate to the business of the sub-fund (see paragraphs 2.107 to 2.112).

Names of sub-funds

2.92 A sub-fund's name is the name specified in ASIC's record of the registration of the sub-fund. [Schedule 1, item 4, subsection 1222T]

Naming requirements

2.93 The name of a sub-fund of the CCIV is dependent on the CCIV's name.

2.94 If the CCIV has, as its name, the expression "Australian Company Number" followed by its ACN, then a sub-fund of the CCIV's name may be the expression "Australian Registered Fund Number" followed by the sub-fund's ARFN. [Schedule 1, item 4, subsection 1222V(1)]

2.95 If the CCIV has, as its name, an available name, then the sub-fund's name must be constituted of the following three elements, in the following order:

•

element 1: the CCIV's name (without the expression "Corporate Collective Investment Vehicle", which the CCIV is required to have at the end of its name (see paragraph 2.43));

•

element 2: a name that is not:

-

identical to name of the second element of the name of any other sub-fund of the CCIV; or

-

a name that has been reserved by ASIC for a person who is not the person applying to have the sub-fund's name registered; or

-

unacceptable for registration under the regulations;

•

element 3: the expression "Sub-fund".

[Schedule 1, item 4, subsections 1222V(2) and (3)]

2.96 Certain permitted abbreviations may be used in the sub-fund's name in place of the words or expressions required by the Corporations Act to be included in a sub-funds name. These abbreviations are:

•

SF (for the expression "Sub-fund");

•

AFRN (for the expression "Australian Registered Fund Number");

•

Aust (for the word "Australian");

•

No (for the word "number"); and

•

& (for the word "and").

[Schedule 1, item 4, section 1222X]

Example 2.1 Name of a sub-fund of a CCIV

Ironbank CCIV has two sub-funds.

The first sub-fund is referable to a part of its business that invests in global equities. This sub-fund has as its name Ironbank Global Equities SF.

The second sub-fund is referable to a part of its business that invests in Australian bonds. This sub-fund has as its name Ironbank Fixed Income SF.

2.97 The incorporation of the CCIV's name into the sub-fund's name ensures that the CCIV and the sub-fund are intrinsically linked by their respective names. In all of the CCIV's dealings with other people in respect of a particular sub-fund of the CCIV (including investors and third parties), a person can identify the CCIV to which the sub-fund relates.

2.98 The second element of the sub-fund's name allows that sub-fund to be uniquely identifiable from any other sub-fund of the CCIV. This supports the CCIV differentiating between the different parts of the business to which each sub-fund of the CCIV relates.

2.99 Requiring the expression "sub-fund" to be at the end of the sub-fund's name is a means of signalling that the entity is a sub-fund (which is important given a sub-fund is not a separate legal entity (see the discussion in paragraph 2.79)).

Changing a sub-fund's name

2.100 The name of a sub-fund of the CCIV may be changed by the CCIV:

•

on application by the CCIV; or

•

at the direction of ASIC.

[Schedule 1, item 4, subsections 1222Y(1) and 1222Z(1)]

2.101 An application by the CCIV must be made in the prescribed form and cannot be lodged with ASIC while the sub-fund is in liquidation. This ensures that creditors in a winding up situation are unambiguously able to identify the sub-fund for the purposes of any debt or claim against the sub-fund throughout the winding up process. See Chapter 7 of this explanatory memorandum for an explanation of the process for winding up a sub-fund. [Schedule 1, item 4, subsections 1222Y(1) and (2)]

2.102 If the proposed name meets the naming requirements under section 1222V, ASIC must change the sub-fund's name by altering its record of registration accordingly. The change takes effect once the record is altered. [Schedule 1, item 4, subsection (3)]

2.103 ASIC may also direct a CCIV to change a sub-fund's name if:

•

the name should not have been registered; or

•

ASIC has directed the CCIV to change its name under section 158 (necessitating a corresponding change to each of the names of the sub-funds of the CCIV).

[Schedule 1, item 4, subsection 1222Z(1)]

2.104 The CCIV has two months from the date on which it is given the direction to lodge an application to change the sub-fund's name. The CCIV commits a strict liability offence with a fine of up to 120 penalty units if it fails to comply with the direction from ASIC within this timeframe. This penalty supports the objective of ensuring that sub-funds are clearly and appropriately identifiable by third parties (including creditors and other persons engaging with the CCIV) by ensuring there is a strong, clearly articulated incentive for the CCIV to comply with a direction from ASIC. The penalty is consistent with the equivalent penalty for companies at subsection 158(2) of the Corporations Act. [Schedule 1, item 4, subsections 1222Z(1) to (3); Schedule 2, item 199, penalty for subsection 1222Z(2) inserted into Schedule 3 to the Corporations Act]

2.105 If a CCIV has failed to comply with ASIC's direction, ASIC may change the sub-fund's name to the expression "Australian Registered Fund Number" followed by the sub-fund's ARFN. ASIC may do this by altering the sub-fund's record of registration and the change will take effect once the record has been altered. [Schedule 1, item 4, subsections 1222Z(4) and (5)]

2.106 Regardless of how a sub-fund's name is changed, any change in a sub-fund's name does not:

•

create a new legal entity;

•

affect the sub-fund's existing property, rights or obligations; or

•

render defective any legal proceedings by or against the CCIV and relating to the sub-fund.

[Schedule 1, item 4, subsections 1222ZA]

Requirement to identify sub-fund of the CCIV on certain documents

2.107 A CCIV is required to set out a sub-fund's name and ARFN on all of its public documents and negotiable instruments that relate to that sub-fund. If the particular document or negotiable instrument relates to more than one sub-fund of the CCIV, then the name and ARFN of each relevant sub-fund of the CCIV must be set out on the document. [Schedule 1, item 4, subsection 1222W(1)]

2.108 This requirement is based on section 153 of the Corporations Act that requires a company to identify its name and ACN all public documents and negotiable instruments. It will require a CCIV to identify all relevant sub-funds of the CCIV on a broad range of documents, including documents that might give third parties rights or obligations in relation to an asset of a sub-fund of the CCIV.

2.109 'Public document' is defined under section 88A of the Corporations Act and includes a range of documents, such as documents lodged with ASIC and documents that are signed or issued by or on behalf of the CCIV in the course of a particular transaction or dealing. There are some carve-outs to the definition, including for example, a label.

2.110 'Negotiable instrument' is defined in section 9 of the Corporations Act and includes, for example, a cheque or letter of credit that is signed or issued by or on behalf of the CCIV.

2.111 The requirements for identifying the sub-fund on certain documents relating to the business of that sub-fund ensures persons who are dealing with the CCIV (being a legal person) can identify which part of the CCIV's business its rights, or obligations, are accruing against. This is important given that a sub-fund is not a separate legal entity from the CCIV, but it is a protected part of the CCIV's business that is strictly segregated from all other parts of the CCIV's business.

2.112 Consistent with the equivalent requirement for companies, a contravention of the requirement to identify the relevant sub-fund(s) on all public documents and negotiable instruments is a strict liability offence attracting a fine of up to 30 penalty units. This is consistent with the Guide to Framing Commonwealth Offences and with strict liability offences imposed for similar requirements in the existing law (see, for example, section 153 of the Corporations Act). [Schedule 1, item 4, subsection 1222W(2); Schedule 2, item 199, penalty for subsection 1222W(1) inserted into Schedule 3 to the Corporations Act]

Registers

2.113 As is the case for companies and registered schemes under Chapter 2C of the Corporations Act, CCIVs must keep a register of:

•

members;

•

holders of options over unissued shares and related options documents; and

•

debenture holders (if any).

2.114 In addition to the information captured for companies generally, a CCIV's register must also capture information at the sub-fund level. In particular, it must identify the relevant sub-fund to which each share or other security is referable to.

2.115 In addition, if a CCIV is a member in the CCIV (such as under cross-investment within the same CCIV, or by investing in another CCIV), the register must show the relevant sub-fund to which the CCIV's membership relates. In practice, this will be the sub-fund to which the shares referable to another sub-fund have been allocated as an asset. [Schedule 1, item 4, section 1222ZB; Schedule 2, items 53 to 56, notes to subsections 169(3), 170(1) and 171(1)]

Example 2.2 CCIV's company register

Ironbank CCIV has two sub-funds: Ironbank Equities Sub-fund and Ironbank Growth Sub-fund. Ros, Sarah, Lachlan and Rebecca are all investors in Ironbank CCIV. Ros and Sarah are investors in Ironbank Equities Sub-fund - they hold shares in Ironbank CCIV that are referable to Ironbank Equities Sub-fund. Lachlan and Rebecca are investors in Ironbank Growth Sub-fund - they hold shares in Ironbank CCIV that are referable to Ironbank Growth Sub-fund. Ironbank Growth Sub-fund has cross-invested into Ironbank Equities Sub-fund. This means that Ironbank CCIV has acquired, in respect of Ironbank Growth Sub-fund, shares in the CCIV that are referable to Ironbank Equities Sub-fund. Under this cross-investment, Ironbank CCIV is a member in Ironbank Equities Sub-fund - and this membership relates to Ironbank Growth Sub-fund. In addition to the information captured in a company register generally, Ironbank CCIV's company register must capture information about its members at the sub-fund level. It must show that:

•

Ros and Sarah are members that hold shares in Ironbank CCIV referable to Ironbank Equities Sub-fund;

•

Lachlan and Rebecca are members that hold shares in Ironbank CCIV referable to Ironbank Growth Sub-fund; and

•

Ironbank CCIV is a member that holds shares referable to Ironbank Equities Sub-fund, and this membership relates to Ironbank Growth Sub-fund.

Chapter 3: CCIVs - Corporate governance

Outline of chapter

3.1 This Chapter sets out the requirements for corporate governance of a CCIV.

3.2 It sets out the rules regarding:

•

governance of CCIVs (such as how a CCIV exercises company powers and the rules regarding a CCIV's constitution);

•

the officers and employees of the CCIV (including the core obligations for the corporate director of the CCIV and the rules relating to its replacement);

•

the officers, employees and auditors of the corporate director of the CCIV;

•

the compliance plan of a retail CCIV;

•

member protection (including related party transactions by retail CCIVs, rights and remedies for the member of a CCIV and the corporate director's civil liability to members);

•

meetings (including resolutions of a CCIV and meetings of the members of a CCIV (or a sub-fund of the CCIV)); and

•

corporate contraventions (including the rules for establishing civil and criminal liability under Commonwealth laws).

Context of amendments

Governance rules

3.3 As noted above, the key feature of a CCIV is its corporate status: a CCIV is a company used for collective investment.

3.4 Several of the core features of a CCIV have been drawn from overseas regulatory precedents - including that its business and affairs are operated by another company (its single 'corporate director').

3.5 In addition, parts of the regulatory framework for CCIVs have been drawn from the MIS regime in order to ensure general parity and consistency between the two regimes (such as many of the requirements for the constitution of a CCIV).

Officers of the CCIV

3.6 The requirement for a CCIV to be operated by a single corporate director draws on aspects of the United Kingdom's OEIC regime. OEICs may have either an authorised corporate director or a board of natural person directors, but overwhelmingly choose to have an authorised corporate director for reasons of governance and cost-effectiveness.

3.7 The single corporate director model also aligns with the existing responsible entity model for the operation of registered schemes and provides a simpler governance structure with clearer lines of responsibility than a board of individual directors.

3.8 The existing model for the operation of registered schemes imposes statutory duties on the responsible entity. There are also a range of duties at general law, including fiduciary duties, that apply to the corporate trustee of a MIS. These duties are largely replicated for the corporate director of a CCIV, with additional duties applying to the corporate director of a retail CCIV (consistent with the requirements for registered schemes). These duties are a key investor protection mechanism that ensure members of a CCIV have a comparable level of investor protection to an investor in a MIS.

Officers and employees of the corporate director of the CCIV

3.9 In addition to the duties placed on the responsible entity under the existing responsible entity model, duties are also imposed on the officers and employees of the responsible entity of a registered scheme. These duties are also a key investor protection that needs to be replicated in the retail CCIV context.

3.10 The officers and employees of the corporate director also owe duties to the corporate director (being a company) under the existing law.

Compliance plan of a retail CCIV

3.11 The existing model for registered schemes includes a requirement to maintain a compliance plan. The compliance plan sets out the measures the responsible entity will apply in operating the scheme to ensure compliance with the law and the scheme's constitution.

3.12 This mechanism is replicated in the retail CCIV context to ensure that members of a retail CCIV have a comparable level of investor protection to an investor in a registered scheme. However, unlike for registered schemes, a retail CCIV does not need to have a compliance committee as there is a requirement for the corporate director of the CCIV to have at least half of its directors as external directors.

Member protection

3.13 Chapter 2E of the Corporations Act sets out the rules regarding member approval of related party transactions for a public company. These rules apply to registered schemes (in a modified form) under Chapter 5C of the Corporations Act.

3.14 Similar rules are included in the context of retail CCIVs to ensure that investors in a retail CCIV have an equivalent level of consumer protection as investors in a registered scheme. The rules require further modification in the retail CCIV context to ensure that member approval is obtained by each affected sub-fund of the CCIV (given that the membership of the CCIV is referable to strictly segregated sub-funds of the CCIV and that the financial benefit may be paid out of the assets of one or more sub-funds of the CCIV).

3.15 Chapter 2F of the Corporations Act sets out the rights and remedies available to members of companies. Given a CCIV is a company, these rights and remedies are available to members of a CCIV. Some modifications are required to account for the unique structure of CCIVs. For example, modifications are required to ensure that members of a sub-fund also have some of the rights and remedies available at the CCIV level.

3.16 The existing responsible entity model also holds the responsible entity directly responsible to members for civil contraventions of Chapter 5C. A similar mechanism is required in the CCIV context to ensure that members of the CCIV also have a direct right of action against the corporate director for similar civil contraventions.

Meetings

3.17 As the directorship of a CCIV is held by a single corporate director and not individual person directors, it is necessary to provide special rules clarifying how a director's resolution may be passed by the directors of the corporate director, on behalf of the CCIV.

3.18 The Corporations Act prescribes different rules for meetings of members of companies and members of registered schemes. While CCIVs are companies, they have many features in common with registered schemes. In particular, and relevantly for the rules regarding meetings, a CCIV has a corporate director (similar to the responsible entity of a registered scheme) and a compliance plan (if it is a retail CCIV, similar to the compliance plan of a registered scheme). Accordingly, the rules for meetings of members of the CCIV are adapted from those applying to registered schemes.

3.19 Membership in the CCIV is referable to a sub-fund of the CCIV. Each sub-fund is strictly segregated from any other sub-fund of the CCIV. Accordingly, provision has been made for meetings (and resolutions) of members of a sub-fund (or sub-funds) of the CCIV (in addition to meetings (and resolutions) of the whole CCIV).

3.20 Further amendments have also been included to ensure the framework in the Corporations Act for facilitating virtual meetings applies to CCIVs (see discussion in Chapter 11 below).

Corporate contraventions

3.21 A CCIV has corporate responsibility for contraventions of its legal obligations, in the same way that other companies do. However, unlike other companies, generally a CCIV's only officer is another company; its corporate director.^[2] Further, a CCIV does not have any employees.

3.22 The corporate director of a CCIV has an overarching obligation to operate the business and conduct the affairs of the CCIV. The corporate director must also perform the functions conferred on it by the CCIV's constitution and the Corporations Act, as well as ensure the CCIV itself complies with its constitution and the Corporations Act.

3.23 The responsibilities of the corporate director are designed to be similar to those of the responsible entity of a registered scheme. Under the framework that applies for registered schemes, the responsible entity (or trustee) of a scheme is directly responsible for any contravention of the law in relation to the scheme.

Summary of new law

Governance rules

3.24 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.

3.25 Unlike other companies, a CCIV has a single corporate director. The corporate director is a public company with its own officers and employees. The new law includes provisions that allow the natural person officers of the corporate director to do some activities, such as enter into a contract on behalf of the CCIV in certain circumstances.

3.26 Both retail and wholesale CCIVs must have a constitution. The constitution of a CCIV is enforceable as a statutory contract between:

•

the CCIV and each member;

•

the CCIV and the corporate director;

•

the corporate director and each member; and

•

a member and each other member.

3.27 The constitution of a retail CCIV must make adequate provision for certain matters (such as the establishment of sub-funds and the method by which member complaints are to be dealt with).

Officers and employees of the CCIV

Officers and employees generally

3.28 A CCIV may only appoint one director: its corporate director. The corporate director is the public company named in ASIC's record of the CCIV's registration as its corporate director or temporary corporate director. A CCIV must not have a secretary or any employees.

3.29 A CCIV may not have any officers, other than a director, a receiver, a liquidator or a trustee or other person administering an arrangement between a CCIV and someone else.

3.30 An officer of a CCIV owes the duties that officers of a company owe under Part 2D.1 of the Corporations Act. In addition, a director of a retail CCIV owes duties similar to those owed by a responsible entity of a registered scheme. The latter duties prevail over the duties to the CCIV under Part 2D.1, to the extent of any conflict.

Further requirements for the corporate director of a CCIV

3.31 Only a public company that is not in external administration and that holds an AFSL authorising it to operate the business and conduct the affairs of the CCIV may be appointed as corporate director of the CCIV.

3.32 As a public company, the corporate director has natural person directors. At least half of the directors of the corporate director of a retail CCIV must be external directors. External directors bring a degree of detached supervision that is expected to enhance the standard of corporate governance of corporate directors of retail CCIVs.

3.33 The rules for appointing and replacing the corporate director of a CCIV are similar to the rules that apply to the appointment and replacement of a responsible entity of a registered scheme.

3.34 As noted above, the corporate director (as an officer of the CCIV) owes the same duties and has the same powers, as other officers of the CCIV (including its duties under Part 2D.1 of the Corporations Act). The director of a CCIV also owes additional duties similar to the duties of the responsible entity of a registered scheme or corporate trustee of a MIS (as relevant).

3.35 The corporate director of a CCIV also owes further duties that are specific to its role - including an obligation to operate the business and conduct the affairs of the CCIV.

3.36 The corporate director of a CCIV cannot appoint delegates but it has the power to appoint an agent to do anything that the corporate director is authorised to do in connection with the CCIV. These agents may appoint sub-agents. Akin to other companies, a CCIV also has the power to appoint an agent, who may also appoint sub-agents. The agents of the CCIV and the sub-agents of both the corporate director and the CCIV are taken to be agents of the corporate director.

3.37 The corporate director of a retail CCIV has extended liability for its agents (and persons taken to be its agents) for the purposes of determining whether there is a liability to the CCIV (or its members) or whether it has properly performed its duties (in order to be paid its fees, or be indemnified, out of the assets of a sub-fund of the CCIV).

Officers and employees of the corporate director of the CCIV

3.38 The officers and employees of the corporate director owe obligations to the corporate director under the existing law, in their capacity as officers and employees of a public company. The new law creates further obligations on these persons in relation to the CCIV.

3.39 In particular, the officers and employees of a corporate director of a retail CCIV owe duties that are similar to the duties owed by officers and employees of a responsible entity in relation to the registered scheme under the existing law.

3.40 The secretary of the corporate director of a CCIV has responsibility for certain contraventions of the law by the corporate director as well as certain contraventions of the law by the CCIV. This extension of the secretary of the corporate director's responsibility is important given a CCIV may not have a secretary.

3.41 Each of the directors of the corporate director of a CCIV has an extended duty to disclose their material personal interests in relation to the affairs of the CCIV to the other directors of the corporate director.

3.42 The restrictions on indemnifying, exempting or insuring an officer or auditor of a CCIV against certain liabilities to the CCIV has been extended to also cover an officer or auditor of the corporate director.

Compliance plan of a retail CCIV

3.43 A retail CCIV must have a compliance plan and a compliance plan auditor (similar to the requirements for a compliance plan of a registered scheme).

3.44 The compliance plan must set out adequate measures to be applied by the corporate director in operating the CCIV to ensure compliance with the Corporations Act and the CCIV's constitution. This is the only basic content requirement for the compliance plan.

3.45 The corporate director must ensure at all times that the CCIV's compliance plan meets the legislative requirements for compliance plans. The corporate director must also comply with the compliance plan.

Member protection

3.46 The rules in Chapter 2E of the Corporations Act (regarding member approval of a transaction that seeks to give a related party a financial benefit) apply to retail CCIVs in generally the same way as they apply to public companies. However, the rules are modified to ensure that member approval is obtained by each affected sub-fund of the CCIV (given that the membership of the CCIV is referable to strictly segregated sub-funds of the CCIV and that the financial benefit may be paid out of the assets of one or more sub-funds of the CCIV). In addition, some modifications are made to align the rules that apply to a CCIV (as a company) to the rules that apply to related party transactions in respect of a registered scheme under Part 5C.7 of Chapter 5C of the Corporations Act.

3.47 The rights and remedies available to members of a company under Chapter 2F of the Corporations Act are available to members of a CCIV. Some modifications have been made to extend certain rights and remedies that are available to members at the CCIV level to ensure they are available at the sub-fund level.

3.48 A member of a CCIV may bring, or intervene in, legal proceedings on behalf of the CCIV in certain circumstances.

3.49 The corporate director of a CCIV has civil liability to members of the CCIV for a contravention of Chapter 8B (regardless of whether or not the corporate director has been convicted). This is consistent with the right of a member of a registered scheme to seek remedy against the responsible entity of the scheme in similar circumstances.

Meetings

3.50 Similar to other companies, a CCIV's powers may be exercised by its director or its members. As with other companies, some decisions may only be made by the CCIV's members. Similarly, some decisions may only be made by the members of a particular sub-fund.

3.51 The corporate director of a CCIV may pass a resolution for the CCIV by passing a resolution of the directors of the corporate director. This mechanism effectively 'looks through' the corporate director of the CCIV (being a company itself) to the natural person directors of the corporate director who are making the decision to exercise the CCIV's powers. Part 2G.1 of the Corporations Act, which sets out the requirements for directors' meetings, does not apply to a CCIV, as this bespoke rule applies instead.

3.52 The rules for holding meetings of members of a CCIV, or a sub-fund, are based on the rules for registered schemes, rather than the rules for companies.

3.53 Some modifications are made to account for a CCIV's corporate status. In particular, a member's voting power at a meeting (of either the CCIV or a sub-fund) is referable to the value of the shares the member holds in the CCIV.

Corporate contraventions

3.54 Bespoke rules apply for the purposes of attributing the physical and mental elements of an offence to a CCIV. These bespoke rules apply to all Commonwealth laws. The general rules contained in the Criminal Code and other attribution rules (for example those contained in Chapter 7 of the Corporations Act) do not apply to a CCIV.

3.55 As a general rule, conduct engaged in by a person other than the CCIV is attributed to the CCIV if it is engaged in by one of the following parties, and the conduct was engaged in on behalf of the CCIV:

•

an agent of the CCIV;

•

a director of the CCIV;

•

an employee, director or agent of the corporate director of the CCIV; or

•

any other person acting at the direction, or with the consent or agreement of one of the entities listed above.

3.56 If the CCIV commits an offence, the new law deems the corporate director to have committed the offence and relieves the CCIV from being liable for any penalty in respect of the offence. This applies to both criminal contraventions by the CCIV and breaches of civil penalty provisions by the CCIV.

3.57 Separate rules allow a Court to order compensation be paid to a CCIV if it suffers loss or damage as a result of a contravention of a State or Territory law.

Comparison of key features of new law and current law

Detailed explanation of new law

Governance rules

CCIV's powers

3.58 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. The CCIV's powers to make, vary, ratify or discharge a contract may be exercised by an individual acting with the CCIV's express or implied authority, akin to other companies. It should be noted, however, that a CCIV's power to issue shares and debentures are modified by the requirements of Part 8B.4. Further details about a CCIV's power to issue securities are contained in Chapter 4. [Schedule 2, items 45 and 46, note 2 to subsection 124(1)]

3.59 However, unlike other companies, a CCIV has only one director - its corporate director. This affects the application of section 127 of the existing law (relating to when a company is taken to have signed a document or fixed a seal). The new law effectively 'looks through' the corporate director to the natural person directors and secretary of the corporate director. Specifically, the CCIV is taken to have:

•

signed a document if two directors, or a director and secretary, of the corporate director of the CCIV sign the document; or

•

fixed a seal to a document if two directors, or a director and secretary of the corporate director of the CCIV witness the fixing of the seal.

[Schedule 1, item 4, section 1223; Schedule 2, items 47 to 49, note 3 to subsection 127(1) and note 2 to subsection 127(2)]

3.60 No amendments have been made to the statutory assumptions that people dealing with companies are entitled to make. However, these assumptions already apply cumulatively as existing subsection 129(8) allows an assumption to be made (for example, about the corporate director's compliance with its internal rules) for the purposes of making another assumption (for example, about the CCIV's compliance with its internal rules).

3.61 The Corporations Amendment (Meetings and Documents) Act 2021 facilitates the electronic execution of documents by a CCIV. These rules will apply to companies under the Corporations Act, including CCIVs. Schedule 4 to the Bill makes related contingent amendments to ensure the rules technology neutral signing and electronic provision of documents extends to CCIVs (see explanation in paragraphs 3.286 to 3.290).

Constitution

3.62 A CCIV must have a constitution. The constitution governs the internal operation of the CCIV and acts as a statutory contract between:

•

the CCIV and each member;

•

the CCIV and the corporate director;

•

the corporate director and each member; and

•

a member and each other member.

[Schedule 1, item 4, subsection 1223B(1), section 1223E]

Replaceable rules do not apply

3.63 Provisions in the Corporations Act that are replaceable rules do not apply as replaceable rules for a CCIV. This means that if the CCIV's constitution does not make provision for a particular matter that is the subject of a replaceable rule, the replaceable rule will not apply and no rules will operate with regard to that matter. [Schedule 1, item 4, section 1223A; Schedule 2, item 50, note to subsection 135(1)]

Adopting, modifying or repealing and replacing the constitution

3.64 A CCIV adopts its constitution on registration. Its constitution cannot be repealed unless it is replaced with another constitution. [Schedule 1, item 4, subsection 1223B(1) and subsection 1223D(1)]

3.65 The process for modifying, or repealing and replacing, the constitution differs depending on whether the CCIV is a retail or wholesale CCIV. Section 136 of the existing law does not apply to the adoption, modification or repeal of the constitution of a CCIV. [Schedule 1, item 4, subsection 1223D(6); Schedule 2, items 51 to 52, note 2 to subsection 136(1)]

3.66 For a wholesale CCIV, the process for modifying the constitution must be set out in the CCIV's constitution. This process must be complied with if the constitution is subsequently modified, repealed or replaced. [Schedule 1, item 4, paragraph 1223D(2)(b) and section 1223F]

3.67 For a retail CCIV, the constitution may be modified, repealed or replaced in the following circumstances:

•

by special resolution of the members of the CCIV;

•

by the corporate director, on its own initiative if it reasonably considers the change will not adversely affect members' rights; or

•

by special resolution of the members of a sub-fund of the CCIV, if the corporate director reasonably considers the change will not adversely affect the rights of any member of any other sub-fund.

[Schedule 1, item 4, subsection 1223D(2)]

3.68 These requirements are generally based on the requirements for changing the constitution of a registered scheme in existing section 601GC.

3.69 If the constitution of either a wholesale or retail CCIV is modified or repealed and replaced, a copy of the modification (or the new constitution) and any notice of a later application date must be lodged with ASIC within 14 days of the modification. A failure to do so is an offence of strict liability with a maximum penalty of 20 penalty units. This is consistent with the Guide to Framing Commonwealth Offences and is essential to ensure compliance where ASIC relies upon the CCIV to provide this information to ensure the integrity of its records and its capacity to oversee the CCIV's compliance with the law and ensure basic protections for investors. In particular, ASIC is not able to appropriately consider the constitution and whether it meets the basic content requirements explained further below if it not provided with an up-to-date constitution as it is changed or replaced. [Schedule 1, item 4, subsections 1223D(3) and (4); Schedule 2, item 199, penalty for subsection 1223D(3) inserted into Schedule 3 to the Corporations Act]

3.70 Section 137 of the existing law sets the date that a modification or replacement of a CCIV's constitution takes effect in certain circumstances. If section 137 of the existing law does not set the date of effect, then the modification, or repeal and replacement, takes effect on the latest of the following:

•

the date on which the modification or the new constitution is lodged with ASIC;

•

if the CCIV is a retail CCIV, and the corporate director of the CCIV determines a later date, that date;

•

if the CCIV is a wholesale CCIV, and the corporate director of the CCIV determines a later date in accordance with any requirements in its constitution, that date.

[Schedule 1, item 4, subsection 1223D(5)

Basic content requirements

3.71 The content of a constitution of a wholesale CCIV is not prescribed, apart from the requirement for the CCIV to set out the process for adopting a constitution after registration, and repealing or modifying the constitution. [Schedule 1, item 4, section 1223F]

3.72 The constitution of a retail CCIV must make provision for:

•

the establishment of sub-funds;

•

the establishment of classes of shares referable to sub-funds;

•

the method by which complaints made by members of the CCIV are to be dealt with; and

•

cross-investment between sub-funds of the CCIV, if the CCIV is to engage in such cross-investment.

[Schedule 1, item 4, paragraphs 1223G(a), (b) and (e)]

3.73 The constitution of a retail CCIV must also state that the CCIV has power to borrow or raise money (noting that, being a company, the CCIV has inherent power to do this). If there are to be limits on the CCIV's exercise of this power, the constitution must also set out those limits. [Schedule 1, item 4, paragraphs 1223G(c) and (d)]

3.74 If some or all of the shares of the CCIV are redeemable shares or redeemable preference shares, then the CCIV's constitution must make provision for the shares to be redeemed. This provision must make provision for the redemption - meaning that it must set out adequate matters regarding the redemption. The matters prescribed must be fair and reasonable to the members of the sub-fund to which the shares are referable. For liquid sub-funds, it must also specify the period within which redemptions must ordinarily be made (while the sub-fund is liquid) - recognising that in limited circumstances the ordinary redemption period may not be able to be satisfied (for example, in times of market volatility). Further, it must set out a price, or method for determining a price for redemption of those shares (while the sub-fund is liquid). The redemption provisions in Part 8B.4 are explained further in Chapter 4. [Schedule 1, item 4, section 1223H]

3.75 These requirements are generally based on the requirements for constitutions of registered schemes, contained in section 601GA of the Corporations Act. However, unlike for registered schemes, a retail CCIV's constitution does not need to set out the consideration that must be paid to become a member because the price of shares in a company may vary over time. In addition, unlike schemes, a CCIV is a company and may issue shares on such terms and with such rights and restrictions as it determines. Nor does it need to give power to a third party to deal with the CCIV's assets because the CCIV has power to make investments itself.

3.76 A failure to comply with the relevant minimum content requirements is a strict liability offence with a maximum penalty of 20 penalty units. Both the offence and penalty are consistent with the Guide to Framing Commonwealth Offences and provide a strong incentive to comply with these requirements core to the functioning of a CCIV and the inherent protections to members (given the contractual nature of the CCIV's constitution). [Schedule 1, item 4, subsections 1223B(2) and (3); Schedule 2, item 199, penalty for subsection 1223B(3) inserted into Schedule 3 of the Corporations Act]

3.77 ASIC also has power to direct a retail CCIV to modify its constitution to either:

•

comply with the minimum content requirements; or

•

ensure that the constitution deals with the matters that are the subject of the minimum content requirements, or the corporate director's right to be paid fees out of the assets of a sub-fund of the CCIV, in adequate detail.

[Schedule 1, item 4, subsections 1223(1) and (2)]

3.78 The direction must be given to the CCIV by notice in writing. The corporate director must comply with the direction within 14 days after it has been given the notice and lodge a copy of the modified constitution with ASIC within 14 days after the modification. A failure to comply with the direction within the required timeframe is a strict liability offence with a maximum penalty of 20 penalty units. A failure to lodge the modified constitution with ASIC within the required timeframe is also a strict liability offence with a maximum penalty of 20 penalty units. Both of these strict liability offences are consistent with the Guide to Framing Commonwealth Offences and with offences in the Corporations Act that apply in other circumstances involving the failure to lodge documents with ASIC or comply with directions given by ASIC. [Schedule 1, item 4, subsections 1223C(4) to (6); Schedule 2, item 199, penalty for subsections 1223C(4) and (5) inserted into Schedule 3 to the Corporations Act]

3.79 When modifying the CCIV's constitution in accordance with a direction from ASIC, the corporate director does not need to comply with the requirements that prescribe how a CCIV's constitution may be modified (see paragraphs 3.62 to 3.67). [Schedule 1, item 4, subsection 1223C(3)]

Officers and employees of the CCIV

Requirements for officers and employees generally

Appointment of officers and employees

3.80 A CCIV must only appoint one director: its 'corporate director'. The corporate director is the public company named in ASIC's record of the CCIV's registration as its corporate director or temporary corporate director. The rules relating to the appointment, removal and replacement of the corporate director are explained further below. [Schedule 1, item 4, subsections 1224(1) to (3)]

3.81 The appointment of more than one director, being a director appointed to a position other than the position of corporate director, is an offence punishable by up to two years imprisonment. This penalty is consistent with the Guide to Framing Commonwealth Offences. It provides a strong incentive to comply with this requirement, which is fundamental to the underlying structure of a CCIV. The CCIV regime has been designed on the basis that it has only one corporate director, with the remainder of the framework predicated on this model. [Schedule 2, item 199, penalty for subsection 1224(1) inserted into Schedule 3 to the Corporations Act]

3.82 These obligations are significant as, unlike other companies that are governed by the Corporations Act, a CCIV's sole director is a public company and not an individual person director.

3.83 Moreover, unlike other directors of conventional companies, the corporate director commits an offence if it appoints an alternate director to exercise some, or all, of its powers. [Schedule 1, item 4, subsections 1224(4) and (5); Schedule 2, item 199, penalty for subsection 1224(5) inserted into Schedule 3 of the Corporations Act]

3.84 Both the prohibition on appointing more than one director and the restriction on appointing an alternate director do not prevent a person from being held to be a shadow director of a CCIV within the meaning of the definition of 'director' in paragraph (b) of section 9 of the existing law. Any such director (or other director appointed in contravention with these requirements) is subject to the obligations of a director of a CCIV. [Schedule 1, item 4, subsection 1224(6)]

3.85 A CCIV must not have any other officers other than a director or a receiver, liquidator or a trustee or other person administering an arrangement between the CCIV and someone else. It is specifically prohibited from appointing a secretary or having any employees. A contravention of either of these requirements is an offence punishable by up to two years imprisonment. This penalty is consistent with the Guide to Framing Commonwealth Offences. It provides a strong incentive to comply with this requirement - which is fundamental to the underlying structure of a CCIV. The CCIV regime has been designed on the basis that the CCIV does not have any officers or employees other than its corporate director and certain persons under an external administration, with the remainder of the framework predicated on this structure. [Schedule 1, item 4, sections 1224A and 1224B; Schedule 2, item 199, penalty for subsections 1224A(1) and (2) inserted into Schedule 3 of the Corporations Act]

Duties of directors and other officers of a CCIV

3.86 An officer of a CCIV, including its director, owes the duties imposed on all company officers under Part 2D.1 of the existing law. This includes the duty to act in good faith in the best interests of the corporation and for a proper purpose under section 181 of the existing law.

3.87 The provisions in the existing law in relation to external administration have been modified so that external administration applies to each sub-fund of the CCIV rather than to the CCIV as a whole (see discussion in Chapter 7 below). The statutory duties that officers owe under Part 2D.1 of the existing law have been similarly modified so that an officer other than a director (such as a receiver or liquidator) only owes these duties to the sub-fund for which they have been appointed. [Schedule 1, item 4, section 1224C]

3.88 In addition to the general officers' duties under Part 2D.1, the director of a CCIV owes additional statutory duties that reflect its role as the operator of a collective investment scheme. These additional duties align with those owed by the corporate trustee and operator of a MIS (including under Chapter 5C of the Corporations Act and at general law). These additional duties ensure that investors in a CCIV are afforded comparable protections as investors in a MIS, with some differences tailored to the different legal structure of a CCIV. A summary of these duties in provided in Table 3.2 below. [Schedule 1, item 4, section 1224D]

3.89 The director of a retail CCIV owes a broader range of duties to members in recognition of the higher degree of protections for retail investors. These duties are based on the current statutory and general law duties that are owed to members of registered schemes. The duties the director of a wholesale CCIV owes relate to the fundamental investor protection for members in a wholesale CCIV and are comparable with the duties owed by a corporate trustee at general law and under trust legislation.

3.90 As noted above, the additional statutory duties are tailored to the different legal structure of a CCIV. In particular, the director of a CCIV (retail or wholesale) owes a duty to act in the best interests of the members of the CCIV, as well as the best interests of the members of each sub-fund (as a whole). This recognises the segregation of each group of members that invest in different sub-funds of a CCIV and ensures that the director must act in their interests in respect of the matters that relate to each sub-fund. However, in the event of any conflict between the director's duty to the members of the CCIV and its duty to the members of each sub-fund, the duty to the members of the CCIV prevails. This recognises the overarching status of the CCIV as a legal entity as a whole. [Schedule 1, item 4, subsections 1224D(1) and (2)]

3.91 The constitution of a wholesale CCIV may exempt the director of a wholesale CCIV from liability for contravention of certain additional duties - to the extent that the contravention was not dishonest and did not involve a lack of good faith. This is consistent with the capacity for the operator of a wholesale (and unregistered) scheme to exclude liability for certain general law duties in the constituent documents for the scheme. It ensures comparable protections are in place for investors in a wholesale CCIV as there are for investors in a wholesale scheme - and recognises their capacity to negotiate bespoke contractual protections under the constituent documents for the CCIV. [Schedule 1, item 4, subsection 1224D(4)]

3.92 If a director of a CCIV contravenes one of these duties, the director contravenes a civil penalty provision. [Schedule 2, item 192, new table items for subsections 1224D(1), (2) and (4) inserted into subsection 1317E(3) of the Corporations Act)]

3.93 If there is a conflict between a director's duties under Part 2D.1 and the additional duties set out above, the additional duties prevail. [Schedule 1, item 4, subsection 1224D(5)]

3.94 The additional duties set out above interact with other laws in the same way that the duties in Part 2D.1 do under section 185 of the existing law. That is, the additional duties have effect in addition to, and not in derogation of, any other rule of law that the person has because of their office or employment in relation to a corporation. [Schedule 1, item 4, subsection 1224D(6)]

3.95 In the same way that a director cannot be insured against a liability arising out of a contravention of section 182 or 183 of the existing law (being duties owed under Part 2D.1), a director of a CCIV cannot be insured against a liability arising out of a contravention of the additional duties outlined above. However, a wholesale CCIV may exempt or indemnify a director of a CCIV from liability if the contravention is not dishonest and does not involve a lack of good faith. [Schedule 1, item 4, subsections 1224D(7) and (8)]

Certain provisions of the Corporations Act do not apply to directors and other officers of a CCIV

3.96 Parts 2D.3 to 2D.5 of the existing law (about the appointment, remuneration, cessation of appointment of directors, the appointment of secretaries and public information about directors and secretaries) do not apply to CCIVs, as a CCIV is prohibited from appointing a director other than the corporate director or a company secretary (as explained above). The rules regarding the appointment, remuneration, removal and replacement of the corporate director are explained further below. [Schedule 1, item 4, paragraphs 1224E(a) and (b); Schedule 2, items 70 to 72, notes to Parts 2D.3, 2D.4 and 2D.5]

3.97 Part 2D.6 of the Corporations Act (about disqualification from managing corporations) does not apply for the purposes of disqualifying the corporate director of the CCIV. An effective mechanism for the disqualification of the corporate director is provided for as part of the requirements for the corporate director to hold an AFSL authorising it to operate the business and conduct the affairs of the CCIV. [Schedule 1, item 4, paragraph 1224F(d); Schedule 2, item 73, note to Part 2D.6]

3.98 Under Part 7.6 of the Corporations Act, a person (including the corporate director) may be disqualified from holding an AFSL in certain circumstances. The regime in Part 7.6 of the Corporations Act also applies to responsible entities of registered schemes (who are required to hold an AFSL authorising it to operate the scheme). An equivalent of Part 2D.6 does not apply to responsible entities of schemes.

3.99 Part 2D.7 of the Corporations Act (which prohibits hedging of remuneration of key management personnel) does not apply to the fees and benefits payable to a corporate director of a CCIV. This is consistent with the treatment for responsible entities of registered schemes, which are also not subject to this prohibition. [Schedule 1, item 4, paragraph 1224E(e); Schedule 2, item 74, note to Part 2D.7]

3.100 Part 2D.8 of the Corporations Act (about remuneration recommendations in relation to key management personnel for disclosing entities) does not apply to CCIVs that are disclosing entities. This is because fees and benefits payable to a corporate director of a CCIV are not subject to the remuneration recommendations made by remuneration consultants. For the corporate director of a retail CCIV, these fees and benefits must be set out in the CCIV's constitution (explained in paragraph 3.130). [Schedule 1, item 4, paragraph 1224E(f); Schedule 2, item 75, note to Part 2D.8]

3.101 The modifications to Parts 2D.5, 2D.6, 2D.7 and 2D.8 do not affect their application to the officers of the corporate director as a public company.

Further requirements for the corporate director of the CCIV

Appointment of the corporate director

3.102 As noted in paragraph 3.80, a CCIV may only appoint one director - its corporate director. The corporate director is the public company named in ASIC's record of the CCIV's registration as its corporate director or temporary corporate director.

3.103 A person applying to register a CCIV must provide information about the company that meets the basic eligibility requirement (explained below) and has consented in writing to becoming the CCIV's corporate director. Upon registration of the CCIV, the body named in the application for registration as the proposed corporate director becomes the corporate director of the CCIV (see paragraph 2.41).

3.104 A change in the corporate director only takes effect once the record of the CCIV's registration is altered to name another company as the CCIV's corporate director (or temporary corporate director). The rules for replacing the corporate director are explained further below. [Schedule 1, item 4, section 1224R]

3.105 Even if the corporate director's appointment, or continuance of its appointment is invalid (because the CCIV or the corporate director did not comply with the CCIV's constitution or the Corporations Act), acts done by the company named in ASIC's record as the corporate director are effective. However, the effectiveness of the act by the corporate director does not necessarily bind the CCIV in its dealings with any other people, nor does it necessarily make the CCIV liable to a third party. [Schedule 1, item 4, section 1224H]

Basic eligibility requirement

3.106 Only a public company that holds an AFSL authorising it to operate the business and conduct the affairs of the CCIV may be appointed as corporate director of the CCIV. This company cannot be in external administration (that is, a 'Chapter 5 body corporate' within the meaning of section 9 of the Corporations Act). [Schedule 1, item 4, section 1224F]

3.107 The corporate director's obligation to operate the business and conduct the affairs of the CCIV is explained further in paragraphs 3.116 to 3.121 below.

Requirement for corporate director of retail CCIV to have external directors

3.108 As a public company, the corporate director has natural person directors. At least half of the directors of the corporate director of a retail CCIV must be external directors. External directors bring a degree of detached supervision that is expected to enhance the standard of corporate governance of corporate directors of retail CCIVs. [Schedule 1, item 4, subsection 1224G(1)]

3.109 A director of a corporate director is an external director if:

•

the director is not, and has not been in the previous two years:

•

an employee or senior manager of the corporate director or a related body corporate;

•

substantially involved in business dealings, or in a professional capacity with the corporate director or a related body corporate;

•

a member of a partnership that is or was substantially involved in business dealings, or in a professional capacity, with the corporate director or a related body corporate;

•

the director does not have a material interest in the corporate director or a related body corporate; and

•

the director is not a relative of a person who has a material interest in the corporate director or a related body corporate.

[Schedule 1, item 4, subsection 1224G(2)]

3.110 A 'related body corporate' is defined in section 50 of the Corporations Act and would, for example, include a holding company or a subsidiary of the corporate director.

3.111 The corporate director of a retail CCIV must comply with the external director requirement within 14 days (or a longer period allowed in writing by ASIC) of becoming the corporate director. If at some later stage the corporate director does not comply with the external director requirement, then the corporate director has 14 days from that day (or a longer period allowed in writing by ASIC) to comply. [Schedule 1, item 4, subsections 1224G(3) and (6)]

3.112 This provision, including discretion for ASIC to extend the 14-day period, is intended to provide some flexibility in the event of non-compliance due to unforeseen circumstances, such as the death or incapacity of a natural person director of the corporate director. In giving an extension, ASIC may impose conditions to be complied with by the corporate director.

3.113 If the corporate director fails to comply with the external director requirement within the relevant period, it is liable for a strict liability offence with a maximum penalty of 20 penalty units. An intentional or reckless failure is an offence punishable by up to two years imprisonment. A failure to comply with a condition imposed by ASIC in extending the 14-day period is a strict liability offence with a maximum penalty of 60 penalty units. These penalties are appropriate given that a failure to have the appropriate number of external directors would reduce or remove the external or independent oversight that is provided by external directors of the corporate director. These penalties are also consistent with the Guide to Framing Commonwealth Offences. [Schedule 1, item 4, subsections 1224G(4) to (7); Schedule 2, item 199, penalty for subsections 1224G(4), (5) and (6) inserted into Schedule 3 to the Corporations Act]

3.114 The requirements (and penalties) for external directors within the corporate director draw upon section 601JA, which requires the responsible entity of a registered scheme to establish a compliance committee if less than half of its directors are external directors. As explained above, the requirement that at least half the directors of a corporate director of a retail CCIV be external directors aligns with the circumstances in which a responsible entity is relieved of the requirement to have a compliance committee under Part 5C.5.

3.115 The corporate director's board is responsible, in place of the compliance committee, for monitoring the extent to which the corporate director complies with the CCIV's compliance plan.

Powers and obligations of the corporate director

3.116 As explained in paragraph 3.86, the corporate director (as an officer of the CCIV) owes the same duties, and has the same powers, as other officers of the CCIV (including its duties under Part 2D.1 of the Corporations Act). The director of a retail CCIV also owes additional duties similar to the duties of the responsible entity of a registered scheme (see paragraph 3.88 above).

3.117 The corporate director of a CCIV also owes further duties that are specific to its role - including an obligation to operate the business and conduct the affairs of the CCIV.

Obligation to operate the CCIV

3.118 The obligation to operate the CCIV applies to the corporate director of both a retail CCIV and a wholesale CCIV. The obligation has two limbs.

3.119 The first limb requires the corporate director to operate the business and conduct the affairs of the CCIV. This is designed to be a single encompassing requirement, rather than one obligation to operate the business and a separate obligation to conduct its affairs. [Schedule 1, item 4, paragraph 1224J(1)(a)]

3.120 The new definition of 'affairs' of a CCIV (which is largely based on the definition of 'affairs' of a body corporate) applies to this first limb. The definition sets out a range of activities that are included in the concept of 'affairs' of a CCIV (such as the promotion, formation, trading, transactions and dealings of the CCIV). The definition is not exhaustive and does not limit the types of matters or activities that are captured by the term. [Schedule 2, items 33 to 34, section 53AAA]

3.121 The second limb places an obligation on the corporate director of a CCIV to perform the functions conferred on it by the CCIV's constitution and the Corporations Act. This is appropriate because the corporate director is the controlling mind of the CCIV. [Schedule 1, item 4, paragraph 1224J(1)(b)]

Corporate director's power to exercise the powers of the CCIV

3.122 The corporate director has the power to exercise all the powers of the CCIV except those powers that the Corporations Act or the CCIV's constitution requires the CCIV to exercise in a general meeting. One example of a power that can only be exercised in a general meeting is amending the constitution. [Schedule 1, item 4, subsection 1224J(2)]

3.123 This power is analogous to the power granted to directors of other companies in existing section 198A. Existing section 198A does not apply to CCIVs as it is a replaceable rule. For a discussion of the application of replaceable rules in the CCIV context, see Chapter 2 of this explanatory memorandum.

No obligation to disclose material personal interests

3.124 Unlike other directors of conventional companies, the corporate director as sole director is not required to disclose a material personal interest to another director as the CCIV may only appoint one director. Accordingly, section 191 (relating to the director's duty to disclose material personal interests) of the existing law does not apply to the corporate director of a CCIV. [Schedule 1, item 4, section 1224K; Schedule 2, item 60, note to Division 2 of Part 2D.1]

Corporate director's responsibility for agents

3.125 The corporate director of a CCIV cannot appoint delegates but it has the power to appoint an agent to do anything that the corporate director is authorised to do in connection with the CCIV. These agents may appoint sub-agents. Akin to other companies, a CCIV also has the power to appoint an agent, who may also appoint sub-agents. The agents of the CCIV and the sub-agents of both the corporate director and the CCIV are taken to be agents of the corporate director. [Schedule 1, item 4, section 1224L; Schedule 2, items 61 and 62, note 2 to subsection 198D(1)]

3.126 When determining whether there is a liability to the CCIV or the CCIV's members, or whether the corporate director of a retail CCIV has properly performed its duties (for the purposes of being paid its fees or being indemnified out of the CCIV's assets), the corporate director of a retail CCIV is responsible for its agents (and persons taken to be its agents) even if the agent (or person) acts fraudulently or outside the scope of its authority. This offers a higher level of investor protection than the delegation rules for other types of companies in existing section 190 and the common law (for example, vicarious liability). It ensures that corporate directors of a retail CCIV have the same responsibility for agents as responsible entities of registered schemes in existing subsection 601FB(3). [Schedule 1, item 4, section 1224M]

3.127 The corporate director of a retail CCIV may have a liability to the CCIV, for example, if it was to breach the duties it owes to the CCIV under Part 2D.1 of the existing law. The corporate director of a retail CCIV may have a liability to the CCIV's members, for example, if it contravened a section of Chapter 8B.

3.128 The corporate director of a wholesale CCIV is not responsible for its agents (and sub-agents), as well as the CCIV's agents (and sub-agents) to the same degree as the corporate director of a retail CCIV. This reflects the fact that sophisticated investors are better able to negotiate bespoke contractual protections and assess investment risks than retail investors.

3.129 Other officers are not responsible for their agents in the same way as the corporate director. Extending the duty to liquidators would significantly increase the risk for liquidators of CCIVs relative to liquidators of conventional companies, potentially making it more difficult to appoint a liquidator of a CCIV.

Limitation on corporate director's right to fees and indemnities

3.130 If the corporate director of a retail CCIV is to have any right to be paid fees, or be indemnified, out of the assets of a sub-fund of the CCIV, then those fees or indemnities must be specified in the CCIV's constitution and are only available if the corporate director has properly performed its duties. [Schedule 1, item 4, section 1224N]

3.131 Any other agreement or arrangement which purports to provide otherwise has no effect.

Retail CCIV - limitation on acquisition of share in CCIV by corporate director

3.132 The corporate director of a retail CCIV may only acquire and hold shares in that CCIV for the consideration payable if the shares were acquired by another person, and subject to terms and conditions that would not disadvantage other members. This is to ensure that such acquisitions reasonably represent their market value and the process is fair to other members. A retail CCIV is subject to similar restrictions for self-acquisitions of shares (such as cross-investment or share buy-backs) (see paragraph 4.103 below). [Schedule 1, item 4, section 1224P]

3.133 A corporate director who contravenes this section, or any person involved in that contravention, contravenes a civil penalty provision. The existing law defines the circumstances in which a person may be 'involved' in a contravention under section 79 of the Corporations Act - including whether the person aided, abetted, counselled or procured the contravention. A person involved in the contravention may include a natural person director of the corporate director, the corporate director, a lawyer or an accountant. [Schedule 1, item 4, subsection 1224P(2), Schedule 2, item 192, new table item for subsection 1224P(2) inserted into subsection 1317E(3) of the Corporations Act]

3.134 If a person's involvement is intentional, then the person is liable for an offence with a maximum penalty of five years imprisonment, 2,000 penalty units or both (for an individual) or 20,000 penalty units (for a body corporate). This penalty is consistent with the Guide to Framing Commonwealth Offences and with the existing offence penalty a responsible entity would be subject to for similar offences (see section 601FG of the existing law). This penalty is justified to ensure integrity of the CCIV regime, by deterring the misuse of a CCIV by the corporate director or any person to acquire or hold shares terms that are not consistent with the market price or that would not be fair to other members [Schedule 1, item 4, section 1224P(3), Schedule 2, item 199, penalty for subsection 1224P(3) inserted into Schedule 3 to the Corporations Act]

Exercise of powers while sub-fund is in liquidation

3.135 The appointment of a liquidator does not remove the corporate director from office. However, the corporate director must cease to exercise a function or power that relates solely to the business of the sub-fund that is being wound up. The corporate director may continue to exercise functions and powers that relate to the other sub-funds. [Schedule 1, item 4, section 1224Q]

3.136 There are two offences that apply to a corporate director who exercises a function or power that relates solely to the sub-fund that is being wound up. First, if the corporate director acts intentionally, the corporate director commits an offence with a penalty of 30 penalty units. Intention is the default fault element under section 5.6 of the Criminal Code. [Schedule 1, item 4, subsection 1224Q(4); Schedule 2, item 199 penalty for subsection 1224Q(4) inserted into Schedule 3 to the Corporations Act]

3.137 Second, if intention cannot be established, the corporate director commits a strict liability offence punishable by up to 20 penalty units. The application of a strict liability offence in this circumstance is consistent with the Guide to Framing Commonwealth Offences and is intended to ensure the integrity of the wind-up rules as they apply to sub-funds, in particular the role of the liquidator. [Schedule 1, item 4, subsection 1224Q(5); Schedule 2, item 199, penalty for subsection 1224Q(5) inserted into Schedule 3 to the Corporations Act]

3.138 The prohibition on exercising a function or power that relates solely to the sub-fund that is being wound-up does not apply to:

•

a person acting with the liquidator, provisional liquidator or Court's approval; or

•

a person acting in circumstances permitted by the Corporations Act.

[Schedule 1, item 4, subsection 1224Q(2)]

3.139 These exceptions mirror the exceptions to section 198G of the Corporations Act.

3.140 Unlike section 198G, the defendant does not bear the evidential burden for establishing that they are permitted to act. In other words, the prosecution must state in their pleadings that the person is not permitted to act, and the burden would then shift to the defendant to prove otherwise. This departure from section 198G has been made to ensure consistency with the Guide to Framing Commonwealth Offences. [Schedule 1, item 4, subsection 1224Q(3)]

3.141 On the other hand, the defendant bears the evidential burden for proving that they are acting with the approval of the liquidator, provisional liquidator or the Court. The reversal of the evidential burden of proof is consistent with the Guide to Framing Commonwealth Offences because the prosecution is unlikely to be aware of any correspondence between the liquidator/provisional liquidator and the defendant. These facts lie peculiarly within the knowledge of the defendant and there would be no additional burden on a defendant to produce evidence of the grant of approval.

3.142 If there is a conflict between a function or power of the corporate director and the liquidator or provisional liquidator, the functions and powers of the liquidator or provisional liquidator prevail. [Schedule 1, item 4, subsections 1224Q(6) and (11)]

3.143 The new provisions relating to the functions of the officer do not interfere with any provision in the Corporations Act which applies despite section 198G (see, for example, sections 60-11, 65-45, 70-20, 90-10, 90-20 and 90-28 of the Insolvency Practice Schedule). [Schedule 1, item 4, subsections 1224Q(9) and (10)]

Replacing the corporate director

3.144 The process for changing the corporate director depends on the circumstances in which the corporate director is being changed. For example, different requirements apply in circumstances where the corporate director must be removed because it is no longer eligible to be the corporate director compared to circumstances where the corporate director wishes to retire from office of its own volition.

3.145 As explained in paragraph 3.104 above, a change in the corporate director only takes effect once the record of the CCIV's registration is altered to name another company as the CCIV's corporate director (or temporary corporate director). It is critical that a CCIV has a corporate director at all times because, without other officers or employees, the CCIV cannot operate and will have no governing mind.

Replacement of an ineligible corporate director

3.146 If the corporate director fails to meet the basic eligibility requirement (explained in paragraph 3.106 above), then ASIC, or a member (or group of members) of the CCIV may apply to the Court for the appointment of a temporary corporate director. [Schedule 1, item 4, section 1224S]

3.147 The application to Court is not mandatory. However, the appointment of a temporary corporate director enables the CCIV to continue to operate with a corporate director who is duly capable of being the corporate director until a permanent corporate director can be secured.

Retirement of corporate director

3.148 If the corporate director of the CCIV wishes to retire from its role, then it must call a meeting of the CCIV's members for the members to consider, and vote on, a special resolution to choose a new company to be the CCIV's corporate director. [Schedule 1, item 4, subsection 1224T(1)]

3.149 The notice of the meeting of the CCIV's members must set out the corporate director's reason for wanting to retire and nominate a new company that meets the basic eligibility requirement (explained in paragraph 3.106 above) and has consented, in writing, to becoming the CCIV's corporate director. [Schedule 1, item 4, subsection 1224T(2)]

3.150 A new company is only appointed as the CCIV's corporate director if the special resolution passes. However, the company chosen by members need not be the one nominated in the notice of the meeting.

3.151 If the special resolution passes, such that the members of the CCIV have chosen a new company to be the corporate director of the CCIV, then the current corporate director must notify ASIC of the change and asking it to alter the record of the CCIV's registration to name the new company as the CCIV's corporate director. This notice must be lodged with ASIC as soon as practicable, and in any event within two business days. It is only once the CCIV's record of registration has been updated that the appointment of the new corporate director is given effect. [Schedule 1, item 4, subsection 1224T(3)]

3.152 A failure to provide ASIC with the requisite notice is a strict liability offence with a penalty of up to 20 penalty units. The strict liability offence is consistent with the Guide to Framing Commonwealth Offences, as it is important that ASIC has up-to-date information about a CCIV's corporate director to enable it to update the record of registration to give effect to the change. [Schedule 1, item 4, subsection 1224T(5); Schedule 2, item 199 penalty for subsection 1224T(3) inserted into Schedule 3 to the Corporations Act]

3.153 In addition, if the corporate director fails to give the requisite notice, the nominated company chosen by the CCIV's members to be the CCIV's corporate director may also lodge the notice with ASIC. [Schedule 1, item 4, subsection 1224T(4)]

3.154 If the special resolution does not pass, such that the members have not chosen a new company to be its corporate director, then the current corporate director of the CCIV may apply to the Court for the appointment of a temporary corporate director. The appointment of a temporary corporate director would enable the current corporate director to retire, while also ensuring the CCIV has a suitability qualified company to act as corporate director until a permanent corporate director can be secured. [Schedule 1, item 4, subsection 1224T(6)]

3.155 There is also nothing to prevent the corporate director from re-commencing the process and calling a new meeting for the CCIV's members to consider and vote on a further special resolution to choose a new company to be the CCIV's corporate director under these provisions.

Replacement of corporate director by members

3.156 If the members of the CCIV wish to replace the corporate director of the CCIV, they may do so by calling a meeting of the CCIV's members to consider and vote on two special resolutions:

•

first, a special resolution that the current corporate director should be removed; and

•

second, a special resolution choosing a body to be the new corporate director of the CCIV.

[Schedule 1, item 4, subsection 1224U(1)]

3.157 The notice of the meeting of the CCIV's members must set out the intention to remove the current corporate director and nominate a company to be the new corporate director that meets the basic eligibility requirement and has consented in writing to becoming the corporate director of the CCIV. [Schedule 1, item 4, subsection 1224U(2)]

3.158 The decision to remove the corporate director can only be made by the members of the CCIV (rather than the members of a particular sub-fund of the CCIV) and cannot be initiated by the members of a single sub-fund unless, consistent with the requirements for a special resolution of the CCIV:

•

they have at least 5 per cent of the total votes of the whole CCIV; or

•

comprise of at least 100 members who are entitled to vote on this resolution for the whole CCIV.

3.159 The current corporate director is only removed and replaced with a new company if both special resolutions pass. The company chosen by members to be the new corporate director does not need to be the one nominated in the notice of the meeting.

3.160 The corporate director must notify ASIC of the appointment as soon as practicable (and in any event within two business days of the appointment) and asking it to alter the CCIV's record of registration to name the appointed company as the CCIV's corporate director. It is only once the CCIV's record of registration has been updated that the appointment of the new corporate director is given effect. [Schedule 1, item 4, subsection 1224U(4)]

3.161 A failure to provide ASIC with the requisite notice is a strict liability offence with a penalty of up to 20 penalty units. The strict liability offence is consistent with the Guide to Framing Commonwealth Offences as it is important that ASIC has up-to-date information about a CCIV changing its corporate director to enable it to update the record of registration to give effect to the change. [Schedule 1, item 4, subsection 1224U(6); Schedule 2, item 199, penalty for subsection 1224U(4) inserted into Schedule 3 to the Corporations Act]

Requirements for a temporary corporate director

3.162 An application to the Court to appoint a temporary corporate director can be made by:

•

ASIC, a member of the CCIV, or a group of members of the CCIV if the CCIV does not have a corporate director that meets the basic eligibility requirement (for example, where the corporate director's AFSL has been cancelled) (see explanation at paragraph 3.146 above); or

•

the current corporate director if the current corporate director wants to retire and members do not choose a new corporate director, or the chosen company does not consent to the appointment (see discussion at paragraph 3.154 above); or

•

ASIC, a member of the CCIV, or a group of members of the CCIV if the temporary corporate director of the CCIV fails to take steps to appoint a permanent corporate director.

3.163 On application, the Court may appoint a temporary corporate director if it is satisfied that such an appointment is in the interests of the members, the company meets the basic eligibility requirement and the company has consented in writing to becoming the temporary corporate director. The Court has discretion to make any further orders that it considers appropriate. [Schedule 1, item 4, subsections 1224V(1) and (2)]

3.164 If the Court appoints a temporary corporate director, the person who made the application must, as soon as practicable after the Court's order appointing the temporary corporate director, and in any event within two business days, lodge a notice with ASIC informing ASIC of the appointment. [Schedule 1, item 4, subsection 1224V(3)]

3.165 A failure to provide ASIC with the requisite notice is a strict liability offence with a penalty of up to 20 penalty units. The strict liability offence is consistent with the Guide to Framing Commonwealth Offences as it is important that ASIC has up-to-date information about a Court changing the CCIV's corporate director and is able to update the record of registration to give effect to the change. [Schedule 1, item 4, subsection 1224V(5); Schedule 2, item 199, penalty for subsection 1224V(3) inserted into Schedule 3 to the Corporations Act]

3.166 In addition, if the person who made the application fails to give ASIC the requisite notice, the company appointed as the CCIV's temporary corporate director may lodge the notice with ASIC. [Schedule 1, item 4, subsection 1224V(4)]

3.167 The temporary corporate director must take steps to ensure that members appoint a new corporate director or, if this fails to occur, to apply to the Court to have the CCIV wound up. The temporary corporate director must call a meeting of the CCIV's members within three months of its appointment to allow the members to choose a new corporate director (or any later period as extended by the Court). The resolution must be a special resolution. Further meetings may be called within the three-month period, or such period as the Court permits. [Schedule 1, item 4, subsections 1224W(1) to (5)]

3.168 A failure to call the meeting of the CCIV's members is a strict liability offence with a penalty of up to 20 penalty units. The strict liability offence is consistent with the Guide to Framing Commonwealth Offences and is justified in this situation as it is essential that the corporate director take steps to ensure a permanent director is appointed. [Schedule 1, item 4, subsection 1224W(10); Schedule 2, item 199, penalty for subsection 1224W(2) inserted into Schedule 3 to the Corporations Act]

3.169 The notice of the meeting of the members must nominate a company to be the permanent corporate director of the CCIV that meets the basic eligibility requirement and has consented, in writing, to becoming the CCIV's permanent corporate director. There is nothing in the new law to prevent the temporary corporate director from being chosen by the members to be the new corporate director, or another company (that is not the subject of the notice of the meeting) from being appointed as the permanent corporate director. [Schedule 1, item 4, subsection 1224W(6)]

3.170 If the members of the CCIV choose a company to be the new corporate director, the temporary corporate director must, as soon as practicable, lodge a notice with ASIC requesting that the CCIV's registration record be updated to reflect the change. [Schedule 1, item 4, subsections 1224W(7) and (8)]

3.171 A failure to provide ASIC with the requisite notice is a strict liability offence with a penalty of up to 20 penalty units. The strict liability offence is consistent with the Guide to Framing Commonwealth Offences as it is essential to the integrity of the record of registration that ASIC has up-to-date information about a Court changing the CCIV's corporate director and is able to update the record of registration to give effect to the change. [Schedule 1, item 4, subsection 1224W(10);Schedule 2, item 199, penalty for subsection 1224W(8) inserted into Schedule 3 to the Corporations Act]

3.172 If the temporary corporate director fails to call a meeting of the CCIV's members to appoint a permanent corporate director within the required period, ASIC, a member of the CCIV, or a group of members of the CCIV may apply to the Court for the appointment of a new temporary corporate director. The new temporary corporate director would then be under the same obligation to take steps to appoint a permanent corporate director. This process is not mandatory. It has been included as a stopgap to provide the CCIV with the opportunity to appoint a new temporary corporate director (who will be subject to the requirements to take steps to secure a permanent corporate director). [Schedule 1, item 4, section 1224X]

3.173 If the temporary corporate director has called one (or more) meetings of the CCIV's members to appoint a permanent corporate director within the required period, but the CCIV's members fail to pass a special resolution appointing a permanent corporate director, the temporary corporate director must apply to the Court for the winding up of all of the sub-funds of the CCIV. If the temporary corporate director does not make this application, ASIC, a member or a group of members of the CCIV may make the application. In addition to making an order to wind up all the sub-funds of the CCIV, the Court may make any further orders it considers appropriate. [Schedule 1, item 4, section 1224Y]

Consequences of changing the corporate director

3.174 If the corporate director changes, the former corporate director must, as soon as practicable, give the new corporate director any books in the former corporate director's possession or control that the Corporations Act requires to be kept in relation to the CCIV. The former corporate director must also give other reasonable assistance to facilitate the change in corporate director. [Schedule 1, item 4, subsection 1224Z(1)]

3.175 A failure to hand over any books, or to give any other reasonable assistance, is a strict liability offence with a maximum penalty of 20 penalty units. This penalty is consistent with the Guide to Framing Commonwealth Offences and is justified in this situation as it is important that the incoming corporate director has the necessary reports and information about the CCIV and its operations to perform its role effectively. [Schedule 1, item 4, subsection 1224Z(2);Schedule 2, item 199, penalty for subsection 1224Z(1) inserted into Schedule 3 to the Corporations Act]

3.176 Further, if the corporate director changes then the rights, obligations and liabilities of the former corporate director in relation to the CCIV become the rights, obligations and liabilities of the new corporate director. However, the former corporate director retains the right to be paid fees and to be indemnified for expenses incurred relating to the period when it was the corporate director. The former corporate director also retains any right, obligation or liability it had as a member of the CCIV and any liability for which it could not have been indemnified out of the assets of the CCIV had it remained the corporate director, and any liability it has arising out of a contravention of a provision of the Corporations Act. [Schedule 1, Part 1, item 4, section 1224ZA]

3.177 A document to which the former corporate director was a party has effect as if the new corporate director (and not the former corporate director) was the party to that document where the document is capable of having this effect after the change in corporate director. [Schedule 1, Part 1, item 4, section 1224ZB]

3.178 These provisions are modelled on sections 601FS and 601FT that apply to registered schemes and are intended to provide an administratively efficient mechanism for the novation of obligations to the new corporate director.

Termination payments

3.179 A CCIV must not give the corporate director a benefit in connection with its retirement from its position as director of the CCIV unless:

•

it is provided for under the CCIV's constitution (and, if it is a retail CCIV, the requirements described in paragraph 3.135 of this explanatory memorandum have been met); or

•

the members of each affected sub-fund of the CCIV have approved the giving of the benefit.

[Schedule 1, item 4, sections 1224ZC and 1224ZD]

3.180 The exceptions for member approval that are available for other companies are also available for a CCIV. In particular, a CCIV does not need to obtain member approval if the benefit is given:

•

under an order of the court; or

•

in prescribed circumstances.

3.181 Some of the exceptions that are available to other companies are not relevant to the benefits given to a corporate director (being a company and not a natural person), in particular the exception for benefits given in respect of:

•

a leave of absence that an officer of another company is entitled to under an industrial agreement; and

•

pensions or lump sum payments (such as retiring allowances of superannuation gratuities); and

•

damages for breach of contract or an agreement between the company and a person as consideration for the person agreeing to hold a position with the company.

[Schedule 1, item 4, section 1224ZE]

Officers and employees of the corporate director of the CCIV

3.182 The officers and employees owe obligations to the corporate director under the existing law, in their capacity as officers and employees of a public company. The new law creates further obligations on these persons in relation to the CCIV. It also extends certain obligations to the auditor engaged by the corporate director.

Duties owed by officers of the corporate director in relation to the CCIV

Duties owed by officers of a retail CCIV

3.183 The duties owed by officers of a corporate director of a retail CCIV are similar to some of the duties owed by the corporate director itself. These are the duty to:

•

act honestly;

•

exercise the degree of care and diligence that a reasonable person would exercise in the officer's position;

•

act in the best interests of the members of the CCIV, as well as the members of each sub-fund of the CCIV;

•

not make use of information acquired through being an officer of the corporate director to gain an improper advantage for the officer or another person or to cause detriment to members of the CCIV; and

•

not make improper use of their position to gain an advantage for themselves or any other person or to cause detriment to members of the CCIV.

[Schedule 1, item 4, paragraphs 1225(1)(a) to (f); Schedule 2, item 57, note to subsection 179(1)]

3.184 The duties to act in the best interests of members aligns with the duties owed by the director of the CCIV (explained above in paragraph 3.90). These duties are tailored to the different legal structure of a CCIV. This recognises the segregation of each group of members that invest in different sub-funds of a CCIV and ensures that the directors of the corporate director must act in their interests in respect of the matters that relate to each sub-fund. However, in the event of any conflict between the duty to the members of the CCIV and the duty to the members of each sub-fund, the duty to the members of the CCIV prevails. This recognises the overarching status of the CCIV as a legal entity as a whole.

3.185 An officer of a corporate director of a retail CCIV is also required to take all steps that a reasonable person would take to ensure that the corporate director complies with the Corporations Act, any conditions imposed on the corporate director's AFSL, the CCIV's constitution and the CCIV's compliance plan. [Schedule 1, item 4, paragraph 1225(1)(g)]

3.186 The duties owed by an officer of a retail CCIV are modelled on the duties owed by officers of a responsible entity in relation to the scheme in section 601FD of the existing law. These additional duties ensure that investors in a retail CCIV are afforded comparable protections as investors in a registered, with some differences tailored to the different legal structure of a CCIV.

3.187 A breach of any of the above duties is a breach of a civil penalty provision. If the breach is intentional or reckless, or a person's involvement in the breach is intentional or reckless, then the person is liable for an offence with a maximum penalty of five years imprisonment. This penalty is consistent with the Guide to Framing Commonwealth Offences and with the penalties an officer of a responsible entity is liable for under the existing law. [Schedule 1, item 4, subsection 1225(2); Schedule 2, item 192, new table item for subsection 1225(1) inserted into subsection 1317E(3) of the Corporations Act, and item 199, penalty for subsection 1225(2) inserted into Schedule 3 to the Corporations Act]

3.188 The officers of the corporate director also owe the Part 2D.1 duties to the corporate director under the existing law. To the extent that there is a conflict between the duties in the new law and the Part 2D.1 duties, the duties in the new law prevail. [Schedule 1, item 4, subsection 1225(3)]

3.189 The additional duties set out above interact with other laws in the same way that the duties in Part 2D.1 do under section 185 of the existing law. That is, the additional duties have effect in addition to, and not in derogation of, any other rule of law that the person has because of their office or employment in relation to a corporation. [Schedule 1, item 4, subsection 1225(4)]

Secretary of the corporate director's responsibility for certain contraventions

3.190 As explained in paragraph 3.85, the CCIV must not appoint a secretary. The corporate director's secretary has responsibility for certain contraventions of the law by the corporate director (being a public company) under section 188 of the existing law.

3.191 The new law extends the operation of section 188 to also hold the corporate director's secretary responsible for certain contraventions of law by the corporate director (being obligations the corporate director has in relation to the CCIV, such as obligations on the corporate director to lodge certain notices with ASIC). The new law also extends the operation of section 188 to hold the corporate director's secretary responsible for certain contraventions of the law by the CCIV (such as obligations on the CCIV to lodge certain notices with ASIC). [Schedule 1, item 4, sections 1225A and 1225B; Schedule 2, item 59, note to subsection 188(1)]

Extended duty to disclose material personal interests

3.192 Section 191 of the existing law (relating to the director's duty to disclose material personal interests) continues to apply to the natural person directors of the corporate director. Akin to other companies, the directors of the corporate director must disclose any material personal interest in the corporate director to the other directors of the corporate director.

3.193 In addition, the new law extends section 191 of the existing law so that a natural person director of the corporate director must also disclose any material personal interest in the affairs of the CCIV to the other natural person directors of the corporate director. [Schedule 1, item 4, section 1225C(1) and (2); Schedule 2, item 58, note to Division 2 of Part 2D.1]

3.194 Strict liability applies to the circumstance that the director of the corporate director has a material personal interest in a matter that relates to the affairs of a CCIV. The imposition of strict liability on this element of the offence is consistent with the operation of subsection 191A(1A) of the existing law (which imposes strict liability in similar circumstances). [Schedule 1, item 4, subsection 1225C(3)]

3.195 The existing exceptions for when a director does not have to disclose a material personal interest continue to apply to the natural person directors of the corporate director, both in respect of their material interests in the corporate director and in the CCIV. These include if the material personal interest arises because the director is a member of the CCIV and the interest is held in common with the other members of the CCIV. [Schedule 1, item 4, subsections 1225C(4) and (5)]

Right of access to CCIV books

3.196 Each natural person director of a corporate director of the CCIV has a right to inspect the books of the CCIV for the purposes of certain legal proceedings. This right is the same as the right of access that applies to directors of other types of companies. [Schedule 1, item 4, section 1225D; Schedule 2, items 63 and 64, note 2 to subsection 198F(1)]

Indemnities, exemptions and insurance against certain liabilities to the CCIV

Restrictions on indemnities and exemptions

3.197 As a CCIV is a type of company, existing section 199A prohibits retail and wholesale CCIVs from granting an officer (including corporate directors) or an auditor:

•

an exemption from a liability to the CCIV incurred as an officer or auditor;

•

an indemnity from a liability owed to the CCIV;

•

an indemnity for certain pecuniary penalties or compensation orders;

•

an indemnity from a liability that do not arise out of conduct in good faith; and

•

certain indemnities for legal costs.

[Schedule 1, item 4, subsection 1225E(2); Schedule 2, item 66, note to subsection 199A(1)]

3.198 The restrictions in existing section 199A are also extended to prohibit the CCIV from granting these types of exemptions or indemnities to an officer or auditor of the corporate director. [Schedule 1, item 4, subsection 1225E(1)]

3.199 Neither existing section 199A, nor the extended operation of section 199A, prohibits all types of indemnities. Similarly, they do not constrain whether the indemnity is given in an employment contract, the constitution or a deed.

Restrictions on insurance

3.200 The CCIV (or a related body corporate) is prohibited from insuring a current or former officer or auditor of the CCIV from a liability (other than legal costs) that arises out of:

•

a wilful breach of duty in relation to the CCIV; or

•

a breach of the officer's statutory duties not to improperly use their position or improperly use information under section 182 and 183 of the Corporations Act (respectively).

3.201 This restriction on insurance is extended to cover a liability of an officer or auditor of the corporate director of the CCIV. [Schedule 1, item 4, subsection 1225F(1) and (2); Schedule 2, item 67, note to subsection 199B(1)]

3.202 In addition, a retail CCIV is prohibited from insuring an officer or auditor of the corporate director of the CCIV for a liability to the members of the CCIV that arises out of a breach of their statutory duties under new section 1225D. [Schedule 1, item 4, subsection 1225F(3)]

Duties of employees of the corporate director in relation to the CCIV

3.203 The employees of the corporate director owe a duty to not make improper use of their position or of information acquired through being an employee of a corporate director in order to gain an advantage for themselves or another person or to cause detriment to members of the CCIV. [Schedule 1, item 4, subsection 1225F(1)]

3.204 These duties that are owed by employees of the corporate director are modelled on the duties of employees of responsible entities of registered schemes in section 601FE of the existing law. As with the corresponding registered scheme provisions, the new duties owed by officers of the corporate director are owed directly to the members.

3.205 A breach of the above duties is a breach of a civil penalty provision. If the breach is intentional or reckless, or a person's involvement in the breach is intentional or reckless, then the person is liable for an offence with a maximum penalty of five years imprisonment. This penalty is consistent with the Guide to Framing Commonwealth Offences and with the penalties an officer of a responsible entity is liable for under the existing law. [Schedule 1, item 4, subsection 1225F(2); Schedule 2, item 192, new table item for subsection 1225F(1) inserted into subsection 1317E(3) of the Corporations Act, and item 199, penalty for subsection 1225F(2) inserted into Schedule 3 of the Corporations Act]

3.206 The employees of the corporate director also owe the Part 2D.1 duties to the corporate director under the existing law. To the extent that there is a conflict between the duties in the new law and the Part 2D.1 duties, the duties in the new law prevail. [Schedule 1, item 4, subsection 1225F(3)]

3.207 The additional duties set out above interact with other laws in the same way that the duties in Part 2D.1 do under section 185 of the existing law. That is, the additional duties have effect in addition to, and not in derogation of, any other rule of law that the person has because of their office or employment in relation to a corporation. [Schedule 1, item 4, subsection 1225F(4)]

Compliance plan of a retail CCIV

Documenting the compliance plan

3.208 A retail CCIV must have a compliance plan. A wholesale CCIV is not required to have a compliance plan. [Schedule 1, item 4, subsections 1226(1) and (2)]

3.209 A CCIV that will, upon registration, be a retail CCIV is required to lodge with ASIC a copy of its compliance plan at the same time it lodges its application for registration (see paragraph 2.14 above).

3.210 In any event, a CCIV that becomes a retail CCIV must lodge a copy of the CCIV's compliance plan with ASIC within 14 days of becoming a retail CCIV. The copy must be signed by all of the directors of the corporate director. A failure to do so is a strict liability offence with a maximum penalty of 20 penalty units. This penalty is consistent with the Guide to Framing Commonwealth Offences and is also consistent with other offences in the Corporations Act that impose strict liability for failure to lodge a document with ASIC. [Schedule 1, item 4, subsections 1226(3) and (4); Schedule 2, item 199, penalty for subsection 1226(3) inserted into Schedule 3 to the Corporations Act]

3.211 The compliance plan must set out adequate measures to be applied by the corporate director in operating the CCIV to ensure compliance with the Corporations Act and the CCIV's constitution. This is the only basic content requirement for the compliance plan. [Schedule 1, item 4, section 1226A]

3.212 The corporate director must ensure at all times that the CCIV's compliance plan meets the legislative requirements for compliance plans. The corporate director must also comply with the compliance plan. [Schedule 1, item 4, paragraphs 1224D(2)(f) and (g)]

3.213 The corporate director's responsibilities in relation to the compliance plan are similar to those applying to responsible entities of registered schemes. However, unlike for registered schemes, there are no prescriptive content requirements for a CCIV's compliance plan. This is intended to improve the administrative efficiency and effectiveness of compliance plans through a more flexible and outcomes-focused approach.

3.214 The compliance plan requirements contained in the new law will be supported by ASIC guidance regarding the content of compliance plans, including in relation to identifying risks of non-compliance and measures for mitigating those risks. This means the compliance plan must be tailored to suit the nature, scale, complexity and assets of the CCIV. An adequate compliance plan should include mechanisms and procedures for early identification of potential breaches and for monitoring overall adherence to the compliance plan.

3.215 The compliance plan forms a part of the overall compliance management system that the corporate director, as an AFSL holder, must implement to meet its licence obligations under section 912A.

3.216 As it is likely that some corporate directors will be the corporate director for more than one CCIV, the new law provides flexibility for the compliance plan of a CCIV that is lodged with ASIC to incorporate by reference specified provisions of a compliance plan of another CCIV. The provisions incorporated by reference may be incorporated as at a specific date, or as in force from time to time. These provisions will be taken to be included in the plan. [Schedule 1, item 4, section 1226B]

This is expected to reduce the administrative burden where a corporate director is the corporate director of more than one CCIV. However, ASIC may require the corporate director to lodge a consolidated copy of the CCIV's compliance plan that sets out the full text of provisions taken to be included in the plan. If the corporate director does not comply with this direction, it commits an offence of strict liability, with a penalty of up to 20 penalty units. This is consistent with other offences in the Corporations Act that impose strict liability for failure to lodge a document with ASIC (see, for example, section 601HD of the Corporations Act). [Schedule 1, item 4, section 1226E; Schedule 2, item 199, penalty for subsection 1226E(3) inserted into Schedule 3 to the Corporations Act]

3.217 ASIC may also give a written direction to the corporate director of a CCIV to give it information about arrangements contained in the compliance plan. The direction must specify the timeframe within which the corporate director must give the information (of no less than 14 days after the direction is given). A failure to comply with this requirement is a strict liability offence, with a penalty of up to 60 penalty units. This is consistent with other offences in the Corporations Act that impose strict liability for failure to lodge information with ASIC when directed (see, for example, sections 321 and 158 of the Corporations Act). [Schedule 1, item 4, section 1226C; Schedule 2, item 199, penalty for subsection 1226C(2) inserted into Schedule 3 to the Corporations Act]

3.218 The corporate director of a CCIV may amend the CCIV's compliance plan or repeal and replace it. ASIC may also direct the corporate director to modify the CCIV's compliance plan to ensure it complies with the basic content requirement explained in paragraph 3.211 above. If the compliance plan is modified or replaced, the corporate director must lodge a copy of the modified or new compliance plan (signed by all the directors of the corporate director) with ASIC within 14 days of the change. The corporate director commits a strict liability offence if it does not comply with ASIC's direction or does not lodge the copy of the modified or new plan. Both of these offences carry a penalty of up to 20 penalty units. These penalties are consistent with the Guide to Framing Commonwealth Offences. [Schedule 1, item 4, section 1226D; Schedule 2, item 199, penalty for subsections 1226D(3) and (4) inserted into Schedule 3 to the Corporations Act]

3.219 These strict liability offences that relate to documenting the compliance plan (explained in paragraphs 3.208 to 3.218 above) are important mechanisms for ensuring that ASIC can access comprehensive and up-to-date information about the compliance plan of a CCIV and for ensuring that CCIVs have in place robust measures for complying with the regulatory requirements and the CCIV's constitution. The offences are consistent with the Guide to Framing Commonwealth Offences and with other offences in the Corporations Act that impose strict liability for failure to lodge a document with ASIC (see, for example, section 601HD of the Corporations Act).

3.220 In contrast to the requirements for registered schemes, there is no requirement for a CCIV to have a compliance committee to provide oversight of the operations of the CCIV. Instead, at least half of the directors of the corporate director of a retail CCIV must be external directors.

3.221 The requirement for external directors applies generally in respect of all retail CCIVs and aligns with the circumstances in which a responsible entity of a registered scheme is relieved of the requirement to have a compliance committee under Part 5C.5. The requirement for the corporate director of a retail CCIV to have external directors is explained in further detail at paragraphs 3.108 to 3.115.

Auditing the compliance plan

3.222 The corporate director of a retail CCIV must engage an auditor to audit compliance with the CCIV's compliance plan. A failure to do so is a strict liability offence with a penalty of up to 20 penalty units. A strict liability offence provides a strong incentive to comply with this requirement, which ensures there is external scrutiny of a CCIV's compliance plan. The penalty is consistent with the Guide to Framing Commonwealth Offences. [Schedule 1, item 4, subsections 1226F(1) and (2); Schedule 2, item 199, penalty for subsection 1226F(1) inserted into Schedule 3 to the Corporations Act]

3.223 The auditor of the compliance plan must be a registered company auditor, an audit firm or an authorised audit company. In order to ensure independent scrutiny, the auditor of the compliance plan must not be:

•

the corporate director (or an associate of the corporate director);

•

a person who holds money or property of the CCIV (or an associate of the person); or

•

the auditor of the corporate director's own statutory financial statements (however, in this instance only, the CCIV compliance plan auditor may be from the same audit firm as the auditor of the corporate director).

[Schedule 1, item 4, subsections 1226F(1) to (4)]

3.224 Within three months of the end of the financial year (generally by 30 September), the auditor must conduct an annual audit of the compliance plan and report whether, in the auditor's opinion, the corporate director has complied with the CCIV's compliance plan, and whether the plan continues to meet the requirements for compliance plans explained above. A contravention of this requirement is a strict liability offence with a maximum penalty of 20 penalty units. A strict liability offence ensures there is a strong incentive for the auditor to undertake a regular and timely audit of the CCIV's compliance plan. The penalty is consistent with the Guide to Framing Commonwealth Offences. [Schedule 1, item 4, subsections 1226G(1) and (6); Schedule 2, item 199, penalty for subsection 1226G(1) inserted into Schedule 3 to the Corporations Act]

3.225 The corporate director can also arrange for the auditor to carry out additional audits. [Schedule 1, item 4, subsection 1226F(5)]

3.226 The auditor of the compliance plan must have access at all reasonable times to the books of the CCIV and assistance for the purposes of the audit of the compliance plan, including assistance with information and explanations as required from officers of the corporate director. An officer of the corporate director who fails to provide this access, or give this information, commits an offence of strict liability with a maximum penalty of 20 penalty units. A strict liability offence ensures officers of the corporate director have a strong incentive to provide the compliance plan auditor with full assistance and disclosure during the audit process and is consistent with the Guide to Framing Commonwealth Offences. [Schedule 1, item 4, subsections 1226G(2) and (3); Schedule 2, item 199, penalty for subsection 1226G(3) inserted into Schedule 3 to the Corporations Act]

3.227 The corporate director must lodge the auditor's report of the compliance plan with ASIC at the same time as it lodges the annual financial statements and reports of the CCIV. A contravention of this requirement is a strict liability offence with a maximum penalty of 20 penalty units. This offence creates a strong incentive for the corporate director to provide ASIC with timely and independently audited information about the CCIV's compliance processes and record over the previous financial year and is consistent with the Guide to Framing Commonwealth Offences. [Schedule 1, item 4, subsections 1226G(4); Schedule 2, item 199, penalty for subsection 1226G(4) inserted into Schedule 3 to the Corporations Act]

3.228 The auditor of the compliance plan has qualified privilege in respect of statements made in the audit report and notifications that the auditor makes to ASIC about contraventions of the compliance plan. [Schedule 1, item 4, subsection 1226G(5)]

3.229 These requirements are based on the requirements for compliance plans of registered schemes contained in section 601HG. They ensure there is an independent, annual compliance review process to assist the corporate director and its officers in monitoring and managing compliance risks.

Offences for contraventions by individual auditor

3.230 As for registered schemes, an individual auditor, audit company, or lead auditor commits an offence if the person fails to notify ASIC of certain matters within 28 days of becoming aware of them. The person must notify ASIC if they become aware of:

•

a significant contravention of the Corporations Act;

•

a contravention of the Corporations Act that is not significant but that the auditor believes has not or will not be adequately dealt with through the audit process; or

•

an attempt by a person to influence or interfere with the audit.

[Schedule 1, item 4, subsections 1226H(1), (2), (3) and (7)]

3.231 A failure to notify ASIC of any of the above matters is an offence with a maximum penalty of one year imprisonment. This penalty is consistent with the Guide to Framing Commonwealth Offences and provides a strong incentive to notify ASIC of key matters central to ASIC's role as regulator. [Schedule 1, item 4, subsection 1226H(6); Schedule 2, item 199, penalty for subsection 1226H(6) inserted into Schedule 3 to the Corporations Act]

3.232 In determining whether a contravention is a significant one, a person should consider:

•

the penalty for the contravention;

•

the effect that the contravention has or may have on the financial position of the CCIV or a sub-fund of the CCIV or the information available about the financial position of the CCIV or a sub-fund of the CCIV; and

•

any other relevant matter.

[Schedule 1, item 4, subsection 1226H(4) and (5)]

3.233 The circumstances that give rise to a contravention and the matters that need to be considered when determining whether a contravention is significant are based on the equivalent provisions for registered schemes.

Changing the compliance plan auditor

3.234 The auditor of the compliance plan may be removed by the corporate director or may resign on its own initiative. In certain circumstances, the corporate director must remove the auditor of the compliance plan.

3.235 The corporate director must remove the auditor if it is no longer eligible to act as the auditor of the compliance plan (see paragraph 3.223 for the eligibility requirements for a CCIV's compliance plan auditor). A failure to do so is a strict liability offence with a penalty of up to 20 penalty units. The corporate director may also remove the auditor for other reasons if ASIC consents to the removal. [Schedule 1, item 4, subsections 1226J(1) and (2); Schedule 2, item 199, penalty for subsection 1226J(1)(a) inserted into Schedule 3 to the Corporations Act]

3.236 The auditor may, by written application, resign subject to ASIC consenting to the resignation. ASIC must notify the auditor and the corporate director whether it consents to the auditor's resignation as soon as practicable after receiving the application. [Schedule 1, item 4, subsections 1226J(3) and (4)]

3.237 To encourage proper disclosure of an auditor's reasons for resigning, a statement by the auditor in its application or in answer to an inquiry by ASIC concerning the reasons for its resignation cannot be used as evidence in civil or criminal proceedings. It also cannot be used as the basis for prosecution, action or suit against the auditor (other than in respect of a contravention relating to false or misleading statements under section 1308). A certificate by ASIC that the statement was made in the auditor's application for resignation, or in answer to an inquiry by ASIC, is conclusive evidence that the statement was so made. [Schedule 1, item 4, subsection 1226J(5)]

3.238 The day on which the auditor's resignation takes effect is the later of:

•

the day specified in the notice of resignation; or

•

the day ASIC consents to the resignation; or

•

the day fixed by ASIC for the resignation.

[Schedule 1, item 4, subsection 1226J(6)]

3.239 If the auditor of the compliance plan changes, the corporate director must, within 7 days, write to ASIC asking it to alter the record of the CCIV's registration to show the name of the new auditor. A failure to do so is a strict liability offence with a penalty of up to 20 penalty units. A strict liability offence ensures there is a strong incentive for the corporate director to provide information to ASIC about the identity of the compliance plan auditor in the event of a change in auditor. The offence is consistent with the Guide to Framing Commonwealth Offences. ASIC must comply with the request if the change complies with the Corporations Act. [Schedule 1, item 4, section 1226K; Schedule 2, item 199, penalty for subsection 1226K(1) inserted into Schedule 3 of the Corporations Act]

3.240 These requirements are based on the requirements for changing the auditor of a compliance plan for a registered scheme, contained in section 601HH.

Member protection

Related party transactions by retail CCIVs

Approval of related party transactions required at the sub-fund level (not at whole-of-CCIV level)

3.241 The rules concerning related party transactions in Chapter 2E of the Corporations Act generally apply to retail CCIVs in the same way that they apply to public companies, and to an entity that a retail CCIV controls in the same way as it applies to an entity a public company controls. The rules concerning related party transactions do not apply to wholesale CCIVs. [Schedule 1, item 4, section 1227; Schedule 2, item 76, note to Chapter 2E]

3.242 To the extent the rules require a retail CCIV to obtain the approval of its members to give a related party a financial benefit, the CCIV must separately obtain the approval of the members of each sub-fund that is affected by the giving of the financial benefit (not the CCIV as a whole). [Schedule 1, item 4, subsections 1227A(1) and (2), Schedule 2, item 77 and 78, note 3 to subsection 208(1)and note 3 to subsection 209(2)]

3.243 If the members of a sub-fund do not give approval, the CCIV cannot enter into the transaction with respect to that sub-fund. If a transaction relates to more than one sub-fund of the retail CCIV, the CCIV must separately obtain the approval of the members of each affected sub-fund. If the members of any of the affected sub-funds do not approve the transaction, the CCIV will not be able to enter into the transaction with respect to those sub-funds.

Exceptions

3.244 If the corporate director of a retail CCIV is entitled to fees or an indemnity under the CCIV's constitution, and the provisions of the constitution comply with the requirements for such clauses (see paragraphs 3.130 to 3.131 above), then a retail CCIV is not required to obtain the approval of the affected members. A similar exception applies to the fees and indemnities given to a responsible entity of a registered scheme (that is set out in the registered scheme's constitution). [Schedule 1, item 4, subsection 1227A(3)]

Exceptions available to public companies not available for retail CCIVs

3.245 The exception for remuneration and reimbursement to an officer or employee of a public company under section 211 of the existing law is not available for a retail CCIV, as there are bespoke exceptions for the corporate director's financial benefits explained above. [Schedule 1, paragraph 1227B(1)(a)]

3.246 The exceptions in sections 213 and 214 of the existing law for small amounts given to a related party, or financial benefits given a closely held subsidiary, are also not available for retail CCIVs. This is consistent with the rules that apply to related party transactions in respect of a registered scheme (see section 601LE in Chapter 5C of the Corporations Act). It recognises that the payment of any amount by a retail CCIV to a related party of the CCIV (no matter how small) requires member approval. [Schedule 1, paragraphs 1227B(1)(b) and (c)]

3.247 The exceptions from the related party transaction rules in the existing law continue to apply to entities the retail CCIV controls in relation to benefits given to its related parties. [Schedule 1, item 4, subsection 1227B(2)]

Procedural requirements for member approval

3.248 Approval for a related party transaction may only be given at a meeting of the members of each affected sub-fund of a retail CCIV. A body corporate that is a member of the CCIV may appoint an individual representative to exercise its powers at the meeting in the same way as an individual may be appointed to exercise the body corporate's powers at a meeting of a registered scheme. [Schedule 1, item 4, section 1227D]

3.249 A retail CCIV must, as for a public company, prepare an explanatory statement to members as part of the process of obtaining member approval. The statement must include certain information, such as the identity of the related party and the nature of the financial benefit to be given. The corporate director of a CCIV, and any of the directors of the corporate director of the CCIV, are also required to set out in the explanatory statement certain information, including:

•

any recommendation about the giving of the financial benefit, and the reasons for the recommendation;

•

whether they have an interest in the outcome of the proposed resolution to approve the financial benefit; and

•

all other information that is known to the company, the corporate director, or any of the directors of the corporate director that is reasonably required by the members in order to decide whether it is in the sub-fund's interest to pass the proposed resolution.

[Schedule 1, item 4, section 1227C]

Meaning of 'related party'

3.250 Section 228 (about 'related parties' of a public company) does not apply to a CCIV. Related parties of a CCIV are instead:

•

the corporate director of the CCIV or an entity that controls the corporate director of the CCIV;

•

the directors of the corporate director and their parents and children, the directors (if any) of an entity that controls the corporate director and their parents and children and any entity controlled by any of these persons (unless also controlled by the CCIV); and

•

any entity acting in concert with a related party of the CCIV on the understanding that the related entity will receive a financial benefit if the CCIV gives the entity a financial benefit.

[Schedule 1, item 4, subsections 1227E(1) to (5) and (8)]

3.251 An entity is also a related party of a CCIV if it was a related party in the previous six months or if it has reasonable grounds to believe it will become a related party of the CCIV at any time in the future. [Schedule 1, item 4, subsections 1227E(6) and (7)]

3.252 Consequential amendments are made to the definitions of 'entity', 'financial benefit' and 'related party' to reflect the modifications contained Part 8B.4 of the new law. [Schedule 2, items 10, 13 and 24, definitions of 'entity', 'financial benefit' and 'related party' in section 9 of the Corporations Act]

Rights and remedies of members of a CCIV

3.253 Members of a CCIV, like members of any other company, may apply to the court for remedy in circumstances where:

•

the conduct of the affairs of the CCIV;

•

an actual or proposed act or omission on behalf of the CCIV; or

•

an actual or proposed resolution of the CCIV's members, or a class of members;

is either contrary to the interests of the CCIV as a whole or oppressive to (or unfairly prejudicial to or unfairly discriminatory against) a member or class of members of the CCIV. This right is extended so that members of one or more sub-funds of the CCIV may seek also remedy when it is contrary to the interests of the members of that sub-fund (or those sub-funds), considered as a whole. [Schedule 1, item 4, section 1227F; Schedule 2, item 79, notes to section 232]

3.254 The court has power to make any order provided for under section 233 of the Corporations Act that it considers appropriate in relation to a CCIV (in the same way that it can in relation to any other company). This includes an order to appoint a receiver to manage any or all of a sub-fund's property or modify or repeal the CCIV's constitution. [Schedule 1, item 4, section 1227G; Schedule 2, items 80 to 81, note to subsections 233(1) and (3)]

3.255 A member or officer of a CCIV (or a former member or former officer) may bring, or intervene in, proceedings on behalf of the CCIV with leave from the court in the same way that a member or officer of any other company can. The court must grant the application for leave if certain factors are established, including if it is probable that the company itself will not bring the proceedings and it is in the best interests of the company that the applicant be granted leave (among other things). The rebuttable presumption that granting leave is not in the best interests of the company applies to CCIVs in the same way as it applies to other companies (except that references to a third party means a person that is not a related party of the CCIV). [Schedule 1, item 4, section 1227H; Schedule 2, items 82 and 83, note 2 to subsection 237(4)]

3.256 The CCIV must comply with the relevant procedures for varying and cancelling class rights in the same way that other companies are required to do so. If the CCIV's constitution sets out the procedure for varying and cancelling class rights, the CCIV must follow that procedure. If the CCIV's constitution does not set out the procedure for varying and cancelling class rights, the CCIV must pass a special resolution of the sub-fund of the CCIV to which the affected shares are referable, instead of a special resolution of the whole CCIV. The CCIV must also pass a special resolution of the affected class of members (in the same way that other companies are required to do so). [Schedule 1, item 4, section 1227J; Schedule 2, items 84 and 85 notes to subsections 246B(1) and 246B(2)]

3.257 Certain actions are taken to vary rights attached to shares of a CCIV in the same way that certain actions are taken to vary the rights attached to shares of other companies (except that sub-funds of the CCIV to which only one class of shares are referable are treated in the same way as other companies with one class of shares). [Schedule 1, item 4, section 1227K]

3.258 A CCIV must notify ASIC in the prescribed form of the particulars of a division of the shares in the CCIV into classes (if the shares were not previously divided in this way) and a conversion of shares in a class into shares in another class in the same way that a public company is required to do so. [Schedule 1, item 4, section 1227L; Schedule 2, item 86, note to subsection 246F(3)]

Civil liability of corporate director to members

3.259 If a member suffers loss or damage because the corporate director has contravened a provision in Chapter 8B, then the member has a direct right of recourse against the corporate director to recover the amount of the loss or damage from the corporate director. This is regardless of whether or not the corporate director has been convicted of an offence, or has a civil penalty order made against it, in respect of the contravention. [Schedule 1, item 4, subsection 1227M(1)]

3.260 This right is consistent with the right of a member of a registered scheme to seek remedy against the responsible entity of the registered scheme in similar circumstances, as provided for in section 601MA of the existing law.

3.261 The new law includes a statutory limitation period that requires the action against the corporate director to be taken within 6 years after the member's cause of action has arisen. [Schedule 1, item 4, subsection 1227M(2)]

3.262 The availability of this remedy for members of a CCIV does not affect any liability that a person, including the corporate director or an officer or employee of the corporate director, has under the Corporations Act or under any other laws. In particular, it does not affect the ability to convict the person of an offence, or make a civil penalty order against it, for the contravention of the relevant provision in Chapter 8B. [Schedule 1, item 4, subsection 1227M(3)]

Meetings

3.263 A CCIV's powers may be exercised by its director or its members. As explained in paragraphs 3.122 and 3.123 above, some of the CCIV's powers must be exercised by the members of the CCIV. For example, the decision to replace the corporate director of a CCIV must be made by the CCIV's members.

3.264 In addition, some of the CCIV's powers may be exercised in relation to a particular sub-fund of the CCIV, by that sub-fund's members. For example, a decision to wind up a sub-fund voluntarily.

3.265 The new law sets out the method by which a resolution for the CCIV may be passed by the corporate director or by the CCIV's members.

Directors' meetings

3.266 The corporate director of a CCIV may pass a resolution for the CCIV by passing a resolution of the directors of the corporate director. This mechanism effectively 'looks through' the corporate director of the CCIV (being a company itself) to the natural person directors of the corporate director who are making the decision to exercise the CCIV's powers. [Schedule 1, item 4, subsection 1228(1)]

3.267 The resolution must clearly state that it is on behalf of the corporate director in its capacity as a corporate director of the CCIV. It should also state which CCIV the resolution relates to if the corporate director is the corporate director of more than one CCIV. These requirements aim to avoid uncertainty about which company the natural person directors of the corporate director are acting for (that is, the CCIV, another CCIV or the corporate director itself). [Schedule 1, item 4, paragraphs 1228(1)(a) and (b)]

3.268 Part 2G.1 of the Corporations Act, which sets out the requirements for directors' meetings, does not apply to a CCIV, as this bespoke rule applies instead. This does not affect the application of Part 2G.1 for resolutions, or meetings, of the corporate director of the CCIV (being a company itself). [Schedule 1, item 4, subsections 1228(2) and (3); Schedule 2, item 87, note to Part 2G.1]

Meetings of members of the CCIV and sub-funds

3.269 The rules for holding meetings of members of a CCIV and its sub-funds are based on the rules for registered schemes, rather than the rules for companies. The rules for meetings of members of registered schemes apply to a CCIV as if:

•

the CCIV is a registered scheme;

•

the CCIV's members are the members of that scheme;

•

the corporate director is the responsible entity of the registered scheme;

•

the CCIV's constitution were the scheme's constitution; and

•

the CCIV's compliance plan is the registered scheme's compliance plan.

[Schedule 1, item 4, section 1228A; Schedule 2, items 12, 27 and 88-90, definitions of 'extraordinary resolution' and 'special resolution' in section 9 and notes Part 2G.2, Part 2G.3 and Part 2G.4 of the Corporations Act]

3.270 Similar adaptations have been made for meetings of the members of a sub-fund of a CCIV. As such, the rules apply to meetings of members of a sub-fund of a CCIV as if:

•

the sub-fund is a registered scheme;

•

the sub-fund's members are the members of the scheme;

•

the corporate director is the responsible entity of the registered scheme;

•

the CCIV's constitution were the scheme's constitution; and

•

the CCIV's compliance plan is the registered scheme's compliance plan.

[Schedule 1, item 4, section 1228B]

3.271 A resolution may only be moved by the members if the resolution does not treat any other member of any other sub-fund differently or affect any other interest of a member of any other sub-fund. This requirement applies to all CCIVs (listed or otherwise). [Schedule 1, item 4, section 1228E]

3.272 If a member of a sub-fund wishes to call a meeting of the members of a sub-fund of the CCIV, then that member may only request a copy of so much of the register of the CCIV's members as relates to that particular sub-fund of the CCIV. If a member is calling a meeting of the members of the whole CCIV, it may request a copy of the full register of members. The CCIV must, without charge, produce a copy of the register of members (in part or in full, as required). A failure to do this is a strict liability offence with a maximum penalty of 20 penalty units. This penalty is consistent with the Guide to Framing Commonwealth Offences and ensures the ability of members to exercise their right to call meetings - being a basic member right in any company. [Schedule 1, item 4, section 1228D]

Example 3.1 Meetings of members of a CCIV and its sub-funds

Ironbank CCIV has three sub-funds, Ironbank Growth SF, Ironbank Wealth SF and Ironbank Gold Investment SF.

Two proposals are put forward.

•

The first proposal involves replacing the corporate director.

•

The second proposal relates to cancelling forfeited shares in each of two of the sub-funds, Ironbank Growth SF and Ironbank Wealth SF.

Separate meetings of the whole CCIV, the members of Ironbank Growth SF and Ironbank Wealth SF are called. For administrative convenience, the meetings are to be held on the same day.

The first proposal affects the interests of the members of the whole CCIV. Accordingly, a resolution is put to all of the members of the CCIV who must vote on the proposal together.

Eighty per cent of the members of the whole CCIV vote in favour of the first proposal. A review of the count of the votes indicates that only 20 per cent of the members of Ironbank Gold Investment SF voted in favour of the proposal. However, because it is a resolution of the whole CCIV (with the vote of all of the members of the CCIV considered as a whole), the resolution is carried.

As the second proposal only affects the interests of the members of Ironbank Growth SF and Ironbank Wealth SF, it is only put forward at the meetings of Ironbank Growth SF and Ironbank Wealth SF.

Eighty per cent of the members of Ironbank Growth SF vote in favour of the second proposal. However, only five per cent of the members of Ironbank Wealth SF are in favour of the proposal.

As the second proposal can proceed in a manner that does not affect the interests of the members of Ironbank Wealth SF, it can proceed in respect of just Ironbank Growth SF. It cannot proceed in respect of Ironbank Wealth SF.

Further modifications to the meeting rules for CCIVs and sub-funds

3.273 Some further modifications to the meeting rules are made to account for the CCIV's corporate status.

3.274 In particular, a member in a CCIV has a share in the CCIV (which are different to interests in a scheme). At a meeting of the CCIV or a sub-fund of the CCIV, a member's voting power is:

•

for a vote on a show of hands, 1 vote;

•

for a vote on a poll at a meeting of the CCIV, 1 vote for each dollar of the value of the total shares in the CCIV that the member holds (and, in the case of a meetings of the members of a sub-fund, that is referable to the relevant sub-fund); or

•

for a vote on a poll at a meeting of a sub-fund of a CCIV, 1 vote for each dollar of the value of the total shares that the member holds in the CCIV that are referable to that sub-fund.

[Schedule 1, item 4, section 1228F]

3.275 The chair has a casting vote and, if the chair is a member, any vote it has in its capacity as member. [Schedule 1, item 4, paragraph 1228F(2)(c)]

3.276 If a member holds a share jointly with another person, then only the vote of the member whose name appears first in the register of members of the CCIV counts. [Schedule 1, item 4, paragraph 1228F(2)(d)]

3.277 If an associate of a CCIV (including the corporate director), or an associate of the corporate director has an interest in the resolution other than in their capacity as a member of the CCIV, they are not entitled to vote at either a meeting of the members of the CCIV or a sub-fund of the CCIV. [Schedule 1, item 4, section 1228G]

3.278 If a CCIV is listed, the corporate director, its associates and the CCIV's associates are entitled to vote their interest on resolutions to remove the corporate director and choose a new corporate director (in the same way that these persons can for listed registered schemes).

3.279 A bespoke rule applies for determining how to calculate the value of a person's shares, for the purposes of determining that person's voting power at a meeting of the CCIV or of the sub-fund. A different method of calculating the value of a person's shares applies depending on whether:

•

the person's shares are redeemable;

•

the CCIV is listed;

•

the sub-fund to which the person's shares are referable is liquid; and

•

the person's shares are in a retail or wholesale CCIV.

[Schedule 1, item 4, section 1228H]

3.280 If the person holds shares in a retail CCIV that is listed, then the value of those shares is the last sale price on the relevant prescribed market on the trading day immediately before the day on which the poll is taken. [Schedule 1, item 4, subsection 1228H(3)]

3.281 If the person holds shares in a retail CCIV that is not listed, and those shares are redeemable and referable to a sub-fund that is liquid, then the value of those shares are calculated in accordance with the rules in the retail CCIV's constitution. A retail CCIV's constitution must make provision for certain matters regarding the redemption of redeemable shares. [Schedule 1, item 4, subsection 1228H(4)]

3.282 If the person holds shares in a wholesale CCIV that are redeemable and referable to a sub-fund that is liquid, and its constitution has set out the amount to be paid for redeeming a share, then the value of the person's shares is calculated in accordance with those rules. [Schedule 1, item 4, subsection 1228H(5)]

3.283 In all other cases, the value of a person's shares is the amount that the corporate director of the CCIV determines in writing to be the price that a willing but not anxious buyer would pay for the shares if it was sold on the business day immediately before the day on which the poll at the meeting is taken. [Schedule 1, item 4, subsection 1228H(2)]

3.284 These methods for calculating the value of the shares of a CCIV are based on the methods for calculating the value of a member's interest in a registered scheme for the purposes of calculating that member's voting power at a meeting of the scheme's members under section 253F of the existing law.

3.285 The right of the auditor of a scheme's compliance plan to attend a meeting of the scheme's members, contained in Part 2G.4 of the Corporations Act, is not applicable to wholesale CCIVs or sub-funds of wholesale CCIVs as a wholesale CCIV is not required to have a compliance plan. [Schedule 1, item 4 section 1228C]

Contingent amendments to facilitate hybrid meetings and the use of technology for CCIVs

3.286 Schedule 4 to the Bill makes contingent amendments to Chapter 1 of the Corporations Act to facilitate technology neutral signature of documents and electronic provision of documents to members in the context of CCIVs.

3.287 The contingent amendments apply from commencement of the CCIVs regime on 1 July 2022 if the Corporations Amendment (Meetings and Documents) Act 2021 has commenced by that date. The contingent amendments do not commence at all if the Corporations Amendment (Meetings and Documents) Act 2021 does not commence prior to 1 July 2022.

3.288 The contingent amendments ensure that technology neutral signing is facilitated for documents relating to meetings of the members of a sub-fund (in addition to meetings of the members of a CCIV, which are already covered as a meeting of the members of a company under the changes). [Schedule 4, items 1 and 2, paragraphs 110(2)(a) and (ba)]

3.289 The contingent amendments also facilitate the technology neutral sending of documents, including financial reports, to members of a CCIV (including members of a sub-fund). In particular, amendments are made to ensure meeting-related documents sent by the corporate director of a CCIV to members of a CCIV (or sub-fund) are technology neutral and allow recipients to make elections regarding the form in which they receive documents. [Schedule 4, items 3 to 6 and 9, paragraph 110E(1)(ba), paragraph 110J(3)(ba), subsection 110K(2A), subsections 100K(4) and (5)]

3.290 Consistent with the requirements in the Corporations Amendment (Meetings and Documents) Act 2021, the corporate director must notify members of their rights to make elections regarding the form of documents. A failure to do so is a strict liability offence with a penalty of up to 30 penalty units. This is the same as the penalty that applies if a company or a registered scheme fails to provide this notice to members of an ordinary company or scheme. [Schedule 4, item 10, penalty for subsection 110KA(2A) inserted into Schedule 3 to the Corporations Act]

Corporate contraventions

General attribution rules

3.291 The new rules for attributing the physical and mental element of an offence to a CCIV apply for the purposes of all Commonwealth laws, irrespective of whether those laws currently apply or disapply Part 2.5 of the Criminal Code, or include other attribution rules for conduct. The special attribution rules do not apply to offences under State laws because such an application would offend the Melbourne Corporation doctrine.^[3] [Schedule 1, item 4, section 1229]

Other attribution rules do not apply

3.292 The new attribution rules are designed to be comprehensive and all existing Commonwealth attribution rules are disapplied in determining whether a CCIV has committed an offence. This includes Part 2.5 of the Criminal Code and any other bespoke rules that attribute:

•

conduct engaged in by a person;

•

conduct engaged in by a person in relation to another person; or

•

a state of mind; or

•

to a body corporate.

[Schedule 1, item 4, section 1229A]

3.293 In the context of civil penalty provisions, rules that attribute an offence or a provision in relation to a contravention to a body corporate are also disapplied in the CCIV context. [Schedule 1, item 4, section 1229A]

3.294 Examples of bespoke attribution rules that are disapplied are section 769B of the Corporations Act, section 12GH of the ASIC Act, section 199 of the Aboriginal and Torres Strait Islander Act 1995 and section 324 of the National Consumer Credit Protection Act 2009.

3.295 The attribution rules do not interfere with the special rules in the new law for determining when a corporate director is responsible for acts of its agents and the CCIV's agents for the purposes of determining certain liabilities (see paragraph 3.126). [Schedule 1, item 4, section 1229C]

Attributing conduct to a CCIV

3.296 As a general rule, conduct engaged in by a person other than the CCIV is attributed to the CCIV if it is engaged in by one of the following parties, and the conduct was engaged in on behalf of the CCIV:

•

an agent of the CCIV;

•

a director of the CCIV;

•

an employee, director or agent (an official) of the corporate director of the CCIV; or

•

any other person acting at the direction, or with the consent or agreement of one of the entities listed above.

3.297 For the purposes of the liability provisions, conduct has the same meaning as in section 769B of the existing law. Section 769B defines 'conduct' as an act, or omission to perform an act, or a state of affairs. [Schedule 1, item 4, subsection 1229B(7)]

3.298 There are certain conditions which need to be established before attributing conduct of an agent, an official of the corporate director or a person acting at the direction of another person. These conditions are explained below.

Attribution from agents of the CCIV

3.299 Conduct engaged in by an agent of the CCIV is taken to have been engaged in by a CCIV if the conduct was engaged in on behalf of the CCIV and the agent was acting within the scope of that agent's actual or apparent authority in relation to the CCIV. [Schedule 1, item 4, subsections 1229B(1) and (4), item 1 of the table]

3.300 Conduct engaged in by an agent appointed by a liquidator, receiver or person administering a compromise is not attributed to a CCIV. If a receiver, liquidator or provisional liquidator is an agent of the CCIV, conduct engaged in by the receiver is also not attributed to the CCIV. [Schedule 1, item 4, subsection 1229B(5)]

Attribution from directors of the CCIV

3.301 Conduct engaged in by a corporate director or a shadow director of the CCIV is taken to have been engaged in by a CCIV if the conduct was engaged in on behalf of the CCIV. [Schedule 1, item 4, subsections 1229B(1) and (4), item 2 of the table]

3.302 Note that the conduct of a liquidator, receiver or person administering a compromise will not be attributed to the CCIV as those persons are not covered by the definition of 'director'.

Attribution from officials of the corporate director

3.303 Conduct engaged in by an employee, director or agent of the corporate director of the CCIV is also taken to have been engaged in by a CCIV if the:

•

conduct was engaged in on behalf of the CCIV; and

•

the employee, director or agent was acting within the scope of their actual or apparent authority in relation to the corporate director.

[Schedule 1, item 4, subsections 1229B(1) and (4), item 3 of the table]

3.304 For the purposes of the attribution rules, the employee, director or agent is referred to as an official. [Schedule 1, item 4, subsection 1229B(4), item 2 of the table]

3.305 Officials of the corporate director are one step further removed from the CCIV. In other words, officials only have a relationship with the CCIV by virtue of their relationship with the corporate director. The new law recognises that both the official and the corporate director must be acting within the scope of their authority.

3.306 This attribution rule does not cover officials of a shadow director. However, they may be covered by the attribution rule for persons acting at the direction or consent of another person.

Example 3.2 Attribution from officials of the corporate director

Samantha is an employee at DB Director Services Ltd. DB Director Services Ltd is the corporate director for multiple CCIVs, including Magic Investments CCIV and Bewitching Investments CCIV.

Samantha is instructed to undertake work for Magic Investments CCIV. While undertaking this work in accordance with the instructions, she engages in conduct which would constitute the physical element of an offence.

Samantha's conduct can be attributed to Magic Investment CCIV because:

•

DB Director Services Ltd is acting on behalf of Magic Investments CCIV; and

•

Samantha is acting within the scope of her authority as an employee at DB Director Services Ltd.

However, Samantha's conduct cannot be attributed to Bewitching Investments CCIV because DB Director Services Ltd is not acting on behalf of Bewitching Investments CCIV.

Attribution from other persons acting at the direction of another person

3.307 There is also an attribution rule that applies to any other person acting at the direction, or with the consent or agreement of:

•

an official of the corporate director;

•

an agent of the CCIV; or

•

the director (or shadow director) of a CCIV.

[Schedule 1, item 4, subsections 1229B(1) and (4), item 4 of the table]

3.308 The person providing the direction, consent or agreement is referred to as the first person. This explanatory memorandum uses the term 'the second person' to refer to the person acting at the first person's direction. The second person could be a sub-agent of the CCIV, an agent of a director or an agent of an official of the corporate director. [Schedule 1, item 4, subsection 1229B(4), item 4]

3.309 The second person is one step further removed from the CCIV. For example, an agent of an official of the corporate director only has a relationship with the CCIV by virtue of the agent's relationship with the official, the official's relationship with the corporate director and the corporate director's relationship with the CCIV. This is illustrated in Diagram 3.1.

3.310 The conduct of the other person is attributed to the CCIV only if each person in the chain is acting on behalf of the person directly above them in the chain. For example, the conduct of an agent of an official is only attributed to the CCIV if:

•

the agent is acting at the direction, or with the consent or agreement of the official of the corporate director;

•

the official is acting within the scope of the official's actual or apparent authority in relation to the corporate director; and

•

the corporate director is acting on behalf of the CCIV.

[Schedule 1, item 4, subsections 1229B(1) and (4), item 4 of the table]

3.311 Similarly, the conduct of an agent of an agent of the CCIV (a sub-agent of the CCIV) is only attributed to the CCIV if:

•

the sub-agent of the CCIV is acting at the direction, or with the consent or agreement of the agent of the CCIV;

•

the agent of the CCIV is acting on behalf of the CCIV.

[Schedule 1, item 4, subsections 1229B(1) and (4), item 4 of the table]

3.312 This is illustrated in the diagram below.

Recursive operation

3.313 The final item in the table in the new law has a recursive operation. In other words, it applies to:

•

a person acting at the direction, or with the consent or agreement of an official of the corporate director, an agent of the director or a director of a CCIV;

•

a person acting at the direction of a person acting at the direction of an official of the corporate director, an agent of director or a director of a CCIV;

•

a person acting at the direction of a person acting at the direction of a person acting at the direction of an official of the corporate director, an agent of a director or a director of a CCIV

and so forth.

3.314 There is no legal limit to the number of times that the final item in the table can be relied on.

Attributing conduct in relation to a counterparty of the CCIV

3.315 Conduct engaged in by a person in relation to a counterparty of the CCIV is taken to be engaged in in relation to a CCIV if certain conditions are satisfied.

3.316 A counterparty may be:

•

an agent of the CCIV;

•

a corporate director or shadow director of the CCIV;

•

an official of the corporate director (that is, an employee, director or agent of a corporate director);

•

a person acting at the direction or with the consent or agreement of an agent of the CCIV, a director of the CCIV or an official of the CCIV (recursively applied).

[Schedule 1, item 4, subsections 1229B(2) and (4)]

3.317 The other conditions that need to be satisfied are the same as those that apply when attributing conduct to a CCIV (see paragraphs 3.296 to 3.314). These are summarised in the below table. [Schedule 1, item 4, subsections 1229B(2) and (4)]

* Operates recursively.

Attributing state of mind to a CCIV

3.318 If the conduct of a person is attributed to the CCIV, that person's state of mind can also be attributed to the CCIV. In attributing the conduct of the person to the CCIV, all of the conditions set out in earlier parts of this Chapter must be satisfied (see Table 3.3 for a summary of these conditions). [Schedule 1, item 4, subsections 1229B(3) and (4)]

3.319 It is not permissible to attribute conduct from one person and the mental element from another person. Instead, the physical and mental element must be attributed from the same person. [Schedule 1, item 4, subsection 1229B(3)]

3.320 The mental state of a receiver or an agent appointed by a liquidator, receiver or a person administering a compromise is not attributed to the CCIV, as those persons are not captured within the definition of 'director'.

3.321 For the purposes of the liability provisions, state of mind has the same meaning as in section 769B of the existing law. Section 769B defines 'state of mind' to include a reference to the knowledge, intention, opinion, belief or purpose of the person and the person's reasons for the person's intention, opinion, belief or purpose. [Schedule 1, item 4, subsection 1229B(6)]

Consequences of contraventions by the CCIV

Policy rationale for treating CCIVs differently to other companies

3.322 Similar to other companies, a CCIV has corporate criminal responsibility for any offence it commits under a Commonwealth, State or Territory law. However, unlike other companies, there are several policy concerns with holding the company solely responsible.

3.323 First, a CCIV has no officers or employees other than its corporate director (except when a sub-fund is in external administration). If a CCIV contravenes its obligations under the law, it is because its corporate director or its agent has caused it to do so.

3.324 The corporate director has overarching responsibility for the CCIV's operations. The corporate director is under an obligation to operate the business and conduct the affairs of the CCIV. It is also under an obligation to ensure the CCIV complies with its constitution and the Corporations Act.

3.325 Second, if a CCIV had sole responsibility for a contravention of the law and was required to pay the resulting fine or penalty, the members would suffer a loss. This is because the fine or penalty would need to be paid out of the assets of a sub-fund (or sub-funds) of the CCIV, thereby reducing the pool of assets available to members. The consequence is that members who are investors in this vehicle would suffer loss for contraventions for which they were not responsible and had no control over.

3.326 Third, in the context of registered schemes, the responsible entity (or trustee) for the scheme bears the consequence for a contravention rather than the registered scheme (or its members). The responsible entity is the only legal person and has responsibility for all of the obligations in relation to the scheme. If the law operated differently for CCIVs and registered schemes, CCIVs would potentially be at a competitive disadvantage.

3.327 For these reasons, the new law seeks to protect members from loss when there has been a contravention of the law by a CCIV. It adopts a different approach for contraventions of Commonwealth and State laws, as set out below.

Contraventions of Commonwealth laws

3.328 If a CCIV commits an offence against a law of the Commonwealth or contravenes a civil penalty provision, the corporate director of the CCIV at the time of the commission of the offence is taken to commit the offence or contravene the provision, along with the CCIV. [Schedule 1, item 4, subsections 1229D(1) and (2) and 1230E(1) and (2)]

3.329 The new law then removes the consequences of committing an offence for the CCIV. Specifically:

•

the CCIV may not be convicted of the offence;

•

the CCIV is not liability for any fine or penalty;

•

an infringement notice may not be given to the CCIV in relation to the alleged commission of the offence or contravention.

[Schedule 1, item 4, subsection 1229D(4) and (5) and subsections 1229E(4) and (5)]

3.330 These provisions do not affect any consequences that apply to the corporate director as a result of the corporate director also being taken to have committed the offence or contravened the provision.

3.331 Nothing in the new law prevents ASIC from seeking an injunction against either the corporate director or the CCIV.

3.332 If there is a change in the corporate director after the commission of the offence, the new corporate director is not liable. Only the corporate director at the time of the commission of the offence or contravention is liable.

3.333 These laws cover:

•

Commonwealth criminal offences;

•

Commonwealth civil penalty provisions in the Corporations Act; and

•

other laws of the Commonwealth which impose a civil penalty in relation to the contravention.

[Schedule 1, item 4, subsection 1229D(1) and subsections 1229E(2)]

Contraventions of State and Territory laws

3.334 ASIC, the CCIV or a member may apply to the Court for a compensation order payable by the corporate director if the CCIV suffers loss or damage as a result of a contravention or an alleged contravention of a State or Territory law. [Schedule 1, item 4, section 1229F]

3.335 A compensation order may be available if:

•

the CCIV is found to have committed a State or Territory offence and ordered to pay a fine;

•

the CCIV is found to have committed a State or Territory civil penalty provision and ordered to pay a penalty; or

•

the CCIV pays an amount in settlement of proceedings in respect of an alleged contravention.

[Schedule 1, item 4, subsections 1229F(2) and (5)]

3.336 An application for a compensation order must be commenced within 6 years of the time when a contravention was proven. If the proceedings were settled and no contravention was proven, an application for a compensation order must be made within 6 years of the alleged contravention. [Schedule 1, item 4, section 1229G]

3.337 The order is enforceable as if it were a judgment of the Court. [Schedule 1, item 4, subsection 1229F(4)]

3.338 These provisions are designed to minimise the likelihood of members suffering damage as a result of the corporate director causing the CCIV to breach its State or Territory obligations. The new laws recognise the Commonwealth does not have the power to deem the corporate director to have committed a State offence and they do not interfere with the State or Territory laws under which the contravention arises. [Schedule 1, item 4, subsection 1229F(6)]

Exception when a sub-fund is in external administration

3.339 The new law ensures that a corporate director is not responsible for an offence or contravention when the relevant conduct is caused wholly by a receiver, liquidator or a person administering a compromise ('an external administrator').

3.340 There are three mechanisms used to achieve this. These are explained below.

1. Attribution rules do not apply

3.341 The conduct or mental state of an external administrator or an agent appointed by an external administrator is not attributed to a CCIV. This is because:

•

Receivers and liquidators (who may be agents of a CCIV) and agents of an external administrator are expressly carved out of the attribution rules that apply to other agents of a CCIV.

•

Only the conduct of directors (not officers) is attributed to the CCIV. This differs to other attribution regimes, such as Part 2.5 of the Criminal Code.

[Schedule 1, item 4, subsections 1229B(4) and (5)]

3.342 This may mean that the physical or mental element is not attributed to the CCIV and the CCIV does not commit an offence or contravene a civil penalty provision at all. If the CCIV does not commit an offence (or contravene a civil penalty provision), then none of the consequences of a contravention by the CCIV flow.

2. Corporate director not taken to be responsible for Commonwealth offences

3.343 Second, there is an exception to the provision that holds that the corporate director is taken to have committed any offence committed by the CCIV. This exception applies if the conduct constituting the offence was engaged by the CCIV solely as a result of an exercise of powers by an external administrator. [Schedule 1, item 4, paragraphs 1229D(1)(b) and 1229E(1)(b)]

3.344 The exception only applies if all of the conduct giving rise to the offence was caused wholly by the external administrator. In other words, the exception does not apply if two acts need to be established, the external administrator caused one act to occur but the corporate director caused the other act to occur.

3. Compensation orders not available for State and Territory offences

3.345 Third, a Court cannot order the corporate director at the time of the commission of the offence to compensate the CCIV if the conduct constituting the contravention solely resulted from the exercise of powers of an external administrator. [Schedule 1, item 4, subsection 1229F(3)]

3.346 This exception operates in the same way as the exception to the provision that holds the corporate director to have committed a Commonwealth offence (see the discussion at paragraph 3.343 to 3.344 above).

Chapter 4: CCIVs - Securities

Outline of chapter

4.1 This Chapter outlines the types of securities that CCIVs may issue and the circumstances when a CCIV is permitted to pay dividends. The Chapter also explains the requirements that a CCIV must satisfy when reducing its share capital (including under redemptions and share buy-backs).

Context of amendments

4.2 A CCIV may have a variable capital structure that provides flexibility for the issue, redemption or repurchase of its shares. Like many managed funds, some CCIVs or sub-fund(s) may be 'open-ended' - meaning that its share capital is not limited. It has broad flexibility to issue, redeem or repurchase shares. Other CCIVs or sub-fund(s) may be 'close ended' (such as listed CCIVs or sub-funds) whose share capital is fixed or limited. Proprietary and public companies are close-ended and are not able to be open-ended.

4.3 At common law, the doctrine of the maintenance of share capital ordinarily prevents a company from reducing its share capital except in the legitimate course of its business. This doctrine is intended to protect the interests of members and creditors. Chapter 2J modifies that position for ordinary companies so that capital can generally be reduced in some circumstances where it is fair and reasonable to members and does not materially prejudice the company's ability to pay its creditors.

4.4 Part 8B.4 recognises that CCIVs are intended to operate as investment funds, rather than carrying on active businesses, and may have a variable capital structure. Part 8B.4 sets out the rules for share capital management for CCIVs - which provide greater flexibility for CCIVs to issue and reduce its share capital in circumstances where other types of companies are prohibited from doing so.

Summary of new law

4.5 Division 1 of Part 8B.4 governs the issue and redemption of shares and the payment of dividends.

4.6 Subdivision A of Division 1 of Part 8B.7 provides that a CCIV may issue shares, including redeemable shares, referable to only one sub-fund of the CCIV. It also specifies the requirements for converting shares of one type into another type.

4.7 Subdivision B of Division 1 of Part 8B.7 sets out the requirements for redemptions of redeemable shares.

4.8 Subdivision C of Division 1 of Part 8B.7 enables a CCIV to pay calls on partly-paid shares in certain circumstances.

4.9 Subdivision D of Division 1 of Part 8B.7 provides for the payment of dividends to members.

4.10 Subdivision E of Division 1 of Part 8B.7 relaxes the requirements for reporting to ASIC in relation to share issues and cancellations.

4.11 Subdivision F of Division 1 of Part 8B.7 permits cross-investment between sub-funds of a CCIV - consistent with other international CCIVs.

4.12 Division 2 of Part 8B.4 sets out the requirements for transactions affecting share capital.

4.13 Subdivision A of Division 2 of Part 8B.4 sets out the circumstances for the reduction of share capital by a CCIV. Generally, it provides greater flexibility for CCIVs to reduce its share capital compared to ordinary companies given its variable capital nature.

4.14 Subdivision B of Division 2 of Part 8B.4 sets out the circumstances in which a CCIV may directly acquire or take control over its shares (including in relation to cross-investment).

4.15 Finally, Division 3 of Part 8B.4 allows a CCIV to issue debentures, but these must also be referable to only one sub-fund.

Comparison of key features of new law and current law

Detailed explanation of new law

Issuing shares in a CCIV

4.16 A CCIV has the power to issue shares in itself. The self-dealing exemption, which allows companies to issue their own shares without holding an AFSL, applies to CCIVs as a CCIV is a type of company.

4.17 A CCIV can determine the terms of issue and the rights and restrictions attaching to its shares in the same way as other companies, subject to one caveat. Each share must be referable to a single sub-fund. That is, the rights attaching to the share must relate to the assets of one sub-fund and to no other sub-funds. This preserves the segregation of assets between each sub-fund. [Schedule 1, item 4, subsections 1230(1) and (3); Schedule 2, item 91, note 5 to subsection 254B(1)]

4.18 The requirement for each share to be referable to only one sub-fund does not preclude a CCIV from issuing multiple classes of shares for each sub-fund. Nor does it prevent members holding shares in more than one sub-fund.

4.19 A CCIV may engage in cross-investment within the CCIV, such that it may acquire in respect of one sub-fund, shares that are referable to another sub-fund (explained further below). The fact that a sub-fund has invested into another sub-fund does not change the underlying character of the shares of the investing sub-fund. Those shares are still only referable to one sub-fund. That is, if sub-fund A acquires shares referable to sub-fund B, the shares that are referable to sub-fund B do not change. Those shares are only referable to sub-fund B (and not also sub-fund A). [Schedule 1, item 4, subsection 1230(2)]

4.20 Regulations may prescribe further requirements placed on a CCIV issuing shares in itself. It is anticipated that any such regulations would contain technical detail concerning the issuance of shares by the CCIV in itself. For example, the regulations may outline pricing mechanisms which would be acceptable for use in determining the price applied to a share issued by a CCIV in itself. [Schedule 1, item 4, section 1230(3), (5) and (6)]

4.21 This regulation-making power is appropriate to ensure alignment between the regulatory requirements applied to MISs when issuing shares and those applied to CCIVs. Any regulations made under this power would be subject to parliamentary scrutiny and disallowance.

4.22 A court can only make an order that is inconsistent with the requirement for each share to be referable to only one sub-fund if the interests of justice require it. [Schedule 1, item 4, subsection 1230(4)]

4.23 The shares referable to the same sub-fund form at least one class of shares. The shares referable to that sub-fund may be divided into further classes - such that multiple classes of shares are referable to the same sub-fund. [Schedule 1, item 4, subsections 1230A; Schedule 2, item 35, note to subsection 57(1)]

Types of shares that may be issued

4.24 A CCIV may issue the same types of shares as other companies, including ordinary shares and preference shares.

4.25 A CCIV also has the power to issue shares that can be redeemed at the member's option and/or the CCIV's option. If all the CCIV's or sub-fund's shares are redeemable at the member's option, the CCIV or sub-fund (as relevant) is 'open-ended' and members can seek a return of their paid-up capital in exchange for cancelling the shares. [Schedule 1, item 4, subsections 1230B(1) to (4)]

4.26 The mere fact that a share can be redeemed does not make it a preference share. This modifies the common law position where shares liable to be redeemed at the member's option are 'preference shares' if the other shares on issue (or the other shares that the CCIV has the power, in its constitution, to issue) cannot be redeemed. [Schedule 1, item 4, subsection 1230B(5)]

4.27 A share that can be redeemed may be either a 'redeemable share' or a 'redeemable preference share'. A redeemable share is an ordinary share that can be redeemed. In the context of a CCIV, a redeemable preference share is a share that can be redeemed and has a preference attached to it (apart from a right to redeem). Any preferences relating to redemptions are ignored for the purposes of determining whether a share is a preference share. Preferences that are taken into account in determining whether a share is a preference share or redeemable preference share are, for example, priority over dividends. [Schedule 1, item 4, subsections 1230B(4) to (5); Schedule 2, item 22, definition of 'redeemable share' in section 9 of the Corporations Act]

Share conversions

4.28 A CCIV may convert any type of share into an ordinary share that is not a redeemable share. There are no specific requirements for this type of share conversion. The new law is based on the provisions applying to the conversion of preference shares into ordinary shares in existing section 254G. In addition, the rules for the variation of class rights in sections 246B to 246G of the existing law continue to apply to any conversion. [Schedule 1, item 4, item 1 of the table at subsection 1230C(1); Schedule 2, items 92 to 93, note 2 to subsection 254G(1)]

4.29 A CCIV may convert any share (including a preference share or an ordinary share that is not redeemable) into a redeemable share if the conversion is approved by a special resolution of the sub-fund of the CCIV to which the share is referable (subject to the restrictions on varying class rights). The requirement to obtain a special resolution is based on the existing requirements for converting ordinary shares into preference shares. Redeemable shares, like preference shares, have additional rights attaching to them that do not apply to other ordinary shares. [Schedule 1, item 4, item 2 of the table at subsection 1230C(1)]

4.30 Conversions of any type of share into a preference share (other than a redeemable preference share) are permitted if the holders rights are set out in the CCIV's constitution or the rights have been approved by a special resolution of the sub-fund of the CCIV to which the share is referable. If there are amounts unpaid on the shares, the unpaid amount is divided equally among the replacement shares. [Schedule 1, item 4, item 3 of the table at subsection 1230C(1); Schedule 2, items 92 to 93, note 2 to subsection 254G(1)]

4.31 Conversions of any type of share (whether an ordinary share, redeemable share or preference share) into a redeemable preference share are prohibited. This reflects existing subsection 254G(3). Nevertheless, the requirements for CCIVs are significantly more flexible than for other types of companies because the right to redemption is not itself a preferential right in the CCIV context. [Schedule 1, item 4, subsection 1231C(2)]

4.32 A CCIV is also permitted to convert shares into a larger or smaller number. Unlike other types of companies, the CCIV is not required to hold a general meeting and pass a resolution in order to do so. [Schedule 1, item 4, subsection 1231C(3); Schedule 2, items 94 to 95, note to subsection 254H(1)]

Share redemptions

4.33 The requirements for redeeming shares in a CCIV are more flexible than the requirements for redeeming shares in other types of companies. This reflects the fact that CCIVs are a type of collective investment vehicle where members of a CCIV can seek a return of their paid-up capital, while still providing a level of protection for creditors. [Schedule 1, item 4, section 1230D]

4.34 The share redemptions rules differ depending on whether the CCIV is a retail or wholesale CCIV and whether the sub-fund to which the share relates is liquid. The requirements for each type of redemption are summarised in Table 4.2 and explained in more detail in the following paragraphs. [Schedule 1, item 4, section 1230D and 1230F; Schedule 2, item 96, note to Part 2H.2]

4.35 All shares are cancelled after they have been redeemed (resulting in a reduction of share capital for the CCIV that is authorised under the law - see explanation in paragraphs 4.88 to 4.98 below). [Schedule 1, item 4, section 1230E]

Redeeming shares of any CCIV

4.36 A CCIV (retail or wholesale) may only redeem shares (being either redeemable shares or redeemable preference shares) if it is in accordance with the terms on which the shares were issued. Terms on which shares are issued has the same meaning as section 254B and section 254J of the existing law, reflecting a company's ability to determine the terms and rights on which its share are issued, and the requirement to redeem in accordance with those terms. [Schedule 1, item 4, subsection 1230F(1)]

4.37 In addition, a CCIV may only redeem shares if the sub-fund to which the shares are referable is not insolvent and there are reasonable grounds for suspecting that the sub-fund to which the shares are referable would not become insolvent immediately after the redemption. Solvency and insolvency is defined under existing section 95A of the Corporations Act (see also explanation at paragraph 4.91 below). [Schedule 1, item 4, subsection 1230F(2)]

4.38 The requirements for redemptions of shares in a CCIV are more flexible than the requirements for redemptions of 'redeemable preference shares' in a company, contained in existing Part 2H.2. In particular, a share redemption in a CCIV does not need to be paid out of profits or the proceeds of a new share issue. Instead, the above solvency requirement must be satisfied. This makes it easier for members of a CCIV to seek a return of their paid-up capital while still providing a level of protection for creditors.

4.39 If a CCIV redeems shares in contravention of these requirements (because the sub-fund was insolvent or the redemption was not in accordance with the terms of issue for the shares), then the redemption is still valid. Any contract or negotiation associated with the redemption is also still valid. [Schedule 1, item 4, subsection 1230F(3)]

4.40 In addition, the CCIV does not commit an offence. However, a person dishonestly involved in the CCIV's contravention is liable for an offence with a penalty of up to 2,000 penalty units or 5 years imprisonment (or both) for an individual, or 20,000 penalty units for a body corporate. This penalty is consistent with the Guide to Framing Commonwealth Offences. It is consistent with the existing penalty for the equivalent redemption provisions for corporations under section 254L of the existing law. It ensures that persons involved in the management of the CCIV's share capital or transactions related to this capital are appropriately incentivised to take reasonable steps to protect the interests of members and creditors when making a redemption - by ensuring the terms of issue are complied with and that a redemption is not made when the relevant sub-fund is insolvent. [Schedule 1, item 4, subsection 1230F(4); Schedule 2, item 199, penalty for subsection 1230F(4) inserted into Schedule 3 to the Corporations Act]

4.41 If a person is involved in the CCIV's contravention but the relevant fault element of dishonesty is not satisfied, then they may be liable for a civil penalty under existing section 1317E of the existing law. [Schedule 1, item 4, subsection 1230F(5); Schedule 2, item 192, new table item for subsection 1230F(5) inserted into subsection 1317E(3) of the Corporations Act]

4.42 The existing law defines the circumstances in which a person may be 'involved' in a contravention under section 79 of the Corporations Act - including whether the person aided, abetted, counselled or procured the contravention. A person involved in the contravention may include a natural person director of the corporate director, the corporate director, a lawyer or an accountant.

Additional requirements for retail CCIVs

4.43 In addition to the requirements above, a retail CCIV is subject to further requirements for the redemption of shares depending on whether the sub-fund to which the share is referable is liquid or not.

4.44 A sub-fund is liquid if at least 80 per cent of the value of its assets are liquid; that is, they can be realised within the period specified in the CCIV's constitution for satisfying redemptions. [Schedule 1, item 4, section 1230H]

4.45 There is a presumption that money in an account or on deposit with a bank, bank accepted bills and marketable securities are liquid assets but the presumption may be rebutted. Regulations may also specify other kinds of property that are presumed to be liquid. Additionally, any other property is a liquid asset if the CCIV's corporate director reasonably expects that the property can be realised for its market value within the period specified in the CCIV's constitution for satisfying redemptions when the sub-fund is liquid. [Schedule 1, item 4, subsection 1230H(2)]

Redeeming shares of a retail CCIV where the sub-fund is liquid

4.46 If a sub-fund is liquid, a retail CCIV may redeem a share in the CCIV if, in addition to the requirements above:

•

the redemption is permitted by the CCIV's constitution; and

•

the redemption is in accordance with the CCIV's constitution.

[Schedule 1, item 4, section 1230G]

4.47 If a retail CCIV redeems a share in circumstances where it is not permitted by the CCIV's constitution or it is not in accordance with the CCIV's constitution, then it is liable for a strict liability offence with a penalty of up to 20 penalty units. This offence is consistent with the Guide to Framing Commonwealth Offences. There is a real risk of members being disadvantaged or treated inequitably if a redemption is not consistent with the constitution - given the constitution sets out the terms and rights attached to the member's shares. [Schedule 1, item 4, subsections 1230G(1) and (2); Schedule 2, item 199, penalty for subsections 1230G(1) and (2) inserted into Schedule 3 to the Corporations Act]

Redeeming shares of a retail CCIV where the sub-fund is not liquid

4.48 The CCIV may only offer members an opportunity to redeem shares in a non-liquid sub-fund to the extent that particular assets of the sub-fund are able to be converted to money in time to satisfy redemption requests that members may make in response to the offer, and no other offer is open in relation to the sub-fund. [Schedule 1, item 4, subsection 1230J(1)]

4.49 A redemption offer must be in writing and must be made in accordance with any procedures for doing so in the CCIV's constitution, or otherwise by giving a copy to all members of the sub-fund in question. For joint members, a copy need only be given to the joint member named first in the register of members. [Schedule 1, item 4, subsections 1230J(2) and (4)]

4.50 The CCIV must also lodge a copy of the offer with ASIC as soon as practicable after making the offer. A failure to lodge this notice is a strict liability offence punishable by up to 20 penalty units. There are legitimate grounds for penalising persons who do not intentionally or recklessly fail to lodge the offer because ASIC needs to be aware of all offers to properly perform its supervisory role and protect consumers. Existing offences for failing to lodge other documents with ASIC are also strict liability offences (see, for example, sections 319 and 320 of the Corporations Act). Both the offence and the penalty are consistent with the principles in the Guide to Framing Commonwealth Offences. [Schedule 1, item 4, subsection 1230J(5) to (6); Schedule 2, item 199, penalty for subsection 1230J(5) inserted into Schedule 3 to the Corporations Act]

4.51 A redemption offer must specify:

•

the period during which the offer will remain open (which must last for at least 21 days after the offer is made);

•

the assets that will be used to satisfy redemption requests;

•

the amount of money that is expected to be available when those assets are converted to money; and

•

the method the CCIV will use to deal with redemption requests if the money available is insufficient to satisfy all requests (provided the method complies with the requirements set out below in paragraph 4.54).

[Schedule 1, item 4, subsection 1230J(3)]

4.52 The CCIV must ensure redemption requests made in response to a redemption offer are satisfied within 21 days after the offer closes. [Schedule 1, item 4, subsection 1230K(1)]

4.53 Only one offer may be open in relation to a particular sub-fund at any one time and the CCIV cannot satisfy the redemption until the offer closes. Thus, a CCIV may not make a standing offer with respect to an illiquid sub-fund. This mirrors the requirements for registered schemes and reduces the risk of members of the same sub-fund being treated differently. [Schedule 1, item 4, subsections 1230J(1) and 1230K(2)]

4.54 If an insufficient amount of money is available (from assets specified in the offer) to satisfy all redemption requests, the requests must be satisfied proportionately according to the following formula:

Amount of money available × [Amount shareholder requested to redeem ÷ Total of all amounts shareholders request to redeem]


4.55 The CCIV has the option of cancelling a redemption offer before it closes if it contains a material error, and must cancel the redemption offer before it closes if it is in the best interests of members of the sub-fund to do so. [Schedule 1, item 4, subsection 1230J(6)]

4.56 The CCIV must make the cancellation in accordance with any procedures for doing so in the CCIV's constitution or otherwise by notice in writing to the members to whom the offer was made. The CCIV must also lodge written notice of the cancellation with ASIC as soon as practicable and in any event within two business days after the cancellation. [Schedule 1, item 4, subsections 1230J(7) to (8)]

4.57 A failure to lodge a written notice of the cancellation with ASIC is a strict liability offence punishable by a penalty of up to 20 penalty units. Both the offence and the penalty are consistent with the principles in the Guide to Framing Commonwealth Offences. A strict liability offence is appropriate because a failure to lodge the document undermines ASIC's ability to perform its supervisory responsibilities. It is consistent with the imposition of strict liability in other circumstances involving the failure to lodge documents with ASIC in the existing law. [Schedule 1, item 4, subsection 1230J(9); Schedule 2, item 199, penalty for subsection 1230J(8) inserted into Schedule 3 to the Corporations Act]

Calls on capital

4.58 The power for a company to limit calls on share capital to when a company is externally administered in existing section 254N does not apply to a CCIV. [Schedule 1, item 4, section 1230N; Schedule 2, item 97, note to subsection 254N(1)]

Dividends

4.59 A CCIV may only pay dividends to members of a sub-fund if the sub-fund to which the share is referable is solvent immediately before the dividend is paid and there are reasonable grounds for suspecting that the sub-fund would not become insolvent immediately after the dividend is paid. [Schedule 1, item 4, section 1230M; Schedule 2, item 98, note 3 to subsection 254T(1)]

4.60 The preconditions for paying dividends are less onerous for CCIVs than for other types of companies (see existing section 254T). Other types of companies are prohibited from paying dividends if their assets do not exceed their liabilities, the payment is not fair and reasonable to the company's shareholders as a whole or the payment of dividends could materially prejudice the company's ability to pay its creditors. Similarly, there is no explicit or implicit requirement for the dividends to be paid from profit.

4.61 Less onerous requirements are appropriate in the CCIV context as CCIVs are a form of collective investment vehicle and may return capital or pay dividends to members on a more regular basis than other types of companies. The only constraints on the payment of capital for registered schemes are those contained in the trust deeds. If a CCIV was required to satisfy the same preconditions for paying dividends as other types of companies, the flexibility of the CCIV regime would be hampered and CCIVs would be at a commercial disadvantage to registered schemes.

4.62 A failure to comply with the requirements for paying dividends is an offence with a maximum term of imprisonment of two years. This is the same as the corresponding offence for other types of companies in existing section 254T. [Schedule 2, item 199, penalty for subsection 1230M(1) inserted into Schedule 3 to the Corporations Act]

4.63 Each share in a class of shares in a CCIV must have the same dividend rights unless the CCIV's constitution provides for differential rights or differential rights are agreed by special resolution of the sub-fund to which the shares are referable. [Schedule 1, item 4, section 1230N; Schedule 2, item 99, note to subsection 254W(1)]

Notice requirements

4.64 The notice requirements in Part 2H.6 do not apply to CCIVs. This is because share issues, redemptions and cancellations are expected to occur more frequently in the CCIV context and the notice requirements could create a large compliance burden for CCIVs. Further, there are no notice requirements applying to registered schemes. [Schedule 1, item 4, section 1230P; Schedule 2, item 100, note to Part 2H.6]

Cross-investment between sub-funds of a CCIV

4.65 A CCIV is generally permitted to acquire in respect of any of its sub-funds, one or more shares that are referable to another of its sub-funds. This is referred to as cross-investment between sub-funds of a CCIV. [Schedule 1, item 4, section 1230Q]

4.66 Cross-investment between sub-funds of a CCIV is intended to allow a CCIV to utilise funds management structures such as:

•

a building blocks structure (also known as a master-feeder structure), where a CCIV establishes sub-funds that hold a certain asset class (building block sub-funds) and then creates a number of other sub-funds with different levels of exposure to the building block sub-funds; or

•

a hedging structure, where one sub-fund of the CCIV holds core assets and additional sub-funds hold a relevant hedging instrument and shares in the core sub-fund.

4.67 The ability to engage in cross-investment between sub-funds of a CCIV applies despite any law (including legislation, common law or equity) in force in Australia or elsewhere. For example, the rules in the Corporations Act that prohibit a company from directly acquiring its own shares do not restrict cross-investment between sub-funds of a CCIV. However, these rules continue to restrict for example, a CCIV from acquiring in respect of a sub-fund, shares that are referable to that same sub-fund. [Schedule 1, item 4, section 1230Q]

Requirements and restrictions on cross-investment

4.68 The regulations may provide for requirements or restrictions on cross-investment. [Schedule 1, item 4, section 1230R]

4.69 These requirements and restrictions are intended to ensure there are adequate protections for members of the CCIV where the CCIV engages in cross-investment. This could include, for example, requirements and restrictions that are designed to prevent circular investment or to ensure there is sufficient transparency relating to cross-investment transactions.

4.70 The current intention is to include a restriction on circular investment in the regulations - subject to feedback obtained in consultation.

4.71 Having these restrictions and requirements in the regulations is appropriate as it ensures there is sufficient flexibility to determine and adjust the requirements over time, in response to changes in the market or issues that may only become apparent once the regime is operational. This approach is also consistent with other comparable overseas regimes, such as Singapore and the United Kingdom.

4.72 If a CCIV does not comply with the requirements or restrictions on cross-investment, the CCIV does not commit an offence. Instead, the person involved in the CCIV's contravention commits an offence if the person acted dishonestly. The offence is punishable by up to five years' imprisonment, 2,000 penalty units or both (for an individual) or 20,000 penalty units (for a body corporate). These penalties are consistent with the Guide to Framing Commonwealth Offences. [Schedule 1, item 4, subsections 1230S(2) and (3); Schedule 2, item 199, penalty for subsection 1230S(3) inserted into Schedule 3 to the Corporations Act]

4.73 If the person involved in the contravention does not act dishonestly, the person contravenes a corporation/scheme civil penalty provision. [Schedule 1, item 4, section 1230S(4); Schedule 2, item 192, new table item for subsection 1230S(4) inserted into subsection 1317E(3) of the Corporations Act]

4.74 The existing law defines the circumstances in which a person may be 'involved' in a contravention under section 79 of the Corporations Act - including whether the person aided, abetted, counselled or procured the contravention. A person involved in the contravention may include a natural person director of the corporate director, the corporate director, a lawyer or an accountant.

4.75 These consequences are appropriate as there is the risk of significant harm to the members of the investor sub-fund and other third parties that engage with the CCIV (such as creditors) if the requirements and restrictions are not complied with. Contravention of these requirements or restrictions could also compromise the integrity of the CCIV's structure (for example, with respect to the strict segregation of the sub-funds of the CCIV).

4.76 Additionally, if a CCIV engages in cross-investment and contravenes the requirements or restrictions in the regulations, this contravention does not affect the validity of the acquisition or share or of any contract or transaction connected with it. This approach ensures there is more certainty for third parties, including members of the investor sub-fund, with respect to these acquisitions. It is also consistent with the existing consequences of failing to comply with the prohibition on companies acquiring shares in itself. [Schedule 1, item 4, section 1230S]

Membership rights of the CCIV

4.77 Where a CCIV, in respect of a sub-fund, acquires shares that are referable to another sub-fund of the CCIV, the CCIV will generally be a member of the second sub-fund as it is the legal person holding shares issued by the second sub-fund.

4.78 To ensure this outcome does not unduly influence the governance of the CCIV or subvert the rights of the other members in the second sub-fund, the CCIV is not entitled to vote as a member of the second sub-fund on a resolution at a meeting of the CCIV's members. [Schedule 1, item 4, subsection 1230T(1)]

4.79 However, the CCIV remains entitled to vote as a member of the second sub-fund on a resolution at a meeting of members of the sub-fund, subject to any requirements or restrictions prescribed in the regulations. This regulation-making power may be used to prescribe when the CCIV's vote can be cast at a meeting of members of the sub-fund, and who can cast the CCIV's vote on behalf of the CCIV at such a meeting. [Schedule 1, item 4, subsection 1230T(2)]

4.80 A CCIV will continue to be entitled to any financial rights it may have in respect of the shares it has acquired in engaging in cross-investment.

Inclusion of cross-investment information in the constitution and product disclosure statements

4.81 If a retail CCIV intends to engage in cross-investment between sub-funds of the CCIV, its constitution must make adequate provision for cross-investment. This ensures that prospective members of a retail CCIV are aware that this type of investment activity could occur in relation to the sub-fund they are considering investing in. [Schedule 1, item 4, paragraph 1223G(e)]

4.82 Additionally, if a retail CCIV intends to engage in cross-investment, its PDS must include a statement to that effect. This will assist retail clients to understand the potential risk profile of their investment. [Schedule 1, item 4, section 1241T(1)]

4.83 Further, if a retail CCIV is required to provide a PDS to a retail client, the PDS may also need to include information about any fees that may be charged to members in respect of any cross-investment activity. The requirement to include information about the cost of the relevant financial product and any amounts that will or may be payable by a holder of the product after its acquisition is an existing feature of the PDS regime.

Other amendments relating to cross-investment

4.84 The provisions make clear that where a CCIV engages in cross-investment and acquires a share in respect of a sub-fund that is referable to another sub-fund within the CCIV, this is not considered to be a share buy-back. [Schedule 1, item 4, section 1230U, note 1 to subsection 1231C(1)]

4.85 Additionally, engaging in cross-investment as permitted by the new cross-investment rules, does not relieve the corporate director of a CCIV, or an officer or employee of the corporate director of a CCIV, from any duties under the Corporations Act or their fiduciary duties. This includes the general duties under Part 2D.1 of the Corporations Act and the specific duties for CCIVs in Divisions 2 and 3 of Part 8B.3. [Schedule 1, item 4, section 1230V]

4.86 A share does not become referable to another sub-fund merely because of cross-investment between sub-funds. That is, the sub-fund to which a share is referable does not change if, after the share is issued, the CCIV acquires the share in respect of another of its sub-funds. [Schedule 1, item 4, subsection 1230(2)]

4.87 For the purposes of the meaning of the assets of a sub-fund (and more broadly, the allocation rules relating to assets and liabilities of sub-funds), a share that is referable to a sub-fund and that is acquired out of another sub-fund's assets, forms part of the other sub-fund's assets. This reflects that the share is property obtained by the application of assets of the other sub-fund. [Schedule 1, item 4, paragraph 1233H(2)(c)]

Share capital reductions

General requirements

4.88 A CCIV may reduce its share capital (for example, under a share buy-back) if it is authorised under the law. The CCIV regime establishes a wide range of circumstances where a reduction in share capital is authorised.

4.89 A reduction is specifically authorised if:

•

it involves the redemption of redeemable shares or redeemable preference shares that comply with the requirements for redemptions in Subdivision B of Division 1 of Part 8B.4 (explained above);

•

it is reduced under a Court order;

•

it involves the cancellation of shares following the return of a financial product under a cooling-off period;

•

it involves the cancellation of forfeited shares (approved by resolution of the members of the relevant sub-fund) or in other circumstances covered by Division 3 of Part 2J.1; or

•

it is authorised under regulations.

[Schedule 1, item 4, sections 1231D, 1231E, 1231F, 1231G and 1231H; Schedule 2, items 102 to 105, notes to Divisions 1, 2 and 3 of Part 2J.1 and Part 2J.2]

4.90 In addition to these specific circumstances, in any event, a reduction is authorised if it is permitted in the CCIV's constitution and, immediately before the reduction, each sub-fund that is affected by the reduction is solvent and there are no reasonable grounds for suspecting it would become insolvent immediately after the reduction. [Schedule 1, item 4, section 1231A]

4.91 A sub-fund is solvent if it is able to pay the debts that are liabilities of the sub-fund as and when they become due and payable. If a sub-fund is not able to pay the debts that are liabilities of sub-fund as and when they become due and payable then the sub-fund is insolvent. These definitions are based on the cash-flow test of solvency which is used for other companies (see existing section 95A of the Corporations Act) but applies them at the sub-fund level. [Schedule 2, items 14 and 26, definitions of 'insolvent' and 'solvent' in section 9 of the Corporations Act]

4.92 If there are any requirements prescribed in regulations for the share capital reduction, then the reduction must also comply with those requirements in order to be authorised. The regulations may prescribe requirements for different types of share capital reductions (such as buy-backs or cancellations), different circumstances in which the reduction arises (such as on-market or off-market, equal access or selective), or different types of CCIVs or sub-funds.

4.93 The capacity to prescribe additional requirements in regulations are intended to ensure there are adequate protections for members and third parties (such as creditors) in different circumstances for share capital reductions in a CCIV. Having these restrictions and requirements in the regulations is appropriate as it ensures there is sufficient flexibility to determine and adjust the requirements over time, in response to changes in the market or issues that may only become apparent once the regime is operational.

4.94 The requirements for reducing a CCIV's share capital relax the existing provisions that apply generally to companies, recognising the CCIV's status as a corporate collective investment vehicle that generally has variable capital. For example, the existing requirements for ordinary companies to obtain shareholder approval and ensure the reduction does not materially prejudice the company's ability to pay its creditors do not apply to CCIVs.

Consequences of non-compliance

4.95 If a CCIV does not comply with the requirements for share capital reductions, the CCIV does not commit an offence. Instead, the person involved in the CCIV's contravention commits an offence if the person acted dishonestly. The offence is punishable by up to five years' imprisonment, 2000 penalty units or both (for an individual) or 20,000 penalty units (for a body corporate). These penalties are consistent with the Guide to Framing Commonwealth Offences and essential to ensure the protection of creditors and members and is consistent with penalties for similar offences elsewhere in the Corporations Act. [Schedule 1, item 4, subsections 1231B(1) and (3); Schedule 2, item 199, penalty for subsection 1231B(3) inserted into Schedule 3 to the Corporations Act]

4.96 If the person involved in the contravention does not act dishonestly, the person contravenes a corporation/scheme civil penalty provision. The maximum penalty for contravening a corporation/scheme civil penalty provision is $200,000. [Schedule 1, item 4, subsection 1231B(4); Schedule 2, item 192, new table item for subsection 1231B(4) inserted into subsection 1317E(3) of the Corporations Act]

4.97 The existing law defines the circumstances in which a person may be 'involved' in a contravention under section 79 of the Corporations Act - including whether the person aided, abetted, counselled or procured the contravention. A person involved in the contravention may include a natural person director of the corporate director, the corporate director, a lawyer or an accountant.

4.98 If a share capital reduction is unauthorised, the validity of the reduction or of any contract connected with it is not affected. This promotes certainty and ensures that third parties can rely on acts by the CCIV relating to share capital reductions. [Schedule 1, item 4, subsection 1231B(2)]

Share buy-backs

4.99 As with other companies, a CCIV may buy back its shares. A share buy-back that amounts to a share capital reduction must meet the same requirements as other share capital reductions by a CCIV explained above. [Schedule 1, item 4, subsections 1231C(1), (2) and (6)]

4.100 Once a CCIV has agreed to buy back its shares, all rights attaching to the shares are suspended. The suspension is lifted if the agreement is terminated. Immediately after the shares are transferred back to the CCIV, the shares are cancelled and the CCIV cannot dispose of them. [Schedule 1, item 4, subsections 1231C(3) to (5)]

Self-acquisition of shares

4.101 A CCIV is generally prohibited from acquiring shares (or units of shares) in itself. [Schedule 1, item 4, section 1231J]

4.102 There are three main exceptions where a CCIV is permitted to acquire its shares. These are:

•

in buying back shares (see paragraphs 4.99 to 4.100 of this explanatory memorandum);

•

under a court order; or

•

when engaging in cross-investment (see paragraphs 4.65 to 4.67 of this explanatory memorandum).

[Schedule 1, item 4, section 1231J(1); Schedule 2, items 106 and 107, note 2 to subsection 259B(1)]

4.103 A retail CCIV must only acquire shares in itself for the consideration payable if the shares were acquired by another person, and subject to terms and conditions that would not disadvantage other members. This is relevant in all circumstances when a retail CCIV acquires shares in itself - including under cross-investment or under a share buy-back. This is to ensure that such acquisitions reasonably represent their market value and the process is fair to other members. The corporate director of a retail CCIV is subject to similar restrictions when acquiring shares in the CCIV (see paragraph 3.132 above). [Schedule 1, item 4, 1231J]

4.104 If a CCIV acquires shares other than when permitted, the CCIV does not commit an offence. Instead, the person involved in the CCIV's contravention commits an offence if the person acted dishonestly. The offence is punishable by up to five years' imprisonment, 2000 penalty units or both (for an individual) or 20,000 penalty units (for a body corporate). These penalties are consistent with the Guide to Framing Commonwealth Offences and with existing offence penalties a responsible entity would be subject to for similar offences (see section 601FG of the existing law). [Schedule 1, item 4, subsection 1231J(4) and (6); Schedule 2, item 199, penalty for subsection 1231J(6) inserted into Schedule 3 to the Corporations Act]

4.105 If the person involved in the CCIV's contravention does not act dishonestly, the person contravenes a civil penalty provision. [Schedule 1, item 4, subsection 1231J(5); Schedule 2, item 192, new table item for subsection 1231J(5) inserted into subsection 1317E(3) of the Corporations Act]

4.106 The existing law defines the circumstances in which a person may be 'involved' in a contravention under section 79 of the Corporations Act - including whether the person aided, abetted, counselled or procured the contravention. A person involved in the contravention may include a natural person director of the corporate director, the corporate director, a lawyer or an accountant.

4.107 Akin to other companies, a CCIV is also prohibited from taking security over shares in itself or a company that it controls. The existing law provides exceptions for companies which are financial institutions or take security under approved ESSs. These exceptions are not available for CCIVs as they should not be financial institutions and cannot hire employees. [Schedule 1, item 4, section 1231K]

Rule against giving financial assistance

4.108 There is no prohibition on a CCIV giving financial assistance. The prohibition on giving financial assistance in Part 2J.3 of the existing law is primarily designed to protect the interests of existing shareholders and creditors by ensuring that a trading company is not able to hand over control of the company to another person. A specific prohibition on a CCIV giving financial assistance is not required because:

•

a CCIV is not a trading company;

•

a CCIV must be widely held if it wishes to take advantage of the concessional tax treatment; and

•

there are specific duties which protect the interests of members of a retail CCIV (see, for example, the corporate director's duty to act in the best interests of members, explained at paragraph 3.183).

[Schedule 1, item 4, section 1231L]

4.109 Retaining the prohibition on giving financial assistance could prevent some of the transactional dealings which are conventional for MISs, such as, fee rebates and the payments of expenses associated with the issue of interests by the corporate director.

Effect on corporate director's duties

4.110 A corporate director is not relieved from any of its duties (including the new duties set out in Chapter 5 of this explanatory memorandum) because it complied with the relevant requirements for share capital reductions or redemptions. [Schedule 1, item 4, section 1231M]

Debentures

4.111 A CCIV may issue debentures so long as each debenture is referable to one and only one sub-fund. Thus, the debenture holder's rights in respect of the assets of the CCIV must be limited to rights in respect to the assets of the single sub-fund against to which the debenture is referable. [Schedule 1, item 4, section 1231N]

4.112 If the debenture or the required trust deed creates or includes a security interest, that interest must not be over CCIV assets that are referable to a different sub-fund.

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:

•

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

•

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

•

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:

•

the language requirements for the records;

•

the physical format of the records; and

•

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:

•

financial statements for the year;

•

the notes to the financial statements; and

•

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:

•

the current or former corporate director;

•

a current or former director of the corporate director;

•

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

•

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)]

Chapter 6: CCIVs - Operating a CCIV

Outline of chapter

6.1 Divisions 1 to 5 of Part 8B.5 of Chapter 8B establish the regulatory framework for operating the sub-funds of a CCIV and allocating the assets and liabilities to sub-funds.

Context of amendments

6.2 Fund managers generally offer investors a choice of funds with different investment strategies. This allows investors flexibility around the assets underpinning their investments and the risk-return exposures they wish to take. Through the facility of sub-funds, CCIVs will be able to offer multiple investment strategies under a single corporate vehicle. This is an important feature of the CCIV regime that is expected to produce economies of scale and cost savings for funds managers, compared with the existing MIS regime that does not allow the consolidation of multiple funds.

6.3 The concept of a sub-fund draws on overseas regulatory precedents such as the United Kingdom's OEIC regime, in particular by having sub-funds sit within a corporate structure but not as a separate legal entity.

6.4 The sub-fund framework allows managed funds to offer a variety of investment options through multiple sub-funds under a single umbrella CCIV, and protects investors in a particular sub-fund of a CCIV by quarantining the business of that sub-fund from the business of all the other sub-funds of the CCIV. This is achieved by strictly segregating the assets and liabilities of each sub-fund from the assets and liabilities of the other sub-funds of the CCIV, including in an external administration context. See Chapter 7 for an explanation of the external administration arrangements for CCIVs and sub-funds.

Summary of new law

6.5 Divisions 1 to 5 of Part 8B.5 of Chapter 8B of Schedule 1 to the Bill establish the regulatory framework for sub-funds.

6.6 Division 1 clarifies the meaning of references to property of a CCIV and liabilities of a CCIV.

6.7 Division 2 sets out the fundamental requirement that every part of a CCIV's business must be referable to one and only one sub-fund and, taken together, the businesses of all of the sub-funds of a CCIV must comprise the entire business of the CCIV. Each sub-fund of a CCIV must be operated as a separate business.

6.8 Division 3 sets out the rules for determining what are the assets and liabilities of sub-funds and the segregated application of assets of sub-funds. It also establishes requirements for keeping an allocation register of the assets and liabilities of a CCIV.

6.9 Divisions 4 and 5 establish the purposes for which sub-fund assets may be applied and requirements for holding assets.

Comparison of key features of new law and current law

Detailed explanation of new law

Operating a sub-fund as a separate business

6.10 A CCIV may only operate a part of its business if that part of the business has been registered as a sub-fund. For the rules relating to registration of a sub-fund, see paragraphs 2.84 to 2.89. [Schedule 1, item 4, subsection 1233B(1)]

6.11 Each part of the CCIV's business that is registered must be operated separately from any other part of the CCIV's business. [Schedule 1, item 4, subsection 1233B(2)]

6.12 The effect of these requirements is that every part of the business of the CCIV must be referable to a sub-fund and no part of a CCIV's business can be referable to more than one sub-fund. If a CCIV has only one sub-fund, then the entire business of the CCIV is referable to that sub-fund. If a CCIV has multiple sub-funds, then each sub-fund must comprise a particular part of the CCIV's business and the business of every sub-fund of a CCIV must, when taken together, constitute the entire business of the CCIV.

6.13 If the corporate director does not register a part of the CCIV's business as a sub-fund or does not operate each sub-fund as a separate business, the corporate director commits an offence. If the corporate director acted intentionally, the offence is a fault-based offence with a maximum penalty of two years imprisonment. If intention cannot be established, the corporate director commits a strict liability offence with a penalty of up to 60 penalty units. [Schedule 1, item 4, subsections 1233B(3) to (5); Schedule 2, item 199, penalty for subsections 1233B(4) and (5) inserted into Schedule 3 to the Corporations Act]

6.14 The requirement to register sub-funds and operate them separately is critical for ensuring segregation between each of the parts of the CCIV's business. If the corporate director does not comply with these obligations, the integrity of the CCIV regime would be fundamentally compromised. For this reason, the imposition of a strict liability offence and penalty is appropriate. The offence is consistent with the Guide to Framing Commonwealth Offences.

Allocating assets and liabilities to sub-funds

6.15 The rules for allocating assets and liabilities of a CCIV to its constituent sub-funds are, to the greatest extent possible, automatic in their application. In this respect, they draw in part on requirements for statutory funds under the Life Insurance Act 1995 and for health benefit funds under the Private Health Insurance (Prudential Supervision) Act 2015.

6.16 The allocation rules are designed to ensure that all of a CCIV's assets and liabilities can be allocated to its sub-funds by the force of the rules themselves and cannot be left unallocated due to an act or omission by the corporate director of the CCIV. This is particularly important given that key aspects of the regulatory framework for CCIVs, such as the rules for external administration, operate at the sub-fund level.

Assets of a sub-fund

6.17 The assets of a CCIV generally comprise the money and property the CCIV acquires in the course of conducting its business. References to property of a CCIV for the purposes of Part 8B.5 include PPSA retention of title property that has vested in the CCIV. For an explanation of the meaning of PPSA retention of title property and a discussion of when PPSA retention of title property vests in a CCIV, refer to paragraphs 7.153 to 7.155. This extension is required as references in the Corporations Act to property of a corporation do not include PPSA retention of title property unless expressly provided for (see the note to the definition of 'property' in section 9). It ensures that the asset allocation rules can apply comprehensively to property of a CCIV. [Schedule 1, item 4, section 1233]

6.18 As a general rule, money or property acquired by a CCIV forms part of the assets of a sub-fund to the extent that the money or property was obtained by applying assets of the sub-fund (for example, by making investments). [Schedule 1, item 4, subsection 1233H(1); Schedule 2, item 3, definition of 'assets' in section 9 of the Corporations Act]

6.19 Subject to this general rule, the assets of a sub-fund comprise:

•

amounts paid in consideration for the issue of any shares that are referable to the sub-fund;

•

shares acquired by the CCIV in respect of the sub-fund that are shares in the CCIV that are referable to another sub-fund of the CCIV;

•

money deposited with or lent to the CCIV in connection with the issue of debentures that are referable to the sub-fund; and

•

any other money or property of the CCIV that, at the time it is acquired, relates solely to the business of the sub-fund.

[Schedule 1, item 4, paragraphs 1233H(2)(a) to (d)]

6.20 Money or property of a CCIV that is not covered by these rules - that is, money or property that relates to the business of more than one sub-fund of a CCIV - is allocated to a sub-fund in the proportion that is fair and reasonable to allocate at the time the money or property is acquired. The proportion that is fair and reasonable to allocate may be nil. [Schedule 1, item 4, paragraph 1233H(2)(e)]

6.21 This is a default allocation that applies subject to there being an operative allocation determination in respect of the money or property. In the absence of an operative allocation determination, the default allocation operates to ensure money or property of a CCIV that relates to the business of more than one sub-fund can be included as assets of a sub-fund. Allocation determinations for assets are explained at paragraphs 6.24 to 6.35 of this explanatory memorandum.

6.22 Provision is also made for the regulations to prescribe matters to be considered in determining the extent to which money or property of a CCIV forms part of the assets of a sub-fund of the CCIV. This ensures any gaps, ambiguities or unintended consequences resulting from the application of the rules governing what are the assets of a sub-fund can be addressed in a timely manner. This is critical given the central importance of the asset allocation rules for the effective operation of CCIVs and sub-funds. [Schedule 1, item 4, subsection 1233H(5)]

6.23 The assets of a sub-fund also include (or exclude) assets that the Court has ordered are to be (or are no longer to be) assets of the sub-fund as part of an arrangement or reconstruction (see paragraph 7.58). The Court's power to determine assets to be, or not to be, assets of a sub-fund operates despite the allocation rules for assets described above. [Schedule 1, item 4, subsection 1233H(4)]

Allocation determinations - assets

6.24 If money or property acquired by a CCIV in a single transaction relates to the business of more than one sub-fund of the CCIV, the corporate director must determine in writing the proportion of the money or property that is to be allocated to each sub-fund. The proportion that is to be allocated to a sub-fund may be nil. [Schedule 1, item 4, subsections 1233J(1) and (2)]

6.25 The determination by the corporate director must be fair and reasonable in the circumstances, having regard to the rules for what are assets of a particular sub-fund (see paragraphs 6.17 to 6.23). The determination must be made as soon as practicable after the money or property is acquired and must result in the money or property being wholly allocated between the CCIV's sub-funds. This protects the segregation of sub-fund assets by ensuring that all money or property that is subject to an allocation determination is allocated across the CCIV's sub-funds and there is no unallocated or partially allocated money or property. [Schedule 1, item 4, subsection 1233J(3)]

Example 6.1 All of the money or property must be allocated

A CCIV acquires property that relates to the business of both of its sub-funds. The corporate director determines that 50 per cent of the property should be allocated to one sub-fund and 45 per cent of the asset should be allocated to the other sub-fund.

This would not be a permissible allocation as it would leave 5 per cent of the property unallocated to a sub-fund.

6.26 In practice, there may be several allocation determinations that are 'fair and reasonable in the circumstances'. The corporate director may determine an allocation of money or property to be fair and reasonable in the circumstances so long as it lies within the bounds of what a reasonable person in the corporate director's position could consider to be fair and reasonable in the circumstances. It does not matter that there may be other allocations that are fair and reasonable.

6.27 As long as the determination is one that a reasonable person in the corporate director's position could make, the allocation determination is operative from the time the money or property is acquired by the CCIV. If such an allocation determination is made after the money or property is acquired by the CCIV then the determination will be retrospective in its application. [Schedule 1, item 4, subsections 1233J(4)]

6.28 The particular proportion of money or property that is allocated to a sub-fund under an operative allocation determination is then taken to form part of the assets of the sub-fund from the time the money or property was acquired. This means that the default allocation for money or property that relates to the business of more than one sub-fund (see paragraphs 6.20 and 6.21) no longer applies in respect of that money or property. This ensures there is certainty about how the money or property is allocated between sub-funds as an operative allocation determination is definitive. [Schedule 1, item 4, subsection 1233H(3)]

Example 6.2 When the default allocation operates

On 31 December a CCIV acquires property that requires an allocation determination. The corporate director does not make an allocation determination until 2 January. The default allocation initially operates on 31 December and 1 January.

On 2 January, the corporate director makes an operative allocation determination. This allocation determination then operates retrospectively from the day the property was acquired, that is, from 31 December and replaces the default allocation, such that the default allocation no longer applies for the period 31 December to 1 January.

6.29 An operative allocation determination is irrevocable. This means that an operative determination may only be declared to be inoperative under an order of the Court. See paragraphs 6.61 to 6.63 for information about orders the Court can make in relation to assets and liabilities of sub-funds. [Schedule 1, item 4, subsection 1233J(5) and section 1233Q]

6.30 If an allocation determination is not 'fair and reasonable', does not result in the money or property being wholly allocated or does not comply with any relevant regulations, then the determination is not an operative determination. Instead, the corporate director's attempted exercise of its power has miscarried and there is no allocation determination by the corporate director. In the absence of an operative allocation determination, the default rule that applies to money or property that relates to the business of more than one sub-fund would continue to have effect (see paragraphs 6.20 and 6.21).

Example 6.3 An operative allocation determination

Grevillea CCIV has three sub-funds (Sub-fund A, Sub-fund B and Sub-fund C). Grevillea CCIV receives a lump-sum transfer of $1,000 from an investor that is consideration for shares to the value of $400 in Sub-fund A and shares to the value of $600 in Sub-fund B. Since the money is received in a single transaction and relates to the business of more than one of Grevillea CCIV's sub-funds, Grevillea CCIV's corporate director must make an allocation determination.

After considering the rules about when money or property forms part of the assets of a sub-fund - in particular the rule that amounts paid up in consideration for the issue of shares referable to a sub-fund are assets of the sub-fund - the corporate director determines that the allocation for Sub-fund A is $400, the allocation for Sub-fund B is $600 and the allocation for Sub-fund C is $0. The corporate director's allocation determination is fair and reasonable in the circumstances having regard for the rules about when money or property forms part of the assets of a sub-fund and results in the $1,000 lump sum being wholly allocated and so is an operative allocation determination.

As a result, $400 becomes part of the assets of Sub-fund A and $600 becomes part of the assets of Sub-fund B from the day the $1,000 lump sum was received by Grevillea CCIV.

6.31 A failure to comply with the requirements for allocation determinations is a fault-based offence, punishable by up to two years imprisonment. It is critical for the integrity of the segregation of each sub-fund that allocation determinations are made in accordance with these requirements. This penalty is consistent with the Guide to Framing Commonwealth Offences. [Schedule 1, item 4, subsection 1233J(6); Schedule 2, item 199, penalty for subsection 1233J(6) inserted into Schedule 3 to the Corporations Act]

6.32 A corporate director is not required to make an allocation determination if all of the sub-funds of the CCIV are being wound up. In a prosecution, the corporate director does not bear an evidential burden in relation to whether all of the sub-funds of the CCIV are in wind up as this information is not uniquely within the knowledge of the corporate director. This is consistent with the Guide to Framing Commonwealth Offences. In this situation, the liquidator or receiver must apply to the Court for an order declaring the extent to which money or property forms part of the assets of each sub-fund of the CCIV. For a discussion of how an allocation determination can be made or challenged after all of the sub-funds enter wind up, see paragraph 7.120. [Schedule 1, item 4, subsections 1233J(7) to (9), paragraph 1233Q(1)(e)]

When a single item of property must be converted into money or other fungible property

6.33 If, as a consequence of applying the allocation rules (see paragraphs 6.17 to 6.22), a single item of property forms part of the assets of two or more sub-funds, the corporate director must convert the property into money or other fungible property that can be allocated between the sub-funds. Once converted, the money or converted assets become assets of each sub-fund of the CCIV according to the proportion of the original asset that formed part of the assets each sub-fund. This is consistent with the general rule that is described in paragraph 6.18. [Schedule 1, item 4, subsections 1233K(1) and (3)]

6.34 For the purposes of this requirement, an item of property should be treated as a single item of property if it would generally be applied or dealt with as a single indivisible item in the ordinary course of commercial dealing. [Schedule 1, item 4, subsection 1233K(2)]

6.35 Converted property must also comply with the allocation rules; that is, no single item of converted property can form part of the assets of two or more sub-funds, as this would necessitate a further conversion of the property. [Schedule 1, item 4, subsection 1233K(3)]

6.36 The conversion must be completed as soon as practicable after the item of property is acquired. A failure to comply with the requirements for converting assets is a fault-based offence, punishable by up to two years imprisonment. It is critical for the integrity of the segregation of each sub-fund that conversions are made in accordance with these requirements. This penalty is consistent with the Guide to Framing Commonwealth Offences. [Schedule 1, item 4, subsection 1233K(5); Schedule 2, item 199, penalty for subsection 1233K(5) inserted into Schedule 3 to the Corporations Act]

Liabilities of a sub-fund

6.37 As with assets, liabilities that are incurred by a CCIV in the course of its business must be allocated to the CCIV's sub-funds. The liabilities of a CCIV for the purposes of the Corporations Act (other than Chapter 2M and the accounting standards made under it) include:

•

debts of the CCIV (including contingent and prospective debts);

•

expenses of the CCIV: and

•

anything else that might give rise to a debt or claim against the CCIV, whether present or future, certain or contingent, ascertained or sounding only in damages.

[Schedule 1, item 4, subsections 1233A(1) and (3)]

6.38 This definition is wide enough to capture contingent or prospective liabilities that may be submitted to a liquidator in the context of winding up.

6.39 For the purposes of the sub-fund rules in Part 8B.5, a CCIV is taken to have incurred a liability when the circumstances giving rise to the debt, expense or claim occur. A debt is generally incurred when the obligation to pay arises. A contingent claim usually arises when the circumstances giving rise to the potential future liability arises. [Schedule 1, item 4, subsection 1233A(2)]

6.40 The liabilities of a sub-fund of a CCIV at a particular time are:

•

liabilities of the CCIV that relate solely to the business of that sub-fund; and

•

any other liabilities of the CCIV to the extent that it is fair and reasonable in the circumstances to allocate the liability to the sub-fund.

[Schedule 1, item 1, subsection 1233L(1)]

6.41 In determining whether it is fair and reasonable in the circumstances to allocate a part of a liability to a sub-fund, the following matters must be taken into account:

•

the extent to which the liability, at the time it arose, related to the business of the sub-fund;

•

the extent to which the assets of the sub-fund, as against assets of other sub-funds, have been applied to meet the liability since it arose; and

•

any regulations made for the purpose of determining whether a liability of a CCIV forms part of the liabilities of a sub-fund of the CCIV.

[Schedule 1, item 4, paragraph 1233L(1)(b) and subsection 1233L(4)]

6.42 The second of these three matters is ambulatory in its operation and is relevant in situations where the proportion of a liability that relates to the sub-fund may alter over time. It is for this reason that the liabilities of a sub-fund are defined with reference to a particular time.

Example 6.4 Variation in the allocation of a liability over time

Hovea CCIV takes out an interest only loan for two of its sub-funds, Sub-fund A and Sub-fund B, for the purposes of making investments for each of the sub-funds. 50 per cent of the loan principal is borrowed against the assets of sub-fund A and 50 per cent of the loan principle is borrowed against the assets of sub-fund B. Interest on the loan accrues daily and is payable in regular instalments.

At the time the first repayment of interest is due, 50 per cent of the interest charge is allocated to each sub-fund, reflecting the sub-funds' respective shares of the loan principal upon which the interest accrued during the first repayment period. At that time, Hovea CCIV pays 50 per cent of the interest charge and repays 25 per cent of the loan principle out of the assets of Sub-fund A and 50 per cent of the interest charge out of the assets of Sub-fund B (no principal is repaid out of the assets of Sub-fund B).

At the time the second payment of interest is due, taking into account the rules for determining when it is fair and reasonable in the circumstances to allocate a liability of a CCIV to a sub-fund, 33? per cent of the interest charge forms part of the liabilities of Sub-fund A and 66? of the interest charge forms part of the liabilities of Sub-fund B, since this reflects the sub-funds' respective shares of the outstanding principle on which interest accrued during the second repayment period.

6.43 As with the rules for assets of a sub-fund, default rules apply for liabilities of a CCIV that do not relate solely to the business of a particular sub-fund, subject to there being an operative allocation determination (see paragraphs 6.46 to 6.54 in respect of the liability. In the absence of an operative allocation determination, the default rules ensure a liability of the CCIV that relates to more than one sub-fund can be included as part of the liabilities of a sub-fund.

6.44 Provision is also made for the regulations to prescribe matters to be considered in determining the extent to which a liability of the CCIV forms part of the liabilities of a sub-fund of the CCIV. This ensures any gaps, ambiguities or unintended consequences resulting from the application of the rules governing what are the liabilities of a sub-fund can be addressed in a timely manner. This is critical given the central importance of the liability allocation rules for the effective operation of CCIVs and sub-funds. [Schedule 1, item 4, subsection 1233L(4)]

6.45 The liabilities of a sub-fund also include (or exclude) liabilities that the Court has ordered are to be (or are no longer to be) liabilities of the sub-fund as part of an arrangement or reconstruction (see paragraph 7.58). The Court's power to determine liabilities to be, or not to be, liabilities of a sub-fund operates despite the allocation rules for liabilities described above. [Schedule 1, item 4, subsection 1233L(3)]

Allocation determinations - liabilities

6.46 If a liability of a CCIV relates to the business of more than one of the CCIV's sub-funds, the corporate director must determine in writing the proportion of the liability that is to be allocated to each sub-fund. The proportion of the liability that is to be allocated to a sub-fund may be nil. [Schedule 1, item 4, subsections 1233M(1) and (2)]

6.47 The corporate director's determination must be fair and reasonable in the circumstances, having regard to the rules for allocating liabilities to sub-funds (see paragraph 6.41). The determination must be made as soon as practicable after the liability arises, result in the liability being wholly allocated between the CCIV's sub-funds, and be expressed to apply from the time the liability arises. [Schedule 1, item 4, subsection 1233M(3)]

6.48 The rules governing allocation determinations for liabilities broadly mirror the requirements for allocation determinations for assets. For a discussion of when a determination is 'fair and reasonable' and why 100 per cent of a liability must be allocated, see paragraphs 6.25 to 6.27.

6.49 The proportion of the liability that is to be allocated to a sub-fund under an allocation determination may be varied in certain circumstances (see paragraphs 6.55 to 6.60) and thus an allocation determination has application at a particular time.

6.50 The allocation determination is operative at a time if the determination applies at that time and is one that a reasonable person in the corporate director's position could make. This means an operative determination may be retrospective in its application. [Schedule 1, item 4, subsection 1233M(4)]

6.51 The proportion of a liability that is allocated to a sub-fund under an operative allocation determination is then taken to form part of the liabilities of the sub-fund at that time. This means that the default allocation for a liability that relates to the business of more than one sub-fund (see paragraph 6.46) no longer applies in respect of that liability at that time. This ensures there is certainty about how the money or property is allocated between sub-funds as an operative allocation determination is definitive. [Schedule 1, item 4, subsection 1233L(2)]

6.52 An operative allocation determination is irrevocable. This means that an operative determination may only be declared to be inoperative under an order of the Court. See paragraphs 6.61 to 6.63 for information about orders the Court can make in relation to assets and liabilities of sub-funds. Although it is irrevocable, the corporate director may vary an allocation determination in certain circumstances (see paragraphs 6.55 to 6.60). [Schedule 1, item 4, subsection 1233M(5) and section 1233Q]

6.53 A failure by the corporate director of a CCIV to comply with the requirements for allocation determinations is a fault-based offence, punishable by up to two years imprisonment. It is critical for the integrity of the segregation of each sub-fund that allocation determinations are made in accordance with these requirements. This penalty is consistent with the Guide to Framing Commonwealth Offences. [Schedule 1, item 4, subsection 1233M(6); Schedule 2, item 199, penalty for subsection 1233M(6) inserted into Schedule 3 to the Corporations Act]

6.54 A corporate director is not required to make an allocation determination if all of the sub-funds of the CCIV are being wound up. In a prosecution, the corporate director does not bear an evidential burden in relation to whether all of the sub-funds of the CCIV are in wind up as this information is not uniquely within the knowledge of the corporate director. This is consistent with the Guide to Framing Commonwealth Offences. In this situation, the liquidator or receiver must apply to the Court for an order declaring the extent to which a liability forms part of the liabilities of each sub-fund of the CCIV. [Schedule 1, item 4, subsections 1233M(7) to (9)]

Varying an allocation determination for a liability

6.55 A corporate director may vary an allocation determination for a liability if it is necessary to do so in order for the allocation determination to remain an operative determination. For example, a corporate director may decide to exercise this discretion when it is aware of a prospective change in circumstances that could render an allocation determination inoperative. [Schedule 1, item 4, subsection 1233N(1)]

6.56 A corporate director must vary a determination if a change in circumstances means that the existing determination becomes, or will become, inoperative. The variation must be made as soon as practicable after the change in circumstances occurs. One situation where a determination may become inoperative is if, as a consequence of one sub-fund paying the part of a liability it is allocated faster than another sub-fund pays the part of the liability it is allocated, the determination ceases to be fair and reasonable in the circumstances. [Schedule 1, item 4, subsection 1233N(2)]

6.57 The corporate director may need to vary a determination multiple times in response to changes in circumstances. That is, the obligation to vary a determination has a recursive operation and operates in respect of the determination as subsequently varied.

6.58 If a corporate director fails to vary a determination as soon as practicable after a determination has or will become inoperative, the corporate director commits an offence punishable by up to two years imprisonment. The corporate director may have a defence available under section 9.1 of the Criminal Code if the corporate director was ignorant of the fact which resulted in the existing determination ceasing to be fair and reasonable. This penalty is consistent with the Guide to Framing Commonwealth Offences. [Schedule 1, item 4, subsection 1233N(5); Schedule 2, item 199, penalty for subsection 1233N(5) inserted into Schedule 3 to the Corporations Act]

Requirements for variations of allocation determinations

6.59 A variation of an allocation determination must be in writing and meet the requirements for allocation determinations, namely, the variation must be fair and reasonable in the circumstances (including having regard to the time when the variation applies), comply with any relevant regulations and result in the liability being wholly allocated. For an explanation of these requirements, see paragraph 6.47. [Schedule 1, item 4, subsection 1233N(3)]

6.60 The variation must also specify the time at which the variation starts to apply, which may be an earlier or a later point in time from when the variation is made. The variation takes effect from the time specified in the variation. This means a variation could take effect retrospectively to make an inoperative allocation determination operative once again, or prospectively to take into account circumstances that will arise in the future that may render an allocation determination inoperative. [Schedule 1, item 4, paragraph 1233N(3)(b), subsection 1233M(4) and note to subsection 1233N(2)]

Orders a Court can make in relation to assets and liabilities of sub-funds

6.61 A Court may make an order or give directions in relation to the assets and liabilities of a sub-fund of a CCIV where it is satisfied an allocation determination is not operative, the CCIV's allocation register is incorrect or deficient, or if all of a CCIV's sub-funds are being wound up. The corporate director of the CCIV, a liquidator or a controller of property of a sub-fund may make an application for such an order. [Schedule 1, item 4, subsections 1233Q(2) and (3)]

6.62 The Court may give any order or direction it considers appropriate in relation to the assets and liabilities of the sub-funds of a CCIV, including an order:

•

requiring the corporate director to update or correct the CCIV's allocation register;

•

declaring that money or property, or a liability, forms part of the assets of a particular sub-fund (or sub-funds);

•

declaring the extent to which money or property, or a liability, forms part of the assets of the CCIV's sub-funds;

•

requiring the corporate director to make an allocation determination or to vary an allocation determination; or

•

declaring that an allocation determination is not operative.

[Schedule 1, item 4, subsection 1233Q(1)

6.63 Where an order requires a corporate director to make an allocation determination (or vary a determination), the determination (or variation) the corporate director makes must be consistent with the order unless the order authorises the corporate director to do otherwise, or the corporate director first obtains leave of the Court. [Schedule 1, item 4, subsection 1233Q(4)]

Documenting the allocation of assets and liabilities to sub-funds

Obligation to set up and maintain an allocation register

6.64 The corporate director must set up and maintain a register of the assets and liabilities of the sub-funds of the CCIV. Under section 1306 of the Corporations Act, the allocation register may be in written or electronic form. The maintenance of the allocation register continues to be a function of the corporate director even when one, some or all of the sub-funds of the CCIV are being wound up. [Schedule 1, item 4, subsections 1233C(1) and (3)]

6.65 This requirement applies from the time the CCIV is registered. A failure by the corporate director to meet this requirement is a strict liability offence with a penalty of up to 60 penalty units. The imposition of a strict liability offence is appropriate as the establishment and continuing maintenance of the allocation register is critical to ensuring there is a complete and up-to-date register of the assets and liabilities of the sub-funds of a CCIV. [Schedule 1, item 4, subsection 1233C(2); Schedule 2, item 199, penalty for subsection 1233C(2) inserted into Schedule 3 to the Corporations Act]

6.66 Assets and liabilities of a sub-fund of a CCIV must be clearly identified as such in the allocation register. Appropriate and sufficient information must be contained in the register to clearly identify each assets and liability of the sub-fund. For example, the register should identify the date on which the asset was acquired and its value, the date on which the liability was incurred and its amount, among other things. [Schedule 1, item 4; subsections 1233D(1) and 1233E(1)]

6.67 The information that must be recorded in the allocation register and when it must be recorded is set out in Table 6.2.

[Schedule 1, item 4, subsections 1233D(2) to (4), subsections 1233E(2) to (4)]

6.68 If the corporate director fails to maintain or update the record, the corporate director commits an offence. If the corporate director acted intentionally or recklessly, the maximum penalty is up to two years imprisonment. If intention or recklessness cannot be established, the offence is a strict liability offence with a penalty of up to 60 penalty units. These penalties and the imposition of a strict liability offence is appropriate as the accuracy of the register is critical to preserving the segregation between the sub-funds and therefore the integrity of the regime. [Schedule 1, item 4, subsections 1233D(5) and (6) and subsections 1233E(5) and (6); Schedule 2, item 199, penalty for subsections 1233D(5) and (6) and subsections 1233E(5) and (6) inserted into Schedule 3 of the Corporations Act]

Retention of records

6.69 The records of entries made in the allocation register and allocation determinations (including variations of allocation determinations) for money or property and liabilities of the CCIV must be retained for seven years after the end of the year in which:

•

the CCIV disposes of money or property; or

•

a liability is discharged or otherwise ceases to be a liability of the CCIV.

[Schedule 1, item 4, subsections 1233G(1) and (2)]

6.70 The failure to retain records is a fault-based offence punishable by up to two years imprisonment (if intention or recklessness is established) or a strict liability offence punishable by up to 60 penalty units. These penalties and the imposition of the strict liability offence is consistent with the Guide to Framing Commonwealth Offences and appropriate because the retention of accurate records of the assets and liabilities of a sub-fund is critical for ensuring the segregation between the sub-funds and the integrity of the CCIV regime. [Schedule 1, item 4, subsections 1233G(3) and (4); Schedule 2, item 199, penalty for subsections 1233G(3) and (4) inserted into Schedule 3 to the Corporations Act]

Interaction with the winding-up rules

6.71 The register provides a record of the assets and liabilities of each sub-fund. This information may be particularly useful to creditors or liquidators.

6.72 A creditor of a CCIV may request information about an allocation and a copy of the relevant part of the register (see paragraphs 7.84 to 7.87 of this explanatory memorandum). [Schedule 1, item 4, section 1233P]

6.73 A liquidator must also be provided with access to the register (see paragraph 7.131). [Schedule 1, item 4, subsections 1238N(2) and (5)]

6.74 The corporate director must update the register even if one or more of the sub-funds are being wound up. In situations where all of the sub-funds are being wound up, the corporate director is not required to make allocation determinations but it must still record any self-allocating assets in the register and update the register to record any determinations made by the Court. For a more detailed discussion of the corporate director's obligations when one or more sub-funds are being wound up, see Chapter 7. [Schedule 1, item 4, section 1233C(3)]

6.75 If the corporate director fails to record an asset or liability in the allocation register, a liquidator may require the corporate director to record the asset or liability. For a discussion of this power, refer to paragraphs 7.117 to 7.119. [Schedule 1, item 4, section 1233F]

Segregated application of assets of sub-funds

Purposes for which an asset of a sub-fund may be applied

6.76 A CCIV must not apply or deal with assets of a sub-fund, whether directly or indirectly, except for one or more of the following purposes:

•

meeting liabilities of the sub-fund;

•

carrying on the business of the sub-fund;

•

paying a dividend to members of the sub-fund;

•

providing consideration to a member of the sub-fund in respect of a reduction of share capital affecting the sub-fund;

•

redeeming redeemable shares or redeemable preference shares referable to the sub-fund;

•

making a payment under the Chapter 5 external administration rules relating to winding up or certain priority payments by a receiver (see Chapter 7 of this explanatory memorandum);

•

complying with a Court-approved compromise or arrangement (see Chapter 7 of this explanatory memorandum);

•

making any other distribution to members of the sub-fund that the CCIV is permitted to make under the Corporations Act and the CCIV's constitution (for example, half yearly distributions); or

•

a purpose specified in the regulations as a permitted purpose.

[Schedule 1, item 4, sections 1234A(1) and 1234B]

6.77 A CCIV is not permitted to apply or deal with money or property of a CCIV that has not been clearly identified in the CCIV's allocation register as forming part of the assets of a sub-fund or sub-funds. [Schedule 1, item 4, section 1234]

6.78 A CCIV is also not permitted to jointly apply the assets of two or more sub-funds to acquire a single asset or grant a single security interest over the assets of more than one sub-fund. These prohibitions are designed to preserve the segregation between the sub-funds. [Schedule 1, item 4, subsection 1234A(3) and section 1234D]

6.79 These provisions ensure that all of the business of a CCIV is conducted through its constituent sub-funds and that the assets of a sub-fund are not applied for the purpose of meeting liabilities or expenses of another sub-fund of the CCIV. Any liability or expense of a sub-fund must be met solely out of the assets of that sub-fund. Similarly, an asset of a CCIV cannot be applied, and a liability of a CCIV cannot be met, until such time as that asset or liability has been allocated to a sub-fund.

6.80 This protects the distinct investment activity carried on by each sub-fund from the impacts of the investment activity carried on by the other sub-funds of that CCIV.

6.81 A single item of property that forms part of the assets of two or more sub-funds of the CCIV and requires conversion into money or other fungible property may not be applied for any purpose other than for the purpose of converting the property (see paragraphs 6.33 to 6.35). [Schedule 1, item 4, section 1234C]

Regulations

6.82 The regulations may prescribe additional purposes for which sub-fund assets may be, or must not be, applied. Prescription of such purposes would not alter any other obligations or requirements in respect of holding or applying assets. [Schedule 1, item 4, paragraphs 1234B(j) and 1234A(1)(b)]

6.83 This is to ensure that the law is flexible and able to respond to particular circumstances that may not have been apparent at the time of drafting. It is also possible that regulations relating to certain types of assets or purposes may be quite technical or detailed in nature or only relevant in certain circumstances, and therefore more appropriately dealt with in regulations.

Court orders

6.84 A court can only make an order that is inconsistent with the rules relating to the purposes for which the assets of a sub-fund may be applied if the court considers the interests of justice to require it to do so. This caveat protects the integrity of the court by ensuring that it is not required to make an unjust order. [Schedule 1, item 4, subsection 1234E(1)]

6.85 Court orders have priority over the rules about the application of sub-fund assets. In other words, if a court makes an order that is inconsistent with these rules, the CCIV must apply the assets and liabilities of the sub-fund so as to comply with the court order, in priority over any other permitted application of sub-fund assets. [Schedule 1, item 4, subsection 1234E(2)]

Consequences of a non-compliant application

6.86 A contravention of the rules concerning the segregated application of assets by a CCIV does not invalidate a contract or transaction related to the contravention. This provides certainty for counterparties of the CCIV entering into contracts or transactions in respect of the business of a sub-fund. However, a Court may prevent a dealing or transaction by issuing an injunction under section 1324 of the Corporations Act. [Schedule 1, item 4, subsection 1234F(1)]

6.87 A person who contravenes the rules relating to the segregated application of assets commits an offence. If intention or recklessness is established, the offence carries a maximum of two years imprisonment. Otherwise, the offence is a strict liability offence with a penalty of up to 60 penalty units. [Schedule 1, item 4, subsections 1234F(2) to (4); Schedule 2, item 199, penalty for subsections 1234F(3) and 4 inserted into Schedule 3 to the Corporations Act]

6.88 These penalties and the imposition of a strict liability offence is appropriate and consistent with the Guide to Framing Commonwealth Offences. The rules relating to the application of assets are critical to ensuring the segregation between sub-funds and protecting the interests of creditors and members of each sub-fund. In this way, they are fundamental to the integrity of the CCIV regime.

How CCIV assets are held

How CCIV money and property must be held

6.89 The CCIV may hold its money and property, or another person may do so on the CCIV's behalf (such as a custodian engaged by the CCIV) - subject to any regulations made for the purposes of this requirement. [Schedule 1, item 4, section 1234G]

6.90 If another person holds the CCIV's money and property, that person is taken to hold the money and property of the CCIV on trust for the CCIV. As a result, there is a fiduciary relationship between the person and the CCIV. However, nothing in Chapter 8B is intended to make a CCIV or its corporate director a trustee or trustees of the money or property of the CCIV. [Schedule 1, item 4, section 1234H]

6.91 This differs from the trust relationship that exists in the context of registered schemes where the responsible entity holds the assets on trust for the members. The difference reflects the fact that a CCIV, unlike a registered scheme, is a separate legal entity.

6.92 The new law sets out requirements about how the money and property of the CCIV must be held. These apply to any person that holds the money and property of the CCIV.

6.93 All assets of a sub-fund of a CCIV that have been clearly identified in the allocation register as such must be held separately from the assets of any other sub-fund of the CCIV. This requirement is subject to the regulations. [Schedule 1, item 4, subsections 1234J(1) and (4)]

6.94 In addition, money or property of a CCIV that has not yet been identified in the CCIV's allocation register as forming part of the assets of a sub-fund and any property of a CCIV that must be converted into money or other fungible property must each be kept separately from any other money or property of the CCIV. This ensures that money or property which does not yet form part of the assets of a sub-fund is not applied as part of the business of the sub-fund. [Schedule 1, item 4 subsections 1234J(2) and (3)]

6.95 If a person fails to hold money or property of a CCIV in accordance with these requirements, the person contravenes a civil penalty provision and commits a strict liability offence punishable by up to 60 penalty units. For an explanation of why a strict liability offence is appropriate, see paragraphs 6.97 to 6.98. [Schedule 1, item 4, subsection 1234J(5); Schedule 2, item 192, new table items for subsections 1234J(1), (2) and (3) inserted into subsection 1317E(3) of the Corporations Act; Schedule 2, item 199, penalty for subsections 1234J(1), (2) and (3) inserted into Schedule 3 to the Corporations Act]

6.96 The regulations may create exceptions for various classes of assets, including assets that are held outside of Australia. [Schedule 1, item 4, section 1234K]

Why strict liability offences are appropriate

6.97 Several of the offences in Division 5 are strict liability offences. Under the Guide to Framing Commonwealth Offences, the imposition of a strict liability offence is appropriate where it is necessary to protect the integrity of the regime.

6.98 The rules relating to the segregated holding of assets protect the segregation between the sub-funds and the interests of the creditors and members of each sub-fund. If the rules are breached and assets of different sub-funds are comingled, there is a real risk that assets of one sub-fund will be mistakenly used to discharge the liabilities of another sub-fund. This would threaten the integrity of the CCIV regime.

Chapter 7: CCIVs - External administration

Outline of chapter

7.1 This chapter outlines the process for winding up a sub-fund and how the other external administration processes apply in the CCIV context. It also outlines the process for deregistering a CCIV and sub-funds of a CCIV.

Context of amendments

7.2 The regulatory requirements for schemes of arrangement, receivership, winding up and voluntary administration for Australian companies - collectively referred to as external administration - are contained in Chapter 5 of the Corporations Act. The amendments contained in Parts 8B.6 of Schedule 1 to the Bill modify the application of the external administration framework so that, in the case of CCIVs, external administration applies to each sub-fund of a CCIV rather than to the CCIV as a whole. This ensures the strict segregation of the assets and liabilities of a sub-fund is preserved throughout the external administration process.

7.3 The provisions in Part 8B.6 draw in part on the approach adopted for external administration of health benefits funds under the Private Health Insurance (Prudential Supervision) Act 2015. Health benefits funds have some similarities to sub-funds of a CCIV in that they are not separate legal entities.

7.4 This approach contrasts with the approach used in the United Kingdom's OEIC regime, where sub-funds are deemed to have separate legal personality for the purposes of external administration (but not for any other purpose). The United Kingdom's approach has not been adopted because it would artificially distinguish between the legal personality of sub-funds before and during external administration.

7.5 The amendments contained in Parts 8B.6 of Schedule 1 to the Bill also modify the application of the external administration framework in Chapter 5 of the Corporations Act so that certain types of external administration do not apply to a CCIV or a sub-fund of a CCIV.

7.6 Chapter 5A of the Corporations Act sets out the process for deregistering a company. The amendments contained in Part 8B.6 provide a process for deregistering sub-funds and CCIVs. A CCIV must be deregistered if it has no registered sub-funds.

Summary of new law

7.7 Part 8B.6 applies the external administration provisions on a sub-fund-by-sub-fund basis by using translation rules. Most significantly, the first translation rule requires references in the provisions to the company undergoing external administration to be read as a reference to the sub-fund.

7.8 Division 1 of Part 8B.6 contains general rules for construing terms and expressions.

7.9 Division 2 of Part 8B.6 sets out the translation rules for the arrangement and reconstruction provisions. It also expands the Court's power to make orders in situations where the arrangement and reconstruction involves a sub-fund.

7.10 Division 3 of Part 8B.6 contains the translation rules for receivership and sets out the special duties and powers of receivers.

7.11 Division 3A of Part 8B.6 provides that two external administration processes - voluntary administration and restructuring - do not apply to a CCIV or a sub-fund of a CCIV.

7.12 Division 4 of Part 8B.6 covers the winding up provisions. It sets out the translation rules and the powers of the corporate director, and the liquidator when a sub-fund is being wound up. It also makes bespoke amendments to the process for serving a statutory demand and applying to the Court for an order for winding up.

7.13 Divisions 5 to 7 of Part 8B.6 cover the insolvent trading provisions in Divisions 3 to 6 of Part 5.7B, offence provisions in Part 5.8 and miscellaneous machinery provisions in Part 5.9. Several of the offence provisions in these Parts (including the duty to prevent insolvent trading) are owed by the natural person directors of the corporate director.

7.14 Division 8 of Part 8B.6 covers the provisions for deregistration and transfer of registration of a CCIV and its sub-funds.

Comparison of key features of new law and current law

Detailed explanation of new law

General principles

Provisions apply on a sub-fund-by-sub-fund basis

7.15 The provisions relating to external administration apply on a sub-fund-by-sub-fund basis. This is designed to preserve the segregated application of assets of each sub-fund. It also accommodates the possibility that different sub-funds of a CCIV could enter an external administration process at different times. [Schedule 1, item 4, sections 1236 and 1237]

7.16 Notwithstanding that the provisions apply on a sub-fund-by-sub-fund basis, they recognise that the CCIV is the only legal entity. Unlike the OEIC regime in the United Kingdom, sub-funds are not deemed to have separate legal personality for winding up. This ensures that the legal character of a sub-fund remains consistent throughout its life and a sub-fund does not become imbued with legal personality when it enters into external administration.

Translation rules

7.17 The main mechanism that is used to apply the external administration provisions on a sub-fund-by-sub-fund basis is the translation rules. These rules ensure that the existing external administration provisions, as they relate to companies, can be applied to sub-funds of a CCIV by substituting references to certain key words with references to alternative words that are relevant in the CCIV context. [Schedule 1, item 4, sections 1235C, 1236E, 1237B, 1238A, 1238D and 1238G]

7.18 The translation rules also apply, by application of section 23 of the Acts Interpretation Act 1901, irrespective of whether the section uses the singular of the word or the plural, for example, it applies to both references to 'a share in the company' and 'shares in the company'.

7.19 The translation rules applying to each of the relevant Chapter 5 external administration procedures for CCIVs (that is, schemes of arrangement, receivership and winding up) are broadly equivalent. The main difference relates to whether references to 'directors' and 'officers' include the natural person directors of the corporate director. Subtle differences also exist to reflect differences in the language in the various parts of Chapter 5. For example, the entity subject to the external administration procedure is referred to as a 'corporation' in Part 5.2 and a 'company' in Part 5.8. These differences are noted in the discussion below.

First translation rule - references to the company

7.20 The first translation rule substitutes a reference in the provisions to the company that is, or is to be, the subject of an external administration procedure with a reference to 'the sub-fund'. The company that is, or is to be, subject to the external administration procedure is referred to as the relevant company. For example, in the context of the winding up provisions in Parts 5.4 to 5.6, the relevant company is the company that is to be, or has been, wound up or is the subject of an application for a winding up order. [Schedule 1, item 4, item 1 of the tables in subsections 1235C(4), 1236E(4), 1237B(4), 1238A(4), 1238D(5) and 1238G(4)]

7.21 The first translation rule applies irrespective of whether the relevant company is referred to as a company, a body corporate or in some other way. It also applies where the reference to the company is implicit, for example, in paragraph 459P(1)(b) where the provision refers to a 'creditor' and it is implied that it is a 'a creditor of the relevant company'. [Schedule 1, item 4, item 1 of the tables in subsections 1235C(4), 1236E(4), 1237B(4), 1238A(4), 1238D(5) and 1238G(4)]

7.22 The first translation rule shifts the focus of the provisions from the CCIV to the sub-fund. It recognises that part of the business of the CCIV relates to the sub-fund, which can be wound up (or undergo another external administration process) independently of the parts of the business that relate to the other sub-funds.

7.23 There are two situations where the first translation rule does not apply, namely, where:

•

the reference is to a company other than the 'relevant company' (see, for example, section 588V, which refers to a 'holding company'); and

•

the reference is to the 'relevant company' but the context requires the entity to have the capacity and powers of a legal person (see examples and further discussion below).

[Schedule 1, item 4, subsections 1235C(4) and (5), 1236E(4) and (5), 1237B(4) and (5), 1238A(4) and (5), 1238D(5) and (6) and 1238G(4) and (5)]

7.24 Examples of the types of provisions that refer to the legal capacity and powers of the company include references to the company:

•

entering into a transaction;

•

paying compensation;

•

being bound by a compromise or arrangement;

•

dealing with property;

•

bringing or being a party to legal proceedings;

•

executing a document or instrument;

•

giving or receiving a document or notice;

•

making an application to the Court or ASIC;

•

having a bank account;

•

having a constitution (as a sub-fund does not have a constitution); and

•

contravening a provision of the Corporations Act.

7.25 In sections which assume legal personality, references to the company continue to be read as references to the CCIV. However, to the extent that it is possible, the operation of these sections is confined to the sub-fund. This approach recognises that the sub-fund is not a legal entity, while still ensuring that external administration applies on a sub-fund-by-sub-fund basis. [Schedule 1, item 4, subsections 1235C(6), 1236E(6), 1237B(6), 1238A(6), 1238D(7) and 1238G(6)]

Example 7.1 Applying the first translation rule

Section 459A states that '[o]n application under section 459P, the Court may order that an insolvent company be wound up in insolvency'.

Applying the first translation rule, the reference to the insolvent 'company' must be read as a reference to the insolvent 'sub-fund'. In other words, the Court must make an order that refers to a single sub-fund of the CCIV, rather than the CCIV as a whole.

Example 7.2 Situation where the first translation rule does not apply

Section 471B provides that:

While a company is being wound up in insolvency or by the Court, or a provisional liquidator of a company is acting, a person cannot begin or proceed with:

(a) a proceeding in a court against the company ....

(emphasis added)

Applying the first translation rule, the first and second reference to a company should be read as a reference to the sub-fund that is being wound up and a provisional liquidator of that sub-fund.

The first translation rule does not apply to paragraph (a) because only a legal person can be sued. This reference should continue to refer to the company, but its operation should be confined to the sub-fund in wind up. For example, it captures proceedings in a court that relate to assets allocated to the sub-fund that is being wound up, but not proceedings that relate solely to assets and liabilities allocated to other sub-funds.

Second and third translation rules - references to director, officer etc.

7.26 The second translation rule replaces a reference in the provisions to 'director', 'directors' and 'board' with a reference to the 'corporate director of the CCIV'. [Schedule 1, item 4, item 1 of the tables in subsections 1235C(4), 1236E(4), 1237B(4), 1238A(4), 1238D(5) and 1238G(4)]

7.27 The second translation rule is necessary as CCIVs, unlike other companies, do not have natural person directors. The effect of the second translation rule is that references to directors generally do not include natural person directors of the corporate director.

7.28 The third translation rule clarifies that a reference to the 'officer' of the relevant company refers to the:

•

corporate director of the CCIV;

•

a shadow director of the CCIV;^[5] or

•

a receiver, receiver and manager, liquidator or trustee administering a compromise or arrangement for the sub-fund that is in external administration.

[Schedule 1, item 4, item 1 of the tables in subsections 1235C(4), 1236E(4), 1237B(4), 1238A(4), 1238D(5) and 1238G(4)]

7.29 This third translation rule recognises that a CCIV may only appoint a single corporate director, but that a different external administrator may be appointed for each sub-fund (as Chapter 5 applies to CCIVs on a sub-fund-by-sub-fund basis).

7.30 There are some exceptions to the second and third translation rules. These provide that the natural person directors of the corporate director:

•

are each taken to be a director of a sub-fund for the purposes of the arrangement and reconstruction provisions (see paragraph 7.52 of this explanatory memorandum for an explanation of the special second translation rule that applies to the arrangements and reconstructions provisions);

•

are ineligible to act as a receiver or a liquidator (see paragraphs 7.62 and 7.109);

•

are required to provide reasonable assistance to the liquidator under existing section 530A (see paragraph 7.113);

•

each individually owe a duty to ensure that a CCIV does not trade in relation to a sub-fund when the sub-fund is insolvent (see paragraph 7.162 for an explanation of the special second translation rule for the property recovery provisions);

•

may commit an offence under existing section 596 if they use fraud to induce a person to give credit to the CCIV, gift the sub-fund's property with the intent to defraud or engage in certain other similar conduct (see paragraph 7.168); and

•

may be mandatorily summonsed up to two years after the end of the external administration procedure under existing section 596A (see paragraph 7.168).

Example 7.3 Applying the third translation rule

A CCIV has two sub-funds. The corporate director of the CCIV is Director Services Ltd, which has three directors - Eliza, Huda and Chen and the CCIV has no shadow directors. A receiver has been appointed to property of the first sub-fund. The second sub-fund is about to be wound up.

Paragraph 532(2)(c) of the existing law prohibits a person from being appointed as the liquidator of a company if the person is 'an officer or employee of the company (otherwise than by reason of being a liquidator of the company or of a related body corporate)' (emphasis added).

Applying the third translation rule, the reference to 'an officer' would mean Director Services Ltd. However, a liquidator cannot be a body corporate in any event. Instead, an exception applies that prevents the three individual directors of Director Services Ltd from being appointed as the liquidator for the second sub-fund.

Paragraph 532(1A)(c), when read subject to the third translation rule, does not prohibit the receiver of property of the first sub-fund from being appointed as the liquidator of the second sub-fund. This is because a reference to an 'officer' only includes the receiver of property of the sub-fund that is to be wound up, not a receiver appointed in respect of property of another sub-fund.

Fourth and fifth translation rules

7.31 The fourth translation rule substitutes a reference to 'shares' in the relevant company with a reference to the 'shares referable to the sub-fund'. This recognises that all shares are shares of a CCIV but the rights attaching to those shares must relate to only one sub-fund. Refer to paragraphs 4.16 to 4.23 of this explanatory memorandum for an explanation of the meaning of shares being referable to a sub-fund. [Schedule 1, item 4, item 4 of the tables in subsections 1235C(4), 1236E(4), 1237B(4), 1238A(4), 1238D(5) and item 3 of the table in subsection 1238G(4)]

7.32 Similarly, the fifth translation rule replaces references to the 'debentures' of a relevant company with references to the 'debentures referable to the sub-fund'. [Schedule 1, item 4, item 5 of the table in subsections 1235C(4), 1236E(4), 1237B(4)]

7.33 The fifth translation rule is not required for the property recovery provisions or the offence or miscellaneous provisions in Divisions 6, 7, and 8 of Part 8B.6 as there is no reference to 'debentures' in these Parts.

Example 7.4 Applying the fourth translation rule

A CCIV has two sub-funds. The Court orders the winding up of the first sub-fund. The CCIV then transfers shares referable to the second sub-fund.

Existing section 486A voids certain transfers of shares in a company that are made after the commencement of winding up by the Court.

Applying the fourth translation rule, the reference to shares in section 486A is read as a reference to the shares referable to the first sub-fund. Therefore, the transfer of shares referable to the second sub-fund is not void, notwithstanding that it occurred after the first sub-fund commenced winding up.

Sixth, seventh and eighth translation rules

7.34 The sixth and seventh translation rules replace references to 'a general meeting' of the relevant company, and to the relevant company 'in general meeting' with a reference to 'a meeting of members of the sub-fund' and 'the members of the sub-fund at a meeting of members of the sub-fund'. The rules for members' meetings of sub-funds are explained in Chapter 3 of this explanatory memorandum. [Schedule 1, item 4, items 6 and 7 of the table in subsection 1237B(4)]

7.35 The eighth translation rule replaces references to 'incorporation' of the relevant company with a reference to 'registration of the sub-fund'. The rules for registration of a sub-fund are explained in paragraphs 2.84 to 2.91 of this explanatory memorandum. [Schedule 1, item 4, item 8 of the table in subsection 1237B(4)]

7.36 The sixth, seventh and eighth translation rules are only required in the parts of Chapter 5 that relate to winding up. The Corporations legislation does not refer to 'general meetings' or 'incorporation' in the context of any other external administration procedures.

Example 7.5 Applying the seventh translation rule

Subsection 495(1) of the existing law requires the 'company in general meeting' to appoint a liquidator for a voluntary wind up.

Applying the seventh translation rule, the liquidator may be appointed at a members' meeting of the sub-fund. There is no need call a general meeting of the CCIV.

Example 7.6 Applying the eighth translation rule

Paragraph 461(1)(c) of the existing law provides that a company may be wound up if it does not commence business within one year from its incorporation or suspends its business for a whole year.

Applying the eighth translation rule, a sub-fund in a CCIV may be wound up if business is not commenced within one year from its registration or if the business of the sub-fund is suspended for a whole year.

Terms defined in relation to a company

7.37 A special translation rule applies to terms or expressions that are only defined in relation to a company or body corporate. This rule states that the company definition is applied but the CCIV is treated as if it had only the sub-fund that is in external administration. All of the other sub-funds of the CCIV are disregarded. [Schedule 1, item 4, subsection 1235(2)]

7.38 Examples of terms that are defined only in relation to a company or body corporate include:

•

related entity in relation to a body corporate;

•

holding company;

•

subsidiary of a company; and

•

affairs of a body corporate.

7.39 Some terms are defined both in relation to a company and in relation to a sub-fund. The special rule for terms defined in relation to a company is not used in these instances. Instead, the definition of the term in relation to a sub-fund is used in the ordinary way. The main terms used in Chapter 5 which are defined in relation to a sub-fund are set out in Table 7.2. [Schedule 1, item 4, subsection 1235(1)]

[Schedule 1, item 4, sections 1233H, 1233L and 1231A; Schedule 2, items 3, 8, 9, 12, 14 to 15, 17, 26-27, 29 to 30, section 9, definitions of 'assets', 'contributory', 'creditor of a sub-fund', 'extraordinary resolution', 'insolvent', 'liabilities', 'member', 'solvent' and 'special resolution', section 51E, definition of 'secured creditor', section 51F]

Other modifications

7.40 The new law provides that any other modifications that are necessary may be made so that the provisions apply to a sub-fund instead of a company. This ensures that the law operates in all circumstances in a manner that reflects, and is consistent with, the translation rules that establish the external administration regime for CCIVs. In particular, it ensures the object of preserving the segregated nature of sub-funds is implemented in corporate insolvency law. [Schedule 1, item 4, subparagraphs 1235C(1)(b), 1236E(1)(b), 1237B(1)(ii), 1238A(1)(b)(ii), 1238D(2)(b) and 1238G(1)(b)]

7.41 For example, in applying corporate insolvency law to CCIVs, certain modifications are made to account for the unique characteristics of a CCIV that distinguish it from other types of companies and the fact that a sub-fund is not a separate legal person.

7.42 This aspect of the translation rules replicates a precedent used in other parts of the Corporations Act where the law operates to ensure an intended outcome is expressly given effect to in all circumstances contemplated by the law (see, for example, paragraph 233(2)(b) and subsection 324BD(2) of the Corporations Act).

Provisions to which the translation rules apply

7.43 The translation rules apply to most of the provisions in Chapter 5 of the Corporations Act that relate to arrangements and reconstructions, receivership, winding up, recovery of property, external administration offences and other miscellaneous external administration provisions (see Table 7.3). [Schedule 1, item 4, paragraphs 1235(2)(a), 1236E(2)(a), 1237B(2)(a), 1238A(2)(a), 1238(3)(a) and 1238G(2)(a); Schedule 2, items 142 to 151, 154, 156 notes to Parts 5.1, 5.2, 5.3A, 5.3B, 5.4, 5.4A, 5.4B, 5.4C, 5.5, 5.6, 5.8 and 5.9 of the Corporations Act]

7.44 Regulations may be made to disapply the translation rules for specified provisions. This regulation making power ensures that adjustments can be made if the translation rules produce an unanticipated result in a particular section, or when later amendments are made to Chapter 5. Flexibility is important as CCIVs are a new type of vehicle and are structured differently to the other types of companies that are subject to Chapter 5. [Schedule 1, item 4, paragraphs 1235C(3)(c), 1236E(3)(c) and 1237B(3)(d), and subsections 1238A(3), 1238D(4) and 1238G(3)]

7.45 The translation rules also apply to other provisions in the Corporations Act and ASIC Act that relate to the operation of one of the provisions listed in Table 7.3. In section 9 of the Corporations Act, 'this Act' is defined to include regulations made under the Corporations Act, the Passport Rules for this jurisdiction, and the Insolvency Practice Rules. Similarly, the ASIC Act includes the regulations made under the ASIC Act. [Schedule 1, item 4, paragraphs 1235C(2)(b), 1236E(2)(b), 1237B(2)(b), 1238A(2)(b), 1238D(3)(b) and 1238G(2)(b)]

7.46 The provisions to which the translation rules apply are referred to as the arrangement and reconstructions provisions (for provisions relating to arrangements and reconstructions), receiver provisions (for provisions relating to receivership), winding up provisions (for provisions relating to winding up), property recovery provisions (for provisions relating to property recovery) external administration offences provisions (for provisions relating to Chapter 5 offences) and external administration miscellaneous provisions (for provisions relating to the miscellaneous provisions in Part 5.9). This terminology is modelled on existing subsection 233(2) of the Corporations Act which refers to 'winding up provisions'. [Schedule 1, item 4, subsections 1235C(2), 1236E(2), 1237B(2), 1238A(2), 1238D(3) and 1238G(2)]

7.47 The translation rules do not apply to the voluntary administration provisions in Part 5.3A of the Corporations Act or the restructuring provisions in Part 5.3B of the Corporations Act, as these types of external administration processes do not apply to a CCIV or a sub-fund of a CCIV.

References to debts and claims

7.48 In the winding up provisions, references to 'debts' of the CCIV refer to 'liabilities of a sub-fund', that is, liabilities of the CCIV that have been allocated to the sub-fund in accordance with the allocation rules for liabilities. References to a claim against the CCIV are read as references to 'claims against a sub-fund' to the extent that the claim is a liability of the sub-fund. [Schedule 1, item 4, section 1237C]

7.49 Similarly, in the property recovery provisions, references to 'incurring debts' cover liabilities of the sub-fund incurred by the CCIV. [Schedule 1, item 4, section 1238B]

7.50 The arrangement and reconstruction provisions, property recovery provisions, external administration offences provisions and external administration miscellaneous provisions do not refer to debts or claims. Accordingly, a corresponding rule is not required for these parts of Chapter 5.

References to 'a Chapter 5 body corporate'

7.51 A CCIV is a 'Chapter 5 body corporate' if any of its sub-funds are undergoing an external administration procedure. In other words, a CCIV is a 'Chapter 5 body corporate' if one or more of its sub-funds is being wound up, a receiver has been appointed to property of the CCIV, or the CCIV enters into a compromise or arrangement which involves one or more of its sub-funds. [Schedule 2, item 6, section 9, definition of 'Chapter 5 body corporate']

Arrangements and reconstructions

7.52 Arrangements and reconstructions of sub-funds of CCIVs occur in the same way as arrangements and reconstructions of Part 5.1 bodies. This is largely achieved by applying the translation rules explained at paragraphs 7.17 to 7.46 of this explanatory memorandum. [Schedule 1, item 4, sections 1235A and 1235C]

7.53 Arrangements and reconstructions involving multiple sub-funds may proceed but they are treated as two separate arrangements for the purposes of Part 5.1. This ensures that separate meetings are held for each sub-fund. [Schedule 1, item 4, section 1235C]

Example 7.7 A 'demerger' of a sub-fund

Casterley House CCIV has two sub-funds and wishes to spin off one sub-fund into a new CCIV.

Casterley House may use Part 5.1 to achieve this.

Example 7.8 A 'friendly takeover' of a sub-fund

Braavos CCIV also has two sub-funds. Meereen CCIV approaches Braavos CCIV with a proposition that involves moving one of the sub-funds into Meereen CCIV.

Part 5.1 may be used to facilitate this 'friendly takeover'.

Example 7.9 An internal reorganisation of a CCIV

Greyjoy CCIV wishes to amalgamate two of its sub-funds into a single sub-fund.

Part 5.1 can be used to facilitate this internal reorganisation. For the purposes of applying Part 5.1, the reorganisation is treated as two separate arrangements - one for each sub-fund. The members of each sub-fund must vote separately on the proposal.

References to the 'director'

7.54 The second translation rule is extended so that a reference to the 'director' of a Part 5.1 body includes both the corporate director and the natural person directors of the corporate director. This is consistent with existing section 410 which extends references to the director in Part 5.1 to the 'directors of the body or any one or more of them'. [Schedule 1, item 4, item 2 of the table in subsection 1235C(4)]

7.55 The consequence of extending the second translation rule to include the natural person directors of the corporate director are that:

•

the natural person directors each owe the obligations in Part 5.1, such as the obligation to instruct an accountant or solicitor if the members resolve to do so (see subsection 411(13));

•

the material interests of the natural person directors must also be disclosed in explanatory statements (see subsection 411(1)); and

•

the natural person directors are prohibited from administering a compromise or arrangement (see subsection 411(7)).

7.56 A person who holds money or property of the CCIV (such as a custodian engaged by the CCIV) is also prohibited from administering an arrangement or compromise. [Schedule 1, item 4, section 1235D]

Court's powers

7.57 The Court's powers to facilitate reconstructions and amalgamations of Part 5.1 bodies have been expanded so that the Court may also make orders when the property or undertakings of one sub-fund are transferred to another sub-fund of the same CCIV. These orders could relate to deregistration of a sub-fund, the allotment or appropriation of shares or any of the other matters listed in section 413. [Schedule 1, item 4, section 1235E]

7.58 The Court also has the power to make any order it considers appropriate in relation to the assets and liabilities of a sub-fund involved in the compromise or amalgamation. Part 5.1 may be used to facilitate a variety of reconstructions and amalgamations and this power gives the Court the flexibility to make whatever orders are required in the circumstances. [Schedule 1, item 4, section 1235F]

Receivers and other controllers of property of sub-funds

7.59 The receivership provisions in Part 5.2 and Division 2B of Part 5.7B operate on a sub-fund-by-sub-fund basis and must be read in accordance with the translation rules. For an explanation of the translation rules, see paragraphs 7.17 to 7.46 of this explanatory memorandum. [Schedule 1, item 4, sections 1236 and 1236E; Schedule 2, item 142, note to 'Part 5.2']

Appointment of a controller

7.60 A controller of property may only be appointed in relation to property of a particular sub-fund of a CCIV. If a controller is appointed in relation to property allocated to more than one sub-fund, it is treated as two separate appointments (one appointment relating to the first item of property and one appointment relating to the second). [Schedule 1, item 4, section 1236A, definition of 'property' and section 1236B]

7.61 Controllers of property are persons who assume control of property subject to a security interest even if they have no management function. They include mortgagees in possession, a receiver and a receiver and manager. The Corporations Act and the new law use the term receiver to refer to both 'receivers' and 'receivers and managers' (see also existing section 416). [Schedule 1, item 4, section 1236A, definition of 'receiver']

7.62 The rules about persons who are disqualified from being appointed as a receiver of property of a sub-fund generally follow the rules about persons who are disqualified from being receivers of property of other types of companies in existing section 418. These persons include the corporate director, the natural person directors of the corporate director, a person who holds money or property for the CCIV, the auditor of the CCIV or the sub-fund, certain persons connected with a related body corporate of the CCIV, a secured party in relation to any property of the sub-fund or the secured party's director, secretary, senior manager or employee. Persons who were the corporate director, a director of the corporate director (or a body corporate related to the corporate director), promoter or connected with a related body corporate of the CCIV within the last 12 months are also prohibited from acting as a receiver unless ASIC grants permission in a written direction. [Schedule 1, item 4, section 1236C]

7.63 The person appointed to act as the receiver must either be a registered liquidator or authorised by, or under, a State, Territory or Commonwealth law to act as a receiver of property of the particular sub-fund. [Schedule 1, item 4, paragraph 1236C(1)(f) and subsection 1236C(2)]

Controller's relationship with a person who holds assets of the sub-fund of the CCIV

7.64 If one or more persons, other than the CCIV, holds assets of the sub-fund of the CCIV, the controller must notify the person or persons of its appointment to the role, or if it ceases to act in the role, in writing as soon as practicable and in any event within three business days after the appointment. [Schedule 1, item 4, section 1236D]

7.65 If one or more persons, other than the CCIV, holds assets of the sub-fund of the CCIV, the receiver may instruct this person or persons, in relation to dealing with assets of the sub-fund in respect of which the receiver was appointed. This power does not extend to mortgagees in possession and other controllers who are not receivers. [Schedule 1, item 4, section 1236G]

Dealing with assets of the sub-fund

7.66 The appointment of a receiver does not affect the operation of the allocation rules or the rules relating to the segregated application of assets (see Chapter 6 of this explanatory memorandum for a discussion of these rules). For example, the receiver cannot make any determinations with respect to the allocation of assets or liabilities to a particular sub-fund.

7.67 A receiver, or other controller, may challenge an allocation determination before the Court. For an explanation of this power, see paragraph 7.120. [Schedule 1, item 4, section 1233Q]

7.68 If a receiver is appointed on behalf of the holders of any debentures of the sub-fund, certain liabilities of the sub-fund (including auditor's fees) need to be paid in priority to any claim for principal or interest in respect of the debentures. This reflects the position for receivers of property of other types of companies in existing section 433. [Schedule 1, item 4, section 1236K]

Rights to inspect books and access reports

7.69 The corporate director must provide a controller with a report about the sub-fund's affairs under existing section 429.

7.70 If the controller requires additional information, it may require a further report from the current or former corporate director, the corporate director's officers or employees or any other persons who participated in the registration of the sub-fund (if the sub-fund was registered within one year of the date of the controller's appointment). This further report may relate to the affairs of the sub-fund or any other sub-fund to the extent that the information is required by the controller for the purpose of attaining the objectives for which the person was appointed. [Schedule 1, item 4, section 1236H]

7.71 The controller has a right, under existing section 431, to inspect any books of the sub-fund that relate to the property in respect of which the controller was appointed (read subject to the translation rules). In addition, bespoke amendments are made to extend the controller's inspection rights to include the right to inspect:

•

the allocation register; and

•

any other books of the CCIV to the extent that inspection is necessary for the purposes of attaining the objectives for which the person was appointed.

[Schedule 1, item 4, section 1236J]

7.72 The controller's inspection rights apply irrespective of whether the books are held by the corporate director, the natural person directors of the corporate director, or some other person such as a custodian (noting that existing section 431 refers generally to books held by 'a person').

7.73 If a controller ceases to act, ASIC may require the controller to transfer any books of the sub-fund to ASIC under existing section 422D. Under the existing law, ASIC is permitted to destroy any books that it still holds after a two-year period. A bespoke amendment is made to require ASIC to notify the CCIV before ASIC destroys any books transferred to it under existing section 422D (unless the CCIV has been deregistered). If the CCIV, by resolution of the corporate director, directs ASIC not to destroy the books, ASIC must transfer the books to the CCIV. [Schedule 1, item 4, section 1236L]

Voluntary administration

7.74 Voluntary administration under Part 5.3A of the Corporations Act is not available in the CCIV context. Voluntary administration allows a company to continue trading for 20 business days without unsecured creditors enforcing their claims, thereby giving the company the opportunity to restructure and negotiate a compromise with its creditors. As a CCIV does not carrying on an active business, a 20-business day moratorium is less likely to improve the outcomes for creditors and members in the CCIV context. [Schedule 1, item 4, section 1236M; Schedule 2, item 144, note to Part 5.3A]

Restructuring

7.75 The arrangements for restructuring a company under Part 5.3B of the Corporations Act are not available in the CCIV context. These arrangements were implemented as part of the Government's economic response to COVID-19 and are intended to reduce the costs of external administration for small businesses. Even if a CCIV met any relevant threshold requirements, the intention is for all CCIVs to be subject to the same insolvency regime. This promotes greater certainty and consistency in respect to the external administration of a sub-fund of a CCIV. [Schedule 1, item 4, section 1236N; Schedule 2, item 145, note to Part 5.3B]

Winding up of sub-funds

Core principles

7.76 Winding up also operates on a sub-fund-by-sub-fund basis. Only a sub-fund of a CCIV can be wound up and the CCIV itself cannot be wound up.^[6] [Schedule 1, item 4, sections 1237 and 1237A]

7.77 The translation rules generally apply for the purposes of winding up (see the discussion of the translation rules at paragraphs 7.17 to 7.47). The translation rules apply to sections 53 and 91, paragraph 233(1)(a), Parts 5.4, 5.4A, 5.4B, 5.5 and 5.6, Divisions 2 and 2A of Part 5.7B and Schedule 2 to the Corporations Act, along with any other provisions of the Corporations Act and ASIC Act which relate to the operation of these sections. [Schedule 1, item 4, sections 1237B and 1237C; Schedule 2, item 80, notes to subsection 233(1), items 145 to 147 and 149 to 152, notes to Parts 5.4, 5.4A, and 5.4B, 5.5, 5.6, 5.7B and subsection 530C(1)]

7.78 The reference to the 'majority of directors' in section 494 is not expressly covered by the second translation rule which states that references to the director are to be read as the corporate director. Nevertheless, it is also to be read as a reference to the corporate director. [Schedule 1, item 4, section 1237K]

7.79 The consequence of applying the translation rules to the winding up provisions is that there are three winding up processes for sub-funds, namely:

•

winding up in insolvency (see existing sections 459A, 459B, 459P and 462);

•

winding up on other grounds (see existing section 461), including if:

-

a special resolution has been passed by the members of the sub-fund for the sub-fund to be wound up by the Court;

-

the CCIV suspends the part of its business that relates to the sub-fund for a whole year;

-

an act or omission is oppressive, unfairly prejudicial or unfairly discriminatory to members of the sub-fund; or

-

the Court is of the opinion that it is just and equitable that the sub-fund is wound up; and

•

voluntary winding up by the members (if the sub-fund is solvent) or by the creditors (if the sub-fund is insolvent) (see existing Part 5.5).

Statutory demands

7.80 A creditor may serve a statutory demand on a CCIV. The statutory demand must specify the name(s) of the sub-fund(s) of the CCIV to which the debt relates and the proportion of the debt that relates to each sub-fund (if more than one). This requirement is included to ensure that the solvency of the other sub-funds is not put into doubt by the service of the statutory demand. [Schedule 1, item 4, subsections 1237E(1) and (2)]

7.81 A statutory demand which does not name any sub-fund(s) or does not specify the proportion of the debt allocated to each sub-fund (if more than one) is invalid. However, if the statutory demand names the incorrect sub-fund(s) or the incorrect proportions, the statutory demand is not invalid and the Court may correct the defect (see paragraph 7.107 below).

7.82 Generally, a creditor would be able to identify the name of the sub-fund(s) from its contract with the CCIV because the CCIV must set out a sub-fund's name and ARFN on all public documents and negotiable instruments relating to the sub-fund's business (see paragraph 2.107 of this explanatory memorandum).

7.83 Nevertheless, the creditor may require the corporate director to confirm the name of the sub-fund. [Schedule 1, item 4, paragraph 1233P(1)(a)]

7.84 The creditor may also require the corporate director to provide the part of the allocation records which relate to the debt. This power is included as the allocation records are not publicly available and contracts do not need to state the proportion of the debt that is to be allocated to each sub-fund. [Schedule 1, item 4, paragraph 1233P(1)(b)]

7.85 A request for details about the identity of the sub-fund(s) or the proportion of the debt allocated to the sub-funds must:

•

take the form of a written notice;

•

include sufficient information to enable the corporate director to identify the debt, claim or property; and

•

specify how and by when the information needs to be provided.

[Schedule 1, item 4, subsections 1233P(1) and (2)]

7.86 The creditor must give the corporate director at least fourteen days to respond. [Schedule 1, item 4, subsection 1233P(1)]

7.87 If the corporate director fails to comply with a request for information within the specified time period, the corporate director commits a strict liability offence publishable by a fine of up to 20 penalty units. The imposition of a strict liability offence and the penalty is consistent with the Guide to Framing Commonwealth Offences. A strict liability offence is required to ensure the integrity of the regime. If the corporate director fails to provide the requested information, a creditor may specify the incorrect sub-fund or proportion in the statutory demand and thereby unnecessarily cast doubt on the solvency of other sub-funds. [Schedule 1, item 4, subsection 1233P(3); Schedule 2, item 199, penalty for subsection 1233P(3) inserted into Schedule 3 to the Corporations Act]

7.88 A failure to comply with a statutory demand affects only the sub-fund(s) specified in the statutory demand. The CCIV may challenge the identity of the sub-fund(s) before the Court (see paragraphs 7.91 to 7.95 of this explanatory memorandum) and if that challenge is successful, only the correct sub-fund(s) specified in the statutory demand are affected. [Schedule 1, item 4, subsection 1237E(3)]

Example 7.10 Consequence of failing to comply with a statutory demand

A CCIV has two sub-funds. A statutory demand is served on the CCIV. The statutory demand refers only to the first sub-fund and the CCIV does not seek to have the statutory demand set aside or dispute the identity of the sub-fund listed in the statutory demand.

The CCIV fails to comply with the statutory demand.

Only the first sub-fund is presumed to be insolvent and may potentially be wound up. The failure to comply with statutory demand does not create any presumption of insolvency for the second sub-fund.

Setting aside a statutory demand

7.89 A CCIV may apply to the Court for an order setting aside a statutory demand if there is:

•

a dispute about the identity of the sub-fund(s) or the proportion of the debt allocated to each sub-fund;

•

a genuine dispute about the amount or existence of the debt (under existing sections 459G and 459H); or

•

a dispute about both the identity of the sub-fund(s) (or the proportion of the debt allocated to each sub-fund) and the amount/existence of the debt.

[Schedule 1, item 4, subsections 1237F to 1237H]

7.90 A different process must be used to apply to the Court for an order setting aside a statutory demand in each of the scenarios outlined at paragraph 7.89 above. These processes are explained below.

Disputes about the identity of the sub-fund or the proportion of the debt allocated to each sub-fund

7.91 The CCIV can challenge the name of the sub-fund(s) in a statutory demand by:

•

applying to the Court for an order setting aside a statutory demand under existing section 459G;

•

filing a notice setting out the name of the sub-fund(s) that the corporate director believes the debt relates to and the proportion of the debt allocated to each of those sub-funds; and

•

serving a copy of the notice on the person who served the statutory demand on the CCIV.

[Schedule 1, item 4, subsections 1237H(1) and 1237H(6)]

7.92 The application to the Court, along with the lodgment and serving of the notice, must occur within the statutory period after the statutory demand is served on the CCIV (see existing section 459G). [Schedule 1, item 4, subsection 1237H(1)]

7.93 The Court must determine the sub-fund or sub-funds of which the debt is a liability and the proportion of the debt allocated to each sub-fund. If the statutory demand fails to identify the correct sub-fund(s) or the correct proportion, the Court may make an order varying the statutory demand and declaring the demand to have had effect as from when the demand was served on the CCIV. The order may be made subject to conditions. [Schedule 1, item 4, subsections 1237H(2) and (3)]

7.94 The Court retains its discretionary power to set aside the statutory demand if it is of the view that the failure to identify the correct sub-fund(s) or the correct proportion will cause substantial injustice under existing section 459J. Alternatively, the Court may impose conditions on the order varying the statutory demand. [Schedule 1, item 4, subsections 1237H(3) and (4)]

7.95 If the Court concludes that the statutory demand correctly identifies the sub-fund, the Court must dismiss the application under existing section 459L. [Schedule 1, item 4, subsection 1237H(5)]

Disputes about the existence or amount of a debt

7.96 The Court may set aside the statutory demand if there is a genuine dispute about the existence of the debt or there is a genuine dispute about the amount of the debt and the 'substantiated amount' (essentially the amount not in dispute) is less than $2,000. The substantiated amount is the difference between the 'admitted amount' (which is essentially the amount of the debt that is not, in the Court's view, in dispute) and the amount of any offsetting claims (see existing section 459H).

7.97 The 'substantiated amount' and the 'admitted amount' are calculated separately in relation to each sub-fund specified in the statutory demand. In other words, the amount of the debt is determined by having regard to only the proportion of the debt and any offsetting claims that relate to the sub-fund. These amounts may be calculated by using the records of allocations that corporate directors are required to retain (see paragraph 6.64 of this explanatory memorandum). [Schedule 1, item 4, section 1237G]

7.98 The Court must dismiss the application if the Court is not of the view that there is a genuine dispute about the existence of the debt or that the substantiated amount is less than $2,000 (see existing section 459L).

Disputes about both the identity of the sub-funds and the existence/amount of the debt

7.99 If the CCIV disputes both the identity of the sub-fund(s) (or the proportion of the debt allocated to each sub-fund) and the existence or amount of the debt, it should follow the process for disputing the existence/amount of the debt set out at paragraphs 7.96 to 7.98. The Court may then deal with the identity of the sub-fund(s) as part of any order that it makes at the end of the proceedings relating to the existence/amount of the debt. [Schedule 1, item 4, paragraph 1237H(1)(d)]

Applications to wind up a sub-fund in insolvency

7.100 The CCIV, the corporate director, ASIC, or a creditor, contributory or liquidator of a sub-fund may apply for a sub-fund to be wound up in insolvency under Division 4 of Part 5.4 of the existing law.

7.101 Under the existing law, the corporate director, ASIC and contributories and certain creditors of the sub-fund may only apply for winding up in insolvency with the leave of the Court. The Court may only grant leave if there is a prima facie case that the company is insolvent (see existing section 459P).

7.102 A sub-fund is presumed to be insolvent in the same situations as when a company is presumed to be insolvent under existing section 459C. This includes if a CCIV failed to comply with a statutory demand and the failure affects the sub-fund. [Schedule 1, item 4, section 1237D]

7.103 As the translation rules apply to Part 5.4, an application to wind up a sub-fund in insolvency must specify the sub-fund. Generally, the creditor can identify the name of the sub-fund from documentation associated with the debt or claim against the CCIV (see paragraphs 2.107 to 2.112 of this explanatory memorandum for a discussion of the requirement to set out the sub-fund's name on all public documents and negotiable instruments). The creditor may also seek information about the identity of the sub-fund from the corporate director (see paragraphs 7.82 to 7.88 of this explanatory memorandum). This parallels the requirement for creditors to specify the name of the sub-fund(s) in a statutory demand. [Schedule 1, item 4, subsection 1237B]

Disputing the identity of the sub-fund

7.104 The CCIV may only dispute the identity of the sub-fund(s) in the application if the application to wind up the sub-fund does not rely on a failure to comply with a statutory demand. If the application is based on a failure to comply with a statutory demand, the CCIV may only dispute the identity of the sub-fund(s) in the statutory demand (see paragraphs 7.91 to 7.95 for a discussion of the process for disputing the identity of the sub-funds named in a statutory demand). [Schedule 1, item 4, paragraph 1237J(1)(b)]

7.105 This is consistent with section 459S which prohibits a company opposing an application for winding up on a ground which could have formed the basis of an application to set aside a statutory demand.

7.106 To dispute the identity of the sub-fund(s), the CCIV must file a notice with the Court that specifies the name of the correct sub-fund(s) and the proportion of the debt that relates to each sub-fund. [Schedule 1, item 4, section 1237J and subsection 1237H(6)]

7.107 The Court may substitute the name of the sub-fund with the name of another sub-fund if it thinks it is appropriate to do so and the notice filed by the creditor complied with the requirements in the Corporations Act (in that it named a sub-fund and the proportion of the debt, albeit that the incorrect sub-fund was named). The application then has effect as if the substituted sub-fund had been the original sub-fund. This ensures that the creditor is not disadvantaged if they identify the incorrect sub-fund. It also ensures that other provisions in the Corporations Act which rely on a sub-fund being named in an application for winding up operate appropriately (see, for example, existing section 490). For example, if the Court substitutes the name of a sub-fund, section 490 prohibits the voluntary wind up of the substituted sub-fund (which would now be wound up insolvency) and not the original sub-fund. [Schedule 1, item 4, subsections 1237J(2) to (5)]

Example 7.11 Effect of the Court substituting the name of a sub-fund in an application for winding up in insolvency

Section 490 of the existing law (when read subject to the translation rules) prohibits the members of a sub-fund from voluntarily winding up the sub-fund if an application for winding up of the sub-fund in insolvency has been filed.

Casterley House CCIV has two sub-funds, Casterley House Growth SF and Casterley House Low Risk SF. An application to wind up Casterley House Growth SF in insolvency was lodged by a creditor.

Casterley House CCIV successfully challenges the identity of the sub-fund in the notice. The Court orders that the name of Casterley House Growth SF be substituted with the name of Casterley House Low Risk SF in the application for winding up in insolvency.

The members of Casterley House Growth SF vote to voluntarily wind up the sub-fund. This is not prohibited by section 490 of the existing law as the application for winding up has effect as if the substituted sub-fund (Casterley House Low Risk SF) had been the original sub-fund specified in the application.

Persons prohibited from acting as a liquidator or provisional liquidator

7.108 Certain persons are prohibited from acting as a liquidator or provisional liquidator under existing section 532. This includes any person who is not a registered liquidator.

7.109 In addition, the new law modifies the effect of section 532 so that the natural person directors of a corporate director are also disqualified from acting as a liquidator or provisional liquidator (except with the leave of the Court). If a person (other than the CCIV) holds the assets of the sub-fund, that person is also disqualified from these roles. [Schedule 1, item 4, section 1237L]

Duties and powers of the liquidator or provisional liquidator

7.110 A liquidator or provisional liquidator may only exercise a power or perform a function to the extent that it relates solely to the carrying on of the business of the sub-fund that is being wound up. This limitation ensures that the liquidator or provisional liquidator controls the affairs of only the sub-fund that is being wound up. [Schedule 1, item 4, subsection 1237N(1)]

Relationship between the powers of a liquidator and the corporate director

7.111 Table 7.4 summarises the responsibilities of the liquidator (or provisional liquidator) and the corporate director after a sub-fund enters into winding up. Further detail is provided in the following paragraphs.

7.112 The corporate director remains in office after the appointment of the liquidator but the corporate director must cease to exercise a function or power that relates solely to the business of the sub-fund that is being wound up. See paragraphs 3.135 to 3.143 for further information about the duties and powers of the corporate director when a sub-fund is being wound up. [Schedule 1, item 4, section 1224Q]

7.113 The liquidator may also seek reasonable assistance from:

•

the corporate director;

•

officers of the corporate director;

•

a former corporate director; and

•

the officers and former officers of a former corporate director.

[Schedule 1, item 4, section 1237Q)]

Powers relating to the allocation of assets and liabilities

7.114 A liquidator or provisional liquidator does not have power to determine the proportion of assets and liabilities that are to be allocated to the sub-fund that is being wound up (or any other sub-fund). This remains the responsibility of the corporate director. [Schedule 1, item 4, subsections 1233J(9) and 1233M(9)]

7.115 Nevertheless, the liquidator has the power to require the corporate director to make an allocation determination and the power to challenge an allocation determination before the Court. [Schedule 1, item 4, sections 1237N and 1233Q]

7.116 These powers are not granted to a provisional liquidator. This is because the main function of a provisional liquidator is to preserve the status of the assets pending the making of a winding up order. The provisional liquidator may apply to the Court for this additional power if the provisional liquidator feels that it is necessary to perform its functions (see Re Rothwells Ltd (1989) 7 ACLC 545).

i) Liquidator's power to direct the corporate director to make an allocation determination

7.117 The liquidator may provide the corporate director with a written notice requiring the corporate director to record a debt, claim or property in the allocation register (and make any required allocation determination) within a specified period. The written notice must contain sufficient information to enable the corporate director to identify the debt, claim or property. Further, the specified period must be at least one business day after the notice is given. [Schedule 1, item 4, section 1233F]

7.118 The liquidator may wish to exercise the power to require the corporate director to record a debt, claim or property in two main situations:

•

where a debt or claim is not known until after the sub-fund enters into winding up; or

•

where a debt, claim or property is known before the sub-fund enters into winding up but was not recorded.

7.119 If the corporate director fails to record the debt, claim or property in the allocation register, the corporate director commits an offence. This is a strict liability offence with a penalty of up to 20 penalty units. The imposition of a strict liability offence is consistent with the Guide to Framing Commonwealth Offences because it is necessary to ensure the integrity of the winding up regime. The failure to make and record allocation determinations could prevent the liquidator from performing their functions and disadvantage creditors. [Schedule 1, item 4, subsections 1233F(4) and (5); Schedule 2, item 199, penalty for subsection 1233F(4) inserted into Schedule 3 to the Corporations Act]

ii) Liquidator's power to challenge an allocation determination before the Court

7.120 A liquidator may apply to the Court to challenge an allocation determination. See paragraphs 6.61 to 6.63 for an explanation of the orders a Court can make in relation to assets and liabilities of sub-funds.

Liquidator and provisional liquidator's interaction with any person who holds assets of the sub-fund

7.121 A CCIV may engage a person to hold the assets of the sub-fund on its behalf (such as a custodian engaged by the CCIV). If a person other than the CCIV holds the assets of the sub-fund, the liquidator or provisional liquidator must notify this person (or persons) of their appointment as soon as practicable and in any case within three business days after being appointed. This ensures that the person (or persons) receives timely notification. For other sections which require notification 'as soon as practicable' and also specify a maximum period, see sections 311, 450A and 533 of the existing law. [Schedule 1, item 4, subsection 1237M(1)]

7.122 If the liquidator or provisional liquidator of a sub-fund resigns or is removed from office, the sub-fund must also notify the person (or persons) holding the assets of the sub-fund in writing as soon as practicable and in any event within three business days after the resignation or removal. [Schedule 1, item 4, subsection 1237M(2)]

7.123 These notification requirements only apply in relation to a person that holds assets of the sub-fund that the liquidator has been appointed to. The liquidator does not need to notify any other person who holds the assets of other sub-funds of the CCIV.

7.124 The liquidator or provisional liquidator has the power to instruct any person about the assets of the sub-fund that is being wound up. This ensures that a liquidator or provisional liquidator can bring in all assets of the sub-fund that is being wound up. [Schedule 1, item 4, subsections 1237N(3) and (4)]

Example 7.12 Powers of the liquidator

Asha is appointed as liquidator of Ironbank CCIV in respect of Maximum Return SF. The CCIV has two other sub-funds which are not being wound up.

Ironbank CCIV has engaged a custodian, Hodor Pty Ltd, to hold the assets of Maximum Return SF on trust for Ironbank CCIV. There are other custodians appointed to the two other sub-funds which are not being wound up.

Asha must notify Hodor Pty Ltd of her appointment. She does not need to notify any other person that is holding the assets of the other sub-funds of the CCIV.

Asha may carry on only the part of the business that relates to Maximum Return SF and issue instructions to Hodor Pty, as a person holding the assets allocated to Maximum Return SF.

Asha cannot determine the proportion of assets and liabilities that are allocated to Maximum Return SF. Nor can she control the part of the business that relates to the other sub-funds or take in the assets of those sub-funds.

Rights of secured creditors

7.125 None of the constraints on the powers of the corporate director affect the rights of a secured creditor to realise or otherwise deal with a security interest. [Schedule 1, item 4, subsection 1224Q(8)]

Effect of winding up on the auditor

7.126 In the CCIV context, the auditor requirements apply to the CCIV as a whole and each of the sub-funds (see paragraphs 5.33 to 5.42 of this explanatory memorandum).

7.127 An auditor does not need to undertake any audit activities for the sub-fund that is being wound up. [Schedule 1, item 4, section 1232S]

7.128 If the CCIV has other sub-funds that are not being wound up, the auditor must continue to undertake their audit activities for:

•

each of the sub-funds that are not being wound up; and

•

the CCIV as a whole as if the only business carried on by the CCIV was the business of the sub-funds that are not being wound up.

7.129 If all of the sub-funds of a CCIV are being wound up, the auditor has no functions to perform and it ceases to hold office. [Schedule 1, item 4, section 1232S]

Access to books

7.130 The corporate director must deliver to the liquidator or provisional liquidator all books relating solely to the sub-fund that is being wound up under existing section 530A. The corporate director does not need to deliver:

•

books that relate to other sub-funds of the CCIV that are not in wind up; or

•

books that relate to the CCIV as a whole (even if those books also relate to the sub-fund that is in wind up).

[Schedule 1, item 4, section 1237R]

7.131 The liquidator or provisional liquidator may inspect the allocation register or any other book retained by the corporate director, the CCIV or any person other than the CCIV that holds the assets of the sub-fund if inspection is necessary for the liquidator to perform its functions or exercise its powers. Under section 1300 of the existing law, the corporate director may also make copies or take extracts. [Schedule 1, item 4, subsections 1237N(2), (4) and (5)]

7.132 Correspondingly, the corporate director may inspect and copy the books relating to the winding up of a sub-fund that are held by the liquidator or provisional liquidator. Inspection is only permitted to the extent that inspection is necessary for the corporate director to perform its functions or exercise its powers. [Schedule 1, item 4, section 1237S]

7.133 The liquidator or provisional liquidator, or ASIC, may also seek a warrant for books or property under existing section 530C.

7.134 The new law clarifies the types of books covered by search, seizure and inspection warrants in section 530C. The books that may be subject to a seizure warrant are the books of the CCIV that relate solely to the business of the sub-fund that is being wound up. These are the category of books that the corporate director must transfer to the liquidator (see paragraph 7.130). [Schedule 1, item 4, subsections 1237Z (1) and (2); Schedule 2, item 152, note to subsection 530C(1)]

7.135 The books that may be covered by a search and inspection warrant are any books of the CCIV, including books that do not relate solely to the business of the sub-fund. This ensures that books that may relate in part to other sub-funds that are not in wind up can be inspected and copied but remain in the hands of the corporate director. [Schedule 1, item 4, subsections 1237Z (1) and (3); Schedule 2, item 151, note to subsection 530C(1)]

7.136 The new law includes additional safeguards when warrants are granted in relation to the books or property of the CCIV. Consistent with the Guide to Framing Commonwealth Offences, these safeguards include that:

•

the person exercising the warrant must announce that they are authorised to enter the premises and provide the occupier of the premises (or their representative) with current photographic identity;

•

the person exercising the warrant must give the occupier (or their representative) a copy of the warrant and information about their rights and responsibilities as soon as practicable;

•

the person who takes custody of the seized property or books may only use them for the purposes of performing their functions;

•

the person who takes custody of the seized property or books must take reasonable steps to return them to the CCIV when they are no longer required to perform the person's functions; and

•

the person exercising the warrant must provide a receipt for the property or book seized under the warrant (one receipt is sufficient if two or more books or items of property are seized).

[Schedule 1, item 4, subsections 1237Z (4) to (11)]

Retention and destruction of books

Books held by an external administrator

7.137 A liquidator or provisional liquidator must, under the Insolvency Practice Rules^[8], retain the books of the CCIV that are transferred to them for at least five years after the sub-fund is wound up (the retention period).

7.138 The CCIV may, by written notice, request that the liquidator or provisional liquidator transfer the books back to the CCIV at the end of the retention period. The liquidator or provisional liquidator is only permitted to destroy the books at the end of the retention period if the CCIV has not made such a request. [Schedule 1, item 4, subsections 1237P(1) to (3); Schedule 2, items 197 and 198, notes to subsections 70-35(3) and 70-35(4) of Schedule 2 to the Corporations Act]

7.139 A liquidator or provisional liquidator who intentionally or recklessly fails to comply with the requirement to transfer the books back to the CCIV commits an offence punishable by a fine of up to 50 penalty units. This is the same as the existing offence for destroying books during the retention period in subsection 70-35(5) of the Insolvency Practice Rules. [Schedule 1, item 4, subsection 1237P(4); Schedule 2, item 199, penalty for subsection 1237P(4) inserted into Schedule 3 to the Corporations Act]

Books held by ASIC

7.140 The Insolvency Practice Rules require a liquidator or provisional liquidator to transfer books in its possession to ASIC if the person ceases to be the liquidator or provisional liquidator and ASIC requests the transfer of the books (see existing section 70-31 of Schedule 2 to the Corporations Act).

7.141 The Insolvency Practice Rules, when read subject to the separating assumptions, require ASIC to retain any books that it obtains under section 70-31 for at least two years after the winding up of the sub-fund is completed (ASIC's retention period) (see existing subsection 70-31(8) of Schedule 2 to the Corporations Act).

7.142 If ASIC wishes to destroy the books at the end of ASIC's retention period, it must notify the CCIV (if the CCIV has not been deregistered). The CCIV may require ASIC to transfer the books to the CCIV, instead of destroying them. This ensures that books are not destroyed if the CCIV remains in existence and the corporate director considers the books to be relevant to the business of sub-funds that have not been wound up. [Schedule 1, item 4, section 1237T]

Operating a CCIV while disqualified

7.143 A person who operates the business and conducts the affairs of the CCIV while a sub-fund is being wound up and within four years of the relation back date (generally the date that the sub-fund enters into winding up) may be personally liable for part of the sub-fund's debts and liabilities. The person will be liable if the liquidator of the sub-fund applies to the Court and the Court makes an order to that effect. [Schedule 1, item 4, section 1237V]

7.144 This provision ensures that persons unlawfully operating the CCIV bear a liability commensurate with that of the corporate director. It mirrors existing Division 7 of Part 5.7B which does not apply as a CCIV does not have a managing director.

Proof and ranking of claims

7.145 If a creditor submits a debt or claim to the liquidator, the liquidator must consider whether the debt or claim is a liability of the sub-fund being wound up. If the liquidator determines that the debt or part of the debt is not a liability of that sub-fund, the debt or part of the debt is not admissible to proof. [Schedule 1, item 4, subsection 1237W (1)]

7.146 The debt or part of the debt that is not a liability of the sub-fund being wound up is not extinguished. This recognises that the creditor may have a legitimate claim against the CCIV but in respect of another part of the CCIV's business. [Schedule 1, item 4, subsection 1237W (2)]

7.147 If the liquidator determines that the debt or claim is partly or wholly a liability of the sub-fund being wound up, the liquidator must determine the value of the debt or claim or refer the question to the Court (see existing section 554A). If the debt relates to more than one sub-fund, the liquidator must determine the value of the entire debt, not just the portion of the debt that relates to the sub-fund that is being wound up. Nevertheless, the value of the debt that is admissible to proof under Division 6 of Part 5.6 is only the portion of the debt that relates to the sub-fund that is being wound up. [Schedule 1, item 4, section 1237X]

7.148 Diagram 7.1 summarises the process that a liquidator must follow when a debt or claim is submitted to them.

Voidable transactions

7.149 The liquidator of the sub-fund may apply to the Court for orders avoiding certain voidable transactions entered into by the CCIV prior to the sub-fund's winding up under existing Divisions 1 and 2 of Part 5.7B. The translation rules apply to these provisions so that they operate only to the extent that the transaction affects the assets and liabilities allocated to the sub-fund. For a discussion of the translation rules, see paragraphs 7.17 to 7.46. [Schedule 1, item 4, section 1237B; Schedule 2, item 153, note to Part 5.7B]

7.150 Voidable transactions consist of insolvent transactions, unfair loans and unreasonable director-related transactions (see Divisions 1 and 2 of Part 5.7B of the existing law). Two bespoke modifications are made to these concepts in the context of CCIVs.

7.151 First, for the purposes of determining whether a transaction is an 'insolvent transaction', the company is presumed to be insolvent if the financial records of either the CCIV or the sub-fund are missing. [Schedule 1, item 4, section 1237ZA]

7.152 Second, 'unreasonable director-related transactions' include certain payments, dispositions and issues made to either the corporate director or a natural person director of the corporate director (or their associates or persons acting on their behalf). [Schedule 1, item 4, section 1237ZB]

Vesting of PPSA security interests that are not continuously perfected

7.153 If a PPSA security interest in the collateral of assets of a sub-fund is not registered within time, the PPSA security interest vests in the CCIV.^[9] This achieves the same effect as existing section 588FL but recognises that:

•

the PPSA security interest is granted by the CCIV which is the legal person; and

•

the winding-up provisions operate at the sub-fund level and the assets to which the security interest attach are allocated to sub-funds.

[Schedule 1, item 4, section 1237ZC]

7.154 Consequential amendments are also made to section 267 of the PPSA to vest security interests in the CCIV if the security interest is not perfected by the time when the winding up of the sub-fund commences. [Schedule 3, item 15, section 267 of the PPSA]

7.155 Other provisions in Division 2A also operate at the sub-fund level and must be read in accordance with the translation rules. For a discussion of the translation rules, see paragraphs 7.17 to 7.46. [Schedule 1, item 4, section 1237B; Schedule 2, item 152, note to Part 5.7B]

Winding up provisions which do not apply

7.156 Part 5.4C of the Corporations Act (about winding up by ASIC) does not apply to a CCIV. One of the main reasons that ASIC uses its Part 5.4C powers is to protect employees' entitlements. As a CCIV has no employees, ASIC does not require this power in the CCIV context. [Schedule 2, item 149, note to Part 5.4C]

7.157 Subdivision B of Division 3 of Part 5.5 (about the simplified liquidation process for creditors' voluntary winding up) does not apply to a CCIV. This simplified liquidation process was implemented as part of the Government's economic response to COVID-19 and is intended to reduce the costs of external administration for small businesses. Even if a CCIV met any relevant eligibility requirements, the intention is for all CCIVs to be subject to the same insolvency regime. This promotes greater certainty and consistency in respect to the external administration of a sub-fund of a CCIV. [Schedule 1, item 4, section 1237B(3)(b)]

7.158 A pooling determination (Division 8 of Part 5.6) may not be made in respect of a CCIV, and a CCIV or its sub-funds may not be part of a pooled group. A pooling determination results in each company in a group being taken to be jointly and severally liable for the debts payable by other members of the group. These determinations would interfere with the segregation of assets and liabilities between sub-funds if they were to apply in the context of CCIVs and sub-funds. [Schedule 1, item 4, paragraph 1237B(3)(c)]

7.159 Part 5.7 (about winding up bodies other than companies) does not apply to CCIVs. A CCIV cannot be a 'Part 5.7 body' as it cannot be registered with ASIC unless it is a company (see paragraph 2.29 of this explanatory memorandum).

7.160 Part 5.4C, Division 8 of Part 5.6 and Part 5.7 are not expressly disapplied. Rather, this result is achieved by disapplying all winding up provisions and then activating select provisions. Parts 5.4C, Division 8 of Part 5.6 and Part 5.7 are not activated. [Schedule 1, item 4, sections 1237A and 1237B]

7.161 Finally, none of the provisions relating to employees or secretaries of a company apply in the CCIV context because a CCIV does not have employees or a company secretary.

Property recovery provisions

Special translation rules

7.162 Special translation rules apply to the property recovery provisions in Divisions 3, 4, 5 and 6 of Part 5.7B. These translation rules ensure that the directors of the corporate director of the CCIV, instead of the corporate director, owe a duty to prevent insolvent trading and other duties in those Divisions. [Schedule 1, item 4, section 1238]

7.163 These special translation rules treat references to the 'director' and 'officer' differently from the general translation rules that apply to the other Parts of Chapter 5. References to 'director' etc are replaced with a reference to the natural person directors of the corporate director, rather than the corporate director. Similarly, references to an 'officer' are replaced with a reference to the natural person director of the corporate director, any shadow director of the corporate director or an external administrator of the sub-fund. [Schedule 1, item 4, subsection 1238A(4), table items 2 and 3]

7.164 Apart from these changes, the translation rules operate in the same way as the rules explained above at paragraphs 7.17 to 7.47 of this explanatory memorandum. [Schedule 1, item 4, section 1238A]

When a debt is taken to have been incurred

7.165 The existing law sets out when a debt is taken to have been incurred for the purposes of the insolvent trading provisions (see existing subsection 588G(1A)). These rules also apply in the CCIV context. [Schedule 1, item 4, subsection 1238C(1)]

7.166 New rules are inserted for redeemable shares which are a new type of ordinary share that is liable to be redeemed (see Chapter 4: of this explanatory memorandum). These rules are modelled on the rules for redeemable preference shares. They provide that a debt is taken to have been incurred when a redeemable share that is redeemable at the CCIV's option is redeemed. If the redeemable share is redeemable otherwise than at the CCIV's option, the debt is taken to have been incurred when the share is issued or another share is converted into the redeemable share. [Schedule 1, item 4, subsection 1238C(2)]

External administration offences and other miscellaneous provisions

7.167 The translation rules explained at paragraphs 7.17 of this explanatory memorandum apply to the external administration offences in Part 5.8 and related machinery provisions in Part 5.9. These Parts include offences for a past or present officer who does not disclose, to the external administrator, all of the property of the sub-fund or fraudulently makes a material omission in any statement relating to the affairs of the sub-fund (existing section 590). Part 5.8 also prohibits a person inducing a person to appoint them as the external administrator and fraud by an officer (existing sections 595 and 596).^[10] [Schedule 1, item 4, sections 1238A and 1238D; Schedule 2, items 153 and 155, notes to Part 5.8 and 5.9]

7.168 Bespoke amendments are made to existing section 596 (relating to fraud by officers) and 596A (summonsing a person for mandatory examination) to apply them to the natural person directors of the corporate director, as well as any other natural persons that are officers. These amendments are required because, as per the second translation rule, 'director' is generally read to mean the corporate director. [Schedule 1, item 4, sections 1237U and 1238F; Schedule 2, items 155 and 157, notes to subsection 596(1) and section 596A]

Deregistration of a sub-fund

7.169 There are three processes for deregistering a sub-fund:

•

voluntary deregistration;

•

ASIC-initiated deregistration; and

•

deregistration following amalgamation or winding up.

[Schedule 1, item 4, sections 1239, 1239A and 1239C; Schedule 2, item 158, notes to Part 5A.1]

Voluntary deregistration

7.170 A CCIV, the corporate director of the CCIV or the liquidator of the sub-fund may apply for a sub-fund of the CCIV to be deregistered if:

•

the CCIV is not a party to any legal proceedings that relate to the sub-fund; and

•

the sub-fund has no remaining assets or liabilities.

[Schedule 1, item 4, subsections 1239(1) and (2)]

7.171 The circumstances in which a sub-fund can be voluntarily deregistered generally mirror the circumstances for companies in subsections 601AA(1) and (2). While there is no explicit requirement for the CCIV not to be carrying on any business that relates to the sub-fund, this is generally the case if the sub-fund has no remaining assets or liabilities.

7.172 Applications to voluntarily deregister a sub-fund must be in the prescribed form and, if the CCIV lodges the application, the CCIV must nominate a person who is to be given notice of the deregistration. [Schedule 1, item 4, subsections 1239(1) and (3)]

7.173 ASIC also has a power to ask for information about the current and former officers of the CCIV (including the corporate director or the liquidator) and the current and former officers of the corporate director. This parallels ASIC's information-gathering powers when deregistering a company in existing subsection 601AA(4). [Schedule 1, item 4, subsection 1239(4)]

7.174 The procedure for ASIC to deregister a sub-fund is the same as the procedure for deregistering a company in existing subsections 601AA(4) to (7). It involves ASIC giving two months' notice of the intended deregistration on its database and publishing a notice of the proposed deregistration. After the two months has passed, ASIC may deregister the sub-fund. It must also notify the applicant (or their nominee) when the deregistration has occurred. [Schedule 1, item 4, subsections 1239(5) to (7)]

7.175 Notices given or published in accordance with the new bespoke provisions for voluntarily deregistering a sub-fund are taken to have been given or published under the existing provisions for voluntarily deregistering a company. This ensures that sections in the Corporations Act that refer to the company notice provisions continue to operate appropriately (see, for example, subsections 589(3), 589(5) and 1351(4)). [Schedule 1, item 4, subsections 1239(8)]

7.176 If the sub-fund is an Australian passport fund, ASIC is prohibited from deregistering the sub-fund if the sub-fund has 'protected members'. For an explanation of which members are protected members and the passport arrangements, see Chapter 10: of this explanatory memorandum and in particular paragraph 10.10. [Schedule 1, item 4, subsections 1239(9) to (10)]

Interaction with Chapter 5

7.177 A CCIV that wishes to deregister a solvent sub-fund has two options. First, it could liquidate the sub-fund's assets, discharge the sub-fund's liabilities, redeem all shares referable to the sub-fund and then voluntarily deregister the sub-fund. Alternatively, it could voluntarily wind up the sub-fund (see paragraphs 7.76 to 7.161 of this explanatory memorandum). Diagram 7.2 summarises these two options.

7.178 The decision about whether or not to use the voluntary winding up process is a commercial decision for the CCIV. Generally, a voluntary winding up process would be used if the preconditions for voluntary deregistration are not satisfied, for example, because the sub-fund has remaining assets which cannot be liquidated.

ASIC-initiated deregistration

7.179 ASIC may deregister a sub-fund if:

•

the CCIV has not lodged any documents that relate to the sub-fund under the Corporations Act in the last 18 months and ASIC has no reason to believe that the part of the business of the CCIV that relates to the sub-fund is being carried on;

•

the CCIV has not paid the portion of the review fees that relates to the sub-fund for at least 12 months after the due date for payment;

•

the liquidator of the sub-fund is no longer acting;

•

the sub-fund's affairs have been fully wound up and the return that the liquidator should have lodged is at least six months late; or

•

the sub-fund's affairs have been fully wound up and the assets of the sub-fund are not enough to cover the costs of obtaining a Court order for the sub-fund's deregistration.

[Schedule 1, item 4, subsections 1239A(1) to (3)]

7.180 The grounds for ASIC deregistering a sub-fund differ from the grounds for deregistering a company in existing subsections 601AB(1) and (2) in two respects. First, the ground for deregistering a company if a response to a return of particulars has not been lodged is not required for a sub-fund as a sub-fund is not a legal entity and is not required to respond to returns of particulars. Second, there is no ground for deregistering a sub-fund if the ASIC Supervisory Cost Recovery Levy is unpaid because this levy is to be imposed on the corporate director, not the CCIV.^[11]

7.181 ASIC must not deregister a sub-fund if the sub-fund has an asset that relates to multiple sub-funds and the asset has not yet been converted into money or multiple fungible assets that can be allocated between the sub-funds. For an explanation of the corporate director's obligation to convert assets that are automatically allocated to one sub-fund and are not fungible assets, see paragraphs 6.17 to 6.35 of this explanatory memorandum.

7.182 If the sub-fund is an Australian passport fund, ASIC is also prohibited from deregistering the sub-fund if the sub-fund has 'protected members' and deregistration would be contrary to the interests of these persons. For an explanation of which members are protected members and the passport arrangements, see paragraph 10.10 of this explanatory memorandum. [Schedule 1, item 4, subsections 1239A(4) and (5)]

7.183 The procedure for ASIC to deregister a sub-fund involves three steps:

•

issuing a notice providing the CCIV with an opportunity to show cause as to why the sub-fund should not be deregistered at a hearing;

•

issuing a notice of intended deregistration; and

•

deregistering the sub-fund and issuing a notice of deregistration.

7.184 The first step (the show cause process) involves ASIC giving the CCIV a written notice that requires the CCIV to show cause, at a hearing before a specified person, as to why the sub-fund should not be deregistered. The notice must specify the grounds on which ASIC proposes to deregister the sub-fund and a reasonable time and place at which the hearing is to be held. The hearing must be held at the time and place specified in the notice, unless the CCIV agrees to a different time or place. [Schedule 1, item 4, subsections 1239A(6) to (7)]

7.185 The person conducting the hearing must give the CCIV an opportunity to be heard at the hearing. After the hearing, the person must provide a report to ASIC with a recommendation about whether the sub-fund should be deregistered and ASIC must consider the report and recommendation. [Schedule 1, item 4, subsections 1239A(8) to (9)]

7.186 Notices provided by ASIC to the CCIV and the report prepared after a hearing are administrative in character and are therefore not legislative instruments. The new law expressly states that these documents are not legislative instruments. This provision is merely declaratory of their existing status and is designed to assist readers. It does not provide an exemption from the Legislation Act 2003. [Schedule 1, item 4, subsection 1239A(10)]

7.187 If ASIC decides to deregister the sub-fund after the hearing, it must give at least five business days' notice of the intended deregistration to the CCIV, the corporate director and any liquidator of the sub-fund and publish the notice in the prescribed manner (unless ASIC does not have the necessary information about the person's identity or address). ASIC may deregister the sub-fund after the notice period has ended. [Schedule 1, item 4, subsections 1239B(1) to (4)]

7.188 ASIC must not deregister the sub-fund if it has reason to believe that the CCIV has one or more single items of property that relate to more than one sub-fund and have not been converted into money, or other property that can be allocated between the sub-funds. The corporate director is required to convert the property as soon as practicable after the property is acquired (see paragraphs 6.33 to 6.35 of this explanatory memorandum). [Schedule 1, item 4, paragraph 1239B(3)(b)]

7.189 Within five business days after the sub-fund is deregistered, ASIC must notify the CCIV, the corporate director and any liquidator of the sub-fund of the deregistration and the date on which the deregistration occurred. [Schedule 1, item 4, subsections 1239B(5) and (6)]

7.190 The deregistration procedure roughly parallels the process for an ASIC-initiated deregistration of a company with two exceptions. First, a show cause process is included to ensure procedural fairness. Deregistration procedures and other similar processes introduced in recent years have included a show cause process and this is now considered best practice. See, for example, existing section 905J (cancellation of derivative trade repository), section 908BJ (suspension or cancellation of a benchmark administrator license) and section 1216C (deregistration of a passport fund).

7.191 The second difference is that ASIC may deregister the sub-fund five business days after issuing the notice of intended deregistration (rather than two months). This change is appropriate as the notice of intended deregistration may only be issued after the show cause procedure has been completed. If ASIC was required to complete the show cause procedure and wait an additional two months after issuing the final notice of intended deregistration, inactive sub-funds would remain registered for a significant period of time.

7.192 Notices given or published in accordance with the new bespoke provision for the ASIC-initiated deregistration of a sub-fund are taken to have been given or published under the corresponding company provision. Similarly, references to the period between ASIC notifying of the proposed deregistration of the company and the actual deregistration are taken to refer to the five-business-day period between ASIC notifying of the intended deregistration of the sub-fund and its actual deregistration. This ensures that other references in the Corporations Act to the company notice provisions continue to operate appropriately (see, for example, subsections 589(3) and 589(5)). [Schedule 1, item 4, subsection 1239B(7) and section 1238E]

Deregistration following amalgamation or winding up

7.193 ASIC is also required to deregister a sub-fund if the Court orders the deregistration of the sub-fund after the conclusion of a reconstruction under Part 5.1, the release of a liquidator or the lodgment of an end of administration return. [Schedule 1, item 4, section 1239C]

Effect of deregistration of a sub-fund

7.194 On deregistration, the property of the sub-fund vests in either the Commonwealth (for trust property) or ASIC (for other property). This vesting occurs in the same way that assets of deregistered companies vest in the Commonwealth or ASIC. [Schedule 1, item 4, subsections 1239D(1) and (2)]

7.195 Subsection 601AD(1) of the Corporations Act (which provides that a company ceases to exist on deregistration) does not apply in the context of a sub-fund being deregistered. This is because the CCIV continues to exist after the sub-fund has been deregistered, noting that a CCIV is automatically deregistered once its last sub-fund has been deregistered (see paragraphs 7.215 to 7.217 of this explanatory memorandum). As a sub-fund does not have legal personality, it is unnecessary to provide that a sub-fund ceases to exist on deregistration. [Schedule 1, item 4, note to subsection 1239D(1)]

7.196 The CCIV must retain, for three years after the sub-fund has been deregistered, the books of the sub-fund apart from the books that a liquidator is required to retain. If the CCIV is also deregistered, the books are to be held by the last corporate director of the CCIV. [Schedule 1, item 4, subsections 1239D(3)]

7.197 Failing to keep books is a strict liability offence with a maximum penalty of 20 penalty units. As the offence is not one of absolute liability, the defence of honest and reasonable mistake of fact is available. [Schedule 1, item 4, subsection 1239D(4); Schedule 2, item 199, penalty for subsection 1239D(3) inserted into Schedule 3 to the Corporations Act]

7.198 The offence and penalty for failing to retain books is consistent with the Guide to Framing Commonwealth Offences. The imposition of a strict liability offence is appropriate in this circumstance as it is necessary to strongly deter misconduct that could result in the sub-fund's records being lost. The strict liability offence also reduces non-compliance and bolsters the integrity of the regulatory regime by allowing ASIC to deal with offences expeditiously. The penalty mirrors the penalty for failing to retain books after the deregistration of the company in existing subsection 601AD(5).

7.199 If the Commonwealth or ASIC becomes aware of any outstanding obligations in relation to the deregistered sub-fund and the CCIV or liquidator would have been bound to act if the sub-fund had not been deregistered, the Commonwealth or ASIC may fulfil the obligation. This gives the Commonwealth and ASIC the same power to fulfil any outstanding obligations relating to a deregistered sub-fund in the same way as for a deregistered company. Alternatively, if ASIC becomes aware of outstanding obligations after the sub-fund's deregistration, ASIC may seek to have the sub-fund reinstated (see paragraph 7.203). [Schedule 1, item 4, section 1239E]

7.200 A creditor of the sub-fund may recover any amount which is payable to the CCIV under an insurance contract which covered the creditor's liability immediately before the sub-fund was deregistered. This achieves the same effect as existing section 601AG. [Schedule 1, item 4, section 1239F]

7.201 If the sub-fund is also an Australian passport fund, it ceases to be a passport fund. The Register of Passport Funds must be updated to reflect this. See Chapter 10: of this explanatory memorandum for a discussion of how the ARFP arrangements apply in the CCIV context. [Schedule 1, item 4, subsections 1239D(5)]

7.202 If a CCIV has its annual fee payable during the period when it is being deregistered then the fee is not required to be paid. [Schedule 1, item 4, section 1242G; Schedule 2, item 196, note to section 1351]

Reinstatement of a sub-fund

7.203 Under existing section 601AH, a sub-fund may be reinstated if:

•

ASIC is satisfied that the sub-fund should not have been deregistered; or

•

the Court orders its reinstatement.

[Schedule 1, item 4, subsection 1239G(1)]

7.204 There is no requirement for the ASIC Supervisory Cost Recovery Levy to be paid in full before ASIC reinstates a sub-fund, unlike existing subsection 601AH(1A). This requirement is not needed because the ASIC Supervisory Cost Recovery Levy is imposed on the corporate director, not the CCIV. [Schedule 1, item 4, subsection 1239G(5)]

7.205 If a sub-fund is reinstated, the sub-fund is taken to have been registered throughout the period it was deregistered. This departs from the language in subsection 601AH(5) because a sub-fund does not 'exist' as it is not a legal person. [Schedule 1, item 4, subsections 1239G(2) and (5)]

7.206 Further, on reinstatement, any property which vested in the Commonwealth or ASIC on deregistration revests in the CCIV (subject to any security interest that may have attached to the property before it vested in the Commonwealth or ASIC). The property is then allocated to the sub-fund in accordance with the allocation rules. [Schedule 1, item 4, subsection 1239G(4)]

7.207 The existing law also gives the Court the power to validate anything done during the period when the sub-fund was deregistered or make any other order that it considers appropriate. This could include an order in relation to the assets or liabilities of the sub-fund or an order in relation to the assets and liabilities of another sub-fund. [Schedule 1, item 4, subsection 1239G(3)]

Reinstatement after the CCIV has been deregistered

7.208 If the CCIV has been deregistered and a sub-fund of the CCIV is to be reinstated, the CCIV must also be reinstated. The CCIV is then taken to have continued in existence as if it had not been deregistered (but only to the extent of the reinstated sub-fund). [Schedule 1, item 4, subsections 1239H(1) and (2)]

7.209 The reinstatement of the CCIV does not reinstate all of the sub-funds. Each sub-fund must be reinstated separately.

Example 7.13 Reinstatement of the CCIV

Frey CCIV and its two sub-funds (Frey Growth Sub-fund and Frey Wealth Sub-fund) have been deregistered.

The Court orders the reinstatement of Frey Growth Sub-fund and Frey CCIV. This does not result in the reinstatement of Frey Wealth Sub-fund.

7.210 The former corporate director is automatically reinstated. This reappointment operates from the time when the CCIV is reinstated. [Schedule 1, item 4, subsections 1239H(3)]

7.211 If the former corporate director ceases to exist or is no longer eligible to hold that position (for example, because their license has been suspended or they are a Chapter 5 body corporate), ASIC may apply for the appointment of a temporary corporate director. Refer to Chapter 3 of this explanatory memorandum for a discussion of the process for appointing a temporary corporate director and an explanation of the eligibility requirements for these positions.

7.212 If the sub-fund was an Australian passport fund prior to its deregistration, the reinstatement of the sub-fund does not result in it becoming a passport fund again. If the sub-fund wished to become a passport fund again, the corporate director must make a new application. [Schedule 1, item 4, subsection 1239G(6)]

Notice requirements

7.213 ASIC must give notice of the reinstatement of a sub-fund and the CCIV in the Gazette. The notice requirements parallel those that apply when a company is reinstated as per subsection 601AH(4) of the existing law. [Schedule 1, item 4, subsections 1239G(5) and 1239J]

7.214 If a CCIV is reinstated, notice must be provided to the company that is reinstated to the corporate director. [Schedule 1, item 4, subsection 1242J]

Deregistration of a CCIV

7.215 ASIC must deregister a CCIV if it does not have any registered sub-funds. This reflects the fact that a CCIV, by definition, must have at least one sub-fund. [Schedule 1, item 4, subsection 1239K(1)]

7.216 ASIC must give the corporate director of the CCIV written notice that the CCIV has been deregistered and the date on which it has been deregistered within five business days after the date the CCIV is deregistered. [Schedule 1, item 4, subsections 1239K(2) and (3)]

7.217 A CCIV cannot be deregistered under section 601AA, 601AB or 601AC of the Corporations Act. It is not necessary to also include a voluntary deregistration process because a CCIV cannot be deregistered while it still has registered sub-funds (and the CCIV is automatically deregistered when it ceases to have any registered sub-funds). Similarly, there is no need for a process for deregistering a CCIV following amalgamation or winding up because these procedures operate at the sub-fund level. [Schedule 1, item 4, subsection 1239K(4)]

Consequences of deregistration

Retention of books of the CCIV

7.218 If the CCIV is deregistered, the corporate director of the CCIV at the time of deregistration must retain the books of the CCIV (apart from the books that the liquidator is required to retain) for three years after the CCIV's deregistration. For an explanation of the books that the liquidator is required to retain, see paragraphs 7.137 to 7.142 of this explanatory memorandum. [Schedule 1, item 4, subsections 1239L(1) and (4)]

7.219 If the corporate director is deregistered during the three year retention period, the natural person directors of the corporate director at the time of the corporate director's deregistration must retain the books for the remainder of the period. [Schedule 1, item 4, section 1239L(3)]

7.220 A failure to retain the books is a strict liability offence with a penalty of up to 20 penalty units. The imposition of a strict liability offence and the penalty complies with the Guide to Framing Commonwealth Offences. Strict liability is appropriate as it is necessary to deter misconduct which could result in the books of the CCIV being lost and allows the regulator to expeditiously deal with offences to maintain public confidence. It is also consistent with the existing offence for failing to retain the books of a deregistered company and the new offence for failing to retain the books of a deregistered sub-fund (see paragraphs 7.196 to 7.198 of this explanatory memorandum). [Schedule 1, item 4, subsection 1239L(2);Schedule 2, item 199, penalty to subsection 1239L(1) inserted into Schedule 3 to the Corporations Act]

Example 7.14 Retention of books following deregistration

ASIC deregisters Baratheon CCIV on 23 March 2023. The corporate director of Baratheon CCIV at the time of deregistration is CD Services Ltd.

At the time that Baratheon CCIV is deregistered, CD Services Ltd has three directors, Arryn, Brienne and Catelyn. One month later, on 23 April 2023, Arryn resigns as a director of CD Services Ltd and is replaced by Dany.

CD Services Ltd is then deregistered on 26 June 2023.

The books of Baratheon CCIV must be retained by CD Services Ltd from 23 March 2023 to 26 June 2023.

After the deregistration of CD Services Ltd on 26 June 2023, Baratheon CCIV's books must be retained by the natural person directors of CD Services Ltd at the time of the corporate director's deregistration (Brienne, Catelyn and Dany).

Brienne, Catelyn and Dany must continue to retain the books until the three year period expires, that is, until 23 March 2026.

Other consequences of deregistration

7.221 Subsections 601AD(1) and (3), and sections 601AF and 601AG continue to apply to CCIVs in the same way that they apply to other types of companies. This means that the CCIV ceases to exist on deregistration and claims may be made against insurers in certain circumstances. [Schedule 1, item 4, subsection 1239L(4); Schedule 2, item 157, note 2 to Part 5A.1]

7.222 Provisions relating to the vesting of property (such as subsection 601AD(2) and section 601AE) are not expressly disapplied but they have no operation in the context of the deregistration of a CCIV. This is because a CCIV may only be deregistered if it has no assets (whereas other types of companies may be deregistered if they have up to $1,000 of assets).

Reinstatement of a CCIV

7.223 A CCIV may only be reinstated if one of its sub-funds is reinstated. For an explanation of the process for reinstating a sub-fund, see paragraphs 7.169 to 7.214 of this explanatory memorandum. [Schedule 1, item 4, section 1239M]

Transfer of registration

7.224 A CCIV cannot transfer its registration under a State or Territory law. State and Territory laws do not currently provide for a company to be registered as a CCIV. [Schedule 1, item 4, section 1239N; Schedule 2, item 159, note to Part 5A.2]

Chapter 8: CCIVs - Control and fundraising

Outline of chapter

8.1 This Chapter outlines how the following Chapters of the Corporations Act apply to CCIVs:

•

Chapters 6 to 6C regarding takeovers, compulsory acquisitions and buy-outs;

•

Chapter 6CA regarding continuous disclosure; and

•

Chapter 6D regarding fundraising and disclosure.

Context of amendments

8.2 Chapters 6 to 6B of the Corporations Act set out the regulatory requirements for takeovers, compulsory acquisitions and buy-outs of certain entities, including companies, listed bodies and listed registered schemes. In particular, these Chapters set out requirements regarding the acquisition of a relevant interest in such entities.

8.3 Chapter 6CA sets out the continuous disclosure requirements for disclosing entities and listed disclosing entities.

8.4 Chapter 6C sets out the requirements for the disclosure of substantial holdings in certain listed entities - including listed companies and listed registered schemes.

8.5 Chapter 6D sets out the fundraising and disclosure requirements for companies.

8.6 The corporate director of a CCIV is a public company that is subject to the full regulatory requirements for public companies, including the provisions of Chapters 6 to 6D in its own right.

Summary of new law

8.7 An acquisition of a relevant interest in issued voting shares in a listed CCIV is subject to the regulatory requirements for takeovers, compulsory acquisitions and buy-outs set out in Chapters 6 to 6B of the Corporations Act. These transactions are also subject to the Takeovers Panel's jurisdiction. Other acquisitions of a relevant interest in a CCIV (such as an acquisition of a relevant interest in an unlisted CCIV) are exempt from these requirements and the Takeovers Panel's jurisdiction.

8.8 The provisions of Chapter 6C of the Corporations Act apply to a listed CCIV in the same way that it applies to other listed entities.

8.9 The provisions of Chapters 6 to 6C of the Corporations Act will continue to apply to CCIVs that propose to acquire, or hold, a relevant interest in another entity that is the subject of these rules.

8.10 CCIVs that are disclosing entities or listed disclosing entities are subject to the continuous disclosure requirements in Chapter 6CA, as modified by Part 8B.7.

8.11 Division 3 of Part 8B.7 exempts offers of securities in a CCIV from the fundraising and disclosure requirements in Chapter 6D of the Corporations Act. It also prohibits offering securities in a CCIV that does not exist, and offering securities in a CCIV that are referable to a sub-fund of the CCIV that is not yet established.

Comparison of key features of new law and current law

Detailed explanation of new law

Takeovers, compulsory acquisitions and buy-outs

Application of the regulation for takeovers, compulsory acquisitions and buy-outs generally

8.12 The prohibition on certain acquisitions of a relevant interest in the voting shares of a company, set out in section 606 of the Corporations Act, apply to an acquisition of a relevant interest in issued voting shares in a listed CCIV. See Chapter 3 above in relation to the facilitation of listing for CCIVs. [Schedule 1, item 4, subsection 1240A; Schedule 2, item 160, note to Chapter 6]

8.13 This approach ensures there is a fair and proper process for the acquisition of a controlling interest in a listed CCIV, consistent with the approach for listed registered schemes. It also provides appropriate member protections in the event of a takeover of a listed CCIV.

8.14 Other acquisitions of interests in other CCIVs (being unlisted CCIVs), are not subject to the prohibitions in section 606 of the Corporations Act. This approach is consistent with the existing treatment of unlisted MISs. This means a person may acquire an interest in an unlisted CCIV (including a controlling interest) - but that person (and the CCIV) will not be subject to the procedural rules and requirements in the Corporations Act for that acquisition.

8.15 In the event of a takeover of a CCIV, the rules in Chapter 6A that enable the bidder to compulsorily acquire or buy-out certain securities in the target company also apply only to a listed CCIV. [Schedule 1, item 4, section 1240E; Schedule 2, items 161 and 162, note 2 to section 660A]

8.16 The Takeovers Panel's jurisdiction to declare circumstances in relation to the affairs of a company to be unacceptable circumstances only applies in relation to the affairs of a listed CCIV. This means that the Takeovers Panel can only intervene in the affairs of a CCIV, including in relation to a takeover of a CCIV, if the CCIV is a listed company. [Schedule 1, item 4, section 1240D]

8.17 The fact that the rules relating to takeovers, compulsory acquisitions and buy-outs in Chapters 6 to 6B do not always apply to the acquisition of interests in a CCIV does not exempt CCIVs from complying with these rules when it is proposing to acquire interests in another entity that is subject to these rules (that is, when the CCIV itself is the bidder in a takeover process).

8.18 For the purposes of Part 8B.7, the term 'securities' has the same meaning as it has in Chapters 6 to 6CA of the Corporations Act. [Schedule 1, item 4, section 1240]

Additional requirements in the takeover of a CCIV

8.19 In the context of a takeover of a CCIV, certain requirements in relation to the matters that need to be disclosed to persons as part of the process are modified to ensure relevant information is provided.

8.20 If a listed CCIV is a target in a takeover, the bidder's statement must include details of the bidder's intention regarding the continued operation of the CCIV, any major changes to be made to the operation of the CCIV (including any redeployment of the CCIV's property), and any plans to remove the current corporate director and appoint a new corporate director. This ensures that a bidder's statement for a listed CCIV covers the same kinds of information as a bidder's statement for a listed registered scheme. [Schedule 1, item 4, subsection 1240C(1)]

8.21 Similarly, a listed CCIV, a corporate director of a listed CCIV or a person that controls a listed CCIV are the bidder in a takeover, and securities in the listed CCIV are offered as consideration under the bid, then all material that would be required to be included in a PDS in relation to those securities must be included in the bidder's statement. This approach ensures a bidder's statement covers appropriate disclosure material when it involves an offer of securities in a CCIV as consideration, consistent with offers of an interest in a registered scheme. [Schedule 1, item 4, subsection 1240C(2)]

8.22 In a takeover situation, where a CCIV is the bidder or target in the process, the requirements that apply to directors of a listed company apply to the corporate director of a listed CCIV. In certain instances, the obligations are extended to also cover the natural person directors of the corporate director - consistent with the treatment of listed registered schemes under the existing law. [Schedule 1, item 4, section 1240B]

8.23 For example, if a CCIV is a target in a takeover, the target's statement must contain a statement from the corporate director and each director of the corporate director that either gives a recommendation that offers under the bid should be accepted (or not) and reasons why, or the reasons why a recommendation is not made. This approach ensures that, in respect of certain matters, the recommendations and assurances of the natural person directors of the corporate director are given.

Information about ownership of listed entities

8.24 The rules in Chapter 6C (regarding information about ownership in listed companies and schemes) apply to listed CCIVs in the same way that they apply to other listed entities. Chapter 6C applies to listed CCIVs without specific modification under new Chapter 8B.

Continuous disclosure

8.25 If a CCIV is a listed disclosing entity, and the listing rules require it to disclose certain information to the market operator, then it must comply with the continuous disclosure requirements in section 674 of the Corporations Act in the same way as other listed disclosing entities.

8.26 If a CCIV is another disclosing entity, then it must comply with the continuous disclosure requirements in section 675 of the Corporations Act in the same way as a disclosing entity whose interests are managed investment products. This is because securities in a CCIV are generally subject to the same disclosure requirements as managed investment products (in particular, the PDS disclosure regime). [Schedule 1, item 4, section 1240F; Schedule 2, item 164, note 5 to subsection 675(2)]

8.27 Consequential amendments have been made to the definition of 'ED Securities' and the requirements relating to debentures to reflect the fact that securities in a CCIV are subject to the PDS disclosure regime. Securities in a CCIV that are not debentures are ED securities if at least 100 people hold securities in that class under offers that required the CCIV to give a PDS. Debentures in a CCIV are ED securities if the offer for the debentures required the CCIV to give a PDS. This does not prevent securities in a CCIV being ED securities in other circumstances as set out in Division 2 of Part 1.2A of the Corporations Act. [Schedule 1, item 4, section 1231P; Schedule 2, item 38, subsection 111AF(3)]

Fundraising

Disclosure requirements for offers of securities in a CCIV

8.28 CCIVs are not subject to the disclosure requirements under Chapter 6D of the Corporations Act. Instead, CCIVs are subject to the PDS disclosure regime under Part 7.9 of the Corporations Act, as modified by Division 4 of Part 8B.7 of the Bill. [Schedule 1, item 4, section 1240G; Schedule 2, items 37 and 164, notes to subsections 92(4) and 700(1)]

Offering securities in a CCIV that does not exist, or referable to a sub-fund that is not established

8.29 A person must not offer securities in a CCIV that does not exist, or securities that are referable to a sub-fund that is not established, if the offer would give rise to an obligation to give a PDS. This is the case even if the person is proposing to register the CCIV or the sub-fund. A person that makes an offer in contravention of this prohibition is liable for a criminal offence with a penalty of imprisonment for up to 5 years. This penalty is consistent with the Guide to Framing Commonwealth Offences and penalties for similar offences elsewhere in the Corporations Act (see section 726 of the existing law). [Schedule 1, item 4, subsections 1240H(1) to (3); Schedule 2, item 199, penalty for subsections 1240H(1) and (2) inserted into Schedule 3 to the Corporations Act]

8.30 For the purposes of this new prohibition, the term 'securities' has the same meaning as in Chapter 6D. The provisions further clarify that a legal or equitable right or interest in a security, or an option to acquire by way of issue a security, is referable to a sub-fund if the security itself is referable to the sub-fund. [Schedule 1, item 4, subsections 1240H(4) and (5)]

8.31 Certain other provisions in Chapter 6D are extended to the new prohibition. These provisions clarify such matters as the scope of offers that are caught by the prohibition (including geographical scope), who the offeror is, the treatment of offers of options over securities and limitations on contracting out of the prohibition. [Schedule 1, item 4, subsection 1240H(6)]

Chapter 9: CCIVs - Regulation of financial services and markets

Outline of chapter

9.1 This Chapter explains the operation of Division 4 of Part 8B.7. Division 4 modifies the operation of financial services law in Chapter 7 of the Corporations Act for CCIVs and sets out how markets and financial services regulation applies to CCIVs and corporate directors.

Context of amendments

9.2 The rules in Chapter 7 set out how financial markets and financial services are regulated, including disclosure requirements for certain financial products and services.

9.3 The provisions in Chapter 7 generally apply to CCIVs and corporate directors in the same way as they apply to other companies. However, certain modifications are required to account for the particular corporate structure of a CCIV, and to ensure that consumer protections and other provisions apply comparably to CCIVs as to registered schemes.

Summary of new law

9.4 The new law modifies Chapter 7 to ensure that the AFSL and PDS regimes apply appropriately to CCIVs and corporate directors.

9.5 For the purposes of Chapter 7, any action undertaken by a CCIV relating to a financial service or financial services business is deemed to also be undertaken by its corporate director, with the exception of issuing securities in a CCIV, which is undertaken by the CCIV itself. This ensures that a corporate director is required to hold an AFSL for the financial services provided in relation to the CCIV. A CCIV itself is always exempt from the requirement to hold an AFSL.

9.6 Additionally, a corporate director is required to hold an AFSL that authorises it to provide the financial service of 'operating the business and conducting the affairs of the CCIV'. Modifications apply to Part 7.6 (concerning licensing of providers of financial services) to ensure that the AFSL regime applies appropriately in the context of CCIVs.

9.7 As shares and debentures in a CCIV are defined as 'securities', they would ordinarily be subject to the prospectus requirements in Part 6D.2. However, modifications to Part 7.9 require that a PDS, rather than a prospectus, be given to retail clients who acquire a security in a CCIV. This approach ensures consistency with the disclosure arrangements that apply to registered schemes. Limited exceptions apply to the PDS requirements where a retail client is associated with a CCIV or corporate director, and in other circumstances as appropriate.

Comparison of key features of new law and current law

Detailed explanation of new law

9.8 Chapter 7 of the Corporations Act applies to a CCIV with the modifications that are set out in Division 4 of Part 8B.7. These modifications ensure that Chapter 7 applies appropriately to CCIVs and corporate directors consistent with the policy objective that the corporate director of a CCIV and not the CCIV itself, be required to have an AFSL. [Schedule 1, item 4, section 1241; Schedule 2, item 165, note to Chapter 7 of the Corporations Act]

Treatment of financial services provided by a CCIV

9.9 For the purposes of Chapter 7, most actions relating to financial services that are legally undertaken by a CCIV are also attributed to the CCIV's corporate director. As a CCIV generally has no officers or employees other than its corporate director, it is the corporate director that operates the business and conducts the affairs of a CCIV. Treating the actions of a CCIV as also being actions of its corporate director provides a framework where the corporate director retains responsibility for the actions of the CCIV.

9.10 Any conduct in relation to financial services or a financial services business that is engaged in by or on behalf of a CCIV (for example, where an agent is acting on behalf of the CCIV) is to be treated as also being engaged in by or on behalf of the corporate director. [Schedule 1, item 4, subsection 1241A(2)]

9.11 Similarly, where conduct relating to a CCIV is engaged in by a third party (that is, not by the corporate director or the CCIV itself), then that conduct is taken to also have been engaged in in relation to the corporate director. [Schedule 1, item 4, subsection 1241A(2)]

9.12 However, these rules do not make the corporate director the issuer of securities in a CCIV (if the CCIV issues securities), and do not make the corporate director a participant in a licensed market or clearing and settlement facility. [Schedule 1, item 4, subsections 1241A(4) and (5)]

9.13 The regulations may also prescribe any other matters to which the provisions relating to conduct apply. The regulations may also exempt matters from the operation of the provisions. [Schedule 1, item 4, subsections 1241A(1)(c) and (6)]

Financial services licensing

9.14 The modifications to Chapter 7 made in Division 4 of Part 8B.7 do not substantively alter the operation of the AFSL regime. Rather, the modifications ensure that the existing provisions apply appropriately to corporate directors and CCIVs. A CCIV is exempt from the requirement to hold an AFSL for the provision of financial services. However, to ensure financial services that are provided by a CCIV are covered by the AFSL regime, the CCIV's corporate director is taken to also provide those financial services, and is therefore generally required to hold an appropriate AFSL (subject to any exemptions). See paragraphs 9.9 to 9.13 of this explanatory memorandum for further information on when a corporate director is taken to provide financial services otherwise provided by a CCIV.

Financial services provided by a CCIV

9.15 A CCIV may provide one or more financial services in the course of its operations. As a matter of practice, it is expected that a CCIV generally would provide the financial service of 'dealing in a financial product' (see Division 4 of Part 7.1 of the Corporations Act). [Schedule 2, items 168 and 169, section 766C]

9.16 Notwithstanding that a CCIV may provide a financial service, a CCIV is exempted from the requirement to hold an AFSL. Modifications to provisions regarding authorised representatives of AFSL holders and others who provide financial services on behalf of AFSL holders ensure that a CCIV is never required to hold an AFSL for any financial services that it provides, and is not subject to regulation as a representative (within the meaning of Part 7.6). [Schedule 1, item 4, section 1241B]

9.17 Other entities that provide financial services in relation to or on behalf of a CCIV (for example, an agent of a CCIV), may also require an AFSL in relation to those services.

9.18 Even though a CCIV does not have an AFSL, it is treated as a professional investor (within the meaning of section 9 of the Corporations Act) if and while the corporate director of the CCIV holds an AFSL. [Schedule 1, item 4, section 1241K; Schedule 1, item 21, note to definition of 'professional investor' in section 9 of the Corporations Act]

Financial services provided by a corporate director

9.19 Chapter 7 is modified to create a new financial service (provided by the corporate director of a CCIV) of 'operating the business and conducting the affairs of a CCIV'. This financial service reflects the obligation imposed on the corporate director of a CCIV under Division 2 of Part 8B.3 to 'operate the business and conduct the affairs of the CCIV' (see paragraphs 3.118 to 3.121 of this explanatory memorandum). Each of the members of a CCIV is a 'client' of this financial service. [Schedule 1, item 4, section 1241C; Schedule 2, item 167, paragraph 766A(1)(da)]

9.20 Where a corporate director provides financial services that relate to a CCIV, those services may be provided directly or as a result of the deeming provisions that treat a corporate director as also providing any financial services that are provided by the CCIV itself. A corporate director may need an AFSL for financial services provided by a CCIV, depending on the nature of those services.

9.21 For the avoidance of doubt, a provision is included clarifying that a single AFSL may cover operating the business and conducting the affairs of more than one CCIV. [Schedule 1, item 4, subsection 1241F(1)]

9.22 The requirements for corporate directors of CCIVs contained in Part 8B.7 are comparable to the AFSL obligations and exemptions that apply to responsible entities of registered schemes. For example, provisions that exempt an RSE licensee from certain AFSL obligations unless the RSE licensee is also a responsible entity of a registered scheme are replicated for corporate directors. Additionally, the breach reporting requirements in the Corporations Act apply to the corporate director of a CCIV (as the holder of the AFSL) in the same manner as they would apply to the responsible entity of a registered scheme. [Schedule 1, item 4, subsections 1241F(2) to (6)]

9.23 It is open to a corporate director of a CCIV to provide other financial services (as defined in Division 4 of Part 7.1 of the Corporations Act) in addition to the financial service of operating the business and conducting the affairs of the CCIV. The obligations that fall on a corporate director providing financial services that are not related to its corporate director role are unchanged by the Bill.

Record keeping obligations of the corporate director

9.24 AFSL holders have particular record keeping obligations regarding the financial services they provide under Division 6 of Part 7.8 of the Corporations Act. A corporate director of a CCIV must keep these records so that the information required to be kept is clearly identifiable for each sub-fund of the CCIV. See paragraphs 5.20 to 5.23 of this explanatory memorandum for more information on the financial records that must be kept for a CCIV. [Schedule 1, item 4, section 1241M]

When ASIC may suspend or cancel the AFSL of a corporate director

9.25 The Corporations Act requires that a person who provides a 'financial service' hold an AFSL that authorises the provision of that financial service (see section 911A of the Corporations Act). ASIC has corresponding powers under section 915B of the Corporations Act to suspend or cancel a person's AFSL in certain circumstances.

9.26 ASIC's suspension and cancellation powers are extended so that ASIC may suspend or cancel a corporate director's AFSL where a CCIV or the members of a CCIV have suffered, or are likely to suffer, loss or damage as a result of a breach of the Corporations Act by the corporate director or the CCIV. These suspension and modification powers are similar to those applying for responsible entities of registered schemes. [Schedule 1, item 4, section 1241G]

Disclosure requirements for CCIVs and corporate directors

9.27 Part 7.9 of the Corporations Act deals with the disclosure requirements for financial products. This part generally does not apply to securities, such as shares or debentures. However, Part 7.9 does apply to interests in a registered scheme. To provide consistency with the disclosure requirements for registered schemes, the PDS regime in Part 7.9 applies to all securities in a CCIV, and in relation to the issue or sale of all securities in a CCIV. [Schedule 1, item 4, section 1241Q]

9.28 The disclosure requirements for securities in Chapter 6D do not apply to securities in a CCIV.

Product Disclosure Statements

9.29 The CCIV, rather than the corporate director, is generally responsible for providing a PDS in relation to securities of the CCIV.

9.30 As explained in Chapter 4 above, securities in a CCIV are referable to one and only one sub-fund. Accordingly, the information contained in a PDS about the securities in the CCIV will generally relate to the sub-fund to which those securities are referable. Further information may be required in relation to the CCIV as a whole.

9.31 As the issuer of securities in the CCIV, the CCIV itself is a 'regulated person' (within the meaning of section 1011B of the Corporations Act). In addition, the CCIV is the 'regulated person' in place of its corporate director where the corporate director is the seller of a security in the CCIV and would otherwise be a 'regulated person' by virtue of the definitions in Division 2 of Part 7.9. This deeming rule flows through to modify the meaning of 'regulated person' in section 994A for the purposes of Part 7.8A. [Schedule 1, item 4, section 1241Q]

9.32 A corporate director of a CCIV continues to be a 'regulated person' for any other reason or in any other circumstance, other than where it is the seller of a security in a CCIV.

9.33 A PDS for a CCIV is generally subject to the same content requirements that ordinarily apply to PDSs for other financial products (see section 1013D of the Corporations Act). This includes the specific requirements applying to financial products that have an investment component (see paragraph 1013D(1)(l) of the Corporations Act) and, where a security in a CCIV is an ED security, the same requirements applying to interests in registered schemes that are ED securities. However, if a CCIV is to engage in cross-investment between sub-funds of the CCIV, its PDS must also include a statement to that effect. [Schedule 1, item 4, section 1241T]

Financial products 'of the same kind'

9.34 Sections 1012C and 1012D of the Corporations Act apply in certain circumstances to financial products, or financial products 'of the same kind' (for example, section 1012D provides exemptions to the PDS requirements for certain clients who already hold financial products 'of the same kind' as those that are newly acquired). Given the unique structure of CCIVs, which may be made up of multiple sub-funds, a security in a CCIV is only 'of the same kind' as another security in the CCIV if the securities are referable to the same sub-fund and issued on the same terms and conditions as the first security. This ensures that a security in a CCIV cannot be 'of the same kind' as another security in the CCIV that is referable to a different sub-fund. [Schedule 1, item 4, section 1241R]

When a PDS is not required

9.35 Part 7.9 of the Corporations Act sets out a number of circumstances where a PDS is not required. These provisions apply to CCIVs under Part 7.9 of the Corporations Act. For example, a PDS is not required where a person already has received an up to date PDS.

9.36 In some cases, specific modifications are made to the provisions in Part 7.9 to ensure certain exceptions apply appropriately in the CCIV context. For example, some exceptions that are available in respect of managed investment products are extended to financial products that are securities in a CCIV for regulatory parity with the MIS regime. These modifications are contained in new section 1241S - which is to be read alongside sections 1012D to 1012E of the existing law.

9.37 In addition to the exceptions in Part 7.9, a PDS is not required in a recommendation, issue or sale situation where there is no consideration for the issue or sale of the security in a CCIV. This replicates the equivalent provision that applies for 'managed investment products', which includes interests in a registered scheme. [Schedule 1, item 4, subsection 1241S(1)]

9.38 A PDS is also not required where the client being issued or sold the security is 'associated' with the CCIV. A person is associated with a CCIV where they have a close relationship with the CCIV or its corporate director. This includes where they are the corporate director of the CCIV, a director, secretary, or senior manager of the corporate director, or a close relative of a director or senior manager of the corporate director. [Schedule 1, item 4, subsections 1241S(2)-(3)]

9.39 Further, a PDS is not required where the client is being recommended or issued fully-paid shares in a CCIV under a dividend reinvestment plan or bonus share plan. The client must already hold shares in the CCIV of the same kind as those being recommended by the corporate director or issued by the CCIV. A PDS is also not required when securities in a CCIV are offered for issue or sale under a compromise or arrangement ordered by the Court under Part 5.1 of the Corporations Act. [Schedule 1, item 4, subsections 1241S(4)-(5)]

9.40 These provisions draw on existing exemptions that are available to ordinary companies that are subject to the disclosure requirements in Chapter 6D of the Corporations Act. Although a CCIV is, like a MIS, subject to the PDS requirements, certain situations specific to companies, such as bonus share plans, are not addressed under the existing PDS regime. As such, an equivalent is required for CCIVs.

9.41 Section 1012DAA of the Corporations Act sets out when a PDS is not required for a rights issue. These provisions include the ability for ASIC to remove a regulated person from the exemption if it is satisfied that the person has breached specified sections of the Corporations Act. This section is modified to apply to CCIVs in the same way as it applies to registered schemes. [Schedule 1, item 4, subsections 1241S(6)-(7)]

9.42 A PDS is also not required to be issued in relation to personal offers where the offer is made in accordance with section 1012E of the Corporations Act, which sets out when an offer is a small scale offering. This provision is extended to cover small scale offers of securities in a CCIV. [Schedule 1, item 4, subsection 1241S(8)]

Replacement PDSs for stapled securities

9.43 Subdivision DA of Division 2 of Part 7.9 allows a replacement PDS to be issued in certain circumstances where an interest in a MIS is offered as part of a 'stapled security' (that is, where the interest in the MIS is only able to be acquired or disposed of with a security). This subdivision is modified to also extend to CCIVs that are part of a stapled security arrangement. [Schedule 1, item 4, section 1241U]

When a PDS must be lodged with ASIC

9.44 In certain circumstances a PDS must be lodged with ASIC. This includes where an interest in a registered scheme is traded on a financial market or the PDS implies that it will be able to be traded on a financial market, or when a financial product is of a kind specified in regulations (see section 1015B). This provision is modified to also require the PDS for a security in a CCIV to be lodged with ASIC in the same circumstances, including when the security in the CCIV is referable to a sub-fund that is an Australian passport fund. Every natural person director of the corporate director of the CCIV must give their consent to the lodgment. [Schedule 1, item 4, section 1241V]

Application forms

9.45 Section 1016A of the Corporations Act provides that the issuer or seller of a financial product may be prohibited from issuing or selling a financial product to a retail client except following an eligible application from the recipient of the financial product. This provision is modified to ensure that it applies to the issue or sale of a security in a CCIV. [Schedule 1, item 4, section 1241W]

Specified period before issuing or selling securities

9.46 Securities in a CCIV that are referable to a sub-fund that is an Australian passport fund can be issued or sold at any time after the PDS is lodged with ASIC. There is no requirement to wait seven days after the PDS is lodged with ASIC as there is for other types of managed investment products. [Schedule 1, item 4, section 1241X]

Ongoing disclosure and periodic statements for securities in a CCIV

9.47 Where a security in a CCIV is an ED security,^[12] the continuous disclosure provisions in Chapter 6CA will apply. These securities are not subject to the ongoing disclosure requirements in section 1017B. This provides the same treatment for securities in a CCIV that are ED securities as interests in a registered scheme that are ED securities. [Schedule 1, item 4, subsection 1241Z(1)]

9.48 The application of the existing continuous disclosure provisions in Chapter 6CA to an ED security in a CCIV means that subsection 1017B(2) provides an offence-specific defence, whereby a CCIV bears an evidential burden in any proceedings against the CCIV based on section 1017B.

9.49 The extension of the existing subsection 1017B(2) to an ED security in a CCIV ensures consistency between the disclosure obligations placed on an ED security in a CCIV and an ED security in other financial products. It is appropriate to reverse the evidential burden of proof in relation to this offence-specific defence because the matter is peculiarly within the knowledge of the defendant, and it would be significantly more difficult and costly for the prosecution to disprove than for the defendant to establish the matter.

9.50 The issuer of securities in a CCIV must provide a periodic statement to holders of CCIV securities, as securities in a CCIV are considered financial products that have an investment component under section 1017D. [Schedule 1, item 4, subsection 1241Z(2)]

Financial Services Guides

9.51 Under Part 7.7, an AFSL holder is generally required to provide a Financial Services Guide when they provide financial services to a retail client. However, a corporate director is not required to provide a Financial Services Guide when the financial service they are providing to the client consists only of operating the business and conducting the affairs of the CCIV. This mirrors the requirements for responsible entities of registered schemes. As a CCIV is not required to hold an AFSL, it is also not required to provide a Financial Services Guide to clients. [Schedule 1, item 4, section 1241L]

Securities of a CCIV sold or issued under a defective PDS

9.52 If a person is issued or sold securities in a CCIV under a defective PDS, the person has the right to return the securities and have the money they paid for the securities returned to them, even if the CCIV or the CCIV's corporate director is being wound up. The directors of the corporate director are personally liable to repay the money. [Schedule 1, item 4, section 1241Y]

Cooling-off periods

9.53 Retail clients who are issued or sold a security in a CCIV have the same statutory cooling-off rights under Division 5 of Part 7.9 as those that attach to interests in a registered scheme. This provides an important consumer protection for retail clients and ensures parity of treatment between registered schemes and CCIVs. [Schedule 1, item 4, section 1241ZA]

Unsolicited offers to purchase securities in a CCIV

9.54 Division 5A of Part 7.9, which applies to unsolicited offers to purchase financial products that are not made on a licensed market, also applies to offers to purchase securities in a CCIV. However, section 1019D (which determines the offers to which Division 5A applies) is modified so that Division 5A does not apply where an unsolicited offer to purchase securities is made to the corporate director of the CCIV. This is appropriate as Division 5A also does not apply when the offer to purchase securities is made to the CCIV (as issuer of the securities). [Schedule 1, item 4, section 1241ZB]

Agreements with unlicensed corporate directors and their CCIVs

9.55 Division 11 of Part 7.6 deals with agreements with a person who does not hold an AFSL, but who is required to hold an AFSL (a 'non-licensee'). Division 11 allows a person who enters into a contract with a non-licensee to rescind the contract in certain circumstances.

9.56 The application of Division 11 is extended so that it also applies where a person enters into an agreement with a CCIV that has a non-licensee corporate director. The modifications account for the unique structure of a CCIV and its corporate director. In this way, a person who enters into a contract with a CCIV will have the same protections as a person who enters into an agreement with a non-licensee responsible entity. [Schedule 1, item 4, section 1241J]

Prohibition on hawking securities in a CCIV

9.57 The Corporations Act includes separate prohibitions on hawking for interests in MISs and securities (sections 992A(1), 992AA(1) and 736(1), respectively). The new law modifies the operation of these provisions so that only the prohibition on hawking for interests in MISs in section 992AA(1) applies to securities in a CCIV. The exemptions to offers that are not made to retail clients, and offers made by an AFSL holder through which a client has acquired or disposed of an interest in a MIS are also replicated for securities in a CCIV. If the CCIV is listed, then an offer of securities in the CCIV made by telephone by a financial services licensee is also exempted. These modifications ensure equivalent prohibitions on hawking apply for securities in a CCIV and interests in a MIS. [Schedule 1, item 4, section 1241N]

9.58 Offence-specific defences are available to a CCIV in any proceeding based on section 992AA(1) or 736(1). The defendant bears an evidential burden when relying on one of these defences. [Schedule 1, item 4, sections 1241N(3) and (5)]

9.59 The offences provided for in sections 992AA(1) and 736(1) pursue the legitimate objective of ensuring retail investors are afforded adequate consumer protections in relation to an offer of securities. It is important that where a CCIV believes an offer of securities is not subject to this consumer protection, it possesses evidence to support this belief.

9.60 It is appropriate to reverse the evidential burden of proof in relation to these offence-specific defences because the matters are peculiarly within the knowledge of the defendant, and it would be significantly more difficult and costly for the prosecution to disprove than for the defendant to establish the matter.

Design and distribution obligations and the product intervention power

9.61 The design and distribution obligations in Part 7.8A of the Corporations Act apply in relation to a retail CCIV. This reflects that issuers of financial products who are required to prepare a disclosure document (such as a PDS) are generally required to comply with the design and distribution obligations. This approach also ensures that members of a retail CCIV are given similar member protections compared to other retail investors, such as members of registered schemes.

9.62 The existing exception from the requirement to prepare a target market determination for certain shares that are financial products is not available for CCIVs. [Schedule 1, item 4, subsection 1241P(1)]

9.63 The design and distribution obligations in Part 7.8A generally apply to a person if they are required under Part 7.9 to prepare a PDS. As explained above, section 1241Q applies the PDS requirements in Part 7.9 in relation to securities in a CCIV. As securities in a CCIV are referable to one and only one sub-fund, the information contained in a target market determination about the securities in the CCIV will generally relate to the sub-fund to which those securities are referable. Further information may be required in relation to the CCIV as a whole. [Schedule 1, item 4, section 1241Q]

9.64 Under new section 1241Q, for the purposes of the disclosure requirements in Part 7.9, a CCIV is the 'regulated person' in place of its corporate director where the corporate director is the seller of a security in the CCIV. This means that the design and distribution obligations under Part 7.8A of the Corporations Act attach to the CCIV rather than the CCIV's corporate director.

9.65 New section 1241Q also ensures the power for ASIC to make product intervention orders in Part 7.9A of the Corporations Act extends to financial products (i.e. securities) that are, or are likely to be, issued or offered for sale by a retail CCIV. This is consistent with how the product intervention power could be exercised by ASIC in relation to interests in registered schemes.

9.66 In the event of a contravention of the design and distribution orders or a product intervention order, a client may recover loss or damage because of the contravention from the corporate director of the CCIV rather than the CCIV itself. This is consistent with the broader liability regime for corporate contraventions (see paragraphs 3.322 to 3.327 above). [Schedule 1, item 4, subsection 1241P(2) and section 1241ZC]

Insider trading

9.67 The prohibition on insider trading in section 1043A of the Corporations Act applies to CCIVs and their corporate directors without modification, subject to the provisions that set out how and when a CCIV is taken to engage in conduct and have a certain state of mind (see Chapter 9 of this explanatory memorandum).

9.68 A member of a CCIV who redeems their CCIV securities is not subject to the insider trading provisions. This mirrors the existing exception for a member of a registered scheme, and ensures that the insider trading provisions do not limit a member's ability to redeem their securities. [Schedule 1, item 4, subsection 1241ZD(1)]

9.69 The exceptions to the prohibition on insider trading that apply in relation to a body corporate's knowledge of its own actions, or the knowledge of its actions by officers, directors and employees of the body corporate, are extended to also apply in relation to the knowledge of a CCIV's actions by the corporate director, or the officers, directors and employees of the corporate director. This is consistent with the approach for body corporates more generally, while ensuring that the provisions apply appropriately given that a CCIV is a separate legal entity to its corporate director, but is a collective investment vehicle without employees. [Schedule 1, item 4, subsections 1241ZD(2)-(3)]

Miscellaneous and clarifying provisions

9.70 For the avoidance of doubt, and to bring CCIVs in line with registered schemes, a number of miscellaneous provisions in Chapter 7 are modified to clarify how the law applies to CCIVs.

9.71 Where a CCIV issues or redeems redeemable shares or redeemable preference shares, this facility does not constitute the financial service of 'making a market'. The issuers of interests in registered schemes and of certain other financial products are similarly excluded from this definition to ensure that a mere redemption facility is not considered a market and subject to additional regulation. [Schedule 1, item 4, section 1241D]

9.72 Certain conduct relating to CCIVs does not constitute a custodial or depository service within the meaning of section 766E of the Corporations Act. In particular, operating a CCIV, operating the business and conducting the affairs of a CCIV, and holding the money or property of a CCIV (including holding the assets of a sub-fund of a CCIV) is not a custodial or depository service. This ensures that these entities are not subject to the regulation that applies to an entity that provides a custodial or depository service. [Schedule 1, item 4, section 1241E]

9.73 Section 923A also applies to prohibit a CCIV from using a restricted word or expression in relation to a financial service or financial services business. This confirms that the existing restrictions apply to CCIVs as well as to corporate directors and other companies. [Schedule 1, item 4, section 1241H]

9.74 The definition of 'financial services law' is directly amended (rather than modified) to also include Chapter 8B. This ensures that a breach of Chapter 8B will constitute a breach of the financial services laws. [Schedule 2, item 166, definition of financial services law in section 761A]

Chapter 10: CCIVs - Extension of Asia Region Funds Passport regime

Outline of chapter

10.1 This Chapter details amendments that extend the ARFP regime to CCIVs.

Context of amendments

10.2 The ARFP Act provides a multilateral framework that allows eligible funds to be marketed across participating economies. The ARFP allows certain funds from other participating economies (notified foreign passport funds) to sell their products in Australia. Funds that qualify as Australian passport funds may also offer interests outside of Australia in other participating economies.

10.3 Currently, only registered schemes may become Australian passport funds. This is because registered schemes were the only type of regulated collective investment vehicle for retail investors at the time that the ARFP Act commenced. However, the Government's intention has always been that, once established, sub-funds of retail CCIVs would also be permitted to become Australian passport funds.

Summary of new law

10.4 Amendments in Schedule 2 to the Bill allow a sub-fund of a retail CCIV to be registered as an Australian passport fund. Other minor amendments extend the existing passport arrangements to sub-funds that become Australian passport funds.

Comparison of key features of new law and current law

Detailed explanation of new law

Registering a sub-fund as an Australian Passport Fund

10.5 The corporate director of a retail CCIV may lodge an application with ASIC to register a sub-fund of the CCIV as an Australian passport fund. This provides the corporate director with the flexibility to elect to register only some of the sub-funds of the CCIV as passport funds. [Schedule 2, items 4 and 169, definition of 'Australian passport fund' in section 9 of the Corporations Act and subsection 1212(1)]

10.6 Sub-funds of a wholesale CCIV cannot become Australian passport funds. Nevertheless, a CCIV which does not have any retail clients may elect to become a retail CCIV by notifying ASIC of its status as a retail CCIV. This ensures that a sub-fund may be registered as an Australian Passport Fund before it has any members.

10.7 The process for registering a sub-fund of a retail CCIV as a passport fund is the same as the process for registering a MIS as a passport fund. ASIC must consider whether the requirements in the Corporations Act and the ASIC Act are likely to be complied with and whether the sub-fund meets the requirements for a passport fund in Annex 3 of the Corporations (Passport) Rules.^[13] If satisfied of these matters, ASIC must register the sub-fund as an Australian passport fund and assign it an Australian Passport Fund Registration Number. The corporate director then becomes the operator of the passport fund. [Schedule 2, items 171 to 178, subparagraphs 1212(2)(b)(i) to (ii), paragraphs 1212(2)(b), 1212A(1)(a) to (b), subsections 1212(3) and 1212A(1) to (2), and section 1212A]

10.8 When lodging documents with ASIC, the CCIV must ensure that all documents relating to the sub-fund that has been registered as an Australian passport fund contain its Australian Passport Fund Registration Number. [Schedule 2, items 179 to 180, section 1212B]

10.9 Amendments have also been made to Part 8A.3 to account for the possibility of the passport arrangements being extended to other types of entities in the future. New defined terms have been created to describe a fund that seeks to become an Australian passport fund (collective investment fund) and the person that would control the fund (proposed operator). Currently the only types of funds that may register to become Australian passport funds are registered schemes, MISs that have applied to become registered schemes and sub-funds of retail CCIVs. The only companies that may be a proposed operator are the responsibility entity of a scheme and the corporate director of a CCIV. [Schedule 2, items 170 to 182, sections 1212, 1212A and 1212B]

Deregistration of an Australian Passport Fund

10.10 If a sub-fund is an Australian passport fund, ASIC cannot deregister the sub-fund unless it is of the opinion that deregistration would not be contrary to the interests of protected members. Protected members are members who became members after the fund became an Australian passport fund or on the expectation that the fund would become an Australian passport fund (excluding the operator, a former operator or any persons related to the current or former operator). For a discussion of the process for ASIC-initiated deregistration, see paragraphs 7.179 to 7.192. [Schedule 1, item 4, subsections 1239A(4) and (5)]

10.11 Similarly, a person cannot apply to voluntarily deregister a sub-fund if the sub-fund has protected members. For a discussion of the voluntary deregistration process, see paragraphs 7.170 to 7.178. [Schedule 1, item 4, subsections 1239(9) to (10)]

10.12 If a sub-fund is deregistered as a sub-fund, it automatically ceases to be an Australian passport fund and ASIC must ensure that the Register of Passport Funds is updated (see paragraph 7.201). The reinstatement of the sub-fund does not reinstate it as an Australian passport fund (see paragraph 7.212). [Schedule 1, item 4, subsections 1239D(5) and 1239G(6)]

10.13 There is also a process in the existing law for a sub-fund to deregister as only an Australian passport fund and continue to remain established as a sub-fund (see existing Subdivision A of Division 1 of Part 8A.7 of the Corporations Act).

Rejecting a notice of intention from a foreign passport fund

10.14 A minor amendment has been made to one of the circumstances when ASIC may reject a foreign passport fund's notice of intention to become a notified foreign passport fund and offer interests in Australia.

10.15 The existing law allows ASIC to reject the notice if ASIC is of the opinion that it is not in Australia's public interest for the fund to offer interests in Australia. Public interest is then defined so that it excludes any benefits that may arise from limiting competition for MISs (see paragraph 1213B(1)(b) and subsection 1213B(3) of the Corporations Act). This definition has been amended to also exclude any benefits from limiting competition for CCIVs. [Schedule 2, items 11 and 181, definition of 'expectation' in section 9 of the Corporations Act and subsection 1213B(3)]

Chapter 11: CCIVs - Other amendments to corporations and financial services law

Outline of chapter

11.1 This Chapter outlines consequential amendments to Chapter 9 of the Corporations Act, contained in Part 8B.8 of the Bill, and to the ASIC Act. These amendments extend ASIC's powers under the ASIC Act and ensure that relevant provisions apply appropriately to CCIVs.

Context of amendments

11.2 Chapter 9 of the Corporations Act includes provisions that deal with a number of miscellaneous matters, including registers, audit companies, offences and the power of the Courts. The new law modifies certain provisions to ensure that they operate appropriately in relation to CCIVs and their corporate directors.

11.3 The ASIC Act enables the majority of ASIC's powers, including investigative powers, and the power to conduct hearings for the purposes of its powers and functions. The ASIC Act also includes ASIC's powers in relation to unconscionable conduct and consumer protections for financial services. Amendments to the ASIC Act ensure that ASIC can appropriately exercise these powers in relation to CCIVs.

11.4 Many of ASIC's powers under the ASIC Act intersect with financial services framework in Chapter 7 of the Corporations Act, which is modified for CCIVs by Division 4 of Part 8B.7 of Schedule 1. As such, most of the amendments to the ASIC Act are to ensure consistency between Chapter 7 of the Corporations Act and the ASIC Act.

Summary of new law

11.5 Part 8B.8 modifies the operation of certain provisions in Chapter 9 of the Corporations Act to ensure:

•

provisions relating to the books of a company apply correctly to CCIVs;

•

certain offence provisions apply to CCIVs and their corporate directors appropriately; and

•

the powers of the AAT and the courts in relation to defects in decision making and powers of review cover CCIVs.

11.6 Amendments to the ASIC Act ensure that:

•

the unconscionable conduct provisions in Division 2 of Part 2 adequately capture the kinds of financial services that relate to CCIVs;

•

there is consistency in the treatment of financial services between the ASIC Act and Chapter 7 of the Corporations Act; and

•

ASIC's powers and functions work effectively in relation to CCIVs.

Comparison of key features of new law and current law

Detailed explanation of new law

Amendments to Chapter 9 of the Corporations Act made by Part 8B.8

Amendments relating to director identification numbers

11.7 Directors of companies are generally required to obtain director identification numbers. However, as the ACN of the corporate director of a CCIV will be sufficient to identify it, it is not eligible to also have a director identification number. [Schedule 1, item 4, section 1242; Schedule 2, item 183, note to subsection 1272B(1)]

Amendments relating to registers and books

11.8 Documents lodged with ASIC are generally able to be viewed by the public. However, certain documents are not publicly available as they include confidential information. This provides protection for potentially sensitive or confidential information to ensure there is appropriate oversight for ASIC. [Schedule 2, item 184, note to subsection 1274(2)]

11.9 The constitution of a wholesale CCIV is also exempted from public inspection. This provides equivalent treatment to wholesale MISs which are not required to provide ASIC with a copy of their constitution, such that the constitution is not available for public inspection. [Schedule 1, item 4, section 1242A]

11.10 Any book of the CCIV that the Corporations Act requires to be made available for inspection may be inspected in accordance with the rules that apply to proprietary companies. This includes the requirement that the CCIV must make a book available within seven days if a person has requested to inspect it. [Schedule 1, item 4, section 1242B; Schedule 2, item 185, note to subsection 1300(2A)]

11.11 It is an offence for a person to falsify or destroy securities of a company, or to falsify or destroy the books of, or relating to, the affairs of a company. This applies to a person who is a current or former officer, employee, or member of a company. Modifications are made to ensure that it is also an offence for a person who is or has been an officer of the CCIV, an officer of the corporate director or an employee of the corporate director to falsify or destroy the CCIV's securities or books. [Schedule 1, item 4, section 1242C; Schedule 2, item 186, note to subsection 1307]

Amendments relating to offences

Specific offences under Part 9.4 of the Corporations Act

11.12 It is an offence for a corporation, such as a CCIV, to make a false or misleading statement that relates to its capital. It is also an offence for an officer or employee of a corporation to make false or misleading statements to certain people (including auditors or operators of financial markets) relating to the affairs of the corporation.

11.13 It is a defence to these offences if the corporation, officer or employee made the statement in reasonable reliance on information given to them by a third party. Where the person is a corporation, a third party is someone other than a director, employee or agent of the corporation. Where the person is an individual, a third party is someone other than an employee or agent of the individual.

11.14 For the purposes of these offences (found in Part 9.4 of the Corporations Act), modifications apply to ensure that persons that have a relationship with the corporate director are also treated as having a relationship with the CCIV. This ensures that the defence operates appropriately for CCIVs, given that a CCIV is a separate legal entity to its corporate director. [Schedule 1, item 4, section 1242D; Schedule 2, items 187 and 188, note to subsections 1309(1) and (2), and note to subsections 1309(9) and (10)]

Offences generally under Part 9.4 the Corporations Act

11.15 Where a prosecution of an offence against the Corporations Act has started, or if ASIC believes that a prosecution should be started, ASIC may require certain persons to assist in the prosecution. If the defendant in such a prosecution is a CCIV, ASIC may require assistance from a current or former corporate director, liquidator or agent of the CCIV, or a current or former officer, employee or agent of the corporate director. [Schedule 1, item 4, section 1242D; Schedule 2, item 190, note to subsection 1317(1)]

11.16 Where a person is being prosecuted for a contravention of certain provisions of the Corporations Act, including Chapter 8B, the Court may order an injunction under section 1324 on the conduct or conduct of that kind. For that same contravention, the Court may also direct the person to disclose certain information or publish an advertisement in accordance with the Court's order. The Court also has the power to make other orders for these contraventions, such as an order to refuse to enforce provisions of a contract. [Schedule 2, items 194 and 195, note to sections 1324A and 1324B, and paragraph 1325(7)(j)]

11.17 The default offence that applies to contraventions of certain parts of the Corporations Act under existing section 1311 of the Corporations Act is not available for any contravention of new Chapter 8B. If a contravention of a provision in new Chapter 8B gives rise to an offence, then it is specified in the relevant provision. The penalty for the contravention is also specified for each relevant provision and included in Schedule 3 to the Corporations Act. This is the case even if the provision in new Chapter 8B is based on an existing provision of the Corporations Act where a default offence is available. [Schedule 2, items 189 and 199, paragraph 1311(1A)(de) and new items in the Schedule 3 to the Corporations Act]

11.18 For example, a contravention of a provision in Chapter 5C (about registered schemes) may attract a default offence under existing section 1311 of the Corporations Act. Certain provisions in new Chapter 8B are modelled on existing provisions of Chapter 5C. A contravention of a provision under new Chapter 8B does not attract a default offence. However, where appropriate and necessary, the relevant provision specifies that it is an offence and the penalty for the offence is included in Schedule 3 to the Corporations Act.

Protections for whistleblowers

11.19 The protections for whistleblowers in Part 9.4AAA are extended so that certain persons connected to the corporate director may make disclosures that relate to the CCIV. A CCIV is a company and, accordingly, is a 'regulated entity' within the meaning of section 1317AAB of the Corporations Act.

11.20 In addition to the individuals that are eligible for whistleblower protections under section 1317AAA of the Corporations Act, the following individuals may make covered disclosures in relation to a CCIV:

•

an officer of the corporate director of the CCIV;

•

an employee of the corporate director of the CCIV; and

•

a relative of an officer or employee of the corporate director of the CCIV; or

•

a dependent of an officer or employee of the corporate director of the CCIV (such as a spouse).

[Schedule 1, item 4, paragraphs 1242E(1); Schedule 2, item 191, note to the heading for Part 9.4AAA]

11.21 Certain persons may receive a covered disclosure in relation to a CCIV under section 1317AAC of the Corporations Act (such as the CCIV's corporate director). In addition, an officer or a senior manager of the corporate director of the CCIV may receive covered disclosures. [Schedule 1, item 4, paragraph 1242E(2)]

11.22 The corporate director of a CCIV, being a public company, must maintain a whistleblower policy under section 1317AI of the Corporations Act. The corporate director's whistleblower policy must cover certain matters about protected disclosures in relation to the CCIV, including:

•

information about to whom disclosures in relation to the CCIV may be made in order to qualify for protection, and how they may be made;

•

information about how the CCIV will support and protect whistleblowers;

•

information about how the CCIV will investigate disclosures that qualify for protection;

•

information about how the policy is to be made available to the officers of the CCIV; and

•

any other matters that may be prescribed by regulations.

[Schedule 1, item 4, subsection 1242E(3)]

Powers of the courts

11.23 A Court has the same powers in relation to an irregularity or defect in a meeting of a sub-fund or a joint meeting of creditors and members of a sub-fund of a CCIV as it has in relation to an irregularity or defect in a meeting of members or members and creditors of a corporation. [Schedule 1, item 4, section 1242F; Schedule 2, item 193, note to subsection 1322(1)]

Meaning of financial services in the ASIC Act

11.24 Outside Division 2 of Part 2 of the ASIC Act, key terms in the ASIC Act have the same meaning as in Chapter 7 of the Corporations Act. Where Division 4 of Part 8B.7 of the Corporations Act modifies the meaning of a provision in Chapter 7 as it applies to CCIVs, then the modified meaning also applies in relation to CCIVs in the ASIC Act. A note to the definition to financial service confirms this approach. [Schedule 3, item 4, definition of financial service in subsection 5(1)]

11.25 To provide consistency with the treatment of financial services that are provided by the CCIV across the ASIC Act and Chapter 7 of the Corporations Act, the corporate director of a CCIV is also taken to provide financial services that are provided by the CCIV. This ensures that the corporate director is responsible for actions of the CCIV that constitute the provision of financial services. See Chapter 9 of this explanatory memorandum for more information on the treatment of financial services provided by a CCIV in Chapter 7 of the Corporations Act. [Schedule 3, item 14, section 243F]

Amendments relating to ASIC's investigation and information gathering powers and CCIVs

11.26 ASIC has certain powers in relation to bodies corporate and their employees, agents and officers. These include powers to request information or documents, or to hold hearings. Amendments ensure that these provisions appropriately reflect the relationship between a CCIV and its corporate director.

11.27 The definition of 'eligible person' extends to the corporate director of a CCIV or liquidator of a sub-fund, as well as the officers of the corporate director or liquidator. This allows ASIC to request books relating to the affairs of the CCIV from the corporate director or its officers, or to require that person to give assistance to ASIC in connection with a prosecution under an offence in the Corporations legislation. [Schedule 3, items 1 to 3, subsection 5(1), definition of eligible person]

11.28 At a hearing held by ASIC, a CCIV may be represented by an officer or employee of the corporate director who has been approved by ASIC, or by the liquidator of a sub-fund. Similarly, where a person can make a requirement of a CCIV under the ASIC Act's investigation and information-gathering provisions, then that requirement may also be made of a person who is or has been an officer of the CCIV or an officer or employee of the corporate director. [Schedule 3, items 11 and 12, subsection 59(6) and section 84]

11.29 Section 93AA of the ASIC Act sets out the process by which ASIC may accept an enforceable undertaking from a person (including CCIVs and corporate directors). This section continues to apply, however the new law applies in relation to conduct by a corporate director that concerns a CCIV. This bespoke provision ensures that the same protections and remedies can apply in relation to a corporate director and CCIV as apply to a responsible entity and a registered scheme. [Schedule 3, item 13, section 93BA]

Amendments to Division 2 of Part 2 of the ASIC Act

Definitions in Division 2 of Part 2 of the ASIC Act

11.30 Division 2 of Part 2 of the ASIC Act provides the framework for ASIC's jurisdiction over unconscionable conduct and other consumer protections in relation to financial services. This Division has its own defined terms, even where that same term is defined for the rest of the ASIC Act. To provide consistency across the Corporations Act and ASIC Act, the amendments to the ASIC Act are similar to those made to Chapter 7 of the Corporations Act.

11.31 Amendments to Division 2 of Part 2 of the ASIC Act ensure that the definition of financial service for the purposes of that Division include financial services related to CCIVs; specifically the financial services of 'operating the business and conducting the affairs of a CCIV' (undertaken by the corporate director). For the avoidance of doubt, operating a CCIV, operating the business and conducting the affairs of a CCIV, or holding the money or property of a CCIV do not constitute providing a custodial or depository service. [Schedule 3, items 5 to 8, paragraphs 12BAB(1)(g) and 12BAB(14)(d), subsection 12BAB(1) and note to section 12BAB(14)]

Defences for prosecutions under Subdivision G of Division 2 of Part 2

11.32 It is a defence to a prosecution under Subdivision G of Division 2 of Part 2 of the ASIC Act if the defendant can establish the existence of certain facts, including that the contravention was due to reasonable reliance on information supplied by another person, or that the contravention was due to the act or default of another person. However, this does not apply where the other person is an employee, agent, or director of the defendant.

11.33 Amendments provide that where the defendant is a CCIV, the CCIV may not use this defence where the other person is the corporate director or an agent of the CCIV, or an employee, director or agent of the corporate director of the CCIV. These amendments ensure that the defence operates appropriately for CCIVs, given that the CCIV is a separate legal entity to its corporate director and is a collective investment vehicle without employees. [Schedule 3, items 9 and 10, paragraph 12GI(2)(b)

Chapter 12: CCIVs - Delegated legislation for regulatory framework

Outline of chapter

12.1 This Chapter sets out the delegated legislation-making powers in the new law that are specific to CCIVs. Part 8B.9 of Chapter 8B allows ASIC to make exemptions and modifications for CCIVs in relation to specified parts of new Chapter 8B. A regulation-making power to modify the operation of the Corporations Act for CCIVs is also included.

Comparison of key features of new law and current law

Detailed explanation of new law

Exemption and modification powers

12.2 ASIC may make exemption and modification orders in relation to the following provisions of Chapter 8B:

•

Part 8B.2 (registration of a CCIV);

•

Part 8B.3 (corporate governance of a CCIV);

•

sections 1230J and 1230K (redemptions for non-liquid sub-funds);

•

Division 4 of Part 8B.4 (financial reports and audits of CCIVs);

•

Division 9 of Part 8B. 6 (deregistration and transfer of registration); and

•

Part 8B.7 (control, financial services and disclosure).

[Schedule 1, item 4, subsection 1243(1)]

12.3 ASIC's exemption and modification powers do not apply to any other parts of Chapter 8B.

12.4 The exemption or modification may relate to a specified security, a specified class of securities or all securities, and relate to any other matter generally or as specified. [Schedule 1, item 4, subsection 1243(3)]

12.5 These orders are either made by legislative or notifiable instrument. If the order relates to all sub-funds of all CCIVs, or all sub-funds of a specified class of CCIVs, or a specified class of sub-funds of CCIVs, then the order must be made by legislative instrument. [Schedule 1, item 4, subsections 1243(2) and (5)]

12.6 Exemption and modification orders must be made by notifiable instrument if it relates to a specified CCIV or a specified entity. Such an order may apply to the CCIV or entity in respect of a specified sub-fund, a specified class of sub-funds or all sub-funds of the CCIV. [Schedule 1, item 4, subsections 1243(2) and (6) to (8)]

12.7 Additionally, ASIC can exercise its exemption power unconditionally or subject to specified conditions. If there are specified conditions, the person to whom the condition applies must comply with those conditions. Only ASIC may apply to the Court for an order that the person comply with the condition in a specified way. [Schedule 1, item 4, subsection 1243(4)]

12.8 ASIC must give a copy of an exemption or declaration that relates to a specified person to that person as soon as reasonably practicable after the exemption or declaration is made. [Schedule 1, item 4, subsection 1243(9)]

12.9 These exemption and modification powers allow ASIC to provide timely administrative relief in circumstances where the strict operation of the new CCIV regime produces unintended or unforeseen results that are not consistent with the policy intent. In particular, issues may arise that were not contemplated at the time of drafting because CCIVs is a new, untested regime. In this context, it is appropriate for ASIC to be able to provide relief where the issues to be addressed are too individual and specific to justify addressing them by legislative means.

12.10 In exercising these powers, the appropriate length of the sunsetting period for each legislative instrument will be considered and will depend on matters including whether:

•

there would be appreciable business uncertainty about the operation of the CCIV regime if the sunsetting period for the instrument was shorter;

•

the particular instrument deals with confined or unique circumstances affecting a particular class of entities or products which do not fit within the strict operation of the primary law but would result in anomalous or inconsistent outcomes that would be inconsistent with the intent of the primary law; and

•

the particular instrument makes minor and technical changes which support the practical operation of the CCIV regime.

12.11 It is also expected that if these exemption and modification powers are used, ASIC will monitor the operation of the instrument and respond accordingly if it becomes apparent that the length of the sunsetting period may not be appropriate.

12.12 ASIC presently has a range of exemption and modification powers under the Corporations Act, including in relation to MISs, takeovers, fundraising, licensing of financial services, accounting and disclosure requirements for financial products. The scope of ASIC's exemption and modification powers for CCIVs mirrors these existing powers in the Corporations Act.

12.13 The exemption and modification powers are subject to the usual safeguards, including administrative review by the Administrative Appeals Tribunal, judicial review and consideration in appropriate circumstances by the Commonwealth Ombudsman. Additionally, any legislative instruments made using the exemption and modification powers would also be subject to disallowance and parliamentary scrutiny.

Regulations

12.14 The regulations may modify the operation of the Corporations Act (including the operation of Chapter 8B) for:

•

a specified CCIV;

•

a specified class of CCIVs;

•

all CCIVs;

•

a specified class of sub-funds;

•

all sub-funds of a specified class of CCIVs; or

•

all sub-funds of all CCIVs.

[Schedule 1, item 4, subsection 1243A]

12.15 This regulation-making power is included to ensure timely resolution of any unforeseen outcomes arising from a new, untested regime. Enabling the modification of the operation of the Corporations Act by regulations will provide the Government with the necessary flexibility to make targeted adjustments that may be necessary to address inappropriate or anomalous outcomes that would be inconsistent with the policy intention of the establishment of CCIVs.

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]

Chapter 14: Extension of temporary loss carry back

Outline of chapter

14.1 Schedule 6 to the Bill amends the income tax laws to extend the loss carry back rules by 12 months, allowing eligible corporate tax entities to claim a loss carry back tax offset in the 2022-23 income year.

14.2 All legislative references in this chapter are to the ITAA 1997 unless otherwise indicated.

Context of amendments

14.3 In 2020 the Government introduced temporary tax incentives to support Australian businesses withstand the impacts of COVID-19 and to assist them to invest, grow and create more jobs. One of the temporary tax incentives was the temporary loss carry back measure.

14.4 Under the current law the temporary loss carry back rules apply to tax losses for the 2019-20, 2020-21 or 2021-22 income years, with the normal rules to apply from the 2022-23 income year.

14.5 The temporary loss carry back rules allow eligible corporate tax entities to offset tax losses against previous income tax liabilities to generate a loss carry back tax offset. Tax losses are 'carried back' and in effect applied against income tax liabilities in a previous income year as far back as the 2018-19 income year. The temporary loss carry back rules are in Division 160 of the ITAA 1997.

14.6 The choice to claim a loss carry back tax offset is an alternative to carrying tax losses forward as a deduction for future income years. Entities that do not elect to carry back losses under the temporary loss carry back rules can carry forward losses as per the normal rules.

14.7 The Government announced in the 2021-22 Budget that it will extend this tax incentive by 12 months. This means the tax incentive will now be available for another income year (i.e. the 2022-23 income year).

Summary of new law

14.8 Schedule 6 to the Bill extends the loss carry back rules by 12 months, allowing eligible entities to carry back tax losses in the 2022-23 income year.

14.9 As a result, the normal rules for losses will apply from the 2023-24 income year.

Comparison of key features of new law and current law

Detailed explanation of new law

14.10 Under the extended temporary loss carry back rules, a corporate tax entity with an aggregated turnover of less than $5 billion can choose to carry back a tax loss for the 2019-20, 2020-21, 2021-22 or 2022-23 income year and apply it against an income tax liability in a previous income year as far back as the 2018-19 income year.

14.11 The amendments extend the temporary tax incentive so that it is available in the 2022-23 income year. A corporate tax entity may be entitled to a loss carry back tax offset for the 2022-23 income year. The loss carry back rules are extended in their current form with the same eligibility requirements. [Schedule 6, items 4 to 18, the heading to Division 160, note 2A after section 160-5, sections 160-1, 160-5, 160-10, 160-15 and 160-25]

14.12 A corporate tax entity will need to make a choice to claim the refundable tax offset when it lodges an income tax return for the 2022-23 income year.

14.13 If the entity does not choose to carry back the tax loss it can apply the normal rules to carry forward and deduct the tax loss against income derived in later income years.

14.14 The temporary loss carry back rules will cease to apply after the 2022-23 income year. From the 2023-24 income year entities are only able to carry losses forward.

Consequential amendments

14.15 The note to the definition of 'carry back' is amended to refer to the 2022-23 income year. [Schedule 6, item 22, the note to the definition of 'carry back' in subsection 995-1(1)]

14.16 Minor amendments are made to other provisions which reference the relevant income years of the temporary loss carry back rules, updating these references to include the 2022-23 income year. [Schedule 6, items 1 to 3, 19 to 21, and 23, note 2 to subsection 36-17(1), the table in section 36-25, paragraph 195-15(5)(c), section 195-37 and paragraph 320-149(2)(aa) of the ITAA 1997 and paragraph (db) of step 1 of the method statement in section 45-340 in Schedule 1 to the TAA 1953]

Application, and transitional provisions

14.17 Part 1 of Schedule 6 commences on the first day of the first quarter following Royal Assent.

14.18 Part 2 of Schedule 6 commences on the later of immediately after the commencement of the provisions in Part 1 of Schedule 1or immediately after the commencement of Division 6 of Part 1 of Schedule 3 to the Treasury Laws Amendment (2021 Measures No. 5) Act 2021 (which is the Act that will be created if the Treasury Laws Amendment (2021 Measures No. 5) Bill 2021 is passed by the Parliament). However, Part 2 of Schedule 1 will not commence if that Act is not enacted. [Schedule 6, item 24, subsection 160-16(1)]

Chapter 15: Deductible gift recipients

Outline of chapter

15.1 Schedule 7 to the Bill amends the ITAA 1997 to:

•

specifically list the Greek Orthodox Community of New South Wales Ltd, Australian Associated Press Ltd, Virtual War Memorial Limited and SU Australia Ministries Limited as deductible gift recipients;

•

extend the deductible gift recipient specific listings of Cambridge Australia Scholarships Limited and Foundation 1901 Limited; and

•

remove the deductible gift recipient specific listing of The East African Fund Limited (with the fund remaining endorsed as a deductible gift recipient under another category).

Context of amendments

15.2 The income tax law allows income tax deductions for taxpayers who make gifts of $2 or more to deductible gift recipients. To be a deductible gift recipient, an organisation must fall within one of the general categories set out in Division 30 of the ITAA 1997 or be specifically listed by name in that Division.

15.3 Becoming a deductible gift recipient status helps eligible organisations attract public financial support for their activities.

15.4 The Greek Orthodox Community of New South Wales Ltd (ABN 50 000 018 128) is a charity that provides for the spiritual, cultural, educational and welfare needs of the Greek Australian community. Its activities include managing care facilities, running Greek language programs, maintaining churches and a Hellenic historical centre, and organising the Greek film festival.

15.5 Australian Associated Press Ltd (ABN 94 641 582 121) is a charity that operates as a national news agency and content producer. It provides editorial and business solutions to Australian and international media and corporate sectors.

15.6 Virtual War Memorial Limited (ABN 89 613 555 347) is a charity that operates as a digital memorial to honour the personal experiences of those who have served Australia in times of conflict. It seeks to present the socio-military history in a way that engages and educates individuals and communities.

15.7 SU Australia Ministries Limited (ABN 74 009 669 569) is a charity that supports and connects children, young people and their families through local schools, churches, and community groups

15.8 Cambridge Australia Scholarships Limited (ABN 71 146 517 366) is a charity that provides scholarships for outstanding Australian graduates to undertake further studies at the University of Cambridge, England.

15.9 Foundation 1901 Limited (ABN 40 602 317 117) is a charity that seeks to commemorate the past, present, and future of Australia's Federation. It promotes awareness and understanding of the ongoing importance of the federation through research, competition, and scholarships.

15.10 The East African Fund Limited, currently operating as The School of St Jude Limited (ABN 53 620 147 775) is a charity that provides free education to children in Tanzania who are otherwise unlikely to attend or complete schooling due to extreme poverty.

Summary of new law

15.11 Schedule 7 to the Bill amends the ITAA 1997 to allow the following entities to be specifically listed as deductible gift recipients under the income tax law:

•

The Greek Orthodox Community of New South Wales Ltd;

•

Australian Associated Press Ltd;

•

Virtual War Memorial Limited; and

•

SU Australia Ministries Limited.

15.12 Schedule 7 to the Bill amends the ITAA 1997 to extend the period in which the following entities are specifically listed deductible gift recipients under the income tax law:

•

Cambridge Australia Scholarships Limited; and

•

Foundation 1901 Limited.

15.13 Schedule 7 to the Bill amends the ITAA 1997 to remove the following entity as a specifically listed deductible gift recipient under the income tax law:

•

the East African Fund Limited.

Detailed explanation of new law

15.14 Taxpayers may claim an income tax deduction for gifts made to the Greek Orthodox Community of New South Wales Ltd (ABN 50 000 018 128) provided the gift complies with the existing requirements of the income tax law. This amendment ensures that the Greek Orthodox Community of New South Wales Ltd receives public financial support for their activities. [Schedule 7, item 7, section 30-105 of ITAA 1997]

15.15 Taxpayers may claim an income tax deduction for gifts made to Australian Associated Press Ltd (ABN 94 641 582 121) provided the gift complies with the existing requirements of the income tax law. This amendment ensures that Australian Associated Press Ltd receives public financial support for their activities. [Schedule 7, item 6, section 30-105 of ITAA 1997]

15.16 Taxpayers may claim an income tax deduction for gifts made to Virtual War Memorial Limited (ABN 89 613 555 347) provided the gift complies with the existing requirements of the income tax law. This amendment ensures that Virtual War Memorial Limited receives public financial support for their activities. [Schedule 7, item 2, section 30-50 of ITAA 1997]

15.17 Taxpayers may claim an income tax deduction for gifts made to SU Australia Ministries Limited (ABN 74 009 669 569) provided the gift complies with the existing requirements of the income tax law. This amendment ensures that SU Australia Ministries Limited receives public financial support for their activities. [Schedule 7, item 1, section 30-25 of ITAA 1997]

15.18 Taxpayers may claim an income tax deduction for gifts made to Cambridge Australia Scholarships Limited (ABN 71 146 517 366) for a longer period than initially provided when it was first listed as a deductible gift recipient, provided the gift complies with the existing requirements of the income tax law. This amendment ensures that Cambridge Australia Scholarships Limited continues to receive public financial support for their activities. [Schedule 7, item 4, section 30-80 of ITAA 1997]

15.19 Taxpayers may claim an income tax deduction for gifts made to Foundation 1901 Limited (ABN 40 602 317 117) for a longer period than initially provided when it was first listed as a deductible gift recipient, provided the gift complies with the existing requirements of the income tax law. This amendment ensures that Foundation 1901 Limited continues to receive public financial support for their activities. [Schedule 7, item 5, section 30-105 of ITAA 1997]

15.20 The East African Fund Limited, currently operating as The School of St Jude Limited (ABN 53 620 147 775) has been registered as a public benevolent institution by the Australian Charities and Not-for-profits Commission. On this basis, the ATO has endorsed this charity to be a deductible gift recipient in the general category of Welfare and rights under section 30-45 of the ITAA 1997. Therefore, its specific listing is removed as it is no longer required. [Schedule 7, item 3, section 30-80 of ITAA 1997]

Consequential amendments

15.21 Schedule 7 also amends the index for Division 30 of the ITAA 1997 to reflect the amendments. [Schedule 7, items 8-12, section 30-315 of ITAA 1997]

Application and transitional provisions

Commencement

15.22 The amendments commence on the first day of the quarter following Royal Assent.

Application

15.23 The amendments apply to gifts made on or after 1 July 2019 to the Greek Orthodox Community of New South Wales Ltd.

15.24 The amendments apply to gifts made on or after 1 July 2021 and before 1 July 2026 to Australian Associated Press Ltd and Virtual War Memorial Limited.

15.25 The amendments apply to gifts made on or after 1 July 2021 and before 1 July 2023 to SU Australia Ministries Limited.

15.26 The amendments extend the period of the listing of Cambridge Australia Scholarships Limited so that it applies to gifts made on or after 1 July 2021 and before 1 July 2026.

15.27 The amendments extend the period of the listing of Foundation 1901 Limited so that it applies to gifts made on or after 1 September 2021 and before 1 September 2026.

15.28 The amendments apply retrospectively. This ensures that if gifts are made to entities during the application dates given above, they may be tax deductible for income tax purposes, provided they comply with other requirements of the income tax law.

Chapter 16: Minor and technical amendments Spring 2021

Outline of chapter

16.1 Schedule 8 to the Bill makes a number of miscellaneous and technical amendments to various laws in the Treasury portfolio.

16.2 The amendments make minor and technical changes to correct typographical and numbering errors, repeal inoperative provisions, remove administrative inefficiencies, address unintended outcomes, and ensure that the law gives effect to the original policy intent.

Context of amendments

16.3 Minor and technical amendments are periodically made to Treasury legislation to remove anomalies, correct unintended outcomes and generally improve the quality of laws. This is part of the Government's ongoing commitment to the care and maintenance of Treasury portfolio legislation.

16.4 The process was first supported by a recommendation of the 2008 Tax Design Review Panel, which was appointed to examine how to reduce delays in the enactment of tax legislation and improve the quality of tax law changes. It has since been expanded to all Treasury portfolio legislation.

Summary of new law

16.5 The minor and technical amendments address technical deficiencies and legislative uncertainties in various Treasury laws by:

•

correcting spelling and typographical errors;

•

fixing incorrect legislative references;

•

reducing unnecessary red tape;

•

addressing unintended outcomes;

•

enhancing readability and administrative efficiency; and

•

repealing redundant and inoperative provisions.

Detailed explanation of new law

Amendments commencing the day after Royal Assent

Australian Prudential Regulation Authority Supervisory Levies Determination 2021

16.6 Section 9-2 of the Australian Prudential Regulation Authority Supervisory Levies Determination 2021 contains a typographical error for the minimum restricted levy amount relating to superannuation entities that are not pooled superannuation trusts, small APRA funds or single member approved deposit funds. The minimum restricted levy amount included in the table was "$7,50", but the intended amount was "$7,500". The amendments update the minimum restricted levy to $7,500. [Schedule 8, item 1, section 9-2 of the Australian Prudential Regulation Authority Supervisory Levies Determination 2021]

16.7 The amendments apply retrospectively from 1 July 2021. It is not expected that the small number of superannuation entities affected by this typographical error would be adversely affected by the retrospective application of this amendment. This is because the correct amount of $7,500 was publicly consulted on and was the amount expected to be paid by the entities. Applying the amendment from the beginning of 2021 financial year ensures that levy obligations for affected entities are consistent with what was originally intended. The APRA has also contacted affected entities to advise them of the error and of this intended correction. [Schedule 8, item 2, section 10-1 of the Australian Prudential Regulation Authority Supervisory Levies Determination 2021]

Amendments to the breach reporting provisions in the Corporations Act 2001 and National Consumer Credit Protection Act 2009

16.8 Schedule 11 to the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 introduced a strengthened breach reporting regime into the Corporations Act and a new regime into the National Consumer Credit Protection Act 2009. Under the regimes, licensees are obligated to report and investigate breaches of the financial services law and credit legislation.

16.9 Paragraph 50A(3)(c) of the National Consumer Credit Protection Act 2009 provides that breaches of other Commonwealth laws, to the extent that those laws cover conduct relating to credit activities, are reportable.

16.10 Under the equivalent provision in the Corporations Act, the breach reporting regime only covers breaches of other Commonwealth laws (to the extent they cover conduct relating to financial services) where those laws are prescribed by the regulations. The scope of the regime under the Corporations Act is therefore narrower and provides greater certainty to licensees about the scope of their breach reporting obligations.

16.11 The amendment adds to paragraph 50A(3)(c) of the National Consumer Credit Protection Act 2009 the requirement that Commonwealth laws be prescribed by the regulations for their breach to be reportable. This aligns the with the approach taken in the Corporations Act where regulations prescribe which Commonwealth laws are caught within the breach reporting regime. This will provide clarity to licensees of their breach reporting obligations. [Schedule 8, items 19 and 22, section 50A(3)(c) of the National Consumer Credit Protection Act 2009]

16.12 The breach reporting regimes under the Corporations Act and the National Consumer Credit Protection Act 2009 provide that significant breaches of core obligations by representatives of licensees are reportable. However, the provisions comprising the core obligations pertain to obligations on licensees only. This means that breaches by representatives of the financial services law or credit legislation do not attract a reporting obligation, even if such breaches are significant.

16.13 The amendments add core obligations on representatives of licensees into the breach reporting regime. This will ensure that breaches of these obligations by representatives of licensees are reportable. [Schedule 8, items 4 and 20, section 50A(3) of the National Consumer Credit Protection Act 2009; section 912D(3)(e) of the Corporations Act]

16.14 The core obligations on representatives of licensees are the same core as the obligations on licensees, except that licensees' core obligations also include those found in other Commonwealth laws (that fall within the scope defined in each of the Corporations Act and National Consumer Credit Protection Act 2009).

16.15 The amendments apply in relation to a reportable situation that arises on or after 1 October 2021. Licensees are not disadvantaged by retrospective application of the amendments because the amendments operate to ensure that, for a reportable situation that arises in the period between 1 October 2021 and the commencement of the amendments, the relevant reporting time period begins on the day the amendments commence. [Schedule 8, item 14, sections 1689 and 1690 of the Corporations Act; Schedule 8, item 22, items 1 and 2 of Schedule 20 to the National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009]

16.16 For example, if a licensee is required to do something within 30 days of becoming aware of a reportable situation, and the time to do that thing was before the commencement of the amendment, the effect of the application provision is that the licensee would be required to do the thing within 30 days after the commencement of the amendments.

16.17 Paragraph 912D(4)(b) of the Corporations Act and paragraph 50A(4)(b) of the National Consumer Credit Protection Act 2009 provide that a breach of a civil penalty provision is significant and reportable to ASIC unless the civil penalty provision is prescribed in the regulations.

16.18 Under both Acts, a breach of a civil penalty provision may be triggered by the breach of one of a number of different provisions, or in relation to one of a number of different matters. Prescribing a civil penalty provision in the Regulations would therefore have the effect of making a breach in relation to multiple provisions or matters exempt from reporting. This limits the ability to make breaches in relation to some matters reportable while exempting others.

16.19 The amendments address this situation by providing that a civil penalty provision may be prescribed to the extent that it relates to the contravention of a specific provision or class of provisions, or a matter or class of matters. This allows particular matters or contraventions of provisions (or classes of the same) to be specified for exemption from reporting, without exempting the whole civil penalty provision and each provision or matter to which the penalty provision relates. [Schedule 8, items 5 and 21, section 912D(6) of the Corporations Act and section 50A(5A) of the National Consumer Credit Protection Act 2009]

16.20 The amendment applies to reportable situations that arise on or after the commencement of the amendment. [Schedule 8, item 14, sections 1689 and 1691 of the Corporations Act; Schedule 8, item 22, items 1 and 3 of Schedule 20 to the National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009]

Other amendments to the Corporations Act 2001

16.21 Section 323DB of the Corporations Act requires listed entities to give each relevant market operator a notice if it or its subsidiary received a JobKeeper payment in a financial year. Section 323DC requires ASIC to publish a report of all notices that were given and released to the market. Item 3 amends a typographical error in subsection 323DC(1), replacing "relevant market regulators" with "relevant market operators" (italic emphasis added). This reflects the intended operation of the subsection, that the requirement on ASIC to report is in relation to notices given to relevant market operators. [Schedule 8, item 3, section 323DC(1) of the Corporations Act]

16.22 A number of amendments are also made to incorporate various modifications of the Corporations Act that are located in the Corporations Regulations 2001 directly into the Act. These amendments improve the readability of the law and reduce the number of instruments that modify the primary law.

16.23 Since 2005, regulation 7.6.08 of the Corporations Regulations 2001 have modified the operation of section 916B of the Corporations Act. These modifications ensure any authorised representative can appoint an individual person to act on behalf of the licensee, so long as:

•

the licensee consents in writing to this occurring; and

•

the representative making the appointments was not themselves appointed in this manner.

16.24 Items 6 and 7 incorporate these modifications into section 916B of the Corporations Act by expanding the group of authorised representatives who can appoint individual persons to act on a licensee's behalf. Currently under that provision, only body corporate authorised representatives can appoint individual persons to act on a licensee's behalf. [Schedule 8, items 6 and 7 section 916B of the Corporations Act]

16.25 For consistency throughout the provision, items 8, 9 and 10 make consequential amendments to the remainder of section 916B to update the terminology to 'authoriser'. [Schedule 8, items 8, 9 and 10, section 916B of Corporations Act]

16.26 Item 11 amends subsection 916F(1AA) to insert two additional exemptions where the person who authorises a representative to provide financial services is not required to notify ASIC of the authorisation. These two exemptions were included as modifications by subregulation 7.6.08(3) of the Corporations Regulations 2001 and include instances where:

•

a representative provides personal advice about a basic deposit product or a facility for making non-cash payments that relates to a basic deposit product; or

•

the authoriser provides information about the representative and the representative's authorisation when requested.

[Schedule 8, item 11, section 916F(1AA) of the Corporations Act]

16.27 Item 14 preserves the operation of existing regulations made under the previous section 916F(1AA) of the Corporations Act, which is repealed and replaced by item 11. [Schedule 8, item 14, section 1692 of the Corporations Act]

16.28 Section 946C of the Corporations Act was modified by regulation 7.7.10AH of the Corporations Regulations 2001 so that in a time critical case, a provider can issue a Statement of Advice to a client within five business days (rather than five calendar days). Item 12 amends paragraph 946C(3)(c) to incorporate this modification in the primary law. [Schedule 8, item 12, section 946C(3)(c) of the Corporations Act]

16.29 Section 1019B of the Corporations Act was modified by regulation 7.9.15G of the Corporations Regulations 2001 so that the client's right to return a financial product in certain circumstances commences no later than the end of five business days (rather than five calendar days) after the product was issued or sold to the client. Item 13 amends paragraph 1019B(3)(b) to incorporate this modification in the primary law. [Schedule 8, item 13, section 1019B(3)(b) of the Corporations Act] Foreign Acquisitions and Takeovers Act 1975

16.30 Section 62A of the Foreign Acquisitions and Takeovers Act 1975 allows the Treasurer to provide a notice which contemplates the variation or revocation of an exemption certificate if the holder of that certificate provides false or misleading information prior to seeking the exemption. The power to give this notice is in subsection 62A(2). However, paragraph 62A(3)(b) incorrectly references the power as being in subsection 62A(1). The amendment fixes this error and ensures the reference is correct. [Schedule 8, item 15, section 62A of Foreign Acquisitions and Takeovers Act 1975]

16.31 Section 76 of the Foreign Acquisitions and Takeovers Act 1975 sets out the content requirements in relation to a no objection certificate that is issued under sections 74 or 75 of that Act. Section 76(4) incorrectly references paragraph 76(1)(c) when referring to the time period requirement which is in subparagraph 76(1)(b)(i). The amendment corrects this error and ensure the reference is correct. [Schedule 8, item 16, section 76 Foreign Acquisitions and Takeovers Act 1975] Income Tax Rates Act 1986

16.32 Amendments are made to ensure the Working Holiday Maker tax regime functions properly despite disruptions caused by COVID-19.

16.33 Under section 3A of the Income Tax Rates Act 1986, an individual who holds a subclass 417 (Working Holiday) visa, subclass 462 (Work and Holiday) visa or certain bridging visas is considered a working holiday maker. Relative to non-resident taxpayers, working holiday makers are effectively subject to concessional tax rates under Part III of Schedule 7 to the Income Tax Rates Act 1986.

16.34 Eligible working holiday makers may apply to the Department of Home Affairs to extend their stay in Australia under a COVID-19 Pandemic Event 408 visa, which is defined in regulation 9204 of Schedule 13 to the Migration Regulations) 1994.

16.35 Section 3A of the Income Tax Rates Act 1986 is amended so that the definition of a working holiday maker includes holders of a Pandemic Event 408 visa if that visa was granted to allow holder to remain in Australia following the expiry of a subclass 417 visa, subclass 462 visa, or certain bridging visas. [Schedule 8, item 17, section 3A of the Income Tax Rates Act 1986]

16.36 The amendments apply retrospectively from 1 July 2019 to taxpayers who are non-residents, whether they were non-residents for the entirety or part of an income year, and prospectively from the first 1 July to occur after the Part commences to all taxpayers. It is not expected that the retrospective application will adversely impact any individuals and ensures non-resident taxpayers are subject to the concessional rates. [Schedule 8, item 18] Payment Times Reporting Act 2020

16.37 Subsection 14(1) of the Payment Times Reporting Act 2020 sets out the content that must be included in payment times reports. Paragraph 14(1)(h) requires reporting on the proportion of all procurement during the reporting period, determined by total value, that was procurement from small business suppliers.

16.38 The amendments repeal paragraph 14(1)(h) of the Payment Times Reporting Act 2020 and substitute a new paragraph. The new paragraph refers to the proportion, by total value, of "all invoices paid" rather than the proportion, determined by total value, of "procurement". [Schedule 8, item 28, section 14 of the Payment Times Reporting Act 2020]

16.39 The amendments are intended to ensure that the reporting content requirement captures the proportion, by total value, of all invoices paid by the entity during the reporting period that were small business invoices rather than the total value of procurement which may differ from invoices paid.

16.40 Subsection 14(2) of the Payment Times Reporting Act 2020 provides that the rules may prescribe the method for working out any of the matters mentioned in subsection 14(1)(g) of that Act, including in relation to the issue or payment of small business invoices for the purposes of paragraph 14(1)(g).

16.41 Subsection 14(2) of the Payment Times Reporting Act 2020 is amended to provide that the rules may prescribe a method for working out any of the matters mentioned in paragraphs 14(1)(e), 14(1)(f), 14(1)(g) and 14(1)(h) of that Act. [Schedule 8, item 29, section 14 of the Payment Times Reporting Act 2020]

16.42 The amendment allows additional rules to be prescribed about the method of working out for those sections. Paragraph 14(1)(e) of the Payment Times Reporting Act 2020 requires the inclusion of a statement on the entity's shortest and longest standard payment periods. Paragraph 14(1)(f) of that Act requires details and an explanation of changes to standard payment periods, if any, during the reporting period. Paragraph 14(1)(h) of that Act as amended relates to the proportion of all invoices paid in a reporting period that were paid to a small business supplier.

16.43 The amendments to subsection 14(1) of the Payment Times Reporting Act 2020 made by this Part apply in relation to a payment times report given on or after the commencement of this Part (including a payment times report for a reporting period that began before the commencement time). [Schedule 8, item 30]

16.44 Rules made under subsection 14(2) of the Payment Times Reporting Act 2020, in force immediately before the commencement time, have effect, at and after the commencement time, as if the rules had been made for the purposes of subsection 14(2) of that Act as inserted by this Part. [Schedule 8, item 30]

16.45 Section 27 of the Payment Times Reporting Act 2020 allows for the delegation of any or all of the Regulators' powers and functions under that Act (except for those specified in subsection 27(2) of that Act).

16.46 Subsection 27(3) of the Payment Times Reporting Act 2020 limits the delegation of certain functions or powers to the level of Senior Executive Service (SES) employee, or acting SES employee in the department.

16.47 The amendments repeal paragraphs 27(3)(a) and (b) of the Payment Times Reporting Act 2020 so that functions or powers under subsections 7(3) (ceasing to be a reporting entity) and 13(4) (further time to give a payment times report) may also be exercised by Executive Level 2 (EL2) officers or acting EL2 officers. [Schedule 1, item 31, section 27 of the Payment Times Reporting Act 2020]

16.48 During the implementation of the Scheme, it has become apparent that decisions about ceasing to be a reporting entity and to allow further time to give a payment times report are generally high volume and routine. The legislation also clearly prescribes the circumstances in which an entity can be considered to cease to be a reporting entity and the circumstances where an extension of time may be allowed.

16.49 For these reasons, the amendments provide greater flexibility by extending the delegation to cover EL2 officers, in addition to SES officers.

16.50 The decision to cease to be a reporting entity, under subsection 7(3) of the Payment Times Reporting Act 2020, and extension of time for submission of a Payment Times Report, under subsection 13(4) of that Act, are reviewable decisions under section 51 of that Act. Subsection 53(1) of that Act requires that reviewable decisions are either considered by the Regulator personally or considered by another individual who was not involved in the original decision and is at the same level as the original decision maker.

16.51 Under paragraph 7(1)(b) of the Payment Times Reporting Act 2020 a constitutionally covered entity which does not meet the criteria for a reporting entity in subsection 7(2) of that Act may volunteer to provide Payment Times Reports by writing to the Regulator prior to the beginning of an income year. A reporting entity which elects under paragraph 7(1)(b) of that Act to report is referred to as a "volunteering entity".

16.52 The amendments clarify that a volunteering entity becomes a reporting entity at the time at which they give notice of their election to become a reporting entity. Reporting entities, who are not volunteering entities, do not commence reporting until the start of an income year in the first reporting period for that income year. This has also been the case for volunteering entities, however, these amendments will mean that volunteering entities will report in the next reporting period regardless of whether it is the first or the second reporting period of an income year. [Schedule 8, items 23 and 24, sections 5 and 7 of the Payment Times Reporting Act 2020]

16.53 The amendment to section 8 of the Payment Times Reporting Act 2020 clarifies the meaning of reporting period for new volunteering entities. It provides that if a volunteering entity becomes a reporting entity within the first 6 months of an income year, the first 6 months of that income year is not a reporting period for the entity. In addition, if a volunteering entity becomes a reporting entity within the last 6 months of an income year for the entity, no period in that income year is a reporting period for the entity. [Schedule 8, items 25 and 26, section 8 of the Payment Times Reporting Act 2020]

16.54 The application provision provides that the amendments apply to those volunteering entities giving notice on or after the commencement date of the amendments. Volunteering entities that have already given notice will need to continue to wait to the start of the relevant income year to commence reporting. [Schedule 8, item 27] Taxation Administration Act 1953

16.55 Under subsection 350-10(4) in Schedule 1 to the TAA 1953, copies or extracts of certain tax documents may be used in substitute of the original document by the ATO for the purposes of court proceedings. Such documents may be used as evidence of the matters set out in the document to the same extent the original document would have been.

16.56 This provision replaced the now repealed subsection 177(1) of the ITAA 1936 and was intended to have the same substantive effect as the rewritten provision even though the new provision expressed the same idea in a different form of words in order to use a clearer or simpler style. [Schedule 8, item 32, section 350-10 in Schedule 1 to the TAA 1953]

16.57 The amendments clarify that a copy of a document to which subsection 350-10(4) applies may be used as conclusive evidence of the same matters that the original document would have been proof of, consistent with the policy intent and the ATO's current administration of the provision.

Amendments commencing first day of next quarter

Income Tax Assessment Act 1997 and Taxation Administration Act 1953

16.58 The amendments ensure the Seasonal Labour Mobility Program tax regime functions properly despite disruptions caused by COVID-19.

16.59 Under Subdivision 840-S of the ITAA 1997, foreign residents who are employed under the Seasonal Labour Mobility Program may be liable to pay income tax on the salary, wages and other types of payments paid to them under that program.

16.60 Individuals who are employed under the Seasonal Labour Mobility Program typically hold a subclass 403 visa. Holders of a subclass 403 visa may apply to the Department of Home Affairs to extend their stay in Australia under a COVID-19 Pandemic Event visa (subclass 408 visa). However, under the subclass 408 visa they will not be subject to the concessional Seasonal Labour Mobility Program tax regime. Currently, this issue is addressed by the Taxation Administration (Remedial Power - Seasonal Labour Mobility Program) Determination 2020, a legislative instrument, made by the Commissioner under section 370-5 of Schedule 1 to the TAA 1953.

16.61 Subparagraph 840-905(b)(ii) of the ITAA 1997 and section 12-319A of Schedule 1 to the TAA 1953 are amended to expand the scope of both provisions to holders of a subclass 408 visa who were previously holders of a subclass 403 visa. [Schedule 8, items 33 and 35, section 840-905 of the ITAA 1997 and section 12-319A in Schedule 1 to the TAA 1953]

16.62 The amendments apply retrospectively from the 1 July 2019. The retrospective application does not adversely impact individuals. [Schedule 8, items 34 and 36]

16.63 The amendments also repeal the Taxation Administration (Remedial Power - Seasonal Labour Mobility Program) Determination 2020. [Schedule 8, item 37]

Amendments with other commencements

National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009

16.64 Amendments made by the National Consumer Credit Protection Amendment (Mandatory Credit Reporting and Other Measures) Act 2021 (the Amending Act) that insert transitional provisions into the National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009 will commence on 1 July 2022. The Amending Act contains a numbering error where item 23 of Schedule 2 to the Amending Act was meant to be a continuation of item 22. Item 23 should have been numbered as item 1 of Schedule 9 under amending item 22. The amendment corrects this error by renumbering the provision to the correct item number. [Schedule 8, item 38, item 23 of Schedule 9 to the National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009. Income Tax Assessment Act 1936

16.65 Section 204 of the ITAA 1936 permits the disclosure of TFN to certain registrars for certain purposes. The Modernising Business Registers Program will consolidate multiple registers maintained by ASIC and the ATO. The registrars will share computer systems with the ATO to efficiently deliver the Australian Business Registry Services.

16.66 The amendments allow the Commissioner to disclose TFNs to the extent reasonably necessary to enable the registrars to share the ATO's computer systems in the performing of their functions or carrying out their powers. [Schedule 8, items 39 and 40, sections 204(2A) and 204(3) of ITAA 1936]

16.67 The amendments to section 204 of the ITAA 1936 have retrospective effect to ensure that any disclosures during computer system development and testing carried out for the Modernising Business Registers Program do not constitute offences due to the inadvertent omission of the provisions inserted by these amendments from the Treasury Laws Amendment (Registries Modernisation and Other Measures) Act 2020.

16.68 This retrospectivity is achieved by linking the commencement time of these amendments to the commencement time of amendments to the TAA 1953 being made by the Treasury Laws Amendment (2020 Measures No. 6) Act 2020 (which specify which registrars the Commissioner may disclose TFNs to). The Treasury Laws Amendment (2021 Measures No. 5) Bill 2021 includes provisions to make the commencement of those amendments retrospective. [Schedule 8, item 43]

16.69 Retrospective application will not adversely affect any persons or entities because its effect is to ensure that appropriate disclosure of TFNs in circumstances that should have been specified at the commencement of the Modernising Business Registers Program does not constitute an offence. Taxation Administration Act 1953

16.70 Section 8WB of the TAA 1953 prohibits the recording or use of TFNs in particular ways, but disapplies the prohibition in some circumstances. The amendments to this section add circumstances connected to the activities of the registrar to the circumstances in which the prohibition is disapplied. [Schedule 8, items 41 and 42, sections 8WB(1A)(b) and 8WB(2) of the TAA 1953]

16.71 These amendments have retrospective application in the same manner and for the same reasons as the amendments to section 204 of the ITAA 1936 described above.

Chapter 17: Retirement income covenant

Outline of chapter

17.1 Schedule 9 to the Bill inserts a new covenant in the SIS Act that requires trustees of an RSE to develop a retirement income strategy for beneficiaries who are retired or are approaching retirement. This covenant is known as the retirement income covenant.

17.2 The retirement income covenant requires trustees to have a strategy to assist beneficiaries to achieve and balance the following three objectives:

•

maximising their expected retirement income;

•

managing expected risks to the sustainability and stability of their expected retirement income; and

•

having flexible access to expected funds during retirement.

17.3 This covenant does not apply to trustees of self managed superannuation funds.

17.4 All legislative references in this Chapter are to the SIS Act unless otherwise stated.

Context of amendments

17.5 In the 2018-19 Budget, the Government committed to introducing a retirement income covenant with the intention of improving retirement outcomes of individuals, while enabling choice and competition in the retirement phase.

17.6 The existing legal obligations on superannuation trustees focus primarily on the accumulation phase and there are no specific obligations to consider the needs of beneficiaries in retirement. The retirement income covenant is intended to address this gap.

17.7 It is intended that member outcomes in retirement will improve by encouraging trustees to focus on and implement strategies for beneficiaries in retirement or approaching retirement.

Summary of new law

17.8 Schedule 9 to the Bill amends the SIS Act to introduce a covenant which requires trustees to formulate, review regularly and give effect to a retirement income strategy for beneficiaries who are retired or approaching retirement.

Comparison of key features of new law and current law

Detailed explanation of new law

Obligations applying to trustees of an RSE

17.9 Trustees of an RSE are required to formulate, review regularly, and give effect to a retirement income strategy for beneficiaries who are approaching or are in retirement. The strategy formulated must meet certain requirements, such as covering relevant beneficiaries and addressing how a trustee will assist beneficiaries to achieve and balance certain objectives. It will be considered a contravention of a covenant for a trustee to fail to comply with this requirement. [Schedule 9, items 1 and 2, sections 52(8A) and 52AA(1)]

17.10 The retirement income covenant will also require trustees:

•

to take reasonable steps to gather the information necessary to inform the formulation and review of the strategy;

•

as part of the strategy, record in writing the following:

-

each determination made by the trustee for the purposes of the strategy;

-

the steps taken to gather information;

-

each decision the trustee considers to be significant in the process of formulating, reviewing or giving effect to the strategy; and

-

the reasons for those determinations, steps and decisions; and

•

make a summary of the strategy publicly available on the RSE's website.

[Schedule 9, item 1, section 52(8A)]

17.11 In formulating the strategy trustees must prepare a document that outlines in generality how the trustee intends to assist beneficiaries covered by the strategy to achieve and balance the following objectives:

•

maximise their expected retirement income;

•

manage expected risks (including longevity risks, investment risks and inflation risks) to the sustainability and stability of their expected retirement income; and

•

have flexible access to expected funds during retirement.

17.12 In formulating the strategy trustees would be expected to identify the expected retirement income needs of beneficiaries and present a plan to build the fund's capacity and capability to service those needs.

17.13 In formulating and giving effect to a strategy for beneficiaries approaching retirement, trustees may consider assistance that could be provided during the accumulation phase.

17.14 A trustee's strategy may include providing a range of assistance to beneficiaries, such as:

•

developing and/or offering specific retirement income products;

•

developing specific drawdown patterns that provide higher incomes throughout retirement;

•

providing budgeting tools or expenditure calculators to identify income and capital needs over time;

•

providing factual information about key retirement topics, such as eligibility for the Age Pension or aged care, the concept of drawing down capital as a form of income, or the different types of income streams available; and

•

providing forecasts to beneficiaries during the accumulation phase about potential income in retirement through superannuation calculators or retirement estimates.

17.15 The trustee has discretion to determine the type and scope of assistance provided, noting that any assistance must also meet the sole purpose test and be in beneficiaries' best financial interests.

17.16 It is considered that the requirement to regularly review the strategy will entail reviewing both the outcomes from the strategy and the strategy itself at regular intervals. At this stage, it is expected that reviews would take place similar to the investment covenant, where reviews of the outcomes from the strategy are annual and reviews of the strategy itself occur every three years.

Consequences of failing to comply

17.17 The obligations form part of the section 52 covenants. Consistent with a contravention of other section 52 covenants, a trustee who contravenes the retirement income covenant may be subject to a civil penalty.

17.18 The civil penalty for a contravention follows the existing civil penalty regime under the SIS Act (see sections 54B and 193 of the SIS Act). The maximum penalty is 2,400 penalty units. The penalty is the same as the penalty for other civil penalty provisions of the SIS Act and like those civil penalty provisions, aims to deter trustees from avoiding, or failing to meet their obligations under the law.

17.19 The civil penalty provides a deterrent from breaching the retirement income covenant, encouraging trustees to develop a strategy to assist beneficiaries in the ways outlined in the covenant. It is important that the penalties reflect the seriousness of potential non-compliance. The maximum penalty amount enables courts to impose proportionate penalties in light of the circumstances of the contravention.

17.20 Where the contravention involves dishonesty or an intention to deceive or defraud, a criminal offence applies. The maximum sentence for such a contravention is five years imprisonment (see section 202 of the SIS Act). The aim of the offence and its sanction is to provide a deterrence from breaching the retirement income covenant.

17.21 The Guide to Framing Commonwealth Offences was considered in determining the applicable criminal offence. It is important that an appropriate range of options are available for responding to contraventions. A criminal offence applies in instances where there is a failure to comply with the obligations of the retirement income covenant that involves dishonesty or an intention to deceive or defraud. This reflects the serious nature of such breaches.

17.22 Failing to comply with the covenant may result in beneficiaries having poorer risk management of their retirement savings, being less informed about the options available in relation to retirement income and ultimately having worse retirement outcomes. It is therefore important that the penalty regime acts as a sufficient deterrent and that the penalties reflect the seriousness of potential non-compliance. Note, for information on when compliance obligations first arise under the retirement income covenant, see paragraph 17.83.

Beneficiaries covered by the strategy

17.23 Trustees are required to formulate a retirement income strategy for beneficiaries who are retired or approaching retirement. A trustee has discretion to determine the class of beneficiaries that the trustee considers meet this description. [Schedule 9, item 2, section 52AA(3)]

17.24 The legislation allows a trustee to approach this determination in any way the trustee considers appropriate. Some examples of factors that may assist a trustee to determine a class of beneficiaries that are retired or approaching retirement include:

•

age which may take into consideration the preservation age or pension age;

•

gender which may take into account differences in expected retirement ages, mortality and morbidity;

•

employment status such as if beneficiaries are no longer employed or the trustee expects employment arrangements to end for beneficiaries;

•

when the trustee expects beneficiaries to satisfy a condition of release requirement; and

•

when the trustee expects beneficiaries to begin to plan for retirement and to retire.

17.25 Trustees do not have to formulate a strategy for certain defined benefit members. Where a beneficiary exclusively holds a defined benefit interest in the RSE and the beneficiary is not permitted to commute that benefit into a lump sum, then the trustee is exempt from developing a strategy for beneficiaries that fall under this category. [Schedule 9, item 2, section 52AA(3)]

17.26 Where beneficiaries of defined benefit schemes can commute their interest into a lump sum and the trustee considers that such beneficiaries are approaching retirement or retired then trustees should consider these beneficiaries when formulating the retirement income strategy. Beneficiaries who are permitted to commute their defined benefit pension have a choice as to how they access their expected retirement savings. This provides justification for why the trustee should consider how to assist these beneficiaries in their strategy.

17.27 In addition, trustees of RSEs that exclusively provide members with benefits relating to death, permanent or temporary incapacity are not required to develop a retirement income strategy. It is considered inappropriate to require these trustees to develop a retirement income strategy when they do not provide retirement benefits. [Schedule 9, item 1, section 52(8B)]

17.28 For the purposes of this rule, 'death benefit' and 'permanent incapacity benefit' have the same meaning as defined in subsection 68AA(10) of the SIS Act. 'Temporary incapacity' has the same meaning as in the superannuation data and payment standards. Regulation 6.01 of the Superannuation Industry (Supervision) Regulations 1994 provides the meaning of 'temporary incapacity' for the purposes of the superannuation data and payment standards.

17.29 Trustees have discretion to develop sub-classes of beneficiaries and differentiate the strategy for those sub-classes. [Schedule 9, item 2, section 52AA(4)]

17.30 Developing sub-classes allows trustees to formulate strategies that reflect their understanding of beneficiaries. This recognises that beneficiaries will have different circumstances and allows strategies to be more tailored to sub-classes. Trustees are best placed to provide distinct strategies to sub-classes based on similar characteristics and their understanding of beneficiaries.

17.31 As part of meeting obligations relating to member outcomes assessments, trustees are required to conduct cohort analysis. Identifying sub-classes for the purposes of formulating a retirement income strategy is expected to involve similar analysis. Examples of factors that trustees can use to determine sub-classes include:

•

superannuation balance amount;

•

expected eligibility for the Age Pension at retirement;

•

partner status;

•

home ownership status, specifically whether the beneficiary's property is owned outright, with a mortgage, or if the beneficiary is likely to be or is renting at retirement;

•

gender which may take into account differences in expected retirement ages, mortality and morbidity;

•

expected retirement age;

•

age that drawdowns from superannuation are expected to begin; and

•

other demographic considerations, such as Aboriginal and/or Torres Strait Islander status.

17.32 Trustee flexibility in determining sub-classes of beneficiaries allows trustees to develop appropriate and tailored strategies for their membership base.

17.33 Where a trustee chooses to develop sub-classes, developing sub-classes is expected to occur at a strategic level. Where sub-classes are determined, it is not intended that trustees need to assign each individual beneficiary to a sub-class. Trustees can take into account information that they can reasonably access to inform the design of any sub-classes but they do not need to consider every characteristic of their beneficiaries when designing sub-classes. All beneficiaries that are retired or approaching retirement should, however, be covered by the strategy in general.

17.34 For example, if a trustee decided to construct sub-classes of their membership by gender and superannuation balance amount, it would not be appropriate for a trustee to have a strategy that only considered lower-balance men, higher-balance men and higher-balance women. The trustee would also need to ensure lower-balance women were covered by their strategy. However, the trustee would not be required to have the data or develop the capability to allocate each of their members to one of those four sub-classes.

Objectives of the strategy

17.35 Trustees need to consider how to balance the three key objectives in retirement of maximising expected retirement income, managing expected risks, and having flexible access to expected funds. Trustees have discretion to consider additional objectives they consider relevant.

17.36 Trustees have discretion in relation to how these objectives are to be balanced using their understanding of the needs and preferences of beneficiaries when formulating the strategy.

17.37 Where these objectives compete, a trustee should identify in the strategy how it is intended to assist beneficiaries balance these objectives. For example, if a trustee is aware that a sub-class of beneficiaries would likely hold a mortgage at retirement, that information can be used to inform the assistance they make available to those beneficiaries in balancing flexible access to capital over the other objectives.

Maximising expected retirement income

17.38 Trustees are expected to assist beneficiaries to maximise expected retirement income throughout the period of retirement and balance this objective with other objectives of the strategy. [Schedule 9, item 2, section 52AA(2)(a)]

17.39 'Retirement income' for the purpose of the strategy is after-tax income that is received during the period of retirement. This expected retirement income includes superannuation drawdowns from the entity or fund, Age Pension payments made under the Social Security Act 1991 and any other income the trustee determines is appropriate. [Schedule 9, item 2, section 52AA(5)]

17.40 As trustees are required to consider inflation risk as part of their strategy, as explained below, maximising expected retirement income must involve considering income in real terms. This ensures trustees consider income in a way that appropriately reflects the value of income to beneficiaries over time.

17.41 Other income that may be appropriate to include as retirement income can be from other non-superannuation assets, income from a partner, other income support payments under the Social Security Act 1991 or the Veterans' Entitlements Act 1986 or superannuation interests held outside the fund if the trustee considers it suitable.

17.42 For the purposes of the strategy (including for working out what is included as 'retirement income'), a trustee must determine the meaning of 'period of retirement'. [Schedule 9, item 2, section 52AA(6)]

17.43 The 'period of retirement' is intended to cover the period between the start of retirement and the life expectancy of the sub-class of beneficiaries, or a longer period as a trustee may deem prudent. It is expected that a trustee consider the retirement patterns of beneficiaries when working out the start of the retirement period and at a minimum, consider the average life expectancy of beneficiaries in forming views about the end of that period. The 'period of retirement' may differ for different sub-classes of beneficiaries.

17.44 Trustees are not required to meet any objective quantitative measure of 'maximised' expected retirement income due to the requirement to balance this with the other objectives of the strategy. The objective of maximising expected retirement income reflects the role of superannuation in providing income in retirement and that trustees should assist beneficiaries to drawdown superannuation balances.

17.45 It is expected that determining what assistance is required to 'maximise' retirement income should involve considering:

•

current and expected behaviour of beneficiaries (for example, regular drawdown behaviour or the size and frequency of lump sum withdrawals);

•

potential volatility (including situations of varying investment returns, inflation scenarios and mortality outcomes); and

•

appropriate modelling and analysis, including modelling of expected Age Pension entitlement.

17.46 These considerations are relevant to the trustee's assessment of the objectives of managing expected risks and providing flexible access to expected funds, as explained below.

Sustainability and stability of expected retirement income

17.47 Trustees are required to balance maximising expected retirement income with managing expected risks to the sustainability and stability of retirement income and the other objectives of the strategy.

17.48 Sustainable retirement income is income that is reliable, durable and lasting for a beneficiary's entire period of retirement. Stable retirement income is income that is broadly constant and predictable year on year over a beneficiary's period of retirement. [Schedule 9, item 2, section 52AA(2)(b)]

Managing risks

17.49 The retirement income strategy requires a trustee to consider how the trustee will assist beneficiaries to manage the impact of expected risks to the sustainability and stability of retirement income throughout a beneficiary's period of retirement. The risks that impact the sustainability and stability of expected retirement income include investment risks, longevity risks, inflation risks and any other risks the trustee deems as relevant. [Schedule 9, item 2, section 52AA(2)(b)]

17.50 A trustee has discretion to determine if their beneficiaries need assistance managing investment, inflation and longevity risks, and how trustees provide that assistance. In exercising their discretion, a trustee needs to consider each of the risks in turn.

17.51 Investment risks include market risk, which is the risk of variable or negative investment returns and sequencing risk, which is the risk that a beneficiary experiences a disadvantageous sequence of investment returns on their retirement savings as they periodically drawdown on those savings in retirement.

17.52 Inflation risk is a key risk to the stability of retirement incomes in real terms. It is the risk that a person's income does not maintain its purchasing power over time.

17.53 Due to the inherent uncertainty of life expectancy, longevity risk must also be considered by a trustee. This is the risk that a beneficiary's retirement savings will not extend for the entire life of a beneficiary.

17.54 Due to the varying levels of exposure to risks for each beneficiary, trustees may develop different approaches to managing risks between funds or even between classes of beneficiaries. The Age Pension provides a minimum amount of investment, inflation and longevity risk management. Depending on the beneficiary's circumstances the Age Pension may be sufficient without additional sources of investment, inflation and longevity risk protection.

17.55 The risks that are listed in the legislation are not exhaustive of the types of risk that could be considered and managed. Other potential risks could include risks associated with beneficiaries' disengagement with, or lack of access to, the fund. There is also the risk to the appropriate management of the sustainability and stability of expected retirement income posed by issues associated with beneficiaries' potential cognitive decline over time.

Flexible access to expected funds

17.56 The retirement income strategy must address how trustees will assist beneficiaries covered by the strategy to have flexible access to expected funds available over the period of retirement and balance this against the other objectives of the strategy. [Schedule 9, item 2, section 52AA(2)(c)]

17.57 Trustees are expected to consider situations where it is anticipated that beneficiaries will need access to funds over retirement. Trustees may wish to consider the life stage of beneficiaries and likely consumption needs. It would be prudent for a trustee to consider financial and in-kind support offered by state/territory and federal governments to offset health and aged care costs when determining the needs of beneficiaries to have flexible access to expected funds.

17.58 The concept of having flexible access to available expected funds is intended to have a broad meaning, which includes private savings, liquid assets and consideration as to the extent to which non-liquid assets can be drawn upon to meet beneficiary needs. Trustees should make informed assumptions about investment arrangements and use this information to assist beneficiaries to have flexible access to expected funds in retirement.

17.59 For example, trustee assistance to their beneficiaries could be in the form of factoring in these needs in the design of retirement income products offered by the fund.

Strategy to be general in nature and its relationship with financial advice and other laws

17.60 The retirement income strategy outlines a trustee's plan to assist beneficiaries covered by the strategy, in generality. It is expected that trustees will consider the broad needs of the beneficiaries covered by the strategy to determine what assistance the trustee may provide that best meets those needs.

17.61 When formulating and giving effect to their strategy, trustees must operate within the existing financial advice framework. Superannuation funds often provide financial product advice to their members.

17.62 Financial product advice is defined in section 766B of the Corporations Act and involves a recommendation or statement of opinion, or a report of either of those things, that is intended to influence a person in making a decision about a financial product or financial products or could reasonably be regarded as being intended to have such an influence. Financial product advice can be general advice (that is advice that does not take into account the particular objectives, financial situation or needs of the client) or personal advice (advice that does take into account the client's objectives, financial situation and needs).

17.63 When providing financial product advice, a superannuation trustee needs to comply with a range of requirements, including the sole purpose test under the SIS Act. Generally, simple, non-ongoing personal advice about a member's interest in the fund can be charged across the membership as intrafund advice. The cost of providing advice that is more complex or ongoing in nature should be incurred directly by the member receiving the advice rather than the membership of the fund as a whole. Trustees should take these matters into account when formulating their strategy.

17.64 Trustees can fulfill the requirements of the covenant and create effective retirement income strategies without providing financial product advice, as the covenant does not require trustees to recommend or state an opinion that is intended to influence a person in making a decision about a financial product.

17.65 The retirement income strategy is to express the general actions the trustee will take to assist beneficiaries to balance key retirement income objectives. It also does not need to consider the specific circumstances of individual beneficiaries.

17.66 However, the covenant obligations do not inhibit trustees from providing financial product advice (including personal advice) if consistent with other obligations.

17.67 Collecting information on beneficiaries, in and of itself, would not result in the provision of financial product advice (which requires making statements of opinion or recommendations about financial products).

17.68 The covenant obligations are also consistent with anti-hawking laws, which permits a trustee to contact a beneficiary who is approaching retirement with information about different retirement income products offered by the fund, provided that the trustee does not make an offer, or request an invitation to a beneficiary during an unsolicited telephone call, face-to-face meeting or other real time interaction that creates an expectation of an immediate response.

Information gathering requirements

17.69 A trustee must take reasonable steps to gather general information about their beneficiaries necessary to inform the formulation and review of their strategy. [Schedule 9, item 1, section 52(8A)(b)]

17.70 Given the general nature of the strategy, reasonable steps should only involve gathering information to the extent necessary to form a broad understanding of beneficiaries as a group in order to identify the types of assistance that could be offered to beneficiaries to achieve and balance the three objectives. Trustees currently make similar judgements about their membership when developing products or considering communication with their beneficiaries.

17.71 In particular, the information gathered should be used to inform elements of the strategy that are to be determined by the trustee.

17.72 If a trustee is considering whether it would be appropriate to include additional sources of income as 'retirement income' for the purposes of the strategy, it may also be considered reasonable steps to gather information about those elements not known to the fund. For example, trustees may consider information about whether beneficiaries are likely to have assets in other funds, other pensions or non-superannuation assets.

17.73 Information gathering may involve surveying beneficiaries or reviewing existing data. Trustees are permitted to use existing publicly available data where the trustee considers it appropriate and relevant in formulating a strategy.

17.74 Relevant publicly available demographic data may be accessed from reliable public sources such as:

•

the Australian Bureau of Statistics;

•

the Australian Government Actuary;

•

the Australian Prudential Regulatory Authority;

•

the ATO;

•

the Department of Social Services; and

•

the Household Income and Labour Dynamics of Australia survey.

17.75 Trustees may also consider qualitative sources of information in developing their strategy, such as research reports by peak bodies or academic literature. For example, existing research on the preferences of Australian retirees or the effectiveness of various communication methods could inform the trustee's strategy, whereas data tables on mortality and morbidity could aid in managing longevity risk of the sub-classes chosen in a strategy for projected life expectancy.

17.76 Trustees are required to regularly review the appropriateness, effectiveness and adequacy of their retirement income strategy including the assumptions underpinning it. As part of reviewing their strategy, trustees are required to take reasonable steps to gather necessary information to inform this process. [Schedule 9, item 1, section 52(8A)(b)]

Publishing the strategy and written records forming part of the strategy

17.77 The retirement income strategy must be in writing. A trustee must record in writing as part of the strategy:

•

each determination made by the trustee for the purposes of the strategy and the reasons for the determinations;

•

all other decisions made by the trustee in formulating, reviewing or giving effect to the strategy, that the trustee considers to be significant, and the reasons for such decisions; and

•

the steps taken to gather information about their beneficiaries that informed the formulation of the strategy, and the reasons for taking those steps.

[Schedule 9, item 1, section 52(8A)(d)]

17.78 The amendments include the following determinations to be made by the trustee for the purpose of the strategy:

•

a determination of the class of beneficiaries of the entity who are retired or who are approaching retirement;

•

a determination of the meaning of retirement income, which may involve a determination that it is appropriate to include income from other sources in the concept; and

•

a determination of the meaning of period of retirement.

17.79 Examples of decisions that the trustee may consider to be significant in formulating their strategy include:

•

decisions to develop sub-classes and to make provision in relation to those sub-classes;

•

how it was chosen to balance the objectives that are present;

•

the data sources relied on; and

•

other relevant factors where appropriate, such as recording further risks to the sustainability and stability to the retirement income than those listed in the legislation.

17.80 Trustees are required to record their reason for each significant decision to provide accountability around the process for formulating the strategy.

17.81 Trustees may have two strategy documents, one detailed for internal use and a published high-level summary of their strategy that is freely available and easily accessible to the public. [Schedule 9, item 1, section 52(8A)(e)]

17.82 As part of the requirement to regularly review the retirement income strategy, trustees must maintain a current summary of the strategy that is available to the public at all times, even if the strategy is currently under review. The purpose of publishing a summary of the strategy is to provide information to the public so the opportunity exists to make informed choices about the RSE that is most applicable to their circumstances.

Application and transitional provisions

17.83 The amendments commence on the day after Royal Assent. This will enable trustees to commence taking steps to gather information to formulate the retirement income strategy. Trustees are expected to have their strategy formulated in writing and a summary publicly available from 1 July 2022. Trustees are not required to give effect to all the components of their strategy on 1 July 2022. Implementation of the strategy is an ongoing process that is required from 1 July 2022. [Clause 1 and Schedule 9, item 3]

17.84 The amendments apply for RSEs in existence before the amendments commence and for RSEs established after commencement. [Schedule 9, item 3]

Chapter 18: Employee share schemes: Removing cessation of employment as a taxing point

Outline of chapter

18.1 Schedule 10 to the Bill amends the ITAA 1997 to remove cessation of employment as a taxing point for ESS interests which are subject to deferred taxation.

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

Context of amendments

18.3 An ESS provides employees (as broadly defined in the ESS rules) with a financial interest in the company they work for through the granting of shares or rights to shares in that company, or in another company if the employing company is a subsidiary of that other company.

18.4 An ESS interest is a beneficial interest in a share in a company or a beneficial interest in a right to acquire a beneficial interest in a share in a company. For simplicity of expression, this Chapter will reference these as shares or rights respectively.

18.5 Employers use ESS to attract, retain and motivate staff by issuing ESS interests such as shares or rights to their employees, usually at a discount.

18.6 Generally, any discount to the market value of ESS interests in shares or rights are taxed up-front, and the market value of the discount must be included in the employee's assessable income for that income year. This outcome reflects the inherent nature of the discount as remuneration from employment.

18.7 However, an employee can access deferred taxation on a discount where the ESS interest obtained under a complying ESS is:

•

at a real risk of forfeiture or loss (other than by disposal) under the conditions of the scheme; or

•

obtained under a salary sacrifice arrangement, and the ESS interest acquired does not exceed $5,000 in an income year; or

•

in the case of a beneficial interest in a right, the ESS genuinely restricts the immediate disposal of the right and the ESS rules expressly provide that Subdivision 83A-C applies to the scheme.

18.8 The deferred taxing point for an ESS interest which is a share is the earliest of:

•

when there is no real risk that the share will be forfeited or lost (other than by disposal) and there are no longer any genuine restrictions preventing the disposal, or

•

when the employee ceases the employment in respect of which they acquired the share, or

•

at the end of the 15-year period following the acquisition of the share.

18.9 The deferred taxing point for an ESS interest which is a right is the earliest of:

•

when the right has not been exercised, and there is no real risk that the right will be forfeited or lost (other than by disposal) and there are no longer any genuine restrictions preventing the disposal; or

•

when the employee ceases the employment in respect of which they acquired the right; or

•

at the end of the 15-year period following the acquisition of the right; or

•

when the right has been exercised, and there is no longer any real risk that the share will be forfeited or lost and any genuine restrictions preventing the disposal of the share no longer apply.

18.10 For both shares and rights, if the ESS interest (or the share acquired by exercising the ESS interest) is disposed of within 30 days of the earliest time of the above taxing points, the ESS deferred taxing point will instead be the time of the disposal.

18.11 Removing the cessation of employment taxing point for tax-deferred ESS will support Australian businesses to attract and retain the talent they need to compete on a global stage.

Summary of new law

18.12 Schedule 10 to the Bill removes cessation of employment as a taxing point for ESS interests which are subject to deferred taxation.

18.13 As a result, cessation of employment will no longer be a taxing point for ESS interests which are subject to deferred taxation. Where an employee ceases the relevant employment their deferred taxation arrangement will continue and the earlier of the remaining deferred taxation points will apply.

Comparison of key features of new law and current law

Detailed explanation of new law

18.14 Schedule 10 to the Bill amends the ITAA 1997 to remove cessation of employment as a taxing point for ESS interests which are subject to deferred taxation. [Schedule 10, items 3 and 6, subsections 83A-115(5) and 83A-120(5)]

18.15 As a result, cessation of employment will no longer be a taxing point for ESS interests which are subject to deferred taxation. Where an employee ceases employment (in the manner and form set out in Division 83A) the earliest of the remaining deferred taxation points will instead apply.

18.16 For ESS interests which are shares, the deferred taxing point will be the earliest of:

•

when there is no real risk that the share will be forfeited or lost (other than by disposal) and there are no longer any genuine restrictions preventing the disposal; or

•

at the end of the 15-year period following the acquisition of the share.

18.17 For ESS interests which are rights, the deferred taxing point will be the earliest of:

•

when the right has not been exercised, and there is no real risk that the right will be forfeited or lost (other than by disposal) and there are no longer any genuine restrictions preventing the disposal; or

•

at the end of the 15-year period following the acquisition of the right; or

•

when the right has been exercised, and there is no longer any real risk that the share will be forfeited or lost and any genuine restrictions preventing the disposal of the share no longer apply.

18.18 If the ESS interest (or the share acquired by exercising the ESS interest) is disposed within 30 days of the earliest time of the above taxing points, the ESS deferred taxing point will continue to be the time of the disposal.

Consequential amendments

18.19 Consequential amendments are made to sections 83A-115 and 83A-120 to reflect changes to internal references within those sections and wording used to provide numerical ordering to taxing points. [Schedule 10, items 2, 4, 5, 7 and 8, subsections 83A-115(2), 83A-115(6), 83A-120(2), 83A-120(6) and 83A-120(7)]

18.20 Consequential amendments are also made to the non-operative guide to Subdivision 83A-C which outlines what the Sub-division is about to remove references to cessation of employment as a possible taxing point. [Schedule 10, item 1, section 83A-100]

Application and transitional provisions

18.21 Schedule 10 to the Bill commences on the first day of the first quarter following Royal Assent.

18.22 The amendments apply to ESS interests for which the ESS deferred taxing point occurs on or after the beginning of the financial year starting after Royal Assent, or if this Bill receives Royal Assent on 1 July-to ESS interests for which the ESS deferred taxing point occurs on or after that 1 July. [Schedule 10, item 9]

Chapter 19: Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Corporate Collective Investment Vehicle Framework and Other Measures Bill 2021

Schedules 1 to 4 - Corporate collective investment vehicles regulatory framework

Overview

19.1 Schedules 1 to 4 to the Bill are compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

19.2 Schedules 1 to 4 of the Bill amend corporate and financial services law to establish a CCIV as a new type of a company limited by shares used for funds management. A CCIV is an umbrella vehicle that is comprised of one or more sub-funds and is operated by its single corporate director.

19.3 Chapter 1 sets out an overview of the regulatory framework for the CCIV regime. Key aspects of the new CCIVs regime include:

•

establishing the core requirements for a company to be a CCIV, such as having a corporate director instead of natural person directors, and segregation of assets and liabilities between sub-funds within the CCIV;

•

different regulatory requirements for retail and wholesale CCIVs to ensure appropriate protections are provided to investors, tailored to their level of sophistication and capacity to negotiate bespoke contractual protections and assess investment risks;

•

establishing the requirements for the management of share capital in a CCIV, including that all shares are referable to a particular sub-fund and facilitating the reduction of share capital in certain circumstances;

•

other consequential modifications to corporate and financial services law, for example, for the regulation of financial services provided by a corporate director and CCIV and external administration of each sub-fund of a CCIV;

•

ensuring the corporate director of the CCIV has overarching responsibility for any contraventions of the law by a CCV, including establishing a chain of liability that generally places the penalty for a contravention of any Commonwealth law by a CCIV upon the corporate director of the CCIV (although the natural person directors of the corporate director may be liable for certain offences and penalties); and

•

introducing a new range of offences and penalties, including strict liability offences.

19.4 The structure of Schedules 1 to 4 to the Bill is set out below.

Objective. Schedule 1 to the Bill inserts a new Chapter 8B into the Corporations Act. Part 8B.1 sets out the objects of the new Chapter 8B that establishes the regulatory framework for CCIVs.

Registration requirements of a CCIV and sub-fund. Part 8B.2 sets out the registration requirements for a CCIV and a sub-fund of a CCIV. Part 8B.2 also sets out the rules for the CCIV's company register.

Corporate governance of a CCIV. Part 8B.3 sets out the rules relating to the corporate governance of a CCIV. This includes the rules regarding:

•

governance of CCIVs (such as how a CCIV exercises company powers and the rules regarding a CCIV's constitution);

•

the officers and employees of the CCIV (including the core obligations for the corporate director of the CCIV and the rules relating to its replacement);

•

the officers, employees and auditors of the corporate director of the CCIV;

•

the compliance plan of a retail CCIV;

•

member protection (including related party transactions by retail CCIVs, rights and remedies for the member of a CCIV and the corporate director's civil liability to members);

•

meetings (including resolutions of a CCIV and meetings of the members of a CCIV (or a sub-fund of the CCIV)); and

•

corporate contraventions (including rules for establishing civil and criminal liability).

Securities of a CCIV. Divisions 1 to 3 of Part 8B.4 establish rules for of the management of share capital and other securities in a CCIV. It outlines the types of securities that CCIVs may issue and circumstances in which a CCIV is permitted to pay dividends. These Divisions also explain the requirements that must be satisfied before a CCIV may redeem its shares or reduce its share capital and set out circumstances in which the sub-funds of the CCIV may cross-invest.

Financial records and reporting for a CCIV. Divisions 4 and 5 of Part 8B.4 set out the rules for the maintenance of financial records by CCIVs and how financial reports and audits are to be prepared and conducted for sub-funds of CCIVs.

Operation of the CCIV and its sub-funds. Part 8B.5 establishes the requirements for operating a CCIV and its sub-fund(s), such as allocating assets and liabilities to sub-funds.

External Administration. Part 8B.6 outlines the process for winding up a sub-fund and how the other external administration processes apply in the CCIV context. It also outlines the process for deregistering a CCIV and sub-funds of a CCIV.

Control, financial services and disclosure. Part 8B.7 outlines the rules for control, financial services and disclosure. Divisions 1 to 3 of Part 8B.7 outline how the following Chapters of the Corporations Act apply to CCIVs:

•

Chapters 6 to 6B regarding takeovers, compulsory acquisitions and buy-outs;

•

Chapter 6C regarding information about ownership in listed entities;

•

Chapter 6CA regarding continuous disclosure; and

•

Chapter 6D regarding fundraising.

Financial services and markets. Division 4 of Part 8B.7 modifies the operation of Chapter 7 for CCIVs and sets out how markets and financial services regulation apply to CCIVs and corporate directors - including the requirements for disclosure.

Consequential amendments. Part 8B.8 outlines other consequential amendments to Chapter 9 of the Corporations Act, such amendments to the corporate whistleblower obligations contained in the Corporations Act.

Exemptions and modifications. Part 8B.9 allows ASIC to make exemption orders and modification declarations in relation to the application of specified parts of Chapter 8B. Regulations may also modify the operation the Corporations Act in relation to its application to CCIVs.

Human rights implications

19.5 The CCIV regulatory regime established in Schedules 1 to 4 to the Bill primarily deals with body corporates rather than individuals - as the core objective of the framework is to establish a new type of corporation that is operated by another body corporate. However, certain parts of the framework applies to individuals (such as the duties of natural persons acting for the CCIV or certain rights and powers for members in a CCIV). To the extent that the new regime applies to individuals, it engages, or may engage, the following human rights:

•

the right to privacy;

•

the right to the presumption of innocence; and

•

the right to a fair and public hearing.

Engagement of the right against arbitrary or unlawful interference with privacy

19.6 Article 17 of the ICCPR requires parties to the ICCPR to uphold the individual right not to have one's private, family and home life or correspondence unlawfully or arbitrarily interfered with. It also includes the right to protection by law of one's reputation. According to the Parliamentary Joint Committee on Human Rights' Guide to Human Rights, the right to privacy includes:

•

the right to respect for confidential and private information, particularly the storing, use and sharing of such information; and

•

the right to control dissemination of information about one's private life.

19.7 The Parliamentary Joint Committee on Human Rights' Guide to Human Rights also states that in order to uphold the right to privacy, a State must adopt measures to protect people from arbitrary interference with their privacy from others, including by corporations.

19.8 The Privacy Act 1988 provides for the protection of personal information, including setting out Information Privacy Principles applying to the Commonwealth public sector and National Privacy Principles applying to many private sector organisations.

19.9 The right to privacy and reputation is not an absolute right and is subject to permissible limits. The implied limitation arises inter alia as a result of the interpreting term 'arbitrary' in Article 17 of the ICCPR, which prohibits unlawful or arbitrary interferences with a person's privacy, family, home and correspondence.

Overview of provisions that interact with the right to privacy

19.10 The new CCIVs regime in the Bill engages the right to privacy because it:

•

involves the collection, security, use or disclosure of information that may include personal information; and

•

regulates information held on a public register.

Personal information of members of a CCIV and the directors of the corporate director of the CCIV

19.11 A number of requirements in the new law require the collection, security, use, disclosure and access to information about the individuals acting in relation to the CCIV and individuals that are members of the CCIV.

19.12 At the point of registration of the CCIV, certain information must be provided in the application form that is relevant to the establishment of the corporate entity. New subparagraph 1222A(3)(c)(i) requires that in an application for registration of a CCIV, the application must include the name and address of each person who consents to be a member of the CCIV. On registration, these persons become members of the CCIV (see section 1222D). This extends and replicates the existing requirements in respect of the establishment of another company by ASIC (see existing paragraph 117(2)(c) and section 120).

19.13 At the point of registration of a sub-fund of the CCIV, certain information must be provided in the application form to establish the sub-fund. New paragraph 1222U(2)(c) requires that in an application for registration of a CCIV, the application must include the name and address of each person who consents to be a member of the sub-fund. This is similar to the above requirements for establishing a company under existing law. The significance of separate registration for sub-fund is explained in paragraph 2.91 above. Separate registration of each sub-fund of a CCIV helps to ensure the business of the sub-fund is protected from the business of other sub-funds of the CCIV. In effect, a sub-fund does not come into being until the day it is registered and given a unique name and identifier - its ARFN - by ASIC. A member in the CCIV's share is referable to one and only one sub-fund - which is require information about members is necessary as part of this process.

19.14 Like all other companies, a CCIV is subject to ongoing requirements to maintain a company register which records, among other things, the certain details about its members and other security holders - including their name and address which constitute personal information (see section 1222ZB of the new law - which extends and applies existing sections 169, 170 and 171 of the Corporations Act). This information is important for identifying the persons that have interests, powers and rights in relation to the CCIV. In particular, this register is used for identifying the persons that may vote on a resolution at a meeting of the CCIV or its sub-fund(s) (see section 1228D of the new law and subsection 252C(3) of the Corporations Act).

19.15 In addition, under new Subdivision C of Division 4 of Part 8B.4, a retail CCIV must prepare a directors' report and financial report in respect of each sub-fund of the CCIV. The directors' report involves a declaration by the directors of the corporate director to make assurances about its financial status, and include the names of each director of the corporate director of a CCIV during the financial year (as well as their signatures) (see subsection 300(1) of the Corporations Act). This extends and replicates the existing requirements for the directors' report and financial reports of other companies to CCIVs - adapted to the CCIV's legal structure.

19.16 These requirements pertain to personal information, and so create an interaction with the right to privacy.

Access to the personal information of members of a CCIV

19.17 Consistent with existing requirements for companies and registered schemes, a person may seek access the CCIV's register (which, as explained above, includes the certain details of members). In particular, a member of a CCIV has the right to inspect the register of members of that CCIV, free of charge. Other persons can request access to the register of members, upon payment of a fee, and subject to certain prescribed improper purposes (including soliciting donations, gathering information about a person's wealth, or unsolicited offers involving financial products). As explained above, this register is also used to determine the persons entitled to vote at a resolution of the CCIV or its sub-fund(s) (see section 1228D of the new law and subsection 252C(3) of the Corporations Act).

19.18 In addition, under the existing law in section 1274(5) of the Corporations Act, a person may apply to ASIC to obtain a copy or extract of the registration of a CCIV or sub-fund. That copy is admissible as evidence in any proceedings. These records contain the names and addresses of members of sub-funds in a CCIV, and so the members' personal information is accessible to any person allowed to access ASIC's record.

Justification for limitations on right to privacy

19.19 To the extent the provisions outlined above limit the right to privacy, those limitations are justified. These limitations are in pursuit of the legitimate objectives of ensuring:

•

directors of the corporate director of a CCIV can be identified and therefore be held personally liable where relevant, particularly in respect of the declarations and assurances they make in relation to the CCIV (for example, in a directors' report);

•

that CCIVs are transparent and keep accurate records in regard to their member base - noting that members are the ultimate 'owners' of a CCIV and have rights, powers and obligations in respect of the CCIV (in the same way as other members of other companies);

•

that members of a CCIV or sub-fund can be identified and contacted in regard to their interests in the CCIV;

•

members of a CCIV or sub-fund in a CCIV can identify and contact other members to hold a members' meeting; and

•

that the laws applicable to CCIVs are, where possible, substantially the same as analogous laws in the Corporations Act.

19.20 These are the same objectives of the corresponding provisions which currently apply to companies and registered schemes under the Corporations Act.

19.21 There is a rational connection between the limitations on the right to privacy imposed by these provisions in the new CCIVs regime and the legitimate objectives described above. The provisions that engage the right to privacy are consistent with longstanding rights of the public to search ASIC's records in relation to companies and MISs, rights of members of a company or MIS to have access to some personal information of other members (so as to be able to call a members' meeting), and obligations on companies to be transparent in their operations.

19.22 These provisions are reasonable and necessary in pursuit of these legitimate objectives. A CCIV should not be exempt from the same obligations placed on other companies and MISs registered under the Corporations Act, and its members should not be deprived of rights enjoyed by members of other companies and MISs.

19.23 To the extent these provisions limit the right to privacy, they are proportionate to the legitimate objective they seek to give effect to. There are clear limits under the above provisions upon what kind of personal information can be recorded and accessed, and the purpose for which it can be used. Personal information of members and directors of the corporate director is limited to what is necessary to identify and contact them, which goes to the legitimate objective underpinning the provisions.

19.24 In addition, in respect of the existing powers to access company records of registration (which are extended to sub-funds as explained above), ASIC is not compelled to provide access. Under existing section 1274A of the Corporations Act, ASIC may permit a person to inspect a document containing personal information, but is not required to allow the inspection. ASIC can therefore choose not to permit a search in the event it is of the opinion that obtainment of personal information by a specific person from the records of transaction would not be in the interests of the individuals to which the personal information relates.

Engagement of the presumption of innocence

19.25 Paragraph 2 of Article 14 of the ICCPR protects the right of a person charged with a criminal offence to be presumed innocent until proven guilty according to law. The presumption of innocence is also a fundamental principle of the common law. As the Parliamentary Joint Committee on Human Rights has observed, the presumption of innocence 'imposes on the prosecution the burden of proving the charge, guarantees that no guilt can be presumed until the charge has been proved beyond reasonable doubt, ensures that the accused has the benefit of doubt, and requires that persons accused of a criminal act must be treated in accordance with this principle'.^[14] The presumption of innocence generally requires the prosecution to prove each element of a criminal offence beyond reasonable doubt.

Strict liability offences

Overview of applicable strict liability offences

19.26 The new CCIVs regime in Bill engages the presumption of innocence because it includes new strict liability offences which allow the imposition of criminal liability without the need to prove fault. As such, the prosecution is not required to prove fault as part of the offence but merely prove that a contravention took place. In this instance, the defence of mistake of fact is available to the defendant.

19.27 The majority of the new strict liability offences inserted by the new CCIVs regime in the Bill apply to bodies corporate rather than natural persons. The legal person responsible for many actions under the CCIV's regime is a body corporate, namely, the CCIV, the CCIV's corporate director or some other body corporate (such as an auditing company).

19.28 However, there are specific instances under the CCIVs regime where a body corporate or a natural person may held liable for their conduct. The following are strict liability offences in the new law that may apply to a natural person, depending on the circumstances:

•

Lodgement of notice with ASIC about the appointment of a temporary corporate director: A person (including a member of a CCIV) may apply to the Court for the appointment of a temporary corporate director in certain circumstances (for example, if the CCIV's corporate director is not eligible for the role). A member may be an individual, and an individual may choose to undertake this process for the CCIV. If a court appoints a temporary corporate director, then the person that made the application to the Court must lodge a notice with ASIC informing it of the appointment as soon as practicable, and in any event within 2 days after the order is made (see subsection 1222V(3)).

•

Failure of an auditor of the CCIV's compliance plan to audit and report on compliance within three months after the end of a financial year: A CCIV must have, at all times, a registered company auditor, an audit firm or audit company engaged to audit compliance with the CCIV's compliance plan. In practice, such an auditor is commonly an audit company. However, an individual may choose to take on this role for the CCIV in certain circumstances (see subsection 1226F(3)). If an individual has chosen to take on this role, it must audit and report on the CCIV's compliance with the compliance plan (see subsections 1226G(1) and (6)).

•

Failure of an officer of the corporate director of the CCIV to allow the auditor of the CCIV's compliance plan access to the books of the CCIV and other relevant information: to assist with the audit of the CCIV's compliance plan explained above, an officer of the corporate director of the CCIV must provide due assistance in the conduct of this audit (see subsections 1226G(3) and (6)). The officer of the corporate director will be an appropriately qualified individual who has chosen to take on this role for the corporate director and in respect of the CCIV operated by this corporate director. As explained above, the CCIV has a single corporate director and generally does not have natural person officers.

•

Holding the money and property of the CCIV: the CCIV, being a company, may hold its money and property (including the assets of a sub-fund, of the money and property of the CCIV that is to be converted into a form that allows it to be allocated). The CCIV may also choose to appoint a person to hold its money and property on its behalf - on trust for the CCIV (see section 1234J). Generally, it is expected that a body corporate would undertake this role for the CCIV if a CCIV was structured in this way. This is consistent with current commercial practice for MISs - where body corporates act as a custodian and hold the money and property of the scheme on trust for the scheme's members. However, there is nothing in the law that prevents an individual from taking on this role if the CCIV chose to appoint an individual, and the individual chose to accept this position. If an individual held this role, then it is subject to certain requirements to ensure the money and property of the CCIV is held in the way required by the new law. In particular, the assets of each sub-fund must be held separately from the assets of all other sub-funds. This is an important integrity measure to ensure the separate and segregated treatment of sub-funds in a CCIV (as discussed in Chapter 6 above). If a person fails to hold the CCIV's money and property separately, then it may be liable for a strict liability offence (see subsections 1234J(1), (2) and (3)).

19.29 The penalties for a contravention of these strict liability offences that may apply to an individual in the new CCIVs regime comply with the Guide to Framing Commonwealth Offences as:

•

the offences are not punishable by imprisonment and the fine does not exceed 60 penalty units for an individual;

•

the potential harm to investors and to the reputation of Australia's financial system of extensive non-compliance is such that fault should not be an element of these offences; and

•

individuals subject to the requirements covered by the offences should be on notice to guard against the possibility of contraventions.

Justification for limitations on right to the presumption of innocence in respect of these strict liability offences

19.30 Presumption of innocence is not an absolute right and is subject to permissible limits, for example in a situation in which threats to the rights of the innocent are minimal in comparison to the threats to the wider public interest. However, because proof of fault is one of the fundamental protections of criminal law, strict liability should only apply where there is adequate justification and subject to specific considerations.

19.31 The strict liability offences created by new law pursue the legitimate objectives of aiding the oversight and enforcement of the CCIV regime, protecting investors, ensuring the integrity of the CCIV's structure and supporting confidence in the CCIVs regime, as well as ensuring that the laws applicable to CCIVs are, where possible, substantially the same as analogous laws in the Corporations Act.

19.32 These strict liability offences are reasonable and necessary in pursuit of these legitimate objectives because of the potential harm that can be caused - to individual investors and third parties (such as creditors) and the integrity of the CCIV regime. It also supports confidence in the operation of the new CCIV regulatory regime more broadly - if individuals involved in operating CCIVs fail to comply with these regulatory obligations inherent to the regime.

19.33 There is a rational connection between the limitations on the presumption of innocence imposed by these new strict liability offences and the legitimate objectives described above. Given that these offences would only apply to those individuals who are intimately involved in the operation of a CCIV, and who have chosen to take on particular roles for the CCIV, these individuals should be cognisant of their regulatory obligations in doing so (and the potential imposition of strict liability offences for certain conduct). The imposition of these strict liability offences for failing to comply is likely to be effective in achieving greater compliance with these important regulatory obligations that are inherent to the effective operation of the CCIV regime.

19.34 These strict liability offences involve a penalty of either 20 or 60 penalty units for contravention by an individual. These penalties are minimal in comparison to the potential harm to the wider public interest, investors and third parties (such as creditors) if a person fails to comply with their regulatory obligations. The severity of the effects of these measures are proportionate to the legitimate objectives explained above.

Reversal of the burden of proof

19.35 An offence provision that requires a defendant to carry an evidential burden or reverses the burden of proof may be considered to engage the right to the presumption of innocence.

19.36 At common law, the prosecution ordinarily must prove all elements of any offence. This is an important aspect of the right to the presumption of innocence. Provisions that reverse the burden of proof and require a defendant to disprove, or raise evidence to dispose, one or more elements of an offence, interfere with this common law right.

19.37 One of the strict liability offences in the new law involves the reversal of burden of proof to a defendant. The defendant that has primary liability for this offence is a body corporate - being the CCIV.

19.38 If a CCIV becomes a retail CCIV, then the CCIV must notify ASIC of this status (see subsection 1222L(3)). A failure to do so is a strict liability offence with a penalty of 20 penalty units. However, it is a defence if the person (being the CCIV) did not know, and could not reasonably be expected to have known, that the CCIV is retail. A defendant bears the evidential burden for this defence in respect of this knowledge (see subsection 1222L(5)).

19.39 This offence pursues the legitimate objective of aiding the oversight and enforcement of the CCIV regime by ASIC, as well as broader confidence in the proper operation of the CCIV regime. It is important that ASIC, third parties and investors are readily able to identify the status of a CCIV as retail or wholesale.

19.40 As explained in Chapters 1 and 2, and in this Chapter 19 above, a CCIV may be either retail or wholesale, with retail CCIVs subject to a regulatory framework that encompasses additional regulatory protections necessary for retail investors. Wholesale CCIVs are subject to a more limited regulatory framework, reflecting the higher degree of investor sophistication among wholesale investors and capacity to negotiate bespoke arrangements with fund providers.

19.41 A CCIV will be a wholesale CCIV unless securities in the CCIV were issued or transferred to a retail client in circumstances that would have required that a PDS be given to that client under Chapter 7 of the Corporations Act. This is intended to ensure that a CCIV with one or more retail clients (within the existing meaning the Corporations Act) will generally be a retail CCIV.

19.42 Whether or not a CCIV is retail or wholesale, with reference to the nature of its clients, is a matter that is peculiarly within the knowledge of the defendant (being the CCIV). It would be significantly more difficult and costly for the prosecution to disprove than for the defendant to establish the matter. Accordingly, this reversal of the burden of proof is appropriate.

19.43 The application of certain existing regulatory requirements to the new CCIV regime means that the following provisions also provide an offence-specific defence, whereby a CCIV bears an evidential burden in any proceedings against the CCIV:

•

Exemption from prohibition on hawking securities: The application of the existing prohibitions on hawking securities in Chapter 7 to CCIVs means that offence-specific defences are available to a CCIV in any proceeding based on subsection 992AA(1) or 736(1). The defendant bears an evidential burden when relying on one of these defences. [Schedule 1, item 4, sections 1241N(3) and (5)]

-

The offences provided for in subsections 992AA(1) and 736(1) pursue the legitimate objective of ensuring retail investors are afforded adequate consumer protections in relation to an offer of securities. It is important that where a CCIV believes an offer of securities is not subject to this consumer protection, it possesses evidence to support this belief. It is appropriate to reverse the evidential burden of proof in relation to these offence-specific defences because the matters are peculiarly within the knowledge of the defendant, and it would be significantly more difficult and costly for the prosecution to disprove than for the defendant to establish the matter.

•

Exemption from continuous disclosure requirements: The application of the existing continuous disclosure provisions in Chapter 6CA to an ED security in a CCIV means that subsection 1017B(2) provides an offence-specific defence, whereby a CCIV bears an evidential burden in any proceedings against the CCIV based on section 1017B. [Schedule 1, item 4, section 1241Z(1)]

-

The extension of the existing subsection 1017B(2) to an ED security in a CCIV ensures consistency between the disclosure obligations placed on an ED security in a CCIV and an ED security in other financial products. It is appropriate to reverse the evidential burden of proof in relation to this offence-specific defence because the matter is peculiarly within the knowledge of the defendant, and it would be significantly more difficult and costly for the prosecution to disprove than for the defendant to establish the matter.

Engagement of the right to a fair and public hearing

19.44 Article 14 of the ICCPR ensures that everyone shall be entitled to a fair and public hearing by a competent, independent and impartial tribunal established by law. This right is not limited by the new CCIVs regime in the Bill, as outlined below.

Infringement notices

19.45 Under the existing Corporations Act framework, certain offences and civil penalties are covered by an infringement notice regime. Relevantly, all strict liability offences are subject to infringement notices. In addition, certain prescribed civil penalty provisions may be subject to an infringement notice. Accordingly, under the existing Corporations Act framework, the strict liability offences contained in new Chapter 8B - including those that affect individuals outlined in this Statement above - may be subject to an infringement notice. The new law has not prescribed any civil penalty provisions to be captured by the existing infringement notice regime, however, the existing Corporations Act framework enables any civil penalties to be prescribed in regulations.

19.46 The infringement notice regime allows ASIC to issue an infringement notice as an alternative to court proceedings, for the payment of a pecuniary penalty in relation to an alleged contravention of specified Corporations Act provisions. If given an infringement notice, a person has the option to either pay the appropriate fine or contest the notice in a court.

19.47 If an infringement notice is complied with, no further action will be taken against the person, and the payment is not considered an admission of guilt (see section 1317DAU of the Corporations Act). However, if the infringement notice is not complied with, ASIC may take action in relation to the alleged contravention of the provision under which the infringement notice was issued.

19.48 To the extent that the infringement notice regime does engage the right to a fair and public hearing by a competent, independent and impartial tribunal, it does not limit the right as the person may still elect to have a matter heard by a court rather than pay the amount specified in the infringement notice.

Criminal process rights

19.49 Guidance Note 2: Offence provisions, civil penalties and human rights, provides that offence provisions need to be considered and assessed against the criminal process rights enshrined in Articles 14 and 15 of the ICCPR. These articles broadly protect the right to a fair trial and fair hearing, prevent the application of retrospective criminal laws, and provide minimum guarantees in criminal proceedings such as laws relating to double jeopardy and self-incrimination.^[15]

19.50 The existing criminal offences framework in the Corporations Act will also apply to the offences contained in the new CCIVs regime, some of which do affect individuals as outlined in this Statement. The provisions in the new CCIVs regime do not affect the existing criminal process rights contained in the Corporations Act and therefore do not limit the right to a fair and public hearing by a competent, independent and impartial tribunal.

Civil penalties are not 'criminal' for the purposes of human rights law

19.51 Guidance Note 2: Offence provisions, civil penalties and human rights, provides that civil penalty provisions may also need to be considered and assessed against the criminal process rights enshrined in Articles 14 and 15 of the ICCPR. Civil penalty provisions may engage these criminal process rights where the penalty might be regarded as 'criminal' for the purposes of international human rights law. This is because the word 'criminal' has an autonomous meaning in international human rights law, regardless of how the provision might be considered in Australian domestic law.

19.52 When a provision imposes a civil penalty, an assessment is required as to whether the penalty is 'criminal' for the purposes of Articles 14 and 15 of the ICCPR. Such an assessment requires consideration of the classification of the penalty under domestic law, the nature of the penalty, and the severity of the penalty.

19.53 Where a civil penalty is assessed as a 'criminal' penalty for the purposes of international human rights law, it must be shown to be consistent with the criminal process guarantees set out in articles 14 and 15 of the ICCPR. If it is assessed as not being 'criminal', these processes need not apply.

19.54 The existing civil penalties framework in Part 9.4B of the Corporations Act applies to the new CCIV regime. The existing law sets out the circumstances that must be satisfied to establish a contravention of a civil penalty provision, such as proof of certain elements and circumstances, and procedural requirements to ensure a fair and proper process.

19.55 The new law creates several additional civil penalty provisions that apply to specified regulatory obligations under the CCIV regime. In certain circumstances, individuals may be liable for a contravention of these civil penalty provisions as follows.

19.56 In particular, the individual officers and employees of the corporate director of a retail CCIV owe certain statutory duties in respect of the CCIV (see subsections 1225(1) and 1225F(1)). These duties generally replicate those owed by the officers and employees of the responsible entity of a registered scheme under Chapter 5C of the Corporations Act and ensure investors in a retail CCIV are afforded comparable protections as investors in a registered scheme, with some differences tailored to the different legal structure of a CCIV (see detailed explanation in Chapter 3).

19.57 In addition, a failure to hold the money and property of the CCIV separately and in the manner required by the new law may attract a civil penalty. As explained in paragraph 19.28 above in relation to the strict liability offences for this conduct, it is generally expected that this role would be undertaken by another body corporate consistent with existing commercial practice for MISs - where body corporates act as a custodian and hold the money and property of the scheme on trust for the scheme's members. However, there is nothing in the law that prevents an individual from taking on this role if the CCIV chose to appoint an individual, and the individual chose to accept this position. If an individual held this role, then it is subject to certain requirements to ensure the money and property of the CCIV is held in the way required by the new law. In particular, the assets of each sub-fund must be held separately from the assets of all other sub-funds. This is an important integrity measure to ensure the separate and segregated treatment of sub-funds in a CCIV (as discussed in Chapter 6 above).

19.58 Further, under the existing civil penalties framework in Part 9.4B of the Corporations Act, a person 'involved' in a contravention of any civil penalty provision by another person is also liable for a civil penalty (see section 1317E of the Corporations Act). Section 79 of the Corporations Act defines the circumstances in which a person may be 'involved' in a contravention - including whether the person aided, abetted, counselled or procured the contravention. The existing civil penalties framework ensures there is personal culpability on the part of the person involved in the contravention in order to be held liable. A person involved in the contravention may include, for example, a natural person director of the corporate director, a lawyer or an accountant, depending on the circumstances. The existing civil penalties framework ensures individuals acting for bodies corporate are appropriately incentivised to ensure the body corporate complies with obligations in the Corporations Act that may give rise to a civil penalty.

19.59 These other new civil penalty provisions that involve obligations on a body corporate that may be contravened by individuals are as follows:

•

Duties owed by a director of a CCIV: A CCIV is operated by a single corporate director. In addition to its statutory duties as a director in Part 2D.1 of the Corporations Act, the CCIV's director owes additional duties that align with those owed by the corporate trustee and operator of a MIS (including under Chapter 5C of the Corporations Act and at general law) (see subsection 1224D(1), (2) and (4)). These additional duties ensure that investors in a CCIV are afforded comparable protections as investors in a MIS, with some differences tailored to the different legal structure of a CCIV. A detailed explanation of these duties is set out in Chapter 3. A person involved in a director's contravention of these duties may also be liable for a civil penalty.

•

Share capital requirements: A CCIV is subject to certain requirements with respect to the management of its share capital to protect the interests of creditors and investors - including requirements regarding the redemption of a member's share or other share capital reduction (such as a share buy-back). The CCIV is also subject to requirements if it engages in cross-investment within a CCIV. Further, the CCIV and its corporate director are subject to requirements to ensure that, if they acquire any shares in the CCIV, they do so for the consideration that another person would pay (and subject to terms and conditions that do not disadvantage other members) (see subsections 1224P(2), 1230F(5), 1230S(4), 1231B(4), and 1231J(5)). Consistent with the consequences that an ordinary company is subject to for breach, the CCIV itself is not liable for any contravention. However, a person involved in the contravention may be liable for a civil penalty. A detailed explanation of these requirements is set out in Chapter 4.

19.60 These new civil penalty provisions for the CCIV regime in the new should not be considered 'criminal' for the purposes of international human rights law.

19.61 Guidance Note 2: Offence provisions, civil penalties and human rights states that if the purpose of the penalty is to punish or deter, and the penalty applies to the public in general, then the penalty may be considered 'criminal' for the purposes of the ICCPR. Additionally, if the penalty carries a penalty of imprisonment or a substantial pecuniary sanction, the penalty may be considered 'criminal'.^[16]

19.62 Whilst the new civil penalty provisions in the CCIVs regime in the new law have the purpose of deterring specific misconduct and incentivising compliance with the law (including incentivising corporate compliance with the law), the penalties apply only in a specific regulatory context, and only to the corporate director of a CCIV or specific persons actively engaged in the operations of the CCIV. Importantly, the CCIV regime is optional, and no element of the law will apply to any entity or person outside of the CCIV regime.

19.63 Additionally, the new civil penalty provisions will apply in response to misconduct in relation requirements that are core to the proper functioning and integrity of the CCIV regime - including ensuring the separate and segregated treatment of sub-fund(s) of the CCIV and the proper management of the CCIV's share capital. These requirements are important to safeguard the interests of investors and third parties (including creditors). Further, the additional statutory duties owed by the director of the CCIV and its officers and employees provide fundamental investor protections to members in a CCIV and ensure regulatory parity with existing structures used for the same investment activities. Mismanagement of a CCIV and its sub-funds could have significant consequences for investors in a CCIV, creditors and the financial market. As such, civil penalty provisions aimed at deterring such misconduct could be considered an important element of a robust consumer protection regime.

19.64 The maximum pecuniary penalties under the existing civil penalties framework in the Corporations Act apply to these new civil penalties. For individuals, a penalty may be ordered up to 5,000 penalty units or three times the benefit derived and detriment avoided because of the contravention (where relevant) (see subsection 1317G(3) of the Corporations Act). These pecuniary penalties may only be awarded if ASIC can demonstrate that the contravention materially prejudices the interests of the CCIV or its members, or materially prejudices the CCIV's ability to pay creditors, or is serious (see subsection 1317G(1) of the Corporations Act). While substantial, these maximum penalties are relative and proportionate to the potential pecuniary losses and detriment to investors that could result from misconduct by a CCIV, its corporate director, the officer or employee of the corporate director or other person involved in the contravention.

19.65 Guidance Note 2: Offence provisions, civil penalties and human rights notes that the nature of the industry or sector being regulated is relevant to the relative size of the pecuniary penalties and fines that may be imposed.^[17] Whilst the new civil penalty provisions have substantial maximum penalties, these are proportionate to the relevant conduct and the relatively large size of the funds management sector and corporate structure of the CCIV support the fact that the new civil penalty provisions should not be considered 'criminal'.

19.66 Additionally, there is no sanction of imprisonment for non-payment of any penalty.

19.67 On that basis, the civil penalty provisions in the new CCIVs regime are not considered 'criminal' and do not limit the right to a fair and public hearing by a competent, independent and impartial tribunal.

Conclusion

19.68 The new CCIVs regime, established by Schedules 1 to 4 to the Bill, is compatible with human rights. It engages, or may engage, with the right to privacy and reputation, the right to the presumption of innocence, and the right to a fair and public hearing. However, to the extent that the new CCIVs regime in the Bill places limitations on these rights, these limitations can be considered legitimate, rational, and necessary in light of the objectives they aim to achieve, and reasonable and proportionate in their extent.

Schedule 5 - Corporate collective investment vehicles tax framework

Overview

19.69 Schedule 5 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

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

19.71 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.

19.72 Where the CCIV meets the AMIT eligibility criteria in respect of a sub-fund, 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 that have a particular character to the relevant class of members. Those amounts will retain that character and be recognised (and taxed) in the hands of each member.

19.73 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.

Human rights implications

19.74 Schedule 5 to the Bill does not engage any of the applicable rights or freedoms.

Conclusion

19.75 Schedule 5 to the Bill is compatible with human rights as it does not raise any human rights issues.

Schedule 6 - Extension of temporary loss carry back

Overview

19.76 Schedule 6 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

19.77 Schedule 6 to the Bill amends the income tax law to extend the loss carry back rules by 12 months, allowing eligible corporate tax entities to claim a loss carry back tax offset in the 2022-23 income year.

Human rights implications

19.78 Schedule 6 to the Bill does not engage any of the applicable rights or freedoms

Conclusion

19.79 Schedule 6 to the Bill is compatible with human rights as it does not raise any human rights issues.

Schedule 7 - Deductible gift recipients

Overview

19.80 Schedule 7 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

19.81 Schedule 7 to the Bill amends the ITAA 1997 to:

•

specifically list the Greek Orthodox Community of New South Wales Ltd, Australian Associated Press Ltd, Virtual War Memorial Limited and SU Australia Ministries Limited as deductible gift recipients;

•

extend the deductible gift recipient specific listings of Cambridge Australia Scholarships Limited and Foundation 1901 Limited; and

•

remove the deductible gift recipient specific listing of the East African Fund Limited

Human rights implications

19.82 Schedule 7 to the Bill does not engage any of the applicable rights or freedoms.

Conclusion

19.83 Schedule 7 to the Bill is compatible with human rights as it does not raise any human rights issues.

Schedule 8 - Minor and technical amendments Spring 2021

Overview

19.84 Schedule 8 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

19.85 Schedule 8 to the Bill makes a number of miscellaneous and technical amendments to various laws in the Treasury portfolio. The amendments are part of the Government's ongoing commitment to the care and maintenance of Treasury portfolio legislation.

19.86 The amendments make minor and technical changes to correct typographical and number errors, repeal inoperative provisions, remove administrative inefficiencies, address unintended outcomes, and ensure that the law gives effect to the original policy intent.

Human rights implications

Right to a fair trial

19.87 Subsection 350-10(4) of Schedule 1 to the TAA 1953, copies or extracts of certain tax documents may be used in substitute of the original document by the ATO for the purposes of court proceedings. Such documents may be used as evidence of the matters set out in the document to the same extent the original document would have been.

19.88 This provision replaced the now repealed subsection 177(1) of the ITAA 1936. Subsection 350-10(4) is intended to have the same substantive effect as the former subsection 177(1). The new provision expressed the same idea in a different form of words in order to use a clearer or simpler style.

19.89 This amendment engages the right to a fair trial under Article 14(1) of the ICCPR. This right is a fundamental part of the rule of law and the property administration of justice. It provides that all persons are equal before the courts and tribunals and have access to justice.

19.90 The amendment allows a Court to substitute a copy of a tax document for the original tax document for evidentiary purposes. The amendment supports the right to fair trial as it clarifies the operation of that section by more clearly and simply providing for the above effect.

Right to work

19.91 Amendments are made to the ITAA 1997, TAA 1953 and the Income Tax Rates Act 1986 to ensure that the Seasonal Labour Mobility Program and Working Holiday Maker tax regimes functions properly despite disruptions caused by COVID-19.

19.92 Article 6(1) of the ICESCR provides for the right for all to gain a living by work which is freely chosen or accepted, and that steps must be taken to safeguard this right.

19.93 Individuals who are employed under the Seasonal Labour Mobility Program typically hold a subclass 403 visa. Holders of a subclass 403 visa may apply to the Department of Home Affairs to extend their stay in Australia under a COVID-19 Pandemic Event visa (subclass 408 visa). However, under the subclass 408 visa they will not be subject to the concessional Seasonal Labour Mobility Program tax regime. Currently, this issue is addressed by the Taxation Administration (Remedial Power - Seasonal Labour Mobility Program) Determination 2020, made by the Commissioner under section 370-5 of Schedule 1 to the TAA 1953.

19.94 Subparagraph 840-905(b)(ii) of the ITAA 1997 and section 12-319A of Schedule 1 to the TAA 1953 are amended to expand the scope of both provisions to holders of a subclass 408 visa who were previously holders of a subclass 403 visa.

19.95 Under section 3A of the Income Tax Rates Act 1986, an individual who holds a subclass 417 (Working Holiday) visa, subclass 462 (Work and Holiday) visa or certain bridging visas is considered a working holiday maker. Relative to non-resident taxpayers, working holiday makers are effectively subject to concessional tax rates under Part III of Schedule 7 to the Income Tax Rates Act 1986.

19.96 Eligible working holiday makers may apply to the Department of Home Affairs to extend their stay in Australia under a COVID-19 Pandemic Event 408 visa, which is defined in regulation 9204 of Schedule 13 to the Migration Regulations) 1994.

19.97 Section 3A of the Income Tax Rates Act 1986 is amended so that the definition of a working holiday maker includes holders of a Pandemic Event 408 visa if that visa was granted to allow holder to remain in Australia following the expiry of a subclass 417 visa, subclass 462 visa, or certain bridging visas.

19.98 The amendments promote this right as they ensure that workers under the above mentioned visas do not experience higher rates of income tax as a result of holding a new visa, granted for the purposes of providing relief in circumstances where COVID-19 has prevented cross-border international movements by temporary Australian visa holders.

Right to protection from arbitrary or unlawful interference with privacy

19.99 Amendments are made to the ITAA 1936 and TAA 1953 to permits the disclosure of TFNs to certain registrars for certain purposes. The Modernising Business Registers Program will consolidate multiple registers maintained by ASIC and the ATO. The registrars will share computer systems with the ATO to efficiently deliver the Australian Business Registry Services.

19.100 The amendments allow the Commissioner to disclose TFNs to the extent reasonably necessary to enable the registrars to share the ATO's computer systems in the performing of their functions or carrying out their powers. The amendments also amend section 8WB of the TAA 1953 regarding the prohibition of the recording or use of TFNs in particular ways. The section disapplies the prohibition in some circumstances. The amendments to this section add circumstances connected to the activities of the registrar to the circumstances in which the prohibition is disapplied.

19.101 Article 17 of the ICCPR requires parties to the ICCPR to uphold the individual right not to have one's private, family or home life or correspondence unlawfully or arbitrarily interfered with. According to the Parliamentary Joint Committee on Human Rights' Guide to Human Rights, the right to privacy includes the right to respect for confidential and private information, particularly the storing, use and sharing of such information.

19.102 The amendments to the ITAA 1936 and TAA 1953 engage the right to privacy because they provide for the collection and disclosure of information that may include personal information, such as an individual's TFN.

19.103 Such disclosure in this context is justified because the disclosure is limited to circumstances authorised by law to allow the Commissioner to effectively share the ATO's computer systems with the Registrar only as necessary to enable the efficient delivery of the Australian Business Registry Services. The disclosure is limited to the Registrar and otherwise the TFNs will remain subject to the general restrictions on the disclosure, use and recording of TFNs. However, enabling such disclosure will provide considerable efficiencies for users of the ABRS while substantially preserving the confidentiality of their TFNs.

Conclusion

19.104 Schedule 8 to the Bill is compatible with human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Schedule 9 - Retirement income covenant

Overview

19.105 Schedule 9 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

19.106 Schedule 9 to the Bill amends the Superannuation (Industry Supervision) Act 1993 to insert a new covenant that aims to ensure trustees maximise the expected retirement income of beneficiaries.

Human rights implications

19.107 The impact of Schedule 9 on the following human rights or freedoms has been considered.

Civil penalties for contravening section 52 covenants

19.108 Consistent with other section 52 covenants, the Retirement Income Covenant may attract a civil penalty for contravening section 52 of the SIS Act.

19.109 The penalty is appropriate given the need to create a sufficient deterrent to non-compliance with the covenant. Failing to comply with the covenant, may result in beneficiaries having poorer risk management of their retirement savings, being less informed about the options available in relation to retirement income and ultimately having worse retirement outcomes. It is therefore important that the penalty reflects the seriousness of potential non-compliance and aligns with community standards and expectations.

19.110 Imposing the civil penalty will act, foremost, as a deterrent but also as an appropriate disciplinary response to non-compliance. The civil penalty amount is reasonable and consistent with existing penalties that apply for existing covenants in the SIS Act and are necessary to improve retirement income outcomes for beneficiaries.

19.111 The civil penalty provision contained in the Schedule is not 'criminal' for the purposes of human rights law. While a criminal penalty is a deterrent or punitive, these provisions are regulatory and disciplinary. Further, the provisions do not apply to the general public, but to a sector or class of people who should reasonably be aware of their obligations under the SIS Act (that is, trustees of an RSE).

19.112 Schedule 9 engages human rights, but does not limit those rights

Criminal offence for contravening section 52 covenant

19.113 Where a contravention of the new civil penalty provisions involves dishonesty or intention to deceive or defraud, that contravention is punishable on conviction by imprisonment for a maximum of 5 years. This may be considered to engage the right to justice in Article 14 of the ICCPR and the right not to be convicted of something that was not a crime when the activity took place in Article 15 of the ICCPR.

19.114 The criminal offences remain consistent with the criminal process or procedural rights that currently exist and are upheld in accordance with Article 14 of the ICCPR.

19.115 The maximum penalty of imprisonment for a maximum of 5 years is adequate to sanction misconduct for the worst possible cases of non-compliance that involve dishonesty and intention to deceive or defraud. The offences are consistent with the existing penalty regime in the SIS Act that provides for when a contravention of a civil penalty provision is also a criminal offence. The penalty is necessary to improve retirement income outcomes for beneficiaries.

19.116 The penalty will apply to offences committed after Schedule 9 commences, and therefore apply prospectively and uphold Article 15 of the ICCPR.

19.117 Schedule 9 engages but does not limit the right to justice in Article 14 of the ICCPR and the right not to be convicted of something that was not a crime when the activity took place in Article 15 of the ICCPR.

Conclusion

19.118 This Schedule is compatible with human rights because to the extent that Schedule 9 may limit human rights, those limitations are reasonable, necessary and proportionate.

Schedule 10 - Employee share schemes: Removing cessation of employment as a taxing point

Overview

19.119 Schedule 10 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

19.120 Schedule 10 to the Bill amends the ITAA 1997 to remove cessation of employment as a taxing point for ESS interests which are subject to deferred taxation.

Human rights implications

19.121 Schedule 10 to the Bill does not engage any of the applicable rights or freedoms.

Conclusion

19.122 Schedule 10 to the Bill is compatible with human rights as it does not raise any human rights issues.

Attachment 1: Regulation Impact Statement - CCIVs

Executive Summary

Corporate Collective Investment Vehicles (CCIV) are a type of corporate structure for funds management treated as a trust for tax law purposes. The key policy objective of developing the CCIV framework has been to increase the competitiveness of Australia's managed fund industry through the introduction of internationally recognisable investment products.

Background

In the 2016-17 Budget, as part of the Ten Year Enterprise Tax Plan, the Government announced its intention to introduce a regulatory framework for a CCIV regime. This decision was informed by Recommendation 3.3^[1A1] of the 2009 Australia as a Financial Centre: Building on our Strengths report (the Johnson Report) and the subsequent 2011 Board of Taxation (BoT) Review of Tax Arrangements Applying to Collective Investment Vehicles (BoT Review)^[1A2].

In summary, these reports recommended that a collective investment vehicle regime be introduced, to encourage foreign investment and increase exports of Australian financial services. The CCIV regime broadly aims to implement the recommendations made by these reports and will ensure that Australia's financial sector keeps pace with the modernisation of financial products. The development of Australia's CCIV regime has been informed by considering similar regimes in other jurisdictions (such as the United Kingdom and Singapore) along with elements of Australia's current funds management industry. This has resulted in a new type of corporate structure for funds management that is both innovative and can be incorporated into Australia's robust corporate and regulatory landscape.

Following the original Budget announcement in 2016, significant work was undertaken on developing the CCIVs regime, including several rounds of draft legislation and public consultation. However, the project was paused due to competing priorities including the Government's response to the Financial Services Royal Commission, and emergency measures for bushfire relief and the COVID-19 pandemic.

In the 2021-22 Budget, the Government announced a revised start date for the regime of 1 July 2022.

Policy Overview

A CCIV is a new form of collective investment vehicle that uses a corporate structure while providing flow-through taxation. It is designed to be an alternative to the common trust-based managed investment scheme. A CCIV is a company, limited by shares, with its assets and liabilities segregated into sub-funds. It has as its corporate director a company with an Australian financial services licence (AFSL) authorising it to operate the business and conduct the affairs of the CCIV. A CCIV does not have any employees or officers other than the corporate director.

A CCIV will have at least one sub-fund, in an umbrella-like structure (see Figure 1). A CCIV may be either retail or wholesale. Retail CCIVs are subject to a regulatory framework that encompasses additional regulatory protections necessary for retail investors. Wholesale CCIVs are subject to a more limited regulatory framework, reflecting the nature of the investors and capacity to negotiate bespoke arrangements with fund providers.

In the proposed option (Option 3, discussed in Chapters three and four), the CCIV tax framework leverages the existing trust taxation framework and the existing attribution flow-through regime (that is, the new tax system for managed investment trusts (MITs), otherwise known as the attribution MIT (AMIT) regime), rather than by creating a new bespoke tax regime (proposed in Option 2, discussed in Chapters three and four). The policy objective is that the general tax treatment of CCIVs and their members align with the existing tax treatment of AMITs (and their members).

Legislation overview

To enact the proposed CCIV regime, amendments and new additions will be made to corporations and taxation legislation and regulations.

Treasury have been working closely with the Australian Securities and Investment Commission (ASIC) and the Australian Taxation Office (ATO) on the legislation amendments and additions. To ensure adequate time for the regulators and industry to prepare for the proposed start date of 1 July 2022, legislation is planned for introduction in the Spring sitting 2021. The 2021 revised Bill also updates the draft CCIV regime for legislative updates and minor technical updates that are a result of legal landscape modernisation since the last iteration.

Stakeholder consultation

Treasury has consulted extensively on the CCIV regime. The draft legislation has been exposed to the public on six occasions totalling 20 weeks across four years and can be viewed at
www.treasury.gov.au/consultation, along with publicly available submissions. The CCIV regime has attracted significant interest and engagement from law firms, accounting firms, fund managers, peak bodies in the financial services, property management and fund management areas, and overseas jurisdictions. The Treasury are grateful for the engagement and enthusiasm many stakeholders have shown for the proposed regime. We appreciate the time and industry expertise that went into the submissions and consultations over many years.

As a result, stakeholder views have strongly influenced the 2021 draft legislation. More explanation of these changes is found in chapters three, four and five of this paper.

Options

Chapters three and four of this paper outline further detail behind the three options available to government. Option 3 is the preferred option.

1.

Status Quo - no change to current legislation

2.

CCIV with mandatory independent depositary for retail CCIVs and bespoke CCIV tax regime

3.

CCIV with optional depositary and streamlined tax regime leveraging existing tax infrastructure and concepts

Conclusion

Stakeholder feedback from the 2019 consultation process on Option 2 indicated that the mandatory depositary and bespoke tax regime would introduce unnecessary complexity and uncertainty.

Option 3, which was proposed in the 2021 public consultation period and is the preferred option, garnered significantly more support from stakeholders. Option 3 has been identified as the most beneficial as the additional flexibility under this approach will likely lead to a greater uptake of the regime. In addition, this option has the lower regulatory cost making it more attractive to potential CCIV providers.

Key Terms

Background

In November 2009, the Australian Financial Centre Forum released the Johnson Report. The Johnson Report made several policy recommendations aimed at increasing Australia's cross-border trade in financial services and improving the competitiveness and efficiency of the financial sector.

In relation to funds management, the Johnson Report recommended the development of the Asia Region Funds Passport (ARFP), as well as consideration of a broader range of tax flow-through collective investment vehicles.

The ARFP will provide a multilateral framework which allows eligible funds to be marketed across member countries, with limited extra regulatory requirements. The ARFP is intended to support the development of an Asia-wide managed funds industry through improved market access and regulatory harmonisation. The Government implemented legislative changes for the ARFP regime in mid-2018, and the program commenced in February 2019 (after Japan and Thailand enacted their respective legislative changes).

The Johnson Report also identified Australia's need for a collective investment vehicle that provides flow-through tax treatment, maintains investor protection, and is more internationally recognisable than the Managed Investment Scheme (MIS) - Australia's current trust-based investment vehicle. In order to address this gap, the report recommended the BoT review the scope for providing a broader range of collective investment vehicles that would be subject to flow-through taxation.

The then Government accepted this recommendation and the subsequent the BoT Review was released in December 2011. The BoT Review recommended the creation of new collective investment vehicles that provide tax neutral outcomes for investors. The BoT Review also recommended that arrangements in offshore jurisdictions, such as Ireland and Luxembourg, inform the design of the new collective investment vehicles.

In the 2016-17 Budget, as part of the Ten Year Enterprise Tax Plan, the Government announced it would introduce tax and regulatory frameworks for a CCIV. Significant work was undertaken on developing the CCIVs regime, including several rounds of draft legislation and public consultation. However, the project was paused due to competing priorities including the Government's response to the Financial Services Royal Commission, and emergency measures for bushfire relief and the COVID-19 pandemic.

In the 2021-22 Budget, the Government announced a revised start date for the regime of 1 July 2022 following consultation on the final design and specification of the regulatory framework, before making a final decision.

1. What is the problem you are trying to solve?

Australia's funds management sector is one of the largest and most sophisticated in the world, but it is largely domestically focused. Only around 3.2 per cent of the $4.31 trillion in total funds under management in Australia is managed on behalf of non-resident investors^[1A3].

The Johnson Report found that Australia's managed funds sector could become more competitive if it offered a funds management vehicle that is commonly used overseas.

In Australia, funds management products are generally offered through trust structures (see box below - 'What is a MIT'). For example, public unit retail trusts, real estate investment trusts and cash management trusts. A 2021 Deloitte Access Economics report found there are more than 300 competitors in the industry, with more than 3,800 funds on offer.^[1A4]

Trusts are generally taxed on a flow-through basis. This means that the income is generally only taxed in the hands of the ultimate beneficiary at the investor's tax rate, for example, a dividend which is then taxed in the hands of the individual who made the investment. The entity itself generally is not taxed. Investors place a high-value on flow-through taxation as income and gains from an underlying investment generally retain their tax characteristics that 'flow-through' to investors.

Furthermore, even amongst common law countries, the Australian model is unique. Traditionally, investment trusts have a manager and a trustee. Australia merged these functions into a single 'responsible entity' in the late 1990s. This feature of Australia's trust-based investment vehicles may further add to the perception that foreign investors are not familiar with Australian trusts.

Regulatory barriers also inhibit the import of funds management products from other jurisdictions. In order to offer a tax-effective unlisted product to investors, foreign fund managers are generally required to adopt a managed investment trust structure which may not be compatible with the structures they are required to adopt in their home jurisdiction. The cost of running two structures impedes the ability for these funds to offer their products in Australia. Thus, global regulatory alignment can lower the barriers to entry for new fund managers seeking to operate in Australia. Over time, it should also make substituted compliance processes simpler for Australian fund managers seeking to offer products overseas.

Promoting the import of funds management products and removing unnecessary barriers would provide multi-faceted benefits for the Australian economy. It would introduce competition into the Australian market. Australian investors would have greater product choice, including better exposure to overseas asset classes. This could assist in addressing the home bias that Australian investors have towards Australian equities. Domestic fund managers would also, in turn, be able to offer an investment vehicle familiar to overseas markets and investors - increasing their investor pool and economies of scale.

Another aspect of international competitiveness is the level of protection afforded to investors by the proposed regulatory regime. Australia's consumer protections for managed fund investors differ from those used overseas and are therefore not familiar to foreign investors. Providing a statutory consumer protection mechanism that is recognisable to foreign retail investors allows for harmonisation of investor protections without detracting from the current domestic standards. This is dealt with in further detail below.

2. Why is Government action needed?

As outlined above and in the Johnson Report and BoT Review, there are tax and regulatory barriers to Australian fund managers, incoming fund managers and foreign financial services providers adopting fund structures commonly in use overseas. The extensive work undertaken has built that business case. In order to act on these recommendations, legislative reform is required.

Changes to corporations legislation and regulations are required to create a new type of investment vehicle and ensure that there are appropriate investor protection and disclosure obligations. Changes to taxation law and regulations will also be required to give effect to the new tax framework supporting the CCIV.

The consumer protections required under the new regime also require legislative backing to ensure they are robust and standardised. The standardisation and harmonisation of certain industry practices will make it easier for foreign financial services providers to enter the Australian market and provide additional competition without eroding investor protections.

Aligning Australia's regulatory framework with well-developed international regimes can lower the barriers to entry for new fund managers seeking to operate in Australia. This can increase competition and allow Australian consumers greater product choice, including exposure to new asset classes.

This reform will enhance the international competitiveness of the Australian managed funds industry by allowing fund managers to offer investment products using vehicles that are commonly in use overseas. This will also maximise the effectiveness of related Government initiatives aimed at increasing access to overseas markets, including the ARFP.

The legislation also contributes to the more general objective of global regulatory alignment. The introduction of the CCIV helps to create a cohesive regional managed funds industry and facilitate more efficient participation in the global marketplace. This proposal presents complex challenges, both in terms of the legislation required to enact, manage and regulate, and in the operational aspect of ensuring that the structure is attractive, sustainable and robust. The proposal to have a corporate structure with flow-through taxation is novel in Australia and has presented challenges in drafting of the law. We have relied heavily on stakeholders for their views and input, which has assisted greatly in understanding how the law will be translated in practice, and to achieving a commercially viable CCIV regime.

The alternative, which will be explored in chapter three, is the status quo - being that the Government does not act on the reports and recommendations, and no change is made to the current investment options. This would present a missed opportunity for the Government to leverage off the international funds market and boost inbound investment.

3. What policy options are you considering?

3.1 Option 1 - Status Quo

Continue with a trust-based investment vehicle available to Australian based fund managers (status quo).

3.2 Option 2 - CCIV with mandatory independent depositary for retail CCIVs and bespoke CCIV tax regime

This option was consulted on publicly in 2018 and 2019. It proposed to adopt a new CCIV, in line with the Government announcement, which would be informed by the Johnson Report and the subsequent BoT Review. This option includes a mandatory depositary for retail CCIVs. Under this approach CCIVs would be prohibited from listing on a prescribed financial market and not able to undertake cross-investment between sub-funds of the same CCIV. Cross-investment is when one sub-fund invests in another sub-fund within the same CCIV, for example, sub-fund 1 purchasing a referable share in sub-fund 2, within the same CCIV.

Under this approach a bespoke tax regime was proposed to enable tax flow-through treatment. A CCIV was to be treated as if it were a separate company in relation to each sub-fund for the purposes of applying the taxation law. The CCIV would have to separately work out the income tax position for each CCIV sub-fund company, bear a separate tax liability for each CCIV sub-fund company, and administrative obligations and entitlements of the CCIV would apply separately to each CCIV sub-fund company. CCIV sub-funds would have been referred to as attribution sub-funds, reflecting the application of the existing attribution system of tax for CCIV sub-funds. That is, a CCIV sub-fund would be taxed like an AMIT and subject to the same eligibility criteria.

This approach would introduce a new concept of an attribution investment vehicle (AIV), and new capital gains tax event labels (e.g. CGT event M1). The new AIV label would have resulted in a change to existing compliance processes, for example, changes to sub-fund distribution statements and potentially the underlying trust deeds.

While the tax outcomes (and eligibility criteria) would have been broadly aligned with the existing tax outcome for AMITs, if a sub-fund failed the attribution sub-fund requirements and was not eligible for safe harbour treatment, the sub-fund would be subject to taxation at the top corporate tax rate and could not frank distributions to members (as the CCIV was not a franking entity). These sub-funds (referred as an excluded sub-fund) would retain this corporate tax outcome for subsequent income years (that is, it could not re-enter the attribution system), however a specific CGT roll-over relief mechanism would be available to facilitate the transfer of the assets of an excluded sub-fund of a CCIV to an ordinary company that is not a CCIV.

This bespoke framework would also have strengthened the administrative penalty regime to operators of AIVs (or the operator's agent), in relation to an AIV 'over' or 'under' resulting from failure to take reasonable care to comply with a taxation law. This would have aligned the AIV administrative penalty regime with other taxpayers.

Option 2 was consulted on publicly in 2018 and 2019 and the stakeholder feedback recorded.^[1A5] The general view was that this option did not adequately balance investor protections and integrity concerns with commercial viability, and that the proposed structure would be unlikely to attract highly mobile capital. This feedback was taken into consideration when the next iteration of the exposure draft was prepared in 2021, which became Option 3.

3.3 Option 3 - CCIV with optional depositary and streamlined tax regime leveraging existing tax infrastructure and concepts

Option 3 was consulted on in 2021, informed by previous stakeholder feedback on Option 2. This option proposes to adopt a new CCIV, in line with the Government announcement, which would be informed by the Johnson Report and the subsequent 2011 BoT Review.

Option 3 uses some of the elements of Option 2, but with certain amendments informed by stakeholder consultation on Option 2 in 2018 and 2019. These changes are aimed at increasing the commercial viability of the regime and suggestions on alignment to the MIS regime while maintaining investor outcomes.

The key policy elements remain under both options, including: a corporate entity limited by shares, the requirement to have a licenced corporate director and the assets and liabilities of the CCIV being referrable to a sub-fund.

Changes from Option 2 to Option 3 include flexibility to utilise a depositary or custodian (no longer mandatory for retail CCIVs), the ability to list a sub-fund on a prescribed financial market and the ability to undertake cross-investment, between sub-funds of the same CCIV. The ability to cross-invest will allow fund managers to pool assets in sub-funds and offer investment opportunities to these pooled assets with different levels of exposure or with different currencies, under the same CCIV. Under option 2, without this functionality, multiple CCIVs would need to be established to ensure the same outcome, similar to the existing MIS regime. Under cross-investment, there will be some limits on voting which will be outlined the Regulations.

The attribution flow-through taxation arrangements would still apply to CCIVs, subject to meeting certain eligibility criteria. However, this option leverages existing tax infrastructure and concepts, rather than creating a bespoke tax framework. This means that the tax outcome for CCIV sub-funds aligns generally with current tax rules, including for sub-funds that do not satisfy the AMIT eligibility criteria (that is, these sub-funds would be taxed under general trust provisions). This option provides a more comparable regime to the existing AMIT regime and more certainty and understanding in how the taxation law will operate. The Option 3 taxation proposal is more straightforward and simpler to apply.

There is significant regulatory burden savings in Option 3 compared to Option 2 from both the removal of the mandatory depositary and the adoption of the AMIT regime for taxation.

Consideration of options

For context, the Government committed to introducing the recommendations of the Johnson Report in the 2013 election campaign. The recommendation of the Johnson Report could be enacted by either Option 2 or Option 3.

Continuing with a trust-based investment vehicle (Option 1) would mean that Australian funds managers will continue to be restricted to offering investment products through MITs, which industry stakeholders advise are unfamiliar to many non-resident investors. In 2016, the Government introduced a new tax system for MITs (known as the AMIT regime) which improved the operation of the taxation law for MITs (that opted into this new regime) by increasing certainty, allowing greater flexibility and reducing compliance costs. This notwithstanding, industry have continued to advocate for a broader range of collective investment vehicles to be made available.

The key feature of the CCIV (Option 2 and 3) is that it would provide a recognisable investment vehicle for overseas investors and fund managers; that is, investment through a corporate structure. Investors purchase a share in a corporate entity and receive a return on the investment, which receives flow-through taxation. This is consistent with investing in other jurisdictions.

When consulted on, stakeholders had concerns with the commercial viability of Option 2, including the mandatory depositary which is not a current feature in the Australian investment market.

Option 3 addressed the major concerns raised in the Option 2 consultation, with stakeholders providing broad support for Option 3, with some suggestions for future improvement raised. These suggestions could be categorised as either technical (or mechanical) changes to ensure the CCIV framework and enabling legislation operates as intended, or broader policy changes that go beyond the immediate policy of establishing the CCIV framework.

4. What is the likely net benefit of each option?

Regulation options

4.1 Option 1 - Status Quo

If the status quo is maintained, Australian funds managers will continue using the MIT structure as the primary collective investment vehicle to attract foreign investment. Fund managers will not be able to use a vehicle that is internationally recognisable and with the flexibility of sub-funds.

If fund managers set up an investment fund in a company, it would be taxed as a corporation, meaning it would be subject to the corporate tax rate (generally 30 per cent), and would lose flow-through taxation. This structure (and tax rate) is generally less attractive to foreign investors with passive income investments. They could not adopt a sub-fund structure because any contractual segregation of assets would not bind third parties to the contract.

For Option 1, there would be no quantifiable benefit or loss, or net benefit as the status quo is maintained.

4.2 Option 2 - CCIV with mandatory depositary for retail CCIVs and bespoke CCIV tax regime

Increase in international competitiveness

The availability of a CCIV is expected to improve the international competitiveness of Australia's funds management industry. Australia will attract more foreign fund managers and foreign investors as they will recognise the corporate structure of the CCIV, and the flow-through taxation benefits. This will bring more foreign investment into Australia and will increase the competitiveness of Australia's managed funds industry by aligning Australia's legal funds structures with those found in the rest of the world. A commercially viable CCIV regime will see an increase in funds under management and reduce costs for both foreign and domestic investors through increased competition and economies of scale.

A greater degree of harmonisation between Australia's funds management vehicles and vehicles which are commonly used internationally is expected to lead to increased international competition within the industry. It is likely that there would be an increased interest from international financial service providers, who have achieved economies of scale elsewhere, and may now look at entering the market due to the attractiveness of the Australian market in light of the introduction of the CCIV regime.

The new vehicle will also maximise the effectiveness of related government initiatives aimed at increasing access to overseas markets, including the ARFP. The ARFP is an international trade arrangement to facilitate cross-border trade in funds management between member economies. Australian fund managers are able to export eligible Australian-domiciled funds into Japan, Korea, New Zealand and Thailand through the ARFP.

Asian investors are familiar with corporate vehicles since these are the most common cross-border funds sold in Asia. Hong Kong and Singapore have recently introduced similar investment vehicles, the Hong Kong Open-ended Fund Company (OFC) and the Singapore Variable Capital Company (VCC).

In Europe and the United Kingdom, the Undertakings for the Collective Investment in Transferable Securities (UCITS) is the corporate structured investment vehicle framework for funds management. The UCITS regime was introduced in 1985 and revised several times. There are more than 29,000 UCITS funds across the EU with over €8 trillion of assets under management^[1A6].

Introduction of a corporate based investment vehicle will support the Australian funds management sector to increase the proportion of funds managed on behalf of overseas investors. By growing beyond the domestic market and increasing the value of funds managed, Australian funds will be able to obtain global economies of scale which could be passed on to consumers in the form of lower costs.

Under this option, the CCIV regulatory framework utilises a company structure limited by shares but is modelled in general terms on the United Kingdom's Open Ended Investment Company (OEIC) regime so that it is recognisable to offshore investors and fund managers.

Regulation

As a company, a CCIV will generally be subject to the ordinary company rules under the Corporations Act unless otherwise specified. However, features of the MIS regime have also been incorporated into the design of CCIVs to the extent that they are consistent with the policy objective. For example, a CCIV must have share capital but the CCIV can issue some or all of its shares as shares that are redeemable at the member's option. This feature is similar to a member's right to withdraw from a registered scheme. Further, while other types of companies are required to appoint natural person directors, a CCIV must have a single corporate director, which is consistent with the OEIC model and also similar to the responsible entity of a registered scheme.

The CCIV regulatory framework distinguishes between retail and wholesale CCIVs. It retains and expands the retail investor protections of a registered scheme while also replicating elements of the flexibility and lighter-touch regulatory approach applying to wholesale MISs. This reflects the fact that sophisticated investors are better able to negotiate bespoke contractual protections and assess investment risks than retail investors.

The new CCIV regime will also improve consumer protections for retail investors in these schemes. For example, it will require that retail CCIVs issue a Product Disclosure Statement (PDS). It should be noted that strong consumer protection standards in the UCITS regime have been one of the major catalysts for its success.

The CCIV regime will also improve the efficiency of the Australian funds management sector. By allowing each vehicle to have sub-funds with statutory segregation of assets and liabilities, funds can offer different investment strategies through a single vehicle. This will permit efficiencies in administration and costs (for example, the fund can enter a single investment management agreement rather than separate agreements for each sub-fund).

Moving to a corporate vehicle would address issues that have arisen as a result of the existing trust-based vehicle lacking a legal personality. In a trust-based vehicle, the manager must enter contracts on behalf of the vehicle and this adds a layer of complexity in operating the fund. The problems are most acute if the manager enters financial distress, typically leading a fund to also experience financial distress that it may otherwise have avoided. These problems are set out in a report issued by the former Corporations and Markets Advisory Committee^[1A7].

A company may be registered as a CCIV if it meets certain basic registration requirements, including that upon registration it will have at least one sub-fund (which must have at least one member). The registration requirements are broadly similar to those of other companies.

Under this option, a CCIV would be prohibited from owning shares in itself, and thereby not able to undertake investment strategies whereby one sub-fund could cross-invest into the assets of another sub-fund under the same CCIV.

The extent to which funds utilise the CCIV, rather than the existing trust structure, will be dependent on its commerciality, establishment costs, transaction costs and potential scalability benefits.

Adopting a CCIV will allow funds managers to use vehicles that are commonly in use overseas and derive greater economies of scale by pooling more domestic and international investors into a single vehicle. This should increase foreign investment, which will likely result in positive impacts to revenue over the longer term. Any change is likely to be gradual as it takes time for funds managers to develop scale and attract foreign investors. Following longstanding practice, revenue costings do not generally incorporate behavioural or second round effects, especially where these are uncertain.

The Depositary

Under this option, a retail CCIV must have a depositary. A wholesale CCIV may choose to have a depositary. If it so chooses, the wholesale CCIV is subject to the full regulatory requirements for depositaries.

The depositary must be a public company or a registered foreign company that holds an AFSL authorising it to act as a depositary for a CCIV. The depositary of a CCIV (and any entities performing depositary functions) must also meet the independence requirement.

The independence requirement involves a simple prohibition on the body that is (or proposes to be) the depositary, and any agents or persons engaged by the depositary to perform depositary functions, from also being an entity that directs investment decisions for the CCIV. This means that the depositary and any other entity performing depositary functions for the CCIV is legally separated from any entity that directs investment decisions for the CCIV.

One of the depositary's core functions is to hold the assets of the CCIV. Another core function of the depositary is to supervise the conduct of certain activities carried out in relation to the CCIV.

The depositary is appointed either as part of the registration of the CCIV or by notice to ASIC. The process for changing depositary depends on the circumstances in which the depositary is being changed. As depositaries are not a key feature of the current fund management sector in Australia it would be subject to a new bespoke regulatory regime and associated guidance and information.

Public Listing on a trading exchange for retail CCIVs

An element of Option 2 is that public listing of a retail CCIV on a trading exchange is not permitted. This includes one or more sub-funds in a retail CCIV. This prohibition does not restrict a security in a CCIV from being quoted on a financial market or settled using financial market infrastructure, such as AQUA, subject to the rules of the relevant market. Feedback from stakeholders in the Option 2 consultation periods was that the inability to list on a public trading exchange was a negative and that the ability to list on a public trading exchange was essential to commercial viability. This approach has been revised in Option 3.

Taxation

This option proposes a bespoke tax regime, reflecting the hybrid nature of the CCIV (that is, a corporate entity with flow-through tax). The alignment with the tax system for AMITs was intended to maintain the benefits of income character retention. Flow-through tax trust features of income character and source assist investors with accessing specific tax benefits, for example, foreign income tax offsets. It also assists non-residents via access to concessional final withholding taxes, and domestic investors to access capital gains discounts. These features can provide Australian based investment structures with a competitive advantage compared to foreign based investment structures that only distribute income as either a dividend or interest payment. Stakeholders support the preservation of flow-through taxation for the CCIV.

Under this approach, a CCIV would be treated as if it were a separate company in relation to each sub-fund for the purposes of applying the taxation law. The CCIV would have to separately work out the income tax position for each CCIV sub-fund company, bear a separate tax liability for each CCIV sub-fund company, and administrative obligations and entitlements of the CCIV will apply separately to each CCIV sub-fund company.

This approach introduces a new concept of an attribution investment vehicle (AIV), and new capital gains tax event labels (e.g CGT event M1). The new AIV label would have resulted in a change to existing compliance processes, for example, changes to sub-fund distribution statements and potentially the underlying trust deeds.

While the tax outcomes would have been broadly aligned with the existing tax outcome for AMITs, during consultation on this option, industry raised some issues with elements of the design which would have resulted in an investor in a CCIV being subject to a different outcome compared to an AMIT. For example, there were concerns that the default tax outcome for sub-funds that did not meet AMIT eligibility criteria was to tax them like a corporate tax entity on an ongoing basis, rather than self-assessing on an income-by-income basis as for existing AMITs. There were also some general concerns about whether this default tax setting, and the potential risk of the loss of flow-through taxation, would be attractive to foreign investors.

This option, and parts of this option, were consulted on in 2017, 2018 and 2019.

Valuing the benefits of Option 2

In relation to the quantifying the monetary value of what CCIVs will bring into the economy, this is difficult to estimate due to the number of variables involved, including the number of new entrants to the market, those that are converting from another investment product into a CCIV, and the investment strategies chosen. There is a lack of data to quantify this question. Assets vary in terms of investment strategy, such as long term and short term holds and performance outcomes. The global funds management industry also needs to be taken into consideration, such as performance in other jurisdictions and the products available. This makes it challenging to accurately estimate a benefit to the Australian economy.

The tax regime under this option was intended to be broadly neutral with existing collective investment structures.

Overall regulatory impact for Option 2

Please refer to Appendix A for an outline of the assumptions used.

4.3 Option 3 - CCIV with optional depositary and streamlined tax regime leveraging existing tax infrastructure and concepts

Under this option, the core regulatory settings are the same as under Option 2 but with some key alterations to improve the commercial viability of the CCIV regime.

These amendments include:

•

flexibility for CCIVs to use a custodian or a depositary;

•

flexibility to list a retail CCIV with one sub-fund on a prescribed financial market in Australia;

•

flexibility to cross-invest between different sub-funds of a CCIV; and

•

flow-through taxation, similar to the AMIT regime.

Optional depositary

Under Option 2, the CCIV regime included a requirement that all retail CCIVs must have an independent depositary and wholesale CCIVs had the option to utilise this feature. The depositary could engage other third parties to hold the CCIV's assets on its behalf (such as a custodian). There are multiple approaches for international regimes in requiring the use of custodians or depositaries. In addition, the current managed investment scheme regime does not require a depositary for the scheme. In practice, and under licensing arrangements, a custodian is often appointed for the scheme.

Under this option, changes have been made to align the requirements for a custodian or a depositary in the CCIV regime to provide greater flexibility and are now also consistent with the current requirements for managed investment schemes in Australia. A CCIV may choose to appoint a depositary or a custodian as a matter of commercial practice or in accordance with other regulatory requirements (such as any similar Australian financial services licensing arrangements for the corporate director of the CCIV).

This change ensures the Australian funds management industry has sufficient flexibility to align their commercial models to particular markets or investors, as required. It ensures equivalent investor protections and comparable levels of regulatory cost across both the MIS and CCIV regime. Under option 2, a new regulatory framework was established to regulate the operation of the independent depositary. As under this approach a depositary is not required, and if a CCIV was to utilise a depositary this would not be a regulated requirement, rather a requirement on a commercial basis, the costing has not been included for this option.

Optional public listing on a prescribed financial market

The second significant change under this option is that retail CCIVs with only one sub-fund will be able to be listed on a prescribed financial market (such as listing platforms like the ASX).

Under Option 2, a CCIV (and sub-funds of a CCIV) were prohibited from being listed. This prohibition did not affect the ability to quote securities in a CCIV on other platforms (such as the ASX's AQUA platform for managed funds and structured products). In practice, these other platforms are restricted to CCIVs with liquid assets.

As suggested by stakeholders in previous consultation, a staged approach to the listing of CCIVs has been adopted under this option. This approach allows for the listing of retail CCIVs with one sub-fund on a prescribed financial market in Australia (such as the ASX) from 1 July 2022. This provides listed retail CCIVs with similar access to listing on a prescribed financial market as registered schemes. It also ensures CCIVs with illiquid assets can access platforms on the financial market, enhancing the commercial viability of the CCIV regime.

The ability to quote securities of a CCIV on other platforms (such as AQUA) is maintained and is not affected by the fact that listing of retail CCIVs is limited to CCIVs with one sub-fund. The listing of retail CCIVs with more than one sub-fund will be considered in the future. The regulatory impacts would likely be similar, if not less, as the listing of the first sub-fund.

Listed CCIVs are generally subject to the existing requirements for listed companies under the Corporations Act. Some modifications are made to ensure the CCIV regime appropriately aligns to the regime for managed investment schemes.

Optional Cross-investment within the same CCIV

Under Option 3, sub-funds in the same CCIV may cross-invest subject to any requirements or restrictions set out in the Corporations Regulations 2001 (the Regulations). This change has been made in response to feedback in previous consultation and to ensure the competitiveness of the Australian CCIV regime internationally. It will allow fund managers to pool assets within the one CCIV, under separate sub-funds. In Option 2, they would have been required to operate multiple CCIVs to give effect to the investment strategy.

To facilitate cross-investment, consistent with other international collective investment vehicles, a CCIV may acquire, in respect of one sub-fund, shares that are referable to another sub-fund of the CCIV. These shares are held as an asset for the first sub-fund. A CCIV also acquires rights as a member of the second sub-fund of the CCIV. As a member, the CCIV is entitled to vote on resolutions at a meeting of the members of the second sub-fund, subject to any requirements in the Regulations. However, the CCIV cannot vote on resolutions at a meeting of the members of the whole CCIV to preserve the voting power of other members in the CCIV. The Regulations will outline any restrictions on the exercising of votes attached to cross-invested shares for sub-fund level resolutions.

Including any requirements or restrictions on cross-investment in the Regulations is consistent with the approach taken in other international jurisdictions and ensures the regime is responsive to the market as the CCIV regime becomes operational and matures over time. From establishment of the CCIV regime on 1 July 2022, a restriction on circular investment is proposed to be set out in the Regulations.

Further regulatory requirements are included in the draft law to ensure:

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the constitution of a retail CCIV makes adequate provision for cross-investment between its sub-funds; and

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the intention to cross-invest is appropriately addressed in any PDS related to securities in a retail CCIV.

These requirements ensure that members of a retail CCIV are appropriately informed about any intention to cross-invest within a CCIV. This has been considered in the regulatory burden costing. Given the contractual nature of the CCIV's constitution, members of a retail CCIV will obtain necessary protections if any of the requirements that have been included in the constitution are contravened.

Revised taxation approach - flow through taxation

The revised approach leverages the existing tax infrastructure, rather than creating a bespoke tax regime, to deliver flow through taxation to a corporate entity. Tax advisers will be familiar with the existing tax arrangements for trusts so the tax advice costs of using a CCIV should be reduced significantly under the revised approach. This approach has the added benefit of reducing the size of the operative legislation, helping to reduce the overall complexity of the CCIV tax law.

The CCIV tax framework operates via a deeming principle which deems a trust relationship for tax law purposes, between a CCIV, the business, assets and liabilities of a sub-fund and the relevant class of members for the purposes of all taxation laws. The overall effect of this is to:

•

treat the assets, liabilities and business of each sub-fund as separate trusts (and separate entities); and

•

treat the CCIV as trustee of the CCIV sub-fund trust; and

•

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

This approach ensures that where the sub-fund meets the AMIT eligibility criteria it will be taxed as an AMIT under the attribution flow-through tax regime in the income tax law. Similarly, if a sub-fund does not meet the AMIT eligibility, it will be taxed under general trust provisions, consistent with current AMIT treatment. This has the added benefit of removing potential uncertainty as to whether the corporate tax system (such as franking/imputation) would apply to sub-funds, as the default tax outcome will be subject to existing trust provisions.

The taxation approach in Option 3, compared to Option 2, is a significant compliance burden saving as Option 3 leverages an existing taxation regime, while Option 2 created a bespoke system.

Valuing the benefits of Option 3

As with Option 2, in relation to the quantifying the monetary value of what CCIVs will bring into the economy, this is difficult to estimate due to the number of variables involved, including the number of new entrants to the market, those that are converting from another investment product into a CCIV, and the investment strategies chosen. Assets vary in terms of investment strategy, such as long term and short term holds and performance outcomes. The global funds management industry also needs to be taken into consideration, such as performance in other jurisdictions and the products available. This makes it challenging to pinpoint the monetary value and net benefits.

In relation to tax, this option aligns with existing tax treatment of AMITs by leveraging the existing trusts tax framework. This ensures the regime is easier to understand and implement, and the tax outcomes for stakeholders are clearer.

From stakeholder feedback, Option 3 was the strongly preferred approach as it is a more attractive proposition (based on the taxation mechanism, and the benefits of listing and cross-investment), however the net benefit cannot be accurately quantified.

Overall regulatory impact for Option 3

Please refer to Appendix A for an outline of the assumptions used.

Overall Regulatory burden estimate table - under option 3

Ongoing costs of Option 2 and Option 3

The ongoing costs of operating a CCIV will not substantially differ to those of operating a MIS. In fact, a CCIV offers operational efficiencies, like sub-funds, that should see operational costs savings compared to MIS.

Costs to businesses

Introducing the CCIV under option 2 is expected to have an overall annual regulatory burden of $2,042,040. Option 3 is expected to have an overall annual regulatory burden of $1,199,189. The main differences between these two options are that Option 2 includes the mandatory depositary and the bespoke taxation system.

Components of these costs are set out in Appendix 1. It does not include the ordinary costs of running a fund, nor the savings of operating a CCIV relative to operating a series of MITs or MISs.

CCIV framework

The ongoing costs of operating a CCIV will be very similar to the operation costs of a MIS. It is possible that the CCIV regime will offer savings to the fund managers through the use of sub-funds, rather than through multiple MITs under the one fund manager, however this is difficult to quantify until put into practice.

The compliance cost represents the cost of establishing and maintaining new funds if they prove to be attractive to the market. The greater the take up of the new CCIVs, therefore, the proportionally greater will be the compliance cost. The figure does not consider a compliance 'saving' from the compliance cost of the MIT that the new CCIV is replacing. However, that will be a factor considered by industry in determining whether to take up the new investment vehicles.

Treasury is working closely with industry stakeholders, regulators and administrators to ensure the new CCIVs will have a comparable cost across the system to the MIT regime, without compromising investor protection and other benefits when comparing the two regimes. The ATO and ASIC will, in line with current practice, work with industry to ensure their administrative and reporting systems are compatible and efficient. This includes preparing guidance, as required, to support taxpayer compliance.

Cumulative benefits with the Asia Region Funds Passport

The introduction of the CCIV is likely to create opportunities for the Australian funds management industry to improve the marketability and access to overseas investors and markets by Australian fund managers. This, in turn, will improve the economies of scale of domestic fund providers and the pool of potential investors they can offer their services to.

As noted above, one of the major benefits of the CCIV is its function to maximise the effectiveness of the ARFP. By reducing the barriers in this way, the ARFP may make offering Australian collective investment schemes overseas profitable where it otherwise may not have been.

Costs to individuals

Some individuals may choose to invest in retail CCIVs. When used at scale, it is anticipated that CCIVs will offer lower management fees compared to the current MIT scheme, due to the savings that can potentially occur using the sub-fund structure, as opposed to individuals AMITs. This would potentially see individual investors paying less management fees and thus receiving a greater return on their investment.

In relation to Option 2, it is likely that individual investors would be paying greater fees due to the costs involved in a depositary. The exact value is difficult to quantify due to the variables involved, although it could be considered low-cost change. Option 2 also has no capacity for public listing, and thus it would reduce the availability to individual investors.

Costs to community organisations and the broader community

There are no regulatory costs to community organisations or the broader community as a result of this regime from any of the options presented.

5. Who did you consult and how did you incorporate their feedback?

The development of CCIVs has a long history, and one that has been heavily influenced by consultation with stakeholders, and consideration of overseas models. This aims to ensure the CCIV regime is an attractive and competitive proposition and garners support with time. As the CCIV regime is optional, stakeholder support and buy-in is critical to uptake of the regime. Given this, Treasury listened closely to stakeholders' feedback and were guided by their expertise.

Early consultation

The CCIV proposition began in the Johnson report, followed by The Board of Taxation undertaking a comprehensive consultation process as part of its 2011 report. Additionally, the Government has undertaken confidential consultations with industry, consumer groups and academics. The first round of consultations occurred between October and December 2014. This consultation developed the high-level regulatory framework for the CCIV. This targeted consultation indicated strong industry demand for CCIVs. The CCIV framework was discussed as part of Tax White Paper Consultations during 2015.

Following the announcement in the 2016-17 Budget, a second round of confidential consultations occurred in October and November 2016 on a high-level framework. Industry representatives, consumer groups, academics and relevant agencies were invited to roundtables and to make submissions in response to a consultation paper. Once again these focussed on the technical aspects of the model design, with industry supporting a flow-through tax model aligned with the then recently enacted attribution method of tax (that is, the new tax system for MITs) over other tax options canvassed, such as adapting the listed investment company model.

Core Framework - 2017 and 2018

The Government publicly consulted on an exposure draft of the core chapter for the CCIV regulatory framework from 25 August to 25 September 2017. This initial consultation was followed by a public consultation on an exposure draft for the proposed tax arrangements between 20 December 2017 and 2 February 2018. This consultation included face-to-face meetings with key industry representatives. In total, 14 submissions were received. The general industry feedback was that while the bespoke nature of the framework design gave rise to broad alignment with the existing AMIT tax outcomes, stakeholders ultimately questioned this framework. In particular, the tax features that departed from the AMIT rules (such as treating a sub-fund that failed to meet the AMIT eligibility criteria as a corporate) and that this may detract from the commerciality of the CCIV framework. A further round of consultation was conducted in October 2018, to finalise the technical elements of the CCIV tax framework. This round of consultation reflected stakeholder feedback by incorporating changes to elements of the core design, such as a proposed tax roll over relief mechanism for a failed sub-fund. Industry welcomed some of the refinements but had reservations about the bespoke tax design.

Exposure drafts and revisions - 2018, 2019 and 2021

The Government consulted on a revised exposure draft including the first tranche of consequential amendments to existing provisions in the Corporations Act for over 4 weeks beginning 13 June 2018 and concluding 18 July 2018. The consultation received 15 submissions. The second tranche of consultations was held from 19 July to 10 August. This consultation received 7 submissions. The Government consulted on a third tranche from 12 October to 26 October 2018. This consultation received 6 submissions. The Government consulted on the full draft legislation (regulatory and tax frameworks) from 17 January to 28 February 2019, receiving 9 submissions. This is Option 2.

Feedback from this round of consultation on Option 2 included:

•

The mandatory depositary is not necessary and would create undue complexity. There are no current depositaries in the Australian market.

•

The taxation outcomes may not be on par with the MIS regime, and this may provide a disincentive to starting a CCIV.

•

Retail CCIVs need the option to list on a trading exchange to be commercially viable.

•

One sub-fund should be able to invest in another sub-fund for effective portfolio management.

After this consultation period, the legislation development was put on hold due to competing Government priorities. In Budget 2021-2022, the Government announced a start date for the CCIV regime of 1 July 2022, and the project was reactivated.

Feedback from the 2019 public consultation round was considered and utilised to inform the next iteration of the draft legislation which was exposed to the public for consultation from 27 August to 24 September 2021. This is Option 3. The changes to this draft reflected the 2019 public consultation feedback, including the removal of the mandatory depositary, optional public listing and optional cross-investment, and a change of approach to taxation. Ten submissions were received and a number of round table discussions were held with Treasury representatives and stakeholders.

Submissions were made from a range of stakeholders including industry peak bodies, accounting firms, legal firms and other associations. Feedback included the following:

•

The revised taxation approach was well supported as a simpler solution.

•

The proposed approach of making the depositary optional was well supported.

•

Cross-investment in one sub-fund was welcomed.

•

The ability to publicly list one sub-fund on a trading exchange was welcomed to improve the commercial viability.

As a result of the consultations, the Government has adopted a number of policies that will improve the functionality and efficiency of the CCIV, including:

•

removing of the mandatory depositary for retail CCIVs and thus aligning the requirements for a custodian or a depositary in the CCIV's regime with the current requirements for managed investment schemes in Australia; and

•

aligning the CCIV tax framework with existing arrangements for the taxation of trusts, including access to the AMIT tax regime where the relevant criteria are met. The intent is that the tax outcomes for an investor in a sub-fund of a CCIV be the same as an investor in an AMIT (rather than broadly aligned).

These changes are expected to lower costs, increase the flexibility in operating the scheme while continuing to protect consumers.

What stakeholders engaged in the process?

The CCIV regime has attracted significant interest and engagement from law firms, accounting firms, fund managers, peak bodies in the financial services, property management and fund management areas, and overseas jurisdictions. Treasury are grateful for the engagement and enthusiasm many stakeholders have shown for the proposed regime, and we appreciate the time and industry expertise that went into the submissions and consultations. The public submissions received across the years of consultation are available on at
www.treasury.gov.au/consultation

Government Stakeholders

The ATO and ASIC have been consistently consulted and involved in the development of the legislation and had significant input into the final policy outcomes.

Previous consultation on Regulatory Impact

The development of the CCIV regime has taken several years. Over that time, there have been early versions of the RIS prepared for consultation and to inform decision making.

Early assessment RISs were assessed by the OBPR in 2016 and 2017 and another early version in 2021.

6. What is the best option from those you have considered?

Consistent with the Government's 2016-17 and 2021-22 Budget announcements, the preferred option is to introduce a new tax and regulatory framework for the CCIV. A new framework has broad support from stakeholders.

To summarise the options available, option 1 has no regulatory cost but it has no benefits to the Australian economy. Option 2 and 3 benefit the Australian economy by attracting foreign investors. Option 2 does not have support from stakeholders as a commercially viable option. Option 3 has stakeholder support. Given this, option 3 has been supported by Government as having the highest net benefits and thus the most viable option for a CCIV regime.

Option 3 provides greater flexibility for industry to utilise the CCIV structure in a commercially viable manner without decreasing the member protections for investors. The policy settings under option 3 of allowing cross-investment provides greater adaptability to different investment structures, meaning that fund managers can provide more investment options to investors without needing to operate multiple entities, but rather can establish additional sub-funds. Under option 2 cross-investment was only allowed at the CCIV-to-CCIV investment level, thus requiring the additional cost of operating an additional CCIV. Option 3 will improve the ability of fund managers to pool more investments, creating economies of scale and better returns and lower fees for investors.

The policy decisions to allow listing for a CCIV with a single sub-fund from 1 July 2022 will also make the CCIV structure more viable for those funds which aim to provide investment options for more illiquid asset types. In addition, the greater flexibility for CCIV operators to determine whether a depositary or custodian is utilised allows CCIVs to still access foreign jurisdictions which require a depositary or custodian. The flexibility also allows the operator to determine if the feature is not required for commercial reasons, such as to keep operating costs low, the operator can exercise that choice.

Additionally, complementary changes to the Corporations Act and related legislation are under review to ensure that existing regulatory frameworks are appropriately adapted to the CCIV regime, including areas such as whistle-blower protections, breach reporting, continuous disclosure, product intervention power, design and distribution obligations and corporate insolvency reforms.

The proposed approach will require new legislation to give effect to the CCIV in domestic taxation and corporations law. It is proposed that the CCIV will provide tax alignment with the current AMIT regime, as CCIVs sub-funds will be subject to similar eligibility criteria that currently apply to AMITs (or general trust provisions otherwise, in line with existing tax outcomes). It is proposed that a CCIV will be required to have a sub-fund, and that each sub-fund will be deemed a separate entity for income tax purposes. Investment in a CCIV will be open to both resident and foreign investors. CCIVs will be eligible for flow through taxation similar to that available to AMITs (and other trusts if subject to general trust provisions), which means investors will generally be taxed as if they had undertaken the investments directly. Foreign resident investors will be subject to withholding taxation on income and capital gains distributed by the CCIV. A CCIV will submit a tax return in respect of each sub-fund, leveraging the current systems/approach used for AMITs (or general trust provisions). Industry stakeholders support this approach.

7. How will you implement and evaluate your chosen option?

Legislation is required to implement this proposal, through changes to the corporations and taxation legislation. In relation to implementation, the ATO would be responsible for administering the tax framework applying to CCIVs. ASIC would be responsible for administering the regulatory framework.

The implementation of the policy will require system updates and reviews of current practices for industry, as well as engagement with fund managers to ensure they are aware of the changes. The ASIC and ATO will monitor the functionality of the CCIV framework. Treasury will also consider feedback from stakeholders on the policy to ensure it is meeting set objectives. Treasury will also continue to work with the ATO to identify any integrity risks that may arise from the preferred option, and to the extent such risks are identified we would seek to progress consequential amendments to ensure the correct policy intent is consistent.

The success of the CCIV regime will be assessed against the adoption of the regime and the outcomes for investors who utilise the CCIV structure. At maturity of the CCIV regime it is expected that the funds under management would be similar to that of the current MIS regime. The policy aim of the regime is to increase levels of foreign investment in Australia, and therefore higher level of foreign investment through CCIVs would be expected than currently observed in the MIS regime. It would not be expected to see the same number of CCIVs and MISs, as the umbrella structure of the CCIV would mean more investment options can be provided (via the sub-funds) within the same structure. A more representative figure would be the total number of sub-funds as compared to MISs.

In relation to Government implementation, all CCIVs will be required to be registered with ASIC, and the ATO will be able to monitor the uptake of the structure to evaluate the effectiveness of the CCIV regime during the implementation period. Monitoring the levels of foreign capital being invested into Australia will also be an indicator of the success of the regime over time.

ASIC is planning to consult on and implement a number of regulatory measures to ensure the effective implementation and operation of the CCIV regime. Principally, ASIC will ensure regulatory harmonisation as necessary through new or amended legislative instruments and AFS licensing requirements.

ASIC may also need to introduce new regulatory guidance or amend existing regulatory guidance as a result of these measures. As a whole, these changes are likely to be minor and machinery in nature, should not alter the underlying policy of the CCIV regime and are designed to ensure regulatory parity between the MIS and CCIV regimes. Where appropriate and to the extent possible, ASIC intends to ensure regularity parity between MISs and CCIVs and to extend the operation of certain legislative instruments to CCIVs that currently apply to other companies, to support the implementation of the CCIV regime.

In relation to the ATO, the ATO will look to mirror current taxpayer experiences with the MIS regime.

APPENDIX A: Estimated impact on funds management activities

Assumptions

While it is difficult to project the number of new CCIV's that will commence in the initial 10 years of the CCIV regime, stakeholders were consulted on this point and these calculations have taken into consideration experiences of other jurisdictions when they have created new similar investment vehicles. When asked, stakeholders found it difficult to suggest a number of possible registrations due to the number of variables involved. They did provide context that they expect the CCIV regime to garner support over time, once the product has been proven in the market.

The regulatory burden calculation across the options assumes that both CCIV and depositaries will be subject to one-off implementation costs related to:

•

administration - preparing new PDSs reflecting legislative change that inform consumers about new business structures and products offered; and

•

learning and education - providing training to employees to meet the new regulatory requirements; and

•

compliance and legal - the cost of creating new systems to ensure compliance with the new regulatory requirements.

CCIV - Option 2

Depositary

CCIV - Option 3

APPENDIX B: Methodology and limitations to regulatory cost estimate

Industry data

Stakeholders were asked to estimate regulatory and taxation compliance costs as part of the Government's public consultation on the draft in several of the rounds of consultation. These are included in the assumptions for Option 2.

In the 2021 consultation, Treasury approached stakeholders for their view of the regulatory and taxation compliance costs for Option 2 and 3. These are included in the assumptions.

Average labour costs

For option 2 and 3, a default hourly labour cost has been used based on Australian average weekly earnings, adjusted to include income tax. This value is scaled up using a multiplier of 1.75 to account for the non-wage labour on-costs (for example, payroll tax and superannuation) and overhead costs (for example, rent, telephone, electricity and information technology equipment expenses). This results in a scaled-up rate of $73.05 per hour.

Limitations

The estimated regulatory burden is relevant to the extent that industry opts to take up the new investment vehicles. Therefore, it is assumed that future CCIVs, including both converting MISs and new CCIVs, have deemed the regulatory burden to be acceptable compared to the existing benefits on offer. Any current MIS has the option of retaining that structure and incurring no implementation costs.

In relation to the total costs and benefits, it is unable to be quantified due to the number of variables involved and data limitations. That being said, Australia will attract more foreign fund managers and foreign investors as they will recognise the corporate structure of the CCIV, and the flow through taxation benefits. This will bring more foreign investment into Australia and will increase the competitiveness of Australia's managed funds industry by aligning Australia's legal funds structures with those found in the rest of the world. It will open up Australia to international funds management and reduce costs for investors through increased competition and economies of scale.

Attachment 2: Regulation Impact Statement - Retirement Income Covenant

1. What is the problem you are trying to solve?

The Retirement Income Review (the Review) suggested an objective of the retirement income system be designed around the goal 'to deliver adequate standards of living in retirement in an equitable, sustainable and cohesive way.'^[2A1] It noted that 'providing income in retirement is the fundamental role of compulsory superannuation.'^[2A2] However, 29 years after the introduction of compulsory superannuation, the retirement phase of superannuation remains under-developed. There is substantial room for improvement in how the superannuation system delivers adequate standards of living in retirement for all Australians, both now and into the future.

That Review found that Australians are projected to accumulate increasingly significant superannuation assets by retirement. The median superannuation balances of men and women approaching retirement (aged 60-64) in 2019 were around $179,000 and $137,000 respectively.^[2A3] By 2060, the median earner is projected to accumulate over $450,000 by retirement in real terms.^[2A4] With the robust design of the accumulation phase of superannuation after years of reform, Australians are well placed to have enough funds to provide for an adequate retirement.

But most retirees are not currently supported to effectively manage their superannuation when they retire. Retirement involves multiple decisions and difficult trade-offs, such as:

•

when to retire;

•

whether to keep their money in superannuation;

•

how to invest their savings, both in and outside of superannuation;

•

how to draw down their savings, both in and outside of superannuation; and

•

their future expenditure and capital needs.

The long-term implications of these decisions, and their complex interactions with other systems like tax, social security, aged care, and housing; make it challenging for many retirees to determine an optimal retirement income strategy without professional support. Yet currently most people do not seek financial advice^[2A5] or professional support at retirement to help navigate this complexity. Rather, in the face of this complexity, evidence shows that Australians currently follow others, disengage, or fall back on rules of thumb and defaults that are not necessarily fit-for-purpose.^[2A6]

Broadly, evidence suggests that the major worry among retirees and pre-retirees is exhausting their assets in retirement.^[2A7] In particular, retirees are concerned about possible future health and aged care costs and concerns about outliving savings. The unknown impact of COVID-19 pandemic is also a source of uncertainty for retirees.^[2A8] Retirees are particularly worried about outliving their savings, and this is exacerbated by the uncertainty of how long a retiree will live.^[2A9] As a consequence of these factors retirees seek to maintain a financial buffer, saving their money in response to the uncertainties.

The 'nest egg' framing of superannuation compounds the complexities around deciding how to manage their superannuation in retirement. Partly because the accumulation phase of superannuation primes people to save as large a lump sum as possible, many retirees struggle to transition to the concept that superannuation is to be consumed to fund their retirement.

Some stakeholders have raised contrary concerns that people draw down their superannuation assets too quickly by taking large lump sums once they reach retirement. However, this is not supported by evidence as being a widespread problem. When the Productivity Commission researched this issue in 2015, it found that less than 30 per cent of superannuation assets are taken as lump sums and when lump sums are taken, they have a median value of around $20 000.^[2A10] Lump sums are more prevalent among those with very low superannuation balances. Those with comparatively more superannuation savings tend to take lump sums that comprise a relatively small proportion of their superannuation assets. Where lump sums are taken, they are used to retire debt or purchase goods and services that can be used throughout retirement, such as making home improvements and purchasing consumer durables. The Productivity Commission also found that lump sums are likely to decline in importance as the superannuation system matures.

Because retirees find it difficult to develop effective retirement income strategies without professional support, much of the savings accrued through the superannuation system are not currently used to provide retirement income. Multiple studies have shown that current retirees die with substantial proportions of the assets they had at retirement, and that the retirees overwhelming spend their retirement savings very slowly.^[2A11]

As Australians increasingly retire with larger superannuation balances, these issues will become more prevalent. Without a change in behaviour, it is expected that bequests from superannuation will grow. By 2060, it is projected that 1 in every 3 dollars paid out of the superannuation system will be a part of a bequest.^[2A12] This outcome is not in line with the purpose of the retirement income system to provide an adequate standard of living in retirement. Despite this, bequests do not appear to be a high priority for retirees and is actually one of the least important retirement savings objectives for people.^[2A13] Although the system should accommodate those who wish to leave bequests, it should not do so to the detriment of retirement incomes.

Low consumption of superannuation also lowers living standards. People could have a higher standard of living in retirement if they had greater confidence to spend their superannuation. The Review noted that 'whether retirees draw down at minimum rates or effectively use their superannuation is critical' to determining whether they have an adequate retirement income.^[2A14] Treasury estimates that using more efficient drawdown patterns from existing superannuation assets could increase the median person's income in retirement by over $100,000, compared to how people typically draw down their superannuation now.^[2A15] How retirees draw down on their superannuation can also be more important than whether they make additional contributions to superannuation in working life, in impacting their living standards in retirement.^[2A16]

2. Why is Government action needed?

The Commonwealth Government has policy responsibility for the tax and regulatory settings that govern Australia's superannuation system. Government action is needed to ensure that those settings deliver appropriate outcomes for all Australians, including delivering an adequate standard of living in retirement (in conjunction with the Age Pension, other government supports and voluntary savings).

This is even more critical given Australia's superannuation system is compulsory. Almost all Australian employees are required to have 10 per cent of their salary (increasing to 12 per cent by 1 July 2025) placed into superannuation, for the purposes of providing income in retirement. The decision of successive Australian Governments to maintain a compulsory superannuation system implies an obligation on the Government to ensure that the system delivers its intended outcomes. While it is possible that increased familiarity with the superannuation system could lead individuals to achieve better retirement outcomes, increased familiarity with the superannuation system is unlikely to occur without intervention. As outlined above, the superannuation system is complex and retirement involves a number of difficult decisions that retirees are not well-equipped to navigate without support. Government action is necessary to equip individuals with greater knowledge and awareness in this complex environment to allow outcomes to improve.

Superannuation funds are managed by trustees, who are required to act in the best financial interests of members with the sole purpose of providing retirement benefits. Covenants in the Superannuation Industry (Supervision) Act 1993 place additional obligations on superannuation fund trustees, which sit alongside this overarching best financial interests duty and sole purpose test. These covenants are encoded in legislation and enforced by Government regulators. Existing covenants in the Superannuation Industry (Supervision) Act 1993 include obligations to formulate, review regularly and give effect to investment, risk management and insurance strategies. There is no obligation for trustees to have a strategy as to how they support their members manage their superannuation to provide income in retirement.

The Government has taken previous action to improve the retirement phase of superannuation, and the supports provided to retirees to help them make the most of their accumulated savings.

•

The Government has legislated to remove barriers to the development of innovative retirement income products through changes to the tax treatment and the social security means test. These changes pave the way for retirement income products that deliver higher, and more sustainable, incomes in retirement.

•

The Government has acted on the recommendations of the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, and implemented reforms to how advice and guidance are provided both within and outside superannuation. These reforms have affected when and how superannuation funds offer guidance and advice to their members.

•

The Government has also legislated for providers of retirement income products to meet design and distribution obligations from 5 October 2021, as per the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019. ^[2A17] These will ensure retirement income products are offered in a more targeted manner to retirees for whom they are suitable.

While the Government has a clear role to play in ensuring the superannuation system delivers an adequate standard of living in retirement, other parties also have responsibility for achieving this outcome. Superannuation fund trustees, financial advisors, the media and peak body organisations, and individuals themselves all play a role in informing how superannuation is used in retirement to deliver adequate incomes. This shared responsibility is inherent in the design of Australia's retirement income system.^[2A18]

3. What policy options are you considering?

All options considered would apply to large and small APRA-regulated funds. As at June 2021 there are 156 large APRA funds and 1,486 small APRA funds in the superannuation industry.^[2A19] Small APRA funds are serviced by three professional trustees.^[2A20]

3.1 Option 1 - Status Quo

This option would involve no change to policy settings.

3.2 Option 2 - Introduce a retirement income covenant requiring trustees to produce a retirement income strategy for their members

This option would require all superannuation fund trustees to formulate, review regularly, and give effect to a retirement income strategy for the retired members of their fund, and the members of their fund approaching retirement. The strategy could be formulated either for all members in generality, or cohorts of members in generality as identified by the trustee. The strategy would outline how the trustee intends to assist their members to balance and achieve three key retirement objectives of maximising their retirement income, managing risks to the sustainability and stability of their income, and having some flexible access to savings.

In effect, the strategy would be a governance document developed by the trustee that:

•

identifies and recognises the broad retirement income needs of the members of the fund; and

•

presents a plan to build the fund's capacity and capability to service those needs.

The strategy would not be financial advice, or represent a plan tailored to the needs of individual members of the fund.

In formulating a retirement income strategy, the trustee would identify and recognise the retirement income needs of members of the fund. To do this, they would need to collect certain information about their members, however the policy would not require trustees to collect any specific information.

In formulating the strategy, the trustee would identify how they will assist their members to balance and achieve the three key objectives. The trustee would have discretion in how to balance the objectives, and the balance may vary between funds or cohorts.

The trustee would have to make their strategy publicly available, for example, by making a summary of their strategy document(s) available on their website.

In implementing the strategy, the trustee would undertake the activities they have outlined in their strategy which would assist their members to achieve and balance the retirement income objectives. There would be no requirement for trustees to take any particular course of action in implementing their strategy, and beneficiaries would not be required to consider or take-up any particular assistance offered by their fund under their strategy. Trustees would not be precluded from assisting members to meet individual needs through tailored advice, in addition to their retirement income strategy.

At a minimum, then, trustees would be required to identify and recognise the retirement needs of members of their fund, identify how they will assist their members to balance the three key objectives, and publish this in a publicly available document. In line with existing covenants, non-compliance would attract a civil penalty.

Any assistance provided by the trustee to give effect to their retirement income strategy would need to comply with existing requirements under the Superannuation Industry (Supervision) Act 1993, the Superannuation Industry (Supervision) Regulations 1994, Design and Distribution Obligations and financial advice rules. Assistance must also meet the sole purpose test and be in members' best financial interests.

Administrative arrangements

This option would require changes to primary and subordinate legislation. APRA and ASIC would be expected to provide the necessary regulatory guidance to support trustees in developing effective retirement income strategies.

3.3 Option 3 - Require trustees to offer personal advice to all members

This option would require superannuation fund trustees to offer personal advice to every member individually at the point of retirement, which the member could then choose to take up to assist them in determining a tailored retirement income strategy.

Trustees would be required to inform members of the financial advice offerings they have available. They would be required to have a personal advice offering for their members, whether provided in-house (e.g. through advisors employed by the fund) or through an external provider. Where appropriate, trustees may be able to provide this advice through an intra-fund advice model.^[2A21] The advice model used, and thus the costs of the advice offered to members, would be at the discretion of the trustee.

The provision of personal advice under this policy would need to comply with existing requirements under financial advice regulations.

Depending on the member's circumstances, they could also be advised through general advice that does not take into account individual circumstances. However, funds would be required to offer personal advice as an option, and a decision to instead take up general advice would be at a member's discretion.

Administrative arrangements

This option would require changes to primary and subordinate legislation. APRA and ASIC would be expected to provide the necessary regulatory guidance to support trustees in ensuring members were offered personal advice, and the regulation of that advice.

3.4 Option 4 - Require trustees to provide a 'soft-default' retirement product to their members

This option would require superannuation fund trustees to offer their member a 'soft-default' retirement income product at the point of retirement, which they could then choose to take up, seek an alternative product, or receive personal financial advice.

The soft-default product would need to be developed by the trustee or offered by the trustee and developed by a third-party product developer.

While these products would be able to be tailored to fund memberships to some extent, they would need to comply with prescribed minimum standards set by the Government or by regulators to ensure they would deliver appropriate outcomes for retirees, and balance competing retirement objectives appropriately. While the minimum standards for this product would not be highly prescriptive, it is likely they would include a requirement that the product seek to achieve an appropriate balance of the key retirement income objectives of maximising retirement income, managing risks to the sustainability and stability of income, and having some flexible access to savings. As such, it would likely be necessary that these products include some form of longevity protection.

In developing and offering the product, trustees would need to comply with existing financial advice laws, including licensing and disclosure requirements.

Administrative arrangements

This option would require changes to primary and subordinate legislation. APRA and ASIC would be expected to provide the necessary regulatory guidance to support trustees in developing and promoting their soft-default retirement products.

4. What is the likely net benefit of each option?

4.1 Option 1 - Status Quo

Overview

Option 1 maintains the status quo. The problems identified in Section 1 would continue to persist. Some superannuation trustees would, of their own accord, put in place measures to improve the outcomes of the members of their funds in retirement. However, not all funds would do this, and those that do may put in place differing levels of support. There would be no additional standardised requirements across all superannuation funds to have structures in place to support members to make the most of their retirement savings.

Option 1 places no additional requirements on the system and therefore has no compliance cost, but means many retirees would have a lower standard of living than might be available to them. This option has been used as the benchmark for considering the costs and benefits of the other options.

Regulatory burden estimate (RBE) table

4.2 Option 2 - Introduce a retirement income covenant requiring trustees to produce a retirement income strategy for their members

Impacts for Superannuation Funds

This option would require all superannuation fund trustees to formulate, review regularly, and give effect to a retirement income strategy for the retired members of their fund, and the members of their fund approaching retirement. As with the other covenants already legislated in the Superannuation Industry (Supervision) Act 1993, there may be a cost for trustees to formulate, review regularly and give effect to a retirement income strategy. Administratively this would require trustees to analyse information related to their membership, along with formulating, reviewing, and giving effect to the strategy. This includes publishing the strategy on the website of the fund.

The retirement income covenant would allow for significant discretion for trustees to tailor their retirement income strategy to the specifics of their membership. This includes discretion around aspects of how the strategy is formulated, and the scope and type of assistance provided by the trustee in implementing their strategy. However, the minimum requirements would ensure all funds do give consideration to how they will assist their members in achieving a balance of key retirement objectives. While there are risks that funds may take minimal actions, funds will need to justify to their members why this option is in their best interests.

Trustees should already have some information on their members from existing regulatory requirements such as member outcomes assessments and the day-to-day operation of their fund. Further data collection could include outsourcing to a third party to conduct surveys of members, or trustees undertaking additional data collection internally. Additionally, trustees could analyse existing data sources, such as:

•

the Australian Bureau of Statistics;

•

the Australian Government Actuary;

•

the Australian Prudential Regulatory Authority;

•

the Australian Taxation Office;

•

the Department of Social Services; and

•

the Household Income and Labour Dynamics of Australia survey

It is anticipated that a requirement to develop a retirement income strategy would result in many trustees evaluating the products and guidance they offer to their members and investigating whether their product offerings can be improved to better meet the needs of their members. The covenant would provide discretion for trustees to provide assistance they thought was best suited for their fund. Assistance could include actions such as:

•

developing and/or offering specific retirement income products;

•

developing specific drawdown patterns that provide higher incomes throughout retirement;

•

providing tools such as expenditure calculators to identify income and capital needs over time;

•

providing factual information about key retirement topics, such as eligibility for the Age Pension, the concept of drawing down capital as a form of income, or the different types of income streams available; and

•

providing guidance to beneficiaries early in accumulation about potential income in retirement through superannuation calculators or retirement estimates.

Trustees would also have the option of engaging a third-party to help them provide assistance to their members. For example, a trustee could choose not to develop a new retirement income product, but rather offer members one developed by a third-party.

Impacts for Individuals

A retirement income covenant could provide retirees and those approaching retirement a higher and more stable income than the status quo. Where trustee assistance gives retirees the confidence to spend their superannuation, and gives them tools to do so effectively, incomes in retirement would increase. Analysis from the Review estimates that using superannuation effectively through improved drawdown patterns could increase the median person's income in retirement by over $100,000, compared to how people typically draw down their superannuation now.^[2A22] The Review highlighted the implementation of a retirement income covenant to guide members into effective retirement strategies, focusing retirement planning on income streams rather than balances, and future improvements to better quality advice and guidance as potential improvements that could encourage more efficient drawdown behaviour.^[2A23]

To the extent that trustees provide additional assistance, a retirement income covenant could increase individuals' engagement with their retirement savings and their peace of mind in retirement. For example, the provision of retirement income projections has shown to increase pre-retirement member engagement, while better guidance and advice has been shown to improve confidence and peace of mind.^[2A24]

A retirement income covenant would not impede retiree choice, or unduly nudge retirees to unsuitable outcomes. Retirees would continue to have choice as to how they manage their affairs in retirement, including how they draw down on their savings and the costs associated with various options. Importantly, by giving trustees discretion to tailor their retirement income strategies to their memberships, the potential for inappropriate products or poor-value guidance to be offered to members is reduced.

This discretion may lead to a wide range of solutions being available to retirees and variation between funds. It is intended that strategies would vary between funds, as they would be tailored to the membership of each fund. However, to the extent funds choose to take actions such as developing new products to give effect to their strategy, variation between retirement income products may cause difficulty for individuals seeking to compare product offerings. As part of the broader Retirement Income Framework, the Government announced an intent to also formulate a new approach to retirement income product disclosure rules that will require providers to report simplified, standardised information on retirement income.^[2A25] This future potential reform would minimise risks of members being unable to compare between funds and products.

Members who already receive financial advice can still benefit from a retirement income covenant. Trustees increasing their capacity to meet the needs of their members through providing new information, strategies or products will provide members with more choice and new options on how to draw down on their savings. For advised members, having these choices provided by their fund will prompt discussion with their adviser or fund on their retirement needs, potentially leading to better outcomes. Also, as different funds come to market with different retirement income strategies, advisers will have more funds and products to compare and find options that best meet the needs of their clients. Both of these outcomes would promote more efficient drawdown strategies for retirees already receiving financial advice.

The retirement income covenant is not intended to create competitive distortions in adjacent markets for financial advice.

Regulatory burden estimate (RBE) table

This option would have an average annual regulatory cost of 20.167 million each year for a 10-year period. This cost is relatively small in comparison to the existing administrative costs of Australia's superannuation system.

During consultation on the Retirement Income Covenant position paper, a wide range of stakeholders provided feedback on policy design and implementation. This included stakeholders Treasury met with to discuss how the proposed covenant would impact their fund. Stakeholders did not raise significant concerns about the regulatory imposition a retirement covenant would have on their business operations or the costs that would be passed on to members. Further details of consultation Treasury undertook is outlined in section 5.

Importantly, this option gives funds significant discretion in the approach they choose to take to complying with the covenant. Funds will need to ensure the business decisions they make and costs they incur in developing a retirement income strategy are in the best financial interests of their members.

There is significant variability between funds in their internal characteristic that will drive how funds comply with their obligation to have a retirement income strategy under the covenant. Accordingly, there will be significant variability in regulatory burden for each fund. This will depend upon:

•

the size and structure of the fund;

•

the trustee's existing approach to meeting the covenants in the SIS Act and other related compliance obligations (e.g. member outcomes assessments), and the extent to which they can be leveraged to meet the retirement income covenant;

•

the data available to the trustee to understand their membership, and the trustee's capacity to analyse that data and continue to evolve the data used for this assessment;

•

the scope of assistance provided to members by the trustee in response to the retirement income covenant;

•

the type of assistance provided to members by the trustee in response to the retirement income covenant, and the cost associated with various types of assistance; and

•

the extent to which trustees choose to develop assistance in-house, or outsource it to a third-party.

The quantification of costs is based upon the assumption that the development of a retirement income strategy would require the following steps:

•

Data collection and analysis of a fund's membership

•

Formulating a retirement income strategy

•

Publication of the strategy

•

Implementation of the retirement income strategy across a fund's operations

•

An annual and three yearly review of the fund's retirement income strategy.

Trustees should be able to build on existing frameworks and resourcing to implement this covenant, as they are already complying with other covenants in the SIS Act such as the investment and insurance covenants, and broader governance obligations such as member outcomes assessments and the design and distribution obligations. Compliance with a retirement income covenant would fit within this existing and familiar regulatory structure. The time and cost taken to understand the requirements of compliance, and integrate them within the fund's existing processes, is therefore relatively low.

For most funds, it is expected that a response to the retirement income covenant would largely involve scaling up existing assistance, as opposed to developing wholly new systems. For example, in response to the retirement income covenant, a trustee could choose to update and expand the factual information provided on their website. Leveraging existing assistance would result in a lower regulatory cost.

The regulatory cost for superannuation funds is front-loaded in the first years of implementation. After this initial period, the ongoing compliance with the covenant can be absorbed into the regular workings of the fund in meeting its broad range of obligations under superannuation law, which include regularly reviewing fund performance against a range of measures.

There would be a small unquantifiable regulatory save for individuals as a result of a retirement income covenant. Individuals would likely spend a similar amount of time preparing for retirement, and engaging with services and products associated with retirement, as they currently do. Those that don't consider these factors in retirement would continue to not consider them in future. This option would give individuals additional resources to assist them in preparing for retirement, and engaging with services that are better facilitated and supported. The ease of access to high quality professional information and economies of scale seen across the industry would therefore reduce the time spent for those that prepare for retirement.

Further, more informed individuals are less likely to need help with retirement choices as they age, given the information they would receive from funds once the covenant is implemented. Individuals will also have a clear place to go to access information about their fund's retirement income strategy and assist them in preparing for retirement.

4.3 Option 3 - Require trustees to offer personal advice to all members

Impacts for Superannuation Funds

This option would require superannuation fund trustees to offer personal advice to every member individually at the point of retirement. Within the superannuation industry, according to 2019 data, around 85 per cent of funds offer access to at least scaled financial advice, and around 50 per cent offer access to comprehensive advice in-house, with others outsourcing to related or contracted parties.^[2A26]

Under this option, the 15 per cent of funds that do not offer access to financial advice would have to either offer advice, or alternatively establish a business partnership and outsource the advice.

Many trustees would already have capabilities in place to deliver some kinds of advice, such as general advice charged as intra-fund advice, should a member elect to receive that type of advice. For those trustees who currently provide personal advice, they should be able to scale their business model to meet the needs of the members who are retired.

A large increase in the uptake of intra-fund advice will increase costs to the fund of providing this advice, which is likely to be reflected in a need to increase administration fees for members. If the advice is paid out of the superannuation fund through the intra-fund advice model, the trustee would need to ensure this complies with the sole purpose test and best financial interests duty. Alternatively, if the fund opts to provide personal advice outside of the intra-fund charging method, the cost of providing this advice will be charged directly to the individual receiving the advice.

Impacts for financial advice industry

Under this option, demand for financial advisors may increase. While the uptake of advice under this option is not clear, if demand for advice increases significantly it is possible that the supply of advisers will not keep up in the short term and price rises may result. A longer implementation timeframe could address any potential cost increases by allowing the industry time to adjust to greater demand.

Impacts for Individuals

Broadly, most people do not seek financial advice at retirement. Around 26 per cent of those aged 55-64 seek financial advice at retirement.^[2A27]The main barriers to seeking advice include that advice is seen as too expensive, finances are too limited to add value, or retirees prefer to manage their own finances and have a lack of trust in the advice industry.^[2A28]

To the extent that this option encourages people approaching retirement to take up financial advice, it may help some retirees effectively navigate the complex decisions around retirement products and investment strategies and may lead to individuals utilising more appropriate drawdown strategies than anchoring the minimum drawdown rates. This may improve their outcomes in retirement. However, the provision of advice may not always lead to changes in behaviour, as both advisors and individuals may still hold behavioural biases such as anchoring to minimum drawdown rates and conservatism. In addition, without further innovation in retirement income products and strategies offered by funds or other providers in the market, advisors will continue to have limited options in the products or strategies they may recommend to individuals, particularly regarding managing complex risks such as longevity risk.

This option would ensure members entering retirement would have an equal opportunity and access to get advice, regardless of the fund they are invested in or their prior awareness of their fund's financial advice offerings.

There is no complete and verifiable estimate of financial advice. The costs of advice will vary depending on the complexity of a person's circumstances and the advice required. One source suggests that in 2020, the median ongoing fee for comprehensive financial advice was $3,256 with the average being $4,000.^[2A29] Another source indicates the cost of comprehensive personal advice is between $2,600 and $2,900, and $1,500 for limited advice.^[2A30] A recent industry paper that surveyed 11 large licensees suggested an average fee of $5,334.64.^[2A31]

Consumer surveys have shown that, on average, people are not willing to pay any more than $500 for comprehensive personal advice.^[2A32] Funds can also offer intra-fund advice to their members, which may be general advice or personal advice. Intra-fund advice still has costs, but these costs can be collectively charged to the membership of the fund. Given the complexities of retirement planning, an option where members are proactively offered advice could be expected to result in more members taking up this advice.

If this caused a large increase in the uptake of intra-fund advice, it would increase the administration fees of the fund. Depending on the fund and the way it charges fees, this could have significant impacts. Administration fees for all members are likely to increase, including those in the accumulation phase. As intra-fund advice costs are spread across the whole membership, younger and lower balance members who are less likely to access this advice could be subsidising the advice of older and wealthier members who do choose to access it.

Some retirees' financial situation is sufficiently limited for personal advice not to be worth the cost. These are predominantly low-wealth retirees, with no complex investments. A lower cost alternative to personal advice, such as accessing factual information or general advice, could achieve the same outcome. In addition, while this option would require trustees to offer personal advice to all members, members may still choose not to take up this advice. These members would not receive a benefit from this option.

The impacts across industry and for individuals assumes the same start date of the retirement income covenant, being 1 July 2022. If the implementation of this option was spread over a longer timeframe, it would allow greater lead in time for preparation and a potential aversion of costs passed on to members such as fees. It may also allow time for the industry to adjust to any sharp increase in demand for financial advisers specialising in retirement. However, a longer implementation timeframe would also delay the benefits of the option, and allow the problems identified in section 1 to persist for those retirees making key decisions during the extended implementation window.

Regulatory burden estimate (RBE) table

As there is no firm definition in Australia of retirement, it is not possible to accurately determine the number of retirees. However, superannuation funds may identify an individual as retired when they choose to switch their account into the tax-free retirement phase. As of June 2020, there were approximately 1.42 million accounts either fully or partially in the retirement phase.^[2A33]As established, already around 26% of those aged 55-64 receive advice. If the remaining 74% not already receiving financial advice were provided personal advice at an assumed cost of $4000, this would have an industry-wide cost to the magnitude of $4.2 billion. As there is no fixed retirement age, it is not possible to estimate the number of additional individuals who will choose to move their account into the retirement phase over ten years, however this would generate an additional ongoing cost as more individuals became part of this cohort.

Alternatively, superannuation funds may identify that advice is most useful as members are approaching or shortly after a common retirement age. If personal advice were provided to the 74% not already accessing financial advice from the 3.4 million accounts where the member is aged 55-64,^[2A34] this would have an industry wide cost of approximately $10.1 billion. Over ten years, advice would also need to be provided to the additional approximately 3.16 million accounts currently held by individuals aged 45-54 who would enter the 55-64 age bracket and not ordinarily receive financial advice in doing so, at an industry-wide cost of $12.7 billion. This would result in a total cost of providing advice $22.7 billion over ten years, to an average of approximately $2.3 billion per year.

However, these estimates are unable to account for the likely high variability in the method by which funds choose to notify members of advice options or provide the advice itself. As the estimates present the cost of in fact providing the advice, they will also depend on the quantity of additional members who take up advice. While the cost of providing advice would be lower with a lower take-up, this would also reduce the effectiveness of this policy option.

As the method of providing advice (such as the distinction between intra-fund advice charged collectively across the fund, and advice charged directly to each member) will have a significant impact on the allocation of costs between individuals and superannuation funds, it is also not possible to allocate this cost between groups. The relevant population for the provision of advice is also not able to be clearly defined.

As such, this option would have an unquantifiable regulatory cost on businesses and individuals. The regulatory burden for businesses and individuals would depend upon:

•

the size and structure of the fund;

•

how the trustee chooses to notify their members and offer advice (e.g. by mail or by e-mail);

•

whether the trustee currently provides advice, and the manner in which they do so;

•

the extent to which members take up financial advice, and which form of advice they take up;

•

the extent to which trustees pass on the costs of intra-fund advice to their members, how these costs are distributed, and how this distribution impacts the willingness to take up the offer of advice; and

•

the extent to which this option affects the supply and demand for advice and cost of advice.

However, as indicated by the estimated industry-wide cost of approximately $2.3 billion annually averaged over ten years if this option were to be fully effective and provide advice to every individual not already receiving advice, the costs for this option are likely to be larger than those for Option 2. Where advice is provided through an intra-fund model, more of the costs for this option are likely to be passed on to individuals, either indirectly or directly. Where advice is charged directly to the member this would not constitute a regulatory cost (as it is entirely the choice of the members). Funds who do not currently offer personal advice will incur a start-up cost in establishing an advice offering for their members. To the extent this option may impact the supply and demand of financial advisers, the cost of accessing financial advice may increase. This may result in additional regulatory burden.

* = Unquantifiable

4.4 Option 4 - Require trustees to provide a default retirement product to their members

Impacts for superannuation funds

This option would require superannuation fund trustees to offer their member a 'soft-default' retirement income product at the point of retirement, within set parameters determined by the Government. For trustees, there is a start-up cost in developing the product, or alternatively a cost of outsourcing development to a third party. There will also be a year-on-year cost for maintaining and reviewing the product each year, ensuring compliance with the standards in the Superannuation Industry (Supervision) Regulations 1994. Depending on the specifications of the product the trustee chooses to develop, there may also be ongoing costs of maintaining capital.

A trustee developing a new retirement product would need to ensure that funding the development of this product was in the best financial interests of all members. This could be problematic if trustees expected a low take up of a new retirement income product. However, funds may be able to cost recover part of the development costs and the ongoing costs of maintaining new products through fees charged on the product itself.

The Australian market for innovative retirement income products remains nascent and undeveloped. Only a few trustees currently offer innovative retirement income streams to their members. Around 87 per cent of retirement assets in Australia are currently allocated to account-based pensions.^[2A35] Account-based pensions alone would likely not meet the requirements for a soft-default product, as they would not protect most members against longevity risk and thus would not be seen to be balancing the key retirement objectives. Most trustees would be required to change their product offering to meet the requirements of this option. Trustees developing new products to comply with this option would face long development costs and high regulatory costs to ensure they comply with the prescribed product rules. Due to the complexity of new retirement income products and their significant development timeframes, it is likely this option would require an extended implementation timeframe to allow suitable products to be developed. It is estimated that funds would require between one and two years to appropriately develop and market a new product.

Stakeholders have previously indicated in consultation that there are substantial barriers to developing new retirement income products. In addition, due to low take-up of these products, they are often not feasible for providers to develop and maintain and high fees may need to be charged, particularly if products become 'legacy products' with few remaining members. The difficulty in transitioning some types of retirement income products, particularly longevity products, may also act as a barrier to funds undertaking other activity such as mergers with other funds.

Setting parameters for a soft-default retirement product also limits innovation. Trustees may be wary of developing products outside of these parameters, even if they may benefit some retirees, as they would not be able to be sold as soft-default products. However, a requirement that trustees develop at least one soft-default retirement income product may also spur trustees to consider and further innovate in developing products in this space.

Impacts for Individuals

Similar to Option 2, this option could provide retirees and those approaching retirement higher and more stable income than the default settings. Where a soft-default retirement income product gives retirees the confidence to spend their superannuation, and gives them tools to do so effectively, incomes in retirement would increase.

Defaults are powerful. Where defaults exist elsewhere in the retirement income system, they have proven to be strong drivers of behaviour. ^[2A36] It could be expected that, under this option, there would be a significant increase in the number of people taking up the soft-default product. However, as the product would only be a soft-default option, members may still choose to opt out of these newly developed products. Historically, the take-up of retirement income products in Australia offering products other than account-based pensions, has been low, with only 13 per cent of pension phase accounts were invested in these products.^[2A37]

There are several potential barriers to taking up innovative retirement income stream products that may cause members to choose to opt out of a soft-default option. For many retirement income stream products involving the pooling of assets, if a member dies before reaching life expectancy, they are likely to lose the remainder of their investment in that product to the pool. Conversely, if they exceed life expectancy, they are likely to receive a greater benefit from the product over time than their initial investment. In some kinds of retirement income products, a member may be unable to exit a product after purchase or may only have a limited time in which to do so.

There can be significant variability in the specific settings between income stream products, and research suggests that while people may be interested in these products, they find the process of choosing between specific products too difficult.^[2A38] While a soft default may overcome some of this choice difficulty, some members may continue to see features of the products themselves as barriers. In addition, not all members would benefit from a product focussed on a prescribed balance of key retirement income objectives. Retirement is not a one-size fits-all proposition, with varying needs and preferences in retirement that require varying approaches to utilising retirement savings. In particular, low-balance members, and members with lower life expectancies, may find poor value in a soft-default product that prioritises longevity protection over higher incomes.^[2A39] To the extent that this option 'nudges' members into the soft-default product, some members may be worse off than if they had used an account-based pension, or they may choose to opt out of the soft-default product, thereby reducing take up. As the retirement phase is undeveloped currently with members retiring with lower balances, it is unclear that this option would result in benefits exceeding costs. Further maturing of the retirement phase of superannuation and the system as whole will affect the costs and benefits of this option.

This option also risks creating a large number of 'legacy products'. Legacy products emerge where members are locked into a product which later becomes unviable, or poor value for money. Protecting against longevity risk often requires pooling members' money together and limiting withdrawals from the product. Where products do not reach scale, there is the potential for high fees to be charged or the benefits of pooling approaches to be unrealised. These limitations, along with the prospect of a flood of new products entering the market to comply with the option, create the potential for members to be committed to poor value products for their whole retirement.

Regulatory burden estimate (RBE) table

To comply with the requirements of this option, each superannuation fund would have to either develop, or commission the development of, at least one new retirement income product which meets the requirements of balancing the key retirement income objectives. The development of these products is likely to occur in four phases of collecting data to understand the needs of the fund's specific membership, designing the product and its specifications, consumer testing the product, and finalising, marketing and launching the product to the market.

The cost to each fund of developing a product is likely to be highly variable depending on a range of factors including the size and structure of the fund, the nature of their membership base, the type of product they choose to develop, and any existence expertise or experience in developing retirement income products. As an estimate for an average fund, in total, this initial cost of developing a product would amount to approximately $3.6 million per fund, or $564.9 million across the relevant funds in the superannuation industry. This aligns with comments made by superannuation industry figures previously that the cost of developing innovative retirement income products would involve spending "millions of dollars on product development".^[2A40]

In addition to the development costs of a product, superannuation funds would face regulatory cost in ongoing maintenance of these products. However, it is not possible to provide a meaningful estimate of the cost of maintaining a product for a number of reasons:

•

The lack of existing and long-running innovative retirement products in the market does not provide a base on which to estimate these costs in the Australian regulatory environment.

•

The significant differences in specifications between products will have a substantial impact on their ongoing costs

•

It is not possible to foretell the proportion of funds who would opt to design a product to a certain set of specifications. It is therefore meaningless to estimate an "average" product, as the market of products from which that average may be created is undefined.

•

The ongoing costs of maintaining a product will be highly dependent on the number of members who choose to take up a product offered as a 'soft-default'.

As such, while an estimate can be made of an approximately $564.9 million industry-wide regulatory burden in the start-up cost of developing a product, it is not possible to quantify a meaningful estimate of the average annual cost over ten years without the ongoing costs of maintaining a product.

There would likely be no additional regulatory burden for individuals as a result of requiring trustees to provide a soft-default product to their members. Individuals would likely spend the same amount of time preparing for retirement, and engaging with services and products associated with retirement, as they currently do.

While this cost has an unquantifiable average annual regulatory burden on superannuation funds over ten years, it is apparent that this option would be costly. Considering only the initial start-up cost of developing a fund, this would amount to an annual average cost over ten years of $56.5 million. While it is not possible to estimate ongoing costs of maintaining these products, it is clear this cost would not be zero. As such, the average annual regulatory cost of this option is likely to be greater than $56.5 million, and therefore, higher than option 2.

* = Unquantifiable

5. Who did you consult and how did you incorporate their feedback?

Consultation on improvements to the retirement phase of superannuation has occurred over many years. The learnings from this consultation have informed the options presented and analysed above.

2014 - Financial Systems Inquiry

The 2014 Financial System Inquiry (FSI) conducted an extensive consultation process on how to best position Australia's financial system to meet Australia's evolving needs and support economic growth. This included consulting on the superannuation and retirement income system.

The consultation included:^[2A41]

•

Over 280 stakeholder submissions on the Inquiry's terms of reference

•

Over 6,500 submissions on the Inquiry's interim report. Around 5 per cent of submissions raised observations related to the underdevelopment of the retirement phase of superannuation.

•

Four public forums

•

15 roundtables, including three specifically on superannuation or retirement incomes

•

Several hundred meetings with stakeholders

The FSI's final report, drawing on this consultation, raised concerns about the lack of choice in products available in retirement. It found that, at the time, at least 94 per cent of retirees' superannuation accounts were in account-based pensions. It found that these products generally do not effectively manage the risk that a retiree will outlive their savings. The FSI also found that incomes from a more efficient product could be 15-30 per cent higher than those from the current typical strategy of drawing the minimum amount from an account-based pension.

The FSI noted that people tend to have diverse needs in retirement, and no given product or combination of products will be appropriate for everyone. Many submissions cautioned that default income streams could result in poor outcomes for some individuals and stifle innovation

The FSI also noted that high-quality advice may be useful to some individuals to help them manage their financial affairs in retirement.

The FSI recommended that superannuation trustees 'pre-select' a 'Comprehensive Income Product for Retirement' (CIPR) for members' retirement, to commence on the members' instruction.

The Government's FSI response in 2015 committed to develop legislation to allow trustees to provide CIPRs to guide members at retirement and improve outcomes for retirees.

2016 - Development of the framework for Comprehensive Income Products for Retirement Discussion Paper

In December 2016, a CIPRs discussion paper was released for consultation. This process received 57 written submissions and involved meeting with more than 100 organisations. Feedback was received from across the superannuation and financial services industries, consumer groups, and advisory bodies.

This consultation process revealed broad agreement on the importance of the CIPRs policy intent to promote more efficient retirement income products that supported higher incomes in retirement, but divergent views on the best way to achieve the objectives. There was considerable agreement on the need for a framework to manage the transition from accumulation to retirement phase.

2018 - Retirement Income Covenant Position Paper

In 2018 the Government consulted a Position Paper on the proposed Retirement Income Covenant (RIC). As proposed, the RIC would establish a requirement for trustees to develop a retirement income strategy for members, offer a CIPR, and provide members with guidance to help them choose appropriate products. This consultation considered both Option 2 and Option 4.

The Position Paper was released for consultation on 17 May 2018 and closed on 15 June 2018. 59 submissions were received from organisations across the superannuation, financial advice and life insurance industries, advisory groups, and consumer groups.

The vast majority of stakeholders supported the introduction of a RIC (Option 2) and recognised the problem the policy sought to address. However, approximately half of responses raised various concerns as to the suitability of compulsory CIPRs (Option 4), and many responses preferred a principles-based approach.

Some specific concerns were raised regarding implementation timeframes, in particular highlighting that the development of innovative income streams (Option 4) takes a significant amount of time and resources.

2020 - Retirement Income Review

In November 2020, the Government released its Retirement Income Review. The Review presented an evidence base on the operation of the retirement income system with the aim to improve understanding of how the system operates and the outcomes it delivers. The Review utilised a consultative approach, receiving over 430 submissions and holding more than 100 meetings with stakeholders across academia, industry bodies, superannuation funds, and consumer groups.

The Review made a number of key observations, including that the retirement phase of superannuation is underdeveloped and that higher retirement incomes could be achieved through using superannuation assets more efficiently.

The Review noted that stakeholders raised a range of measures that could help people use their retirement savings, including:^[2A42]

•

Funds providing regular estimates of an individual's retirement savings being expressed in terms of an income stream rather than balance at retirement;

•

Educating people that their health and aged care costs are heavily subsidised by the Government;

•

Emphasising that the Age Pension provides a safety net for people who outlive their savings or when the value of their retirement savings falls significantly;

•

Amending the minimum drawdown rates so that income is delivered when people are more likely to consume it, namely earlier in their retirement rather than the current drawdown rates, which are highest at ages 85-90; and

•

At retirement, guiding people towards products that deliver an income stream and provide protection against market fluctuations and outliving saving.

The Review also noted that most people do not seek advice about retirement income planning. Some submissions to the review considered financial advice to be critical to making better decisions and reducing worry and uncertainty in retirement. However, they noted people were deterred from accessing personal financial advice because of its high cost and unclear benefits, and their distrust of the financial advice industry. Some stakeholders suggested the type of financial advice people need has changed over time and demand for financial advice will increase in future. They argued the superannuation industry should play a greater role in providing financial advice.^[2A43]

The Review highlighted the importance of the retirement income covenant in improving retirement outcomes and led to increased calls from stakeholders for the policy to progress and be implemented as soon as possible.

2021 - Retirement Income Covenant Position Paper

A Position Paper on an updated retirement income covenant, reflecting Option 2, was released for 3 weeks consultation from 19 July 2021 to 6 August 2021. A public consultation process was the most appropriate approach as the covenant has broad impacts on industry and its members.

Treasury received 69 submissions including written submissions and one-on-one consultation meetings, with responses from across superannuation funds, industry bodies, consumer groups, financial advice industry and individuals. 53 of 69 submissions supported the retirement income covenant and the need for action in this area. Stakeholders supported the principles-based approach and the removal of the requirement to offer a CIPR (Option 4), which had been a feature of the earlier consultation in 2018.

Through this consultation, Treasury met one-on-one with a large number of superannuation funds and industry bodies to discuss a wide range of topics relating to the covenant. Stakeholders did not raise any concerns with regulatory imposition posed by the retirement income covenant during these meetings, and the key groups of superannuation funds and their representative bodies indicated that having a strategy in place within the suggested implementation timeframe would be achievable. In contrast, stakeholders did raise that there are more significant barriers to developing new retirement income products.

Superannuation funds and their representative bodies particularly supported the principles-based approach as providing them the necessary flexibility to tailor their approach to their specific membership base.

Adjustments to the policy also occurred after consultation, such as expanding the identification of risks that trustees may wish to consider, and adjusting the policy to exclude some forms of superannuation interest where the strategy would not provide benefit.

Of those submissions who did not support the retirement income covenant, most disagreed with the inclusion of self-managed superannuation funds (SMSFs). The policy was subsequently amended to carve out SMSFs from Option 2. Stakeholders who did not support the SMSF carve out included peak representative bodies and a small business.

Option 3 was tested with subject matter experts but not specifically tested with industry during the position paper consultation.

Informal consultation with regulators and industry

Alongside formal consultation processes, Treasury regularly consults with stakeholders about the effectiveness and appropriateness of retirement income policy settings. These consultations with industry stakeholders and ASIC, APRA and the ATO, as regulators of the superannuation industry, has informed policy development at all stages.

6. What is the best option from those you have considered?

Option 2, introducing a retirement income covenant requiring trustees to produce a retirement income strategy for their members, is considered to be the preferred option due to having a low regulatory cost, while allowing for appropriate support to be provided in the retirement phase of superannuation.

Retirement is not a one-size fits-all proposition, and trustees are best placed to know their members' needs in retirement. A retirement income covenant and the discretion provided within the covenant incentivises trustees to consider the needs of their specific membership and develop assistance to support them. The covenant also allows trustees to balance the costs of providing assistance with the aim of having products available for members that are value for money. Although the costs for Options 3 and 4 were ultimately unquantifiable, Option 2's cost remains substantially lower than the estimates provided for Options 3 and 4 in the process of attempting to estimate regulatory burden.

For members, the retirement income covenant has the potential to improve the choices they are offered at retirement, and the support provided to help navigate those choices, at a relatively low cost. While there is some regulatory cost to superannuation funds, the benefit from increased superannuation drawdowns driven by funds having retirement income strategies (as noted above, more efficient draw down on superannuation assets is expected to increase a median person's income in retirement by over $100,000) is expected to exceed any superannuation fund regulatory cost passed on to members as fees.

Option 1 does not fix the problems faced by today's retirees. If the status quo does not change, it is unlikely that these problems will be fixed for future retirees either. Where superannuation trustees do choose to take actions to improve retirement outcomes, this would not be equally accessible to all individuals.

Option 3, requiring trustees to offer personal advice to all members, is likely to improve the retirement outcomes of some members who take up the advice. However, it is likely to come at a significant regulatory cost for both funds and individuals, while only prompting minor changes in behaviour without further retirement income options entering the market. This option may also place additional burden on the financial advice sector. While the regulatory burden of this option is ultimately unquantifiable, estimates show that if take up of offered advice is high, it is likely to have the highest regulatory cost of any option. While these costs may be lower if take up of advice was low, the potential benefits would also not be realised.

Option 4, requiring trustees to provide a soft-default retirement product to their members, may also improve retirement outcomes. However, given the development of innovative retirement income streams is still in its infancy in Australia and consumers are generally reluctant to take up these products, mandating these products as a soft-default option is likely to come at significant cost, and risks creating many legacy products which have to be dealt with over the coming decades. Products may not be suitable for all members, and some members may elect not to take up new products, thereby reducing the effectiveness of this option. Although the inability to quantify ongoing costs of these products makes this option overall unquantifiable, the high development costs of products are likely to create a higher regulatory cost than Option 2, although less than Option 3.

7. How will you implement and evaluate your chosen option?

Implementation

Implementing a retirement income covenant will require amendments to primary legislation. As with the other covenants in the Superannuation Industry (Supervision) Act 1993, APRA and ASIC will regulate trustees' compliance and are expected to provide necessary information on how trustees can comply with the new retirement income covenant. As outlined, trustees already have obligations under current prudential standards and APRA Reporting Standards to understand their membership base.

APRA and ASIC publish guidance and information on matters that trustees should take into account when seeking to meet their obligations under the covenants in the Superannuation Industry (Supervision) Act 1993, and ASIC publishes guidance and information on how trustees can meet their obligations under the Corporations Act 2001. Similar guidance and information may be published for the retirement income covenant if necessary. Explanatory materials developed as part of the legislative process will also provide context for superannuation trustees to the new covenant's operation.

Communication with superannuation industry bodies will ensure the key requirements of the policy are understood. Dialogue with the superannuation industry has been ongoing for a number of years on the covenant and will continue during implementation. Helping industry understand their key obligations will provide clarity on expectations for implementing the covenant. Further, communicating with broader retirement stakeholders, including seniors' advocacy groups will assist retirees to better understand and engage with their fund's offerings. Encouraging retiree confidence through broader stakeholder communication will assist in promoting the policy intent of the covenant.

Evaluation

Through its usual stakeholder engagement processes, Treasury will encourage feedback on the operation of the retirement income covenant. This includes feedback from superannuation trustees, advocacy groups and retirees themselves through avenues such as ministerial correspondence.

APRA and ASIC will provide ongoing feedback to the Treasury on trustee compliance with the covenant. This feedback will help evaluate the current policy settings and identify any implementation issues.

Metrics for tracking policy success will rely on longer term data analysis from sources such as the ABS, ATO, APRA and HILDA. This data can be used to examine changes in retiree behaviour that could indicate the policy's progress. Qualitative analysis, including surveys of retirees and academic research, may also play a role in determining whether the covenant improves retirement outcomes and feelings of confidence amongst retirees.

No formal review of the policy is planned.

Additional Information / Summary

RIS status at each major decision point

2018-19 Budget

The Government announced in the 2018-19 Budget that it would amend the Superannuation Industry (Supervision) Act 1993 to introduce a retirement covenant that will require superannuation trustees to formulate a retirement income strategy for superannuation fund members. An Interim RIS was developed for consideration ahead of that decision, with the RIS to be finalised following consultation with industry and key stakeholders.

Final policy decisions and introduction of legislation

This final RIS has been prepared following extensive stakeholder consultation, ahead of the Minister for Superannuation, Financial Services and Financial Technology's final decisions regarding the legislation to implement a retirement income covenant.