1 Legislative and regulatory framework
1.1 In broad terms, which legislative and regulatory provisions govern alternative investment funds in your jurisdiction?
The primary source of legislation regulating alternative investment funds (AIFs) and investment managers in Australia is the Corporations Act 2001. Regulation is also provided by the relevant Australian regulator – the Australian Securities and Investments Commission (ASIC), which administers and enforces the laws, and publishes its own regulatory guides and guidance for fund managers in Australia.
1.2 Do any special regimes or provisions apply to specific types of alternative investment funds?
AIFs are generally regulated in the same way as other forms of managed investment schemes (the Australian term for investment funds), although fundamental differences will arise depending on whether the fund is a registered fund (typically designed for retail investors) or a wholesale fund (not required to be registered and designed for sophisticated, professional and other investors classified as wholesale investors). While this is not a requirement for wholesale investors, some AIFs choose to be registered as this can make them more attractive to institutional investors, such as large Australian superannuation (pension) funds.
1.3 Do the legislative and regulatory provisions governing alternative investment funds have extra-territorial reach?
ASIC has many memoranda of understanding with other regulators in other jurisdictions to ensure that the interests of investors in Australia, and people investing in investment funds regulated or managed in Australia, are adequately protected. In certain cases, legislation has extra-territorial reach and may affect foreign managers targeting Australian investors.
1.4 Are any bilateral, multilateral or supranational instruments in effect in your jurisdiction of relevance to alternative investment funds?
The regulators globally, particularly those who are members of the International Organization of Securities Commissions, cooperate with each other in enforcing the laws and regulations of the relevant jurisdictions.
1.5 Which bodies are responsible for regulating alternative investment funds in your jurisdiction? What powers do they have?
ASIC is responsible for regulating all funds and issuing Australian financial services licences (AFSLs). Those that promote or offer funds in Australia are generally required to hold an AFSL or fall within a particular exemption. This applies regardless of whether the offerings are restricted to wholesale clients and whether the funds are AIFs. Any person that carries on or is deemed to carry on a financial services business in Australia will generally be required to hold an AFSL covering the provision of financial services, unless a particular exemption applies. A ‘financial service' includes marketing a fund, arranging for a person to invest in a fund, issuing interests in a fund, providing advice in relation to investment in a fund, providing investment management services to a fund and more.
Other regulatory bodies relevant to the AIF ecosystem include the following:
- the Australian Prudential Regulation Authority, which primarily focuses on the prudential regulation of banks, insurance companies, superannuation funds and, most recently, non-bank lenders;
- the Australian Securities Exchange (ASX), which prescribes rules governing the listing of investment funds on the ASX, including listed real estate investment trusts and exchange traded funds, as well as rules governing the conduct of market operators and brokers;
- the Australian Transaction Reports and Analysis Centre, which administers Australia's anti-money laundering and counter-terrorism financing laws, including rules relating to the identification of investors in investment funds and counterparties to derivative transactions;
- the Foreign Investment Review Board, which screens applications for foreign investment into Australia, in particular with respect to investment in residential property, large commercial real estate, agriculture, infrastructure and other investments that are above certain monetary thresholds or that raise national interest considerations. Additional screening requirements apply for investment by foreign government investors (including sovereign wealth funds) and investment funds and other entities in which any foreign government investor has a significant interest;
- the Takeovers Panel, which focuses on resolving takeover or corporate control-related disputes arising in relation to listed or other widely held entities;
- the Australian Taxation Office, which is the federal revenue collection agency and is also charged with regulating the self-managed superannuation fund sector; and
- the revenue agencies of the states and territories, which are responsible for stamp duties and land taxes on land, mining and infrastructure-related transactions.
1.6 To what extent do the regulators cooperate with their counterparts in other jurisdictions?
ASIC has many memoranda of understanding with other regulators in other jurisdictions to ensure that the interests of investors in Australia, and people investing in investment funds regulated or managed in Australia, are adequately protected.
2 Form and structure
2.1 What types of alternative investment funds are typically found in your jurisdiction?
Hedge funds and private equity funds are generally made available only to wholesale investors, since they have specialised fee structures and are often illiquid (with either a soft lock or a more permanent lock on withdrawals). There has been a growing trend in making absolute return funds also available to retail clients. Real estate funds are historically popular in Australia. Listed and other retail real estate funds are a long-established investment product in Australia. There are also the same types of alternative investment funds (AIFs) available to wholesale investors in Australia as there are in any other sophisticated jurisdictions, such as credit funds, distressed investment funds and other types of atypical investment products.
2.2 How are these alternative investment funds typically structured?
Most investment funds set up in Australia, whether alternative or standard, are structured as ‘unit trusts'. Australian investors are used to investing in unit trusts, and the tax consequences and flow-through tax treatment of unit trusts are well understood and catered for in Australian law and practice. Where a foreign fund is made available to a wholesale investor in Australia, the fund will invariably retain the structure under which its non‑Australian investors may participate. These would include corporate entities, limited partnerships or a combination of both.
2.3 What are the advantages and disadvantages of these different types of structures?
The advantages of establishing a fund in Australia as a unit trust are:
- the recognisability of the product in the Australian market;
- the flow-through tax treatment for investors – in particular:
- flow-through of capital gains tax discount benefits on capital gains for resident individuals and superannuation funds; and
- flow-through of concessional tax rates on dividends, interest, royalties and non-Australian source income and gains for non-resident investors; and
- potential access to concessional tax rates for foreign entities in treaty countries, sovereign entities and certain foreign pension funds.
However, flow-through tax treatment is generally not available in the case of public unit trusts that conduct, control or have the ability to control a trading business.
2.4 What are the most widely used alternative investment funds structures used in your jurisdiction?
The most commonly used fund structure is the unit trust, although other structures such as limited partnerships are sometimes used for private equity or venture capital. Corporations are not commonly used as investment fund vehicles in Australia, as companies are generally subject to income tax and capital gains tax (currently at a tax rate of 30%). Dividend imputation is generally available to resident investors to entitle them to a tax credit for their share of income tax paid by a company on their dividend income from the company. However, for foreign investors, dividend imputation merely relieves the dividend from withholding tax. Listed investment companies (LICs) are an exception: if an investment company qualifies as a LIC, it can allow a form of flow-through tax benefit to shareholders for capital gains. The absence of a general form of corporate with flow-through tax treatment has been identified as a deficiency in the Australian investment framework. Revised draft legislation has been developed to provide the asset management industry with the ability to adopt a corporate collective investment vehicle structure with flow-through tax treatment, subject to operating within the parameters of the legislation. At the time of writing, the revised draft legislation has not been put into law.
2.5 Is there a preferred alternative fund structure for particular investment strategies (ie, hedge fund/private credit/private equity)?
The unit trust structure is preferred for most AIF structures, although limited partnerships are often used for venture capital or private equity strategies. Listed investment vehicles (such as LICs and listed trusts) have become somewhat more popular over the last few years although the tax position of listed investment companies needs to be carefully managed.
2.6 Are alternative investment funds required to have a local administrator appointed?
The form, structure and regulatory requirements for an AIF will depend on whether it is registered (as a managed investment scheme will generally not be available to retail investors if it is not registered). In the case of an unregistered fund, there are no specific requirements for a local administrator or other service provider. In the case of a registered fund, there is no requirement for a local administrator; although it is common for the trustee (referred to as a responsible entity) of the fund to appoint a local administrator to handle matters such as application and withdrawal processing, accounting, some aspects of tax management, maintenance of registers and other services typically provided by an administrator.
2.7 Are alternative investment funds required to appoint a local custodian to hold assets? If yes, what legal protections are in place to protect the alternative investment fund's assets?
In order to hold custody of the assets of an Australian investment fund, the custodian must hold an Australian financial services licence and must meet the regulatory capital (net asset backing) requirements imposed by the Australian Securities and Investments Commission.
2.8 Is it possible for an alternative investment fund to redomicile to your jurisdiction? If yes, what considerations are required and what are the steps involved?
It is not common for an alternative investment fund established and domiciled outside Australia to redomicile in Australia. This is because, if the fund is a registered fund, it will need to have a constitution which meets Australian legal and regulatory requirements. In the case of an unregistered fund, there may be reasons to redomicile in Australia although this is less common.
3.1 Must alternative investment funds be authorised or licensed in your jurisdiction?
An unregistered fund (namely one which is available only to wholesale clients) need not be authorised or licensed itself in Australia. A fund that is offered to retail client investors must be registered with the Australian Securities and Investments Commission (ASIC). A venture capital or private equity fund structured as a limited partnership must be registered with Innovation Australia. The entity managing, marketing or distributing a fund, however, must be licensed (ie, hold an Australian financial services licence (AFSL)) or have the benefit of a particular exemption.
3.2 If so, what criteria must be satisfied to obtain authorisation? Do any restrictions apply in this regard?
An alternative investment fund (AIF) that is registered or required to be registered (it must be registered if it is to be offered to retail clients) must have a constitution and an approved trustee (known as a responsible entity and which has an AFSL with a responsible entity authorisation). Any entity managing, marketing or distributing the fund must be licensed (ie, hold an AFSL) or have the benefit of a particular exemption.
3.3 What is the process for obtaining authorisation of alternative investment funds and how long does this usually take?
The constitution must be lodged and registered with ASIC and meet the requirements of the Corporations Act and ASIC requirements for contents of a fund constitution. Once an acceptable constitution is lodged with ASIC, registration must be effected within 14 days; although the process leading up to preparing a complying constitution can, of course, take some time.
4 Management and advisory relationships
4.1 How are alternative investment fund managers and advisers typically structured in your jurisdiction?
The structure of an alternative investment fund (AIF) in Australia will usually include an entity that will act as the trustee (or responsible entity, in the case of a registered fund), which in turn will appoint a fund manager (whether a third-party manager or an adviser or affiliate of the trustee) to manage the fund and the assets of the fund. If the trustee of an AIF is an affiliate of the fund manager, the trustee is often formed specifically for the purpose of acting as trustee of that fund. Other appointed service providers can include administrators and custodians.
4.2 What are the advantages and disadvantages of these different types of structures?
The primary advantage is that investors understand these structures and the roles of the parties, including the clear separation of functions. A possible disadvantage is the marginal extra cost of an additional party.
4.3 Must alternative investment fund managers be authorised or licensed in your jurisdiction?
AIF managers must be authorised or licensed to market and distribute the fund or manage the assets of the fund, or must have the benefit of a particular exemption. The fund manager will typically hold an Australian financial services licences (AFSL) (or a ‘foreign AFSL'), or be appointed as an authorised representative of an AFSL holder (which may be the trustee of the fund).
Traditionally, AFSL exemptions were available, on application, to regulated entities in a few recognised foreign jurisdictions which the Australian Securities and Investments Commission (ASIC) regards as having equivalent regulation and supervision as in Australia. For example, an investment adviser regulated by the Securities and Exchange Commission in the United States or by the Financial Conduct Authority in the United Kingdom would typically be entitled to such an exemption (upon application). That exemption process, however, was replaced from 1 April 2020 by a foreign Australian financial services licence regime, which requires these foreign entities to apply for a ‘foreign AFSL'.
4.4 If so, what criteria must be satisfied to obtain authorisation? Do any restrictions apply in this regard?
Obtaining an AFSL involves a merits-based application to ASIC. The application must include evidence of compliance and governance arrangements supporting compliance with financial services laws and the policies of regulators (including ASIC), including financial regulatory capital, conflict management, risk management and other measures. The applicant must put forward submissions demonstrating organisational competency, and include detailed background information of several nominated responsible managers and criminal and credit checks and references.
Australian financial services licensing of foreign financial services providers: Following a consultation process, ASIC has proposed the adoption of a ‘foreign AFSL' regime for offshore asset managers that are interested in advisory or asset management relationships with wholesale clients in Australia. The foreign AFSL regime mirrors the existing AFSL regime, subject to the relaxation of a number of regulations where the foreign financial services provider is otherwise regulated under a sufficiently equivalent foreign regulatory regime. The foreign AFSL regime was introduced on 1 April 2020 and is intended to replace the passport regime currently relied on by foreign financial services providers from a number of jurisdictions with regulatory regimes that are viewed as sufficiently equivalent to the Australian regime. Under prior law, foreign financial services providers that are regulated by their equivalent securities regulator in the United States, the United Kingdom, Hong Kong, Singapore or Germany may (upon application) access relief from the need to hold an AFSL to provide financial services to wholesale clients in Australia.
4.5 What is the process for obtaining authorisation and how long does this usually take?
The process is to complete an online application and lodge the documents and proofs requested. Three months to six months is the typical timeframe. The application must include evidence of compliance and governance arrangements supporting compliance with financial services laws and the policies of regulators (including ASIC), including financial regulatory capital, conflict management, risk management and other measures. The applicant must put forward submissions demonstrating organisational competency, and include detailed background information of several nominated responsible managers and criminal and credit checks and references.
4.6 What other requirements or restrictions apply to alternative investment fund managers and advisers in your jurisdiction?
The main restrictions and requirements applicable to AIF managers and advisers in Australia are the licensing requirements. Other financial services laws may apply, including privacy legislation, anti-corruption/bribery law and anti-money laundering and counter-terrorism measures.
4.7 Can an alternative investment fund manager impose restrictions on the issue, redemption or transfer of interests in the funds under management?
If an AIF is not registered, there is no limit on the restrictions that can be included in the fund constitution regarding the issue, redemption or transfer of interests in the fund, subject to adequate disclosure. The same generally applies if an AIF is registered, except that there are requirements regarding the timing and apportionment of redemption payments if the fund is illiquid and in relation to the suspension of redemptions in the case of a liquid fund.
4.8 Are there any requirements regarding the ownership of alternative investment fund managers? If so, please provide details.
ASIC applies fit and proper checks prior to licensing AIF managers. A change in control of a licensed entity will also trigger an ASIC review.
4.9 Can alternative investment fund managers delegate to third-party investment managers or investment advisers? If yes, please provide details of any specific requirements.
As the holder of an AFSL, an AIF manager is generally entitled to provide investment management services to wholesale clients, including under a segregated mandate agreement with an institutional investor client. There are no specific requirements relating to the ability of an investment manager to delegate to third-party managers and advisers, provided that those parties are appropriately licensed and authorised.
4.10 Can alternative investment fund manager provide investment management services to clients other than alternative investment funds? If yes, do any additional requirements apply?
An investment manager which is appropriately licensed and authorised under an AFSL can provide investment management services to clients other than AIFs, subject to appropriate governance and competency.
5.1 Is the marketing of alternative investment funds subject to authorisation in your jurisdiction?
The marketing of AIFs is regulated by the Corporations Act 2001. The regulatory requirements apply regardless of whether the fund is marketed to wholesale clients or retail clients. The entity marketing a fund must be licensed (ie, hold an Australian financial services licence (AFSL) or have the benefit of a particular exemption.
5.2 If so, what criteria must be satisfied to obtain authorisation? Do any restrictions apply in this regard?
In order to engage in marketing activities in Australia, the promoter must hold an AFSL (or a ‘foreign AFSL'). A licence can be limited – for example, by allowing the entity to engage in dealing and advice activities (typically, marketing would cover either or both of these) to wholesale investors only. Although an AFSL may include authorisations that allow the holder to market funds to retail clients, the particular funds must first be registered in order to be offered to retail clients.
5.3 What is the process for obtaining authorisation and how long does this usually take?
The procedures for obtaining an AFSL differ according to whether the entity is an Australian incorporated and domiciled entity or whether it is a foreign investment adviser regulated by an approved foreign jurisdiction such as the US Securities and Exchange Commission or the Financial Conduct Authority.
5.4 To whom can alternative investment funds be marketed?
Alternative investment funds (AIFs) can be marketed to both wholesale clients and retail clients. If marketed to retail clients, the fund must be registered, and will be regulated, as a registered scheme and require a product disclosure statement. Depending on the type of AIF, the Australian Securities and Investments Commission (ASIC) has new powers under which it may deem the marketing of an investment in such a fund to retail clients as inappropriate and exercise its intervention powers.
5.5 What are the content criteria that marketing materials for alternative investment funds must satisfy?
The marketing rules are set out in the Corporations Act 2001 and ASIC policy. For example, in the case of an offer to retail clients, the marketing cannot be undertaken unless and until a disclosure document (called a ‘product disclosure statement') is available and the marketing materials refer to that document and the importance of investors obtaining a copy of and reading that document.
5.6 What other requirements or restrictions apply to marketing materials for alternative investment funds?
In the case of marketing generally – whether to wholesale clients or retail clients – ‘misleading and deceptive conduct' rules apply. These rules apply for all kinds of funds, whether alternative or not; but in the case of AIFs, they will be more closely scrutinised (especially if offered to retail clients), to ensure that investors are not given information that is misleading or deceptive (whether by inclusion or omission).
Offers to wholesale clients do not require a product disclosure statement, but will usually be made in the same way as they are made in many other jurisdictions – namely, using an information memorandum (or private placement memorandum), which is a private offering document and does not have prescribed content.
Wholesale clients comprise certain institutional, sophisticated and professional investors that meet relevant criteria prescribed by the Corporations Act 2001. For example, a person who provides an accountant certificate certifying net worth of at least A$2.5 million (or annual gross income of at least A$250,000 for the last two years) may qualify as a wholesale client. It is anticipated that ASIC will in due course tighten up aspects of the wholesale client definition.
5.7 Can alternative fund managers from other jurisdictions market alternative investment funds in your jurisdiction without authorisation?
Fund managers from outside Australia cannot actively market their fund in Australia unless they hold an AFSL or operate under an exemption. A new regime will be in place from 1 April 2020 for foreign fund managers to apply for a foreign AFSL as noted in question 4.4.
5.8 Is the appointment of local marketing entities required in your jurisdiction?
Local marketing entities that hold an AFSL will be the only entities permitted to promote and distribute the fund and engage with clients and investors unless the foreign fund manager or fund promotor holds an AFSL or a foreign AFSL, or benefits from other exemption.
5.9 Is it possible to market alternative investment funds to retail investors in your jurisdiction? If so, are there specific requirements?
Foreign AIFs can typically be offered to wholesale clients in Australia without much restriction (subject to the licensing rules and the regulation of marketing activities and market conduct rules). In practice, foreign AIFs are rarely offered directly to retail clients in Australia, as there are many layers of regulation which apply to retail offerings, including stricter Australian licensing requirements and the need for the fund to be registered with ASIC.
ASIC has recently been provided with additional product intervention powers, which are aimed at regulating some product architecture. Additional design and distribution regulations will take effect in early 2021 and will require financial product issuers and distributors to have a customer-centric approach to designing, marketing and distributing financial products to retail customers. This will enable ASIC to prevent the offering of certain types of funds to retail investors where those funds are not suitable for retail investors (which could arise in the case of a complex investment fund that has limited withdrawal rights). The issuer and distributor will be required to identify the target market by making a target market determination for that product, and ensure that the product is distributed only to that market segment.
6 Investment process
6.1 Do any investment or borrowing restrictions apply to the portfolios of alternative investment funds?
No specified investment or borrowing restrictions apply to the portfolios of alternative investment funds (AIFs), subject to limited exceptions. If the fund is offered to retail clients with short-term withdrawal rights, then as a matter of structure, the fund must invest in assets which will enable that liquidity obligation to be met. Specific provisions in the Corporations Act 2001 deal with the difference between liquid and illiquid funds and the types of liquid investments which would be required to satisfy withdrawal requests.
6.2 Are there any specific legal or regulatory requirements regarding investments in particular assets?
Venture capital or private equity vehicles formed as venture capital limited partnerships or early stage venture capital limited partnerships must invest only in certain eligible venture capital investments (which excludes certain sectors, such as companies involved in the provision of finance, real estate or infrastructure; although it can include certain start-up fintech businesses).
7 Reporting, governance and risk management
7.1 What key disclosure requirements apply to alternative investment funds in your jurisdiction?
As alternative investment funds (AIFs) are usually offered only to wholesale (non -etail) clients, the key disclosure document is the information memorandum, however named, which must not contain information that is misleading or deceptive (whether by inclusion or omission).
7.2 What key reporting requirements apply to alternative investment funds in your jurisdiction?
Reporting, governance and risk management requirements differ according to whether the fund is registered or unregistered. For unregistered funds, this will depend largely on what is promised in the information memorandum.
7.3 What key governance requirements apply to alternative investment funds in your jurisdiction?
If the fund is offered to retail clients and is therefore registered, the trustee (responsible entity) must be appropriately authorised and a compliance committee must be established for the fund (unless more than half of the directors of the responsible entity are independent directors).
7.4 What key risk management requirements apply to alternative investment funds in your jurisdiction?
If the fund is unregistered (as is typically the case with AIFs that are offered to wholesale clients only), it will not be subject to any legislative reporting, governance or risk management requirements; but the licence-holding trustee or manager will be subject to legislative risk management requirements, including in relation to conflicts of interest and risk management processes.
Funds that are offered to retail investors and use an absolute return, hedge, infrastructure, mortgage or direct real estate investment strategy must report to investors annually based on a set of disclosure principles and benchmarks.
8.1 How are alternative investment funds treated for tax purposes in your jurisdiction?
Unit trusts investing in portfolio interests in financial assets, or ‘passively' investing in real estate to derive rent, will generally have flow-through tax treatment, and income and capital gains will be taxable in the hands of unitholders (if Australian tax residents) or on a withholding basis (from distributions to non-Australian tax resident unitholders).
A public unit trust that carries on a ‘trading business' for a relevant tax year is generally denied flow-through tax treatment and is treated as if it were a company for most tax purposes, including being subject to the applicable corporate tax rate. The cases in which a unit trust will be considered to carry on a ‘trading business' include:
- conducting real estate development or similar activities; or
- controlling, or having the ability to control, a trading business.
Taking into account these tax considerations, the Australian market developed what is known as a ‘stapled trust' structure, which generally involves investors being offered units in a trust (that restricts its activities to those necessary to retain flow-through tax treatment) stapled to units in another trust, or to shares in a company, that in either case carries on or controls a trading business (often using land or infrastructure leased to it by the trust). This structure became very common for investment in infrastructure such as toll roads, seaports and energy utilities. Although there has been long-standing use of these types of stapled structures, the Australian government recently enacted measures to limit the benefits of stapled structures –albeit with a transitional period of continuing favourable treatment for certain eligible arrangements. A 30% withholding tax rate on distributions of certain kinds of ‘non-concessional' income has been introduced, and may, for example, apply to investments in agricultural land or residential housing (other than affordable housing). At the same time, steps were taken to codify, and to an extent pare back, access to concessional tax treatment through flow-through trusts for foreign pension funds and sovereign entities.
There are special rules for eligible domestic investment trusts that are widely held, known as managed investment trusts (MITs). Unit trusts that are eligible to meet the criteria for MIT status may attract a concessional tax profile for non-resident investors, including (potentially):
- flow-through of tax treaty rates on dividends, interest and royalties;
- a concessional withholding tax rate (15%) on distributions of other Australian source income, such as rental income by real estate-based MITs; and
- tax-free treatment of non-Australian source income and capital gains.
Additionally, MITs can elect for capital account treatment of gains on the realisation of eligible investments (subject to various exceptions, including land held as trading stock, debt interests and certain financial arrangements), which may be advantageous to both Australian and foreign resident investors. For example, non-resident investors are subject to withholding tax under the capital account election only in relation to gains from the disposal of an interest held (directly, or in some cases, indirectly) by the MIT in real property situated in Australia (defined broadly). Australian resident individuals and superannuation funds, on the other hand, can access discounted capital gains tax treatment where the relevant investment was held by the MIT for at least 12 months.
Eligibility for MIT status requires the following, among other things:
- Certain investment management decisions are made within Australia;
- The trust meets a widely held requirement (which may potentially also be satisfied if a substantial part of the unitholder base comprises certain types of widely held investors, such as pension funds); and
- The trust has an investment strategy that excludes the taking of controlling interests in portfolio entities that carry on a trading business.
Unit trusts may be operated in any manner as determined in the trust deed adopted by the trustee, which may, for example, provide for operation as either an evergreen or closed-end fund. For taxation purposes, MITs may elect to be treated as ‘attribution MITs' which, among other things, permits the trusts to attribute income and gains of different character to different members in accordance with entitlements under the trust instrument. It also allows the trusts to correct errors or delays in finally ascertaining trust income by making adjustments in the year the need for correction is discovered, rather than having to reopen prior year distributions and tax filings.
While foreign investment funds will not generally be subject to Australian capital gains tax on portfolio investments in Australian businesses, capital gains tax can be incurred in the case of non-portfolio investments in companies, trusts or limited partnerships holding land or mining assets – for example, an interest of 10% or more in an entity for which more than 50% of its asset value is attributable to ‘taxable Australian property' such as real estate or mining or petroleum interests.
Some controversy has arisen as to how these rules apply to investments by foreign limited partnerships which are eligible for flow-through treatment in the home jurisdictions of the investing partners (eg, the United States) and hence arguably entitled to flow-through tax treatment under Australian tax treaties with those jurisdictions. Litigation in the federal courts has not yet finally resolved the issue, but has apparently concluded that the limited partnership itself cannot claim the benefit of the treaty protections for transparent vehicles (Commissioner of Taxation v Resource Capital Fund IV LP  FCAFC 51).
Limited partnerships are generally treated under Australian tax law as companies – that is, they are taxed at the company tax rate and do not offer flow-through tax treatment. However, exceptions to this general rule apply to limited partnerships that are registered with the Australian government to engage in eligible venture capital investment activities. These types of limited partnerships can be used for certain venture capital and certain private equity investment strategies. Legislation provides for registration of venture capital limited partnerships (VCLPs), early stage venture capital limited partnerships (ESVCLPs) and Australian venture capital funds of funds (AFOFs). Each of these may be eligible for certain capital gains tax concessions on qualifying investment activities. For example, eligible foreign investors will generally not be subject to Australian tax on realised capital gains by VCLPs on eligible venture capital investments held for at least 12 months. The concessional treatment of eligible venture capital investments has been supplemented by a regime for ‘early stage innovation companies' (ESICs) that includes an upfront tax offset for up to 20% of the value invested (but capped at $200,000) and a capital gains tax exemption for ESIC shares held for at least 12 months, but less than 10 years. Early stage investor tax concessions may also be available to start-up fintech businesses for investments made after 1 July 2018
8.2 How are alternative investment fund managers and advisers treated for tax purposes in your jurisdiction?
Australian investment fund managers and advisers are generally treated in the same way as regular taxpayers. In general, income and other rewards for management or advisory services will be taxed as ordinary income; there is a capital gains tax treatment for carried interests in venture capital partnerships in certain cases.
Foreign investment fund managers and advisers are generally exempt from Australian taxation, provided that they do not have a permanent establishment in Australia; but in some cases they may be taxed on Australian-sourced fee income – for example, if operating through a dependent agent in Australia. Distributions of carried interests from a MIT may in some cases be deemed to be Australian-sourced income.
Foreign investment funds using Australian-based managers, advisers or agents need to be careful not to establish a taxable Australian presence. In 2015, the tax laws were amended to introduce the investment manager regime (IMR), to enable an IMR-compliant foreign fund to retain its non-resident tax status for qualifying portfolio investments if its Australian presence is limited to using an eligible independent Australian fund manager. The IMR also confirms that qualifying portfolio investments will not be subject to Australian income tax where they are held by eligible widely held foreign funds that do not have an Australian manager and do not otherwise have a permanent establishment or trading business in Australia.
8.3 How are alternative investment fund investors treated for tax purposes in your jurisdiction?
There is generally flow-through of tax in funds which are structured as unit trusts so that investors typically share their tax burdens proportionate to their holdings in the funds (see question 8.1).
8.4 What effect do international laws such as the US Foreign Account Tax Compliance Act and international standards such as the Common Reporting Standard have in your jurisdiction?
Australia has enacted legislation to implement the US Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS) in Australia. Managers have updated their onboarding processes to capture information needed to meet the compliance obligations attached to FATCA and CRS.
8.5 What preferred tax strategies are typically adopted in the alternative investment fund context?
The unit trust structure is the most commonly used because of its flow-through tax treatment and potential access to concessional tax treatment of distributions to foreign investors. Some private equity and venture capital funds are structured as VCLPs, ESVCLPs and AFOFs. See question 8.1 above for more information.
9 Trends and predictions
9.1 How would you describe the alternative investment fund landscape and prevailing trends in your
The landscape for alternative investment funds (AIFs) in Australia is promising, especially for the pension industry. The pool of investable capital from Australian superannuation funds (comprising both large public offer funds and self-managed superannuation funds) is among the largest in the world (largely due to the compulsory retirement savings regime introduced in the 1980s). Superannuation funds are constantly on the lookout for investment opportunities which may provide enhanced returns for their members. Many foreign investment managers and distributors and advisers are generally familiar with the Australian sophisticated and professional investor's style, local investment fund structures and tax issues, and many are therefore comfortable with establishing satellite or feeder funds for Australian investors.
9.2 Are any new legal or regulatory developments anticipated which will impact on alternative investment funds or alternative investment fund managers in your jurisdiction?
Corporate and limited partnership fund structures: In the 2016–2017 budget, as part of the Ten-Year Enterprise Tax Plan, the government announced that it would introduce tax and regulatory frameworks for two new types of collective investment vehicles (CIVs): the corporate collective investment vehicle (CCIV) and the limited partnership CIV. On 19 January 2019, the Treasury released comprehensive exposure drafts of both the regulatory and tax legislation for the CCIV regime. However, the relevant legislation is still to be enacted at the time of writing. The CCIV regime enables asset management firms to structure an investment fund as a corporation and is designed to be an internationally recognisable investment vehicle that can be marketed to foreign investors. Legislation facilitating more widespread use of a limited partnership structure is also proposed (currently, limited partnerships are used only in the private equity and venture capital sectors), and it is hoped will follow closely after finalisation of the CCIV legislation. The overarching aim of such legislation is to provide a choice of tax-transparent structures (unit trusts, corporations or limited partnerships), but with equivalent governance features. The introduction of these alternative structures reflects industry feedback that corporations and limited partnerships are more familiar legal structures in many markets outside Australia, including across Asia. The new structures aim to complement other recently enacted legislation (the Corporations Amendment (Asia Region Funds Passport) Act 2018) aimed at facilitating the cross-border marketing of similarly regulated fund products across jurisdictions that are signatories to the new Asia Region Funds Passport regime (initially Australia, South Korea, Thailand, New Zealand and Japan).
Tighter measures for the retail investor environment: As noted above, the new Australian Securities and Investments Commission intervention powers and product design and distribution obligations will change the landscape for AIFs offered to retail clients.
Advisers and other distributors of alternative investment funds will also need to have regard to the Financial Planners and Advisers Code of Ethics 2019 introduced by the Financial Adviser Standards and Ethics Authority. The code aims to ‘professionalise' the retail client advisory sector by introducing various ethics-based duties and standards.
9.3 Do you envisage any particular industry strategy of attracting particular interest in the next 12 months?
Over the next 12 months, we expect that there will be continued government initiatives to enhance the establishment and prospering of technology based and venture capital funds (for structures, see question 2.6), as in the past few years. This undertaking is being promoted and managed by the Department of Industry, Innovation and Science.
Real estate investment funds have for many years been a large and important part of the investment landscape in Australia, mainly for industrial and commercial property investments. New types of specialised property investment funds are being established to fill emerging needs and markets – for example, student accommodation funds, disability housing, child care/education facilities, defence force personnel housing and other areas of special need.
Other types of AIFs likely to grow in the near future are climate change and impact investing funds (there has already been rapid growth in ethical investment funds), high-yield corporate bonds and other investment types designed to provide a decent return in a low inflation, low interest rate environment.
Private equity funds in Australia largely adopt the best practice reporting and valuation guidelines formulated by their industry body, the Australian Investment Council (AIC) (formerly the Australian Private Equity and Venture Capital Association). The AIC represents private equity, private credit funds, sovereign wealth and other institutional investors (including large superannuation entities), and are largely aligned with the private equity principles formulated by the Institutional Limited Partners Association. As the domestic private equity funds industry continues to attract significant investment from foreign investors, we also expect to see the continued alignment of domestic private equity funds terms with those in other developed private equity markets.
10 Tips and traps
10.1 What are your top tips for the smooth establishment and management of an alternative investment fund in your jurisdiction, and what specific challenges would you note?
The introduction of alternative collective investment structures, coupled with the Asia Region Funds Passport, should assist Australian asset managers to more effectively access foreign investor markets. Australian managers should continue to be supported by the reforms of several years ago (and since adopted in practice) under the investment manager regime (see question 8.2), which removes some traditional tax uncertainty associated with foreign funds engaging with Australian managers.
In terms of foreign asset manager access to the Australian investor market, the new foreign Australian financial services licence regime will involve an upfront cost in the associated application process. This should, however, provide certainty for managers in terms of a clear pathway for access to the Australian market and enhance Australian investor confidence associated with engaging with foreign managers.
The industry is expecting sustained foreign investor interest in Australian real estate, agriculture and infrastructure investment exposure. MIT structures are becoming understood by more and more well-known large foreign investors, and accepted as the gateway necessary to access a concessional withholding tax profile and deemed capital account election.
Acknowledgement: co-authored by Special Counsel Stephen Etkind
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.