The investment funds industry in Australia is both developed and meticulously regulated. Aligning with global trends, investments in Australian investment funds have experienced significant growth over the past decade. This surge is sustained by the following factors:
- A mature and advanced financial services industry.
- Presence of robust service providers.
- Well-developed regulatory framework.
- Favorable tax regime.
In recent years, the Australian market has witnessed an upswing in Exchange-Traded Funds (ETFs), driven by direct retail ownership of Australian stocks, along with the increasing popularity of actively managed Exchange-Traded Managed Funds. This article will delve into the key factors to think over if you are contemplating the establishment of an investment fund in this country.
Regulation of investment funds activity: regulatory framework
Australian funds operating as a controlled investment scheme should be registered under the Corporations Act 2001, unless specified otherwise. If the fund is to be presented to retail clients in Australia, it is imperative to prepare and furnish potential investors with a product disclosure statement that conforms with the Corporations Act.
Registration/licensing of funds in Australia
Typically, a fund should enroll with ASIC as a controlled investment scheme unless all investors qualify as "wholesale clients." These clients encompass professional investors, such as financial institutions, investment advisers, and other holders of Australian Financial Services (AFS) licenses, or investors who own or control at least 10 million Australian dollars.
The application for registering an investment fund with ASIC requires the operator, known as the "responsible entity" (RE), to undertake the following actions:
- Possess an AFS license covering the fund's activities.
- Draft a Constitution (trust deed) for the fund, aligning with the Corporations Act and ASIC policy.
- Prepare a compliance plan outlining the process for regular reviews to ensure the RE complies with the Corporations Act and the Constitution while managing the fund.
- Appoint an auditor.
- Establish a compliance committee to adhere to legislative requirements.
- If the fund is to be listed or traded on an exchange, the fund's documents must also undergo evaluation by the relevant stock exchange.
For the proposition of foreign funds in this country that are not locally registered managed investment schemes, there currently exist mutual recognition agreements permitting their offering to retail clients in Australia. These agreements are grounded in the regulations of the fund's home country and currently extend to funds from New Zealand, mutual funds from the United States, funds from Hong Kong, and Singaporean funds. For various reasons, managers of foreign funds have typically preferred not to rely on these agreements and instead opted to establish an investment fund in Australia.
Registration/licensing of fund operators
For local funds and operators, for an Australian firm to present units in a fund to retail users, it must:
- Obtain an AFS license extending to the fund's activities.
- Enroll the fund as a managed investment scheme.
- Prepare a Product Disclosure Statement.
For an Australian investment manager of a domestic retail fund, an AFS license is required, permitting financial product advice and transactions including the fund's assets, which are monetary products, unless it acts as a corporate trustee affiliated with the fund or applies another exception.
International funds and managers. The corporations act may have extraterritorial application. Thus, unless an exception applies, monetary services or products offered from other jurisdictions to investors in Australia may necessitate obtaining a license and enrolling the investment fund if it is offered to Australian retail clients. Currently, the only exceptions allowing a foreign operator to offer its foreign funds to retail clients in Australia are mutual recognition agreements and the ARFP.
If you are considering enrolling an investment fund in this country, note that until April 2020, there was a broad exemption from Australian licensing requirements for managing Australian funds, available under a "passport" agreement for monetary service providers regulated in certain jurisdictions, such as the United States, the United Kingdom, Germany, Hong Kong, and Singapore. Foreign fund managers who availed themselves of this exemption before March 2020 can continue to rely on it until the end of March 2024. However, after March 2024, a new fund manager licensing regime will apply to all.
Marketing of funds
For those interested in registering an investment fund in Australia, it's useful to know that a typically required AFS license or applicable exemption is needed for the sale of retail funds here. One can also be an authorized representative of another AFS licensee and rely on that entity's license. Valuable exceptions for marketing to Australian retail clients include mutual recognition agreements or passporting arrangements. Outside of these agreements, the sale of foreign funds to investors in Australia is limited to the wholesale market.
For Australian issuers looking to sell their assets to retail clients, marketing is typically done through the distribution of a Product Disclosure Statement (PDS), aligning with the Corporations Act. Common forms of fund distribution among retail clients include investment platforms (known as investor-directed portfolio services, where a custodian holds various investments on behalf of the investor, and consolidated reporting and administration are provided) and investment advisory networks.
Establishing an investment fund in Australia: taxation procedure for funds
Setting up an investment fund in Australia involves navigating a nuanced tax landscape. The Australian fiscal framework is intricate, spanning federal and state/territory jurisdictions. At the helm of federal tax oversight is the Australian Taxation Office (ATO), entrusted with enforcing a spectrum of levies. This encompasses income tax, capital gains tax, and the Goods and Services Tax (GST). Concurrently, state and territory levies encompass stamp duty, adding an additional layer of complexity to the taxation procedure for funds.
Retail funds are typically structured as unit trusts and, as much as possible, are usually operated as "flow-through" entities for income tax purposes. This results in investors in the fund, rather than the fund itself, being subject to tax on annual net taxable income. Retail funds may sometimes be structured as Managed Investment Trusts (MIT) for tax purposes to access tax concessions.
Conclusion
This publication has delved into the legal and regulatory aspects of governing investment funds in Australia, which can significantly impact the fund's structure. If you have any remaining inquiries, feel free to seek consultation and ongoing support for establishing a fund in Australia from the specialists at our company.
