Australia is a jurisdiction that is welcoming to alternative fund strategies and managers. Whilst historically, alternative asset classes were under-served by experienced managers and under-allocated to by investors, this environment is changing, with attractive tax treatment for private equity (PE) and venture capital (VC) strategies, and an increasing desire by institutional and high net worth investors to allocate capital to hedge funds, alternative credit funds and other private asset funds.

The types of alternative funds that are commonly established in Australia include private equity, hedge, alternative credit and venture capital funds.

Due to its flexibility, unit trusts are the most commonly used structure.

A unit trust or limited partnership can be used for private equity and venture capital funds, usually as a venture capital limited partnership or early-stage venture capital limited partnership (in certain circumstances). A unit trust is simpler to establish and offers greater flexibility with respect to the asset classes in which it can invest; however, certain limited partnerships can attract tax benefits for investors and fund managers where certain requirements are met.

For hedge and credit strategies, a unit trust is the only suitable local structure.

The Australian Government has passed legislation for a new vehicle known as a "Corporate Collective Investment Vehicle" (CCIV), which is intended to provide for a tax regime for a corporate vehicle to be taxed in the same way as an attribution-managed investment trust, with a number of underlying sub-funds, in particular as a flow-through vehicle. The regime applies from 1 July 2022.

Unit Trusts

Structure and regulation

In Australia, unit trusts can be structured as open- or closed-end vehicles, where performance fees can take the form of a traditional performance fee on a net asset-value increase or a private equity-style "carry waterfall".

There are very few legal requirements that apply to Australian unit trusts, which are simple to establish and, provided they are only offered to wholesale investors, often have no regulatory or other registration or approval requirements (note that there would typically be regulatory requirements for the manager or trustee, see 2.3 Regulatory Regime). Invariably, these vehicles can be tailored to meet the bespoke fund design needs of fund managers and investors.

These structures can be used to invest capital into any asset class, making it an attractive vehicle for many fund managers and investors. In addition, it is relatively easy to structure multiple unit classes in the one-unit trust, allowing for different fee options, the ability to gain exposure to multiple asset classes and other tailoring options to suit investor needs. Although partnerships are often used for PE and VC strategies where the tax regime allows, it is also very common to see unit trusts used for these strategies due to their flexibility.

A unit trust is managed by its trustee, who may in practice appoint an investment manager to provide investment management services in respect of the trust. The use of corporate trustees is common by fund managers who either do not desire to manage the day-to-day administration of their own trust, or who may lack the necessary regulatory licence to act as a trustee.

Partnerships

In Australia the only form of corporate investment vehicle is an incorporated limited partnership.

The common partnership structures used by a private equity or venture capital fund to invest primarily in Australian businesses are known as venture capital limited partnerships (VCLPs) for private equity and venture capital funds or early-stage venture capital limited partnerships (ESVCLPs) for early-stage venture capital funds.

Overview of VCLPs and ESVCLPs

An incorporated limited partnership must meet specific requirements before it can be registered as a VCLP or an ESVCLP with Innovation and Science Australia, an Australian government department. There are specific requirements for a VCLP and an ESVCLP set out in the Venture Capital Act 2002 (Cth) (VC Act), with many consistencies between the two, including, but not limited to:

• the term of the partnership, which must be more than five years and less than 15 years;
• the minimum committed capital, which must be at least AUD10 million; and
• the partnership, which must only carry out activities related to making eligible venture capital investments (EVCIs) as defined by the relevant Australian tax legislation.

An EVCI is an equity investment in an unlisted company or unlisted trust that is located in Australia, does not exceed more than 30% of the partnership's committed capital, and which has a predominant activity that is not an "ineligible activity". An ineligible activity includes property development or land ownership, banking, providing capital to others, leasing, factoring, securitisation, insurance, construction or acquisition of infrastructure facilities and/or related facilities, and making investments that are directed at deriving income in the nature of interest, rent, dividends, royalties or lease payments. In order for an investment to qualify as an EVCI, the investment must not exceed the value restriction imposed at the time of the investment (ie, AUD50 million for an investment by an ESVCLP and AUD250 million for an investment by a VCLP).

In addition to the requirements for registration, the VC Act applies various restrictions to these structures:

• no single investor in an ESVCLP, other than in certain defined circumstances, can contribute more than 30% of the total committed capital;
• the maximum committed capital for an ESVCLP is AUD200 million; and
• VCLPs and ESVCLPs cannot invest in a single investment whose total assets exceed AUD200 million at the time of investment; and
• in general, these entities cannot make debt investments other than "permitted loans", as defined in the VC Act.

Given the strict requirements and restrictions imposed on VCLPs and ESVCLPs, many fund managers use these vehicles in conjunction with "side-car" or parallel funds (usually soft stapled-unit trusts). This structure allows fund managers to obtain the tax benefits afforded to VCLPs and ESVCLPs in respect of investments which are EVCIs, whilst providing the fund manager with the flexibility to invest in non-EVCIs via the parallel funds. This has been a common strategy for leading Australian private equity and venture capital funds.

Corporate Collective Investment Vehicles

Overview

Amendments to the Corporations Act effective as on 1 July 2022 saw the creation of a new investment vehicle in Australia, the Corporate Collective Investment Vehicle (CCIV). A CCIV is a company limited by shares, which entitles it to own property and to sue and be sued in its own name. This vehicle has been designed as a funds management vehicle rather than as an operating company. A CCIV can operate as a closed-end or open-end vehicle, with the shares being redeemed in the ordinary course in accordance with their terms of issuance.

Structure and regulation of CCIVs

A CCIV must consist of one or more sub-funds and is created on registration with ASIC. It is governed by its constitution, the existence of which is a prerequisite to registration. Further sub-funds can be created on application to ASIC and each sub-fund will have a separate Australian Registered Fund Number (AFRN). Each share in a CCIV must be referable to a sub-fund and a share cannot be referable to more than one sub-fund. Whilst a CCIV has legal personality, a sub-fund does not. Accordingly, assets and liabilities are those of the CCIV on account of a specific sub-fund.

A number of statutory mechanisms in the Corporations Act provide for the ring-fencing of assets and liabilities between sub-funds.

There must be a corporate director for each CCIV. The corporate director must be a public company holding an AFSL with authority to operate the business and conduct the affairs of the CCIV. As well as being bound by directors' duties generally and the duties of an AFSL holder under the Corporations Act, the corporate director of a CCIV is subject to specific obligations particular to the nature of CCIVs. Corporate directors must ensure each sub-fund operates as a separate business entity so that assets and liabilities are recorded as belonging to the specific sub-fund within CCIV. Additionally, it is a statutory requirement that public documents and negotiable instruments relating to a CCIV must include the name and AFRN of the sub-fund to which they relate.

A CCIV can be wholesale or retail. Where a CCIV is a retail CCIV, it is subject to more stringent obligations broadly similar to those of a registered managed investment scheme, including prescriptive contents of its constitution. A CCIV (as a whole) will be classed as a retail CCIV if it is designated on registration as a retail CCIV or if any shares in the CCIV are issued (or in certain circumstances transferred) to a individual as a retail client. Consequently, a CCIV may become a retail CCIV after the fact. The corporate director must notify ASIC in such circumstances.

Tax treatment of CCIVs

If a CCIV sub-fund meets the eligibility criteria for an AMIT, it is by default taxed as an AMIT under Division 276 of the ITAA97's attribution flow-through tax regime. This permits flow through taxation of the beneficiaries, even though the legal character of the CCIV is a corporate entity.

Entities managing alternative funds should either hold an Australian financial services licence (AFSL) with appropriate authorisations, be appointed as the authorised representative of the holder of an AFSL or otherwise fall within a relevant licensing exemption under the Corporations Act 2001 (Cth) (Corporations Act). Where the fund is a unit trust, both the trustee and the manager should have the appropriate authorisations to manage and issue interests in a managed investment scheme, and the trustee should generally be authorised to provide custodial and depository services. If the fund is a CCIV or an incorporated limited partnership, the manager should have similar securities authorisations. Where a foreign manager wishes to offer an Australian fund, it is common to appoint a corporate trustee as the trustee of the fund, who would appoint the manager as the investment manager of the fund (see 3.8 Local Regulatory Requirements for Non-local Managers regarding regulation of the manager). If the fund is a CCIV, it would be a requirement to appoint a local AFSL holder with the appropriate authorisations as the corporate director.

The regulatory requirements applicable to a fund manager differ depending on whether the fund manager accepts investments from retail or wholesale clients. Generally, wholesale clients are sophisticated investors who satisfy the relevant financial means tests under the Corporations Act or who have sufficient experience and market knowledge. Anyone who is not a wholesale client is a retail client. Frequently, alternative funds will be primarily suitable for wholesale investors. This is because it is unattractive for fund managers to offer such products to retail investors, due to the costs of licensing and compliance, level of disclosure required, and rules concerning liquidity.

From a regulatory perspective, alternative funds open to wholesale clients only operate with relative freedom.

There are very few limitations applying to alternative funds. There are adverse tax implications for private equity funds if a trust controls a business to the extent that it is designated a "trading trust". In such a case, the trust would potentially not be eligible to qualify as a managed investment trust and potentially could be like a company (where the trust is widely held). The concept of "control" is currently widely interpreted for Australian income tax purposes.

In certain circumstances, including where 20% of the interests in an Australian fund are held by a foreign entity or 40% of the interests in aggregate in an Australian fund are held by foreign entities and their associates, approval may be required by the Foreign Investment Review Board (FIRB) in respect of the investments of that fund.

Funds can originate loans and alternative credit funds are becoming significant competitors to Australian banks as providers of capital at all levels of the capital stack, including senior secured, subordinated and mezzanine financing.

Where loans are provided to consumers, the lender may need an Australian Credit Licence; however, this is not typical for alternative credit funds.

The origination and provision of loans is not generally a financial service and, accordingly, (other than in respect of consumer loans) no regulatory licensing is necessary for this activity. However, management or promotion of a credit fund will constitute a financial service and regulatory licensing will usually be required, as discussed in 2.3 Regulatory Regime.

Where a fund originates loans and itself is the relevant lender of record, any borrower fees paid to the fund will often be exempt from applicable sales tax.

Funds in general can invest in any asset in Australia, subject to local law. Funds can hold digital currencies, loans, consumer credit and other assets. Investments into cannabis and cannabis-related investments are the subject of regulation. To the extent that these assets are lawful in Australia, funds can hold them. Where a fund lends to consumers, it may be required to hold an Australian credit licence.

A regulated fund (typically an Australian unit trust) is known as a registered managed investment scheme, which means it is registered with the Australian Securities and Investments Commission (ASIC). The registration process is relatively straightforward and only requires that:

• the trustee of the fund holds an AFSL, authorising it to be a "responsible entity" of a registered managed investment scheme;
• the responsible entity is an Australian public company; and
• the constitution of the fund meets the requirements of the Corporations Act.

In the event an application for registration is received by the ASIC, a decision on registration must be made within 14 days of its receipt.

In a similar manner to registered managed investment schemes, a CCIV must have as its director a corporate director who must:

• be a public company; and
• hold an AFSL authorising it to operate the business and conduct the affairs of a CCIV.

In addition, the CCIV must:

• comprise at least one sub-fund with a member; and
• have a constitution that meets the requirements of the Corporations Act.

A foreign-domiciled manager may be appointed as the investment manager of an Australian fund provided the foreign manager is in compliance with the Australian financial services licensing requirements, as discussed in 3.8 Local Regulatory Requirements for Non-local Managers.

A foreign manager's licensing requirements, as well as the exemptions on which they may rely, generally vary according to whether the foreign manager provides financial services to retail or wholesale clients and the class of financial products that they offer to their clients.

Licensing

In general, there are no locality restrictions in the Australian fund management industry. As long as a manager complies with the Australian financial services licensing regime, the manager can be located entirely offshore.

However, registered managed investment schemes and CCIVs must be operated by a responsible entity or corporate director (respectively), which, amongst other things, must be an Australian public company, as set out in 2.6 Regulatory Approval Process.

Partnerships

The VCLP and ESVCLP can be registered where the partnership was established as a limited partnership in a foreign country that has a particular category of double-taxation agreement with Australia and where all of the partnership's general partners (GPs) are residents of that country. In addition, the partnership would still need to meet the same requirements as Australian partnerships for these purposes. The manager for the partnership can be located offshore. In these circumstances, if a financial service is being provided in Australia – which would be likely unless all investors were offshore – both the GP and the manager may need to comply with Australian financial services licensing laws (see 3.2 Regulatory Regime and 3.8 Local Regulatory Requirements for Non-local Managers).

Trusts

Whilst a foreign entity can be the trustee of an Australian unit trust, licensing requirements have made this fairly uncommon. Foreign managers wishing to establish an Australian vehicle (such as a hedge fund, private equity fund, venture capital fund or credit fund) typically hire an Australian corporate trustee to perform this role and arrange local licensing for the management entity separately.

In the event that a foreign entity acts as trustee of an Australian unit trust, the trust will not qualify as a managed investment trust (see 2.11 Tax Regime for more information on the tax benefits of qualifying as a managed investment trust).

In Australia, there are generally no requirements as to the choice and location of service-providers, including administrators, custodians and fund administrators. However, where a custodian is used, it is typical for an Australian custodian holding an appropriate AFSL to be selected in order to mitigate cash balance sheet requirements.

Non-local service-providers are typically not subject to regulation or registration requirements, on the basis that they would not be providing the financial services in Australia under the relevant legislation. An exception to this may be where the non-local service-provider provides anti-money laundering (AML) compliance services, in which case they may be required to register with AUSTRAC, the AML regulator.

Taxation of a Trust

Typically, the income and gains of a trust are subject to flow-through tax treatment (ie, taxable income of a trust is taxed at the hands of the investors) and therefore, investors are taxed directly on their pro rata share of the income of the trust and gains arising from the disposal of any investment of the trust.

Where the trust qualifies and elects to be a "managed investment trust" (broadly, the trust needs to be managed by an AFSL holder, widely held, not closely held, and cannot control a trading business in order for the trust to qualify as a "managed investment trust"):

• fund payment distributions made by the managed investment trust to foreign investors residing in a foreign jurisdiction that has signed an Exchange of Information arrangement with Australia may be subject to the concessional managed investment withholding tax of 15%, though this may be reduced to 10% in the case of the MIT holding a "green building"; and
• investors' share of the gains arising from disposals of investments by the funds should be taxed under the capital gains tax provisions (where a certain election has been made by the trust). As a result, potential capital gains tax discount may be available for eligible Australian resident investors.

Taxation of a VCLP or ESVCLP

A VCLP or ESVCLP provides fund managers and investors with support to help stimulate venture capital investments by way of tax benefits.

For a VCLP, the key Australian tax implications include:

• "flow-through" treatment. Taxable income derived by the VCLP "flows through" the partnership to the investors and will be taxed in the hands of the investors; and
• "CGT exemption". A full capital gains tax (CGT) exemption is available for eligible venture capital partners (ie, tax-exempt foreign residents or foreign venture capital funds) on gains derived from disposal of EVCIs made by the VCLP (subject to satisfying certain requirements).

For an ESVCLP, the key Australian tax implications, which are more concessionary that the VCLP regime, include:

• "flow-through" treatment. Taxable income derived by the ESVCLP "flows through" the partnership to the investors and will be taxed in the hands of the investors;
• "tax offset". A non-refundable carried-forward tax offset is available to investors for the lesser of either 10% of their eligible contributions or share of investments in the ESVCLP (subject to satisfying certain requirements);
• "revenue gain or profit exemption". Any revenue gain or profit arising from the disposal of an EVCI by an ESVCLP will be excluded from the taxable income of an investor of the ESVCLP. This applies only if the revenue gain that arises would have been subject to the CGT exemption if the asset disposed of was a CGT asset. Note that the exemption is capped where the relevant investment exceeds AUD250 million; and
• "income exemption". An investor's share of income (eg, dividend) derived from EVCIs made by an ESVCLP will be excluded from the partner's taxable income calculation if the partner is a limited partner of an Australian-resident general partner.

Taxation of a CCIV

Complying CCIV Sub-fund Trusts will be treated as AMITs. Under the AMIT attribution flow-through regime:

• for income tax purposes, 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;
• the CCIV Sub-fund Trust is taken to be a fixed trust and members are taken to have a vested and indefeasible interest in a share of the income and capital of the trust; and
• the CCIV Sub-fund Trust is able to use the 'unders' and 'overs' regime to reconcile a variance in calculating trust components of a particular character for an income tax year in the income year that the variance is discovered.

The withholding tax and tax treaty 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.

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, including where the trust is taxed as a public trading trust under Division 6C of Part III of the ITAA36.

Where a CCIV Sub-fund Trust is considered to be a public trading trust, it will effectively be taxed as a company. Accordingly, this puts a lot of pressure on the interpretation of what constitutes a public trading trust (which will result in the fund being taxed as a company).

One area of concern under the CCIV regime involves a scenario where a CCIV Sub-fund Trust ceases to be an eligible AMIT. In these circumstances, a CCIV Sub-fund Trust will be taxed either in accordance with general trust provisions or as a public trading trust under Division 6C of Part III of the ITAA36.

In these circumstances, it should also be noted that the CCIV regime creates a strange situation where the sub-fund of a CCIV that is deemed to be a trust under the statutory fiction in Subdivision 195-C of the ITAA97 is then deemed to be a company under the public trading trust rules contained in Division 6C of Part III of the ITAA36.

Generally, a resident trust should be able to qualify for the benefits of a double-tax treaty between Australia and a foreign jurisdiction. However, this should be considered on a jurisdiction-by-jurisdiction basis.

It is important to note that there are certain limitations on the investment of VCLPs/ESVCLPs in foreign jurisdictions. Due to this, the possibility of a VCLP/ESVCLP being eligible for benefits under double tax treaties has not been further considered.

Similar to a trust, a VCLP/ESVCLP should be treated as a flow-through entity for Australian income tax purposes. Accordingly, the benefits under double-tax treaties would need to be considered by a foreign partner (along with any Australian tax concessions) in determining the Australian tax implications of their share of the VCLP/ESVCLP's taxable income.

The use of subsidiaries for investment purposes is common in a unit trust in order to effect segregation of the assets of one class of units from others and ring-fence legal liability in respect of underlying investments. Subsidiaries may also be useful where investors external to a fund co-invest into an asset, in situations where the manager wishes to retain control of the asset or charge fees to the co-investors.

Typically, promoters or sponsors would come from Australia; however, fund managers frequently use offshore promoters in order to target foreign investors, particularly in Europe and North America.

Most investors in Australian alternative funds are Australian-domiciled; however, it is not unusual to see significant foreign capital invested in Australian funds, particularly private equity funds and venture capital funds.

A desire among many investors to access fixed income returns has resulted in the continued launch of credit strategies, and this trend is expected to continue due to interest rate increases.

Institutional investors with the ability to deploy significant capital have noticeably increased a focus on providing capital to managers in the form of mandates, rather than be an investor in a pooled fund. As would be expected, this trend has seen, to some extent, downward pressure on management fees and terms providing increased control over allocation to those institutional investors.

Where a fund is offered to retail investors, in general the issuer must issue a product-disclosure statement (PDS) to investors. A PDS is a regulated disclosure document whose form and content is regulated by the Corporations Act. The content requirements provide that a PDS must be presented in a clear and concise format and must provide sufficient disclosure to an investor to make an informed product choice. In addition, there are prescribed forms for the disclosure of fees and costs of a product. Additional disclosure requirements apply for certain types of products, such as products deemed to be "hedge funds" (this is a technical test and may capture many funds not generally regarded as hedge funds) and residential mortgage funds. A PDS does not have to be publicly available but must be issued to every retail client investing in a product.

Where a financial product is available to retail clients, the issuer must issue a "Target Market Determination" (TMD), which specifies the type of investor the product may be suitable for. The TMD must be publicly available.

As mentioned below, the regulatory regime in respect of non-local managers is under review. ASIC has extended the previous relief available to those who were already relying on it; however, it is expected that further changes will be introduced to deliver certainty to non-local managers.

Whilst CCIVs, since 1 July 2022 have become a theoretical part of the funds management landscape, there are a number of regulatory and practical barriers that have prevented their widespread use to date. As continued consultation with the industry ensues, it is hoped that a number of these barriers will be removed, including the transition from existing structures to CCIVs as well as streamlining as simplification of the regulatory hurdles currently in place of AFSL holders to become authorised as corporate directors of CCIVs.

Alternative fund managers themselves are typically structured as Australian proprietary companies limited by shares. However, fund managers' internal structures often provide that the management entity may contract with other internal entities for the provision of investment advisory services to mitigate any tax and legal exposure.

A fund manager would need to hold, or be otherwise authorised under, an AFSL issued by the ASIC. It is common for managers who do not hold an AFSL to be authorised under another AFSL-holder's licence. The relevant AFSL or authorisation would need to authorise the manager to perform a variety of financial services, such as:

• provide financial product advice in respect of securities, interests in managed investment schemes and derivatives; and
• issue interests in the relevant class of financial products (or arrange for the issue of these).

As discussed further in 3.8 Local Regulatory Requirements for Non-local Managers, foreign managers may rely on funds-management relief or apply for a foreign AFSL, which is a limited AFSL for foreign managers providing financial services to wholesale clients. In certain circumstances, a foreign manager may be required to register as a foreign company in Australia, if it is carrying on a business in Australia.

Management fees (including performance-based fees) paid to a fund manager from a trust should be treated as assessable income for Australian income tax purposes. Consideration should be given to whether any benefits under the relevant double tax treaty are available for management fees received by a foreign-resident fund manager.

Management fees (excluding performance-based fees) paid to a fund manager from a VCLP/ESVCLP should be treated as assessable income for Australian income tax purposes. Consideration should be given to whether any benefits under the relevant double-tax treaty are available for management fees received by a foreign-resident fund manager.

Income tax implications arising from "carried interests" are outlined in 3.5 Taxation of Carried Interest.

The "investment manager regime" (IMR) provisions under the Australian Income Tax system provide an exemption for returns or gains that would otherwise be assessable income of a fund for Australian income tax purposes, provided these returns or gains are attributable to a permanent establishment in Australia, which arises solely from the use of an Australian-based manager.

Broadly, this exemption is only applicable for an IMR financial arrangement (ie, a financial arrangement excluding a financial arrangement that is, or relates to, a capital gains tax (CGT) asset that is taxable Australian property) that has been made on behalf of an IMR entity (ie, a non-resident entity (regardless of the type)) by an independent Australian fund manager. In addition, the exemption requires that the IMR entity must have less than 10% interest in the counterparty to the IMR financial arrangement and not engage in any trading business in Australia.

The requirements that need to be satisfied to obtain this exemption are complicated and, therefore, careful consideration is required.

Where structured appropriately, a "carried interest" received by a fund manager from a VCLP/ESVCLP should be subject to concessional capital gains tax treatment.

A carried interest received by a fund manager from a trust should be treated as ordinary assessable income of the fund manager. No capital gains tax discount should be available for the fund manager under this scenario.

Australian managers can outsource many of their investment functions and business operations with relative freedom. If outsourcing investment functions, it is likely that the provider of investment services would be required to hold an AFSL or otherwise be authorised by the holder of an AFSL.

The outsourcing of business operations is generally beyond the scope of financial services' regulation, other than in respect of anti-money laundering services. Compliance with anti-money laundering legislation is required by the issuer of interests in the relevant fund. This function can be outsourced and it is likely that the person undertaking such services will be required to register with AUSTRAC, the Australian AML regulator.

Where an investment manager is engaged by a regulated superannuation fund to provide investment management services in respect of a portfolio, there are specific regulatory requirements in respect of business continuity, disaster recovery, cybersecurity and providing such services offshore.

There are no relevant requirements specific to Australian fund managers. However, where a manager holds an AFSL, they are subject to strict conditions (both financial and non-financial) under the AFSL and associated legislation with which they must comply, including having adequate financial and operational resources to carry on its financial services business.

A non-local manager is bound by Australian financial services laws if it provides financial services in Australia and is required either to rely on applicable funds management relief, apply for a foreign AFSL, which is a limited AFSL for foreign managers providing financial services to wholesale clients, or apply for an AFSL.

The regulatory arrangements for non-local managers are currently subject to a state of uncertainty. Accordingly, as at the date of writing, non-local managers who had previously accessed "sufficient equivalency" relief may continue to do so until 31 March 2024. Otherwise, if the manager cannot take advantage of another exemption, they will need to apply for a Foreign AFSL or be an Authorised Representative of an AFSL-holder.

Foreign AFSL (FAFSL)

This regime allows FFSPs to provide a wider range of financial services to any wholesale client in Australia, provided it is regulated by the:

• Danish FSA;
• French AMF or ARPR;
• German BaFin;
• Hong Kong SFC;
• Luxembourg CSSF;
• Ontario OSC;
• Singapore MAS;
• Swedish FI;
• UK FCA; or
• US SEC (among other regulators), subject to the relevant authorisations on that licence.

An FAFSL does not impose the same obligations, nor does it have the same application burden, as an AFSL. However, the application process does require submissions relating to the persons providing and responsible for the financial services.

Authorised Representative

It is possible for a person to be authorised to provide financial services by the holder of an AFSL. Under this exemption, an AFSL-holder would be required, in writing, to allow, and be responsible for, the provision of relevant financial services by the FFSP.

Alternative funds are frequently invested in by institutional investors from both Australia and offshore. Most major Australian institutional investors have an allocation for private equity funds.

Typical investors into Australian alternative funds include high net worth (HNW) investors, family offices, superannuation funds, partnerships, sovereign wealth funds and national and international alternative investment managers. In the last 12 months, the alternative funds sector has seen significant growth in assets under management from Australian and foreign investors. It is common to see alternative funds attracting capital from all categories of wholesale investors. Venture capital strategies have commonly been more popular among HNW and family-office investors than institutional investors, with certain notable exceptions.

Alternative funds can be marketed to any client in Australia, as long as the person marketing the fund is authorised under an AFSL (or an exemption – see 3.8 Local Regulatory Requirements for Non-local Managers) to provide financial product advice, or deal in the relevant fund interests to the relevant client group. Typically, these funds would be marketed to wholesale clients only.

If the person is not authorised to provide these services to retail clients, marketing activities must be limited to wholesale clients. In addition, where the fund is distributed to retail clients, it would usually need to be registered with the ASIC as a "registered managed investment scheme" or as a retail CCIV (see 2.6 Regulatory Approval Process and 2.8 Other Local Requirements) and comply with regulated disclosure requirements (see 4.5 Regulatory Regime) and associated rules applying to regulated products.

As previously stated, any person (including a firm) must hold (or be otherwise authorised under) an AFSL authorising the provision of financial product advice to the relevant client group, namely, retail or wholesale clients (as the case may be). The AFSL authorisation must relate to the specific type of financial product that is to be marketed (typically, securities or interests in a managed investment scheme).

A firm that is not domiciled in Australia will be able to market funds in Australia as long as they comply with the licensing regime for foreign financial service-providers. A foreign firm will be able to provide financial services to Australian wholesale clients if they satisfy the requirements of relevant funds-management relief or hold an FAFSL. It is worth noting that a foreign firm is not able to market funds to Australian retail clients unless it holds, or is otherwise authorised under, an AFSL.

As an alternative, it may be possible for a foreign firm to provide financial services in Australia as an authorised representative of a holder of an AFSL.

There also exists temporary, very limited relief, that may allow an offshore person to engage in limited marketing to wholesale clients in certain circumstances. Where this relief applies, it is not necessary for a non-local manager to be licensed in Australia.

Local investors are generally able to invest in alternative funds established in Australia.

Typically, there are no required regulatory filings or marketing documents required in respect of alternative funds marketed to wholesale clients.

The most likely exception is where the fund is a registered managed investment scheme or a retail CCIV and fund interests are issued to retail clients. Those fund interests would typically be required to be issued pursuant to a regulated disclosure document, known as a product disclosure statement (PDS), and an "in-use" notice would be required to be filed with the ASIC. In these circumstances, there are regulatory obligations in respect of continuous disclosure notices to be filed with the regulator, as well as the requirement for, in the event of open-end funds, the PDS to be materially correct at all times. In addition, if it is proposed that the fund is listed on the Australian Securities Exchange (ASX), the PDS would be required to be provided to the ASIC for review and lodged with the ASX, in addition to complying with relevant disclosure requirements under the Corporations Act.

It is a fundamental requirement of disclosure that communications to investors must not be misleading or deceptive, including by omission.

Where retail investors are being issued with interests in a fund, the PDS must comply with statutory disclosure rules, including detailed costs' disclosure, and the issuer of the product has ongoing continuous disclosure obligations.

As previously discussed, taxable income of a trust (or a complying CCIV sub-fund, which is treated as a trust) VCLP or ESVCLP is generally taxed at the hands of the investors. For Australian income-tax purposes, different kinds of investors are subject to different taxation principles and taxation rates (eg, corporates are taxed at the corporate tax rate (generally 30% unless a complying small business), individuals are taxed at the relevant marginal tax rate (the highest being 45% plus certain levies) and complying superannuation funds (taxed at a rate of 15%). It should be noted that tax concessions may be available for foreign pension funds and sovereign wealth funds, although legislation has been introduced to limit the extent of these exemptions where the pension funds and sovereign wealth funds have non-portfolio interests in the investee entities.

Given the complex nature of the Australian taxation system, consideration should be given by an investor to the application of the Australian income tax provisions based on the facts and circumstances of the investor.

Where a capital gain has been derived by an Australian investor from its investment in a trust (or complying CCIV sub-fund)/VCLP/ESVCLP (ie, as a result of a disposal of a capital asset by the investment vehicle or a disposal of an interest in the investment vehicle), the capital gain could be subject to a discount where the relevant asset has been held for at least 12 months and the investor is a qualifying taxpayer. A company does not qualify for the CGT discount.

Where a capital gain has been derived by a non-resident investor from its investment in a trust (or complying CCIV sub-fund)/VCLP/ESVCLP (ie, as a result of a disposal of a capital asset by the investment vehicle or a disposal of an interest in the investment vehicle), the capital gain could be exempt if the relevant asset is not "taxable Australian property" (ie, broadly, it does not relate directly or indirectly to Australian real estate or mining rights). No capital gains discount is available for non-resident taxpayers.

Where a non-resident investor disposes of an asset that qualifies as taxable Australian property (eg, interest in a land-rich Australian fund), the purchaser will be required to withhold 12.5% of the purchase price and remit this amount to the Australian Taxation Office. The non-resident investor should be able to claim a tax credit for the amount withheld (which could be refundable if the tax liability of the non-resident investor is lower than the withheld amount).

There are special or preferential tax treatments available for investors of a VCLP/ESVCLP, as previously outlined.

FATCA

Under the FATCA Agreement between Australia and the United States, entities that are classified as "Reporting Australian Financial Institutions" (including banks, private equity funds, and managed funds) are required to provide the following information to the Australian Taxation Office by 31 July in the following income year regarding their "US Reportable Accounts" (as defined by the FATCA Agreement):

• account-holder's name, address, account number;
• US tax-identification number;
• account balance or value of the account at the end of the relevant period; and
• name and identifying number of the institution.

Note that "Reporting Australian Financial Institutions" only have obligations to provide the requisite FATCA information to the Australian Taxation Office (and not to the IRS).

CRS

Australia has signed the OECD Multilateral Competent Authority Agreement on Automatic Exchange of Account Information. Entities that are treated as "Reporting Financial Institutions" under the CRS (ie, Part II.B of the Standard for Automatic Exchange of Financial Account Information in Tax Matters) are required to provide certain information regarding a Reportable Account under the CRS to the Australian Taxation Office no later than 31 July in the following income year.

The CRS reporting obligations of a Reporting Financial Institution under the Australian Tax Act should be broadly consistent with the CRS Commentary (ie, Part III.B of the Standard for Automatic Exchange of Financial Account Information in Tax Matters). The Australian Tax Act provides certain specifications regarding how the Reporting Financial Institutions should apply the due diligence procedures outlined in the CRS and the CRS Commentary for the purposes of the Australian Taxation Law.