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The fund taxation overhaul - a new world of opportunity?

An interview with Ka Sen Wong, Allen & Overy by Carla Hoorweg, Senior Policy Manager, Investment, Technology & Innovation, FSC

The new tax regime for managed funds, known as the “attribution managed investment trust” or “AMIT” regime, is now up and running and many businesses are considering whether to enter the regime from 1 July 2017. We speak to Ka Sen Wong, Australian head of tax at global law firm, Allen & Overy, about the business opportunities coming out of the reforms.

CH: What is the AMIT regime in 25 words or less?

A new tax regime for managed funds, which reduces tax uncertainty, improves flexibility and most importantly, offers new product opportunities.

CH: What are some of those new product opportunities?

The main big change is investor classes, by which I mean having investors in the same fund with different rights. Up until now, classes typically haven’t been used widely, other than to charge different fees. A big part of this is the tax treatment: a single fund has only one tax return. So if you had Class A in a profit position and Class B in a loss position, the losses of Class B would automatically shelter the profits of Class A from tax, raising difficult questions about how to compensate Class B investors for those losses. Under the new rules, you can choose to have a segregated tax treatment for different classes, i.e. the tax losses of Class B can be ringfenced to that class.

This is great, because it offers flexibility to your investor base. You could have a single pool of assets supporting multiple classes, but add different overlays to suit different economic preferences. So for example, you could overlay a derivatives strategy on a class to generate extra yield, or maybe capital protection. Or you could put gearing into a class to reduce the investors’ capital outlay. The tax outcomes from those overlays could be hived off for each separate class. And in fact, you could be a lot more creative depending on your risk appetite.

You can also now issue debt units, which basically means a unit paying a fixed preferential return. Holders of such units will be taxed on the fixed returns in the same way as interest, and those returns will be tax deductible to the fund. This effectively provides a whole new source of debt funding.

These changes are particularly timely as the Asia Region Funds Passport is just about to come in.

CH: And can you remind us what that is?

An agreement between a number of countries across Asia to allow funds to cross-sell into each other’s jurisdictions, instead of having to set up new funds.

CH: And how does that link in with AMIT?

When the passporting rules come in, some Australian funds will be able to be sold into Japan, Korea, Thailand and whoever else signs up – hopefully Singapore. This plays really strongly to some of those new product opportunities. So you could have different classes with the same underlying portfolio, but different currency overlays, a Yen hedge for your Japanese investors, Won for Koreans et cetera. You can also be assured of finding a wider range of investment preferences. You might find pension fund investors in Asia who are looking for that steady debt-like return on their long-term investments. This makes the AMIT rules and the passporting rules a really powerful combination.

The passporting rules are not quite here yet, but they are due for completion by 31 December 2017 so hopefully the first countries will come on line this year. And that’s in no small part due I think to the involvement of the FSC.

CH: Thankyou! We do try our best!

Going back to AMIT, when should we start?

Now, basically. The rules are already active, so the only limit is your imagination!

CH: Who can make use of the new AMIT opportunities?

Any fund manager really. The main threshold is a “widely held” test, so small club deals don’t work – unless the investors are themselves entities like superfunds, life companies or large funds.
Incidentally, many small to medium fund managers will have a significant advantage when it comes to implementation. For the larger institutions, rolling out a new system is a major undertaking, especially when it comes to things like approvals and system build. A smaller organisation has the ability to change more fluidly and get new product out the door more quickly.

CH: Any last thoughts?

Just one. We’ve been talking about new products as opportunities – or in the case of the passport, new markets. But they’re threats as well, because they’re equally open to your competitors. And really what that means is that you can’t ignore these developments, and just hope for everything to keep going on in the same way. They are happening in real time, and if you’re not on the train, you’ll be left at the station. Standing still is going backwards.

So I would encourage people to reach out to the FSC if they want more information about these reforms, because they are vitally important to your business, and the FSC has been at the forefront of helping introduce them.

Thanks Ka Sen for an insightful discussion.

Well, it looks like Ka Sen sees a world of opportunity for fund managers. And some generous words about the FSC. We do encourage members and non-members to contact us if you are interested in reforms like the AMIT regime and the ARFP.

Carla Hoorweg, Senior Policy Manager - Investment, Innovation & Technology

Ka Sen Wong is a tax lawyer and head of Allen & Overy’s Australian tax practice, with particular expertise in financial services and cross-border transactions. Email: kasen.wong@allenovery.com

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