The establishment of an investment fund in Australia is strictly monitored by local legislation. If you are planning to enroll a fund in Australia, today's material may be apt, as it describes some points of the supervision of public funds.

Oversight of funds in Australia

Funds proposed to retail users entail the listing as administered investment funds adhering to Corporations Act 2001: LLC, partnerships, trusts.

These entities are typically supervised as operated investment schemes (MIS) in conformity with:

  • Companies Act;
  • Corporations Rules;
  • Australian stocks and investing committee act 2001 (ASIC act).

The supervising institution liable to oversee investment funds in Australia is ASIC.

The oversight of MIS encompasses:

  • Organizational, functional prerequisites.
  • Demands for disclosing records in promotional activities, market responses, offers, and releases stick to the ASIC act.
  • Unceasing disclosure duties for MIS registered on the exchange, oversight of takeovers, substantial holdings.
  • Compulsory attainment of an Australian financial services license (AFSL).

A fund will be categorized a MIS if the next parameters are met:

  • People entrust funds or estate to get entitlement to profits generated by the fund.
  • Funds are created by combining contributions, and these pooled resources are utilized collectively in a joint endeavor to get monetary upsides or property rights or interests among the fund participants.
  • Attendees lack direct operational supervision over the fund on a daily practice, though they may possess consultation authority or the ability to give instructions.

Exceptions are applied for funds:

  • when all participants and the operator are affiliated legitimate companies; or
  • that have structural forms regulated otherwise.

This may encompass legal entities, debt liabilities, and convertible bills, large partnerships (typically professional ones), and stocks managed by Australian deposit-taking institutions (banks and other monetary institutions) in the course of their regular banking activities. ASIC also retains the power to grant exceptions or alter the application of MIS rules.

The Australian government has unfurled several rounds of legislative proposals to usher in the utilization of combined business investment structures as an alternate to the existing MIS. The enactment of this regime is presently shrouded in uncertainty, prompting our specialists to vigilantly follow the dynamic shifts within the country's legal framework.

Creating a fund in Australia: What you need to know?

To open a fund in Australia, you should have:

  • a responsible entity serving as the sole executor of the fund;
  • the RE must acquire an AFSL, allowing it to run the Fund;
  • the appointment of a fund adherence committee, comprising no less than 50% outer participants;
  • a name that doesn't coincide with any other registered entity or MIS name;
  • the formulation of a Constitution and a compliance assurance plan that align with the conditions of the Corporations Act.

The Constitution must bear legal force and encompass "apt provisions" on specific matters, comprising:

  • remuneration to be disbursed for any interests in the Fund;
  • the investment and credit powers of the fund;
  • leaving procedures from the fund and participants' exit rights. If you aim to launch a fund in Australia, note that for illiquid capital, a withdrawal phase should stick to the Corporations Act;
  • procedures the RE will employ to address grievances;
  • the process of Fund liquidation; and
  • commission remuneration for the RE and different compensations.

The conformance plan should describe the actions the responsible company will take to guarantee adherence to the Corporations Act and the fund's charter. The essential criteria for the conformance plan encompass:

  • Providing separate identification and custody of the fund's finances.
  • Agreements regarding the assigning of the conformance committee, if necessary (membership, when it convenes, reports and instructions to the RE, availability of documents, and access to the fund's auditor).
  • A revision of the adherence plan.
  • Provisions regarding accounting, records and document management.

A company auditor that is officially assigned is obligated to annually assess the RE's adherence to the conformance plan. In alignment with the RE's goals, there is a possibility of designating a custodian for the safekeeping of the fund's assets. It is essential to note that the auditor answerable for evaluating the conformance plan and the auditor overseeing the fund must be distinct individuals. ASIC holds the influence to mandate revisions and enhancements to the fund's compliance plan and can also seek details regarding the plan.

The request for enrollment of the foundation in Australia shall be delivered to ASIC by RE in conformity with the estimated sample. The request should be made together with:

  • An assertion of compliance made by the RE CEOs;
  • The statute of the fund;
  • Compliance plan.

The fund auditor and the compliance auditor should be assigned and informed by the ASIC. It reviews the application during 14 days of submission of the request. The foundation is enrolled in Australia if the ASIC determines that the RE and the documents submitted meet the directives of the Corporations Act.

Important! Since RE is a public company, it should have at least 3 directors, 2 of executives have to normally reside in Australia.

The passport fund of Asian territory offers a multilateral framework among engaging countries to support cross-jurisdictional marketing of passport funds in involved locations. In 2021, Japan, Thailand, New Zealand and Australia were prepared to accept requests for registration from domestic holdings of future passports and requests for entry from foreign passport holdings. If you are interested in the situation this year, please contact our experts, who will provide you with current data on this issue.

To be listed as a foreign passport fund in Australia, a candidate should:

  • Register the fund in his country;
  • Enroll an international firm in Australia;
  • Inform ASIC of the intention to offer a foreign fund in Australia.

The application should be accompanied by a duplicate of the product disclosure statement and any arrangement to use the chosen name.

Forming an Australian hedge fund: oversight instructions and limitations

Registered MIS fall under strict regulation, with ASIC representing the overseeing institution and publishing multiple rule-making stipulations.

As stated earlier, an enrolled fund must have an appropriate Constitution, a compliance plan, a public company as the responsible entity executor, auditors, and if less than 50% of the RE's board of executives are external, a compliance committee for the fund.

The Corporations Act controls various actions concerning a registered fund, comprising amending the fund's Constitution, removal and replacement of the RE, meetings of the fund's members, the fund's annual and semi-annual reports, the liquidation of the fund, participants' exits from the fund, and ongoing reporting and disclosure requirements.

For those intending to establish an investment fund in Australia, it's important to note that the responsible entity, while executing its powers, has several obligations under the corporations statute. These comprise:

  • General responsibilities encompass the responsibility to function with integrity and exercise a prudent level of diligence.
  • Acting in the best interests of the participants and prioritizing their interests in case of a conflict between the interests of the participants and those of the RE.
  • Not using information obtained as the RE to gain an unfair advantage for themselves or others or to harm members.
  • Performing duties in compliance with the fund's Constitution and adhering to the compliance plan.
  • Duties regarding segregation, regular assessment, and preservation of the fund's assets.
  • Reporting to ASIC any breaches that have or may have a significant adverse impact on the interests of the Fund's members.

The RE may assign agents and other individuals but is answerable to the participants of the fund for the performance of the assigned individual, even if his actions exceed the appointed authority.

The stewardship of the liable company directors comes with paramount responsibilities towards the fund's participants, superseding any conflicting duties to the members of the RE company. Failure to uphold these duties may invoke the imposition of civil penalties. Comparable duties extend to the dedicated workforce of the RE.

The compliance committee is appointed by the responsible entity. Its powers comprise:

  • Monitoring compliance with the RE compliance plan for the fund.
  • Notifying the RE of any violations of the Corporations Act or the fund's Constitution.
  • Announcing to ASIC if the committee believes that the RE is not taking appropriate action to address any issue it has reported.

The committee must also periodically assess the adequacy of the Compliance Plan and inform the RE of any changes it believes should be made. Requests for requested changes should also be reported to ASIC.

The comptroller must appoint an auditor for the compliance plan. The auditor conducts an annual audit of compliance with the compliance plan and submits a report to the RE (which the RE submits to ASIC along with its annual financial statements) and, in the case of regular non-compliance, to ASIC.

Certain types of funds may be subject to additional authorization or registration requirements. For example, conditions apply under the AFSL for the responsible entity when the RE utilizes a scheme of arrangement. A fund structured as a limited liability company must also be registered in accordance with the relevant state partnership legislation. Furthermore, funds listed on the Australian Securities Exchange (ASX) must adhere to the listing rules and be regulated by both the ASX and ASIC.

Capital structure

If you wish to initiate a fund in Australia, note that there are no specified financial structure conditions for such entities. However, the liable entity running the fund must conform with the capital requirements of the Australian financial services license. AFSL conditions typically require the fund executor to:

  1. Be a solvent company with positive net assets.
  2. Comply with cash flow directives for at least the next 12 months of the fund's activities.
  3. Have professional indemnity insurance.
  4. Keep the necessary level of net tangible assets.

If the fund's assets are held by a custodian and meet capital conditions, should be more:

  • AUD 150,000,
  • 0.5% of the average amount of the funds, or
  • 10% of the RE's average income.

If the fund's assets are not held by a custodian and meet capital conditions, should be no less than:

  • AUD 10 million, or
  • 10% of the RE's average revenue.

Restrictions on portfolio investments

There are no restrictions on the portfolio investments of the fund, but ownership should be allowed by the fund's Constitution. It is common to comprise broad investment powers in the Constitution.

It should be mentioned that some investors may have prohibitions on investing in funds with derivative financial instruments or leverage, and the nature of the fund's investments can affect whether the fund is classified as liquid under the Corporations Act.

Reporting and conflict of interest

The RE is obligated to function in the best interests of the fund participants, not in its own interests. Strict restrictions pertain to connected party transactions involving a registered fund's RE. Any related party that has a connection to the fund's assets or is capable of jeopardizing them is not allowed. Additionally, under general legislation, transactions between related parties are not permitted unless explicitly authorized by the fund's Constitution.

Beyond the disclosure mandates applicable to offerings, listed funds should conform with responsibilities pertaining to continuous and periodic reporting.

The RE of a registered fund must:

  • Provide investors with confirmation of their transactions, including investments and withdrawals, as well as reports on the fund's balance, value, and transactions for each reporting period.
  • Inform members or publish notices about any significant changes or material events concerning the fund, and comply with ongoing disclosure obligations.
  • Submit reports to ASIC regarding the fund.

The RE must also file certain reports with Australian Transaction Reports and Analysis Center and Australian Taxation Office (ATO) to combat money laundering and criminal activities, including reports on suspicious transactions. This is because funds and fund managers are subject to legislation on privacy, anti-money laundering, and taxation (including income tax, capital gains tax, goods and services tax, and stamp duty fee).

In addition to legislation and general law, listed funds must stick to Listing Rules. The common statute of trusts is especially relevant to enrolled funds in Australia because the Corporations Act stipulates that the fund's property is held in trust for the participants of the fund.

License requirements

Anyone engaging in monetary services in Australia should obtain a financial services license issued by ASIC in conformity with the Corporations Act.

Financial services business covers each of the mentioned activities concerning financial products:

  • Issuing, acquiring, modifying, or disposing of a financial product, or arranging for such conduct.
  • Providing advice on financial products that may reasonably be regarded as intended to influence a person's decision about a financial product. Presenting purely factual information is not considered advice. If personal consultations are provided to retail clients, additional requirements must be met by the advisers.
  • Dealing with an organized controlled investment scheme.
  • Supplying custodial or depository services – an agreement under which a product is held in trust for or on behalf of the client or the client's nominal representative.

Various exclusions pertain to the condition to have an AFSL. Conditional exemptions, for example, apply to certain advisers and dealers (referred to as foreign financial services providers) with certain local licenses from the UK, the US, Singapore, Hong Kong, Germany, or Luxembourg when their operations in Australia are limited to wholesale clients. They need to submit various relevant documents to ASIC and comply with ongoing disclosure requirements for both their Australian wholesale clients and ASIC.

Exchange-traded funds (ETFs) should conform with the relevant rules of the exchange on which they are traded. For example, ETFs traded on the exchange must adhere to the ASX operating rules, also knows as "AQUA" rules. ETF issuers must also meet several criteria set by the exchange. ASIC Information Sheet 230 provides more detailed information on the types of criteria ASIC, as the market operator regulator, expects market operators to consider and require from ETF issuers. These criteria include issues related to portfolio transparency, liquidity, and market mechanisms. Different requirements apply to active ETFs (i.e., ETFs that do not track an index but hold actively traded assets) and other ETFs.

Establishing a public investment fund in Australia: marketing directives

The design and distribution obligations (DDO) structure, which came into effect in 2021, focuses on developers and suppliers enforcing a more consumer-oriented way to the development, marketing, and allocation of monetary products among retail clients.

DDO broadly pertains to money products needing an investment disclosure statement, securities needing a prospectus, and monetary products under the ASIC Act of 2001 (such as credit agreements and user leases).

Under the new obligations, issuers must identify a target market determination (TMD) for every product, which comprises defining the expected class of consumers, among other things. Issuers must undertake "prudent measures" that are expected or likely to align the distribution of the financial product with the TMD. Issuers must periodically review the TMD and maintain certain records. In the case of significant transactions involving a financial product that does not align with the TMD, issuers must notify ASIC.

Distributors also have specific obligations under DDO; notably, they should not involve in retail distribution unless they believe a TMD has been made, or reasonably steps have been taken (or are likely to be taken) to confirm the distribution aligns with the TMD. Suppliers should apprise issuers of considerable transactions' inconsistency to the TMD and maintain certain records.

TMD for participating in the fund must outline the category of retail clients that constitutes the audience market for the Fund and include additional information, such as:

  • All specifications and limitations on the issue or distribution of the Fund.
  • Events or circumstances that would rationally suggest that the TMD is no more "suitable."
  • The date of the first planned review of the TMD.
  • Types of records that distributors must present to the responsible firm.

The DDO structure pertains to responsible entities and distributors of funds created after October 5, 2021, as well as to funds that existed before this date but will continue to be issued to retail clients after this date.

Tax regime

Australia has a comprehensive tax system where taxes are levied at both the federal and state/territory levels. The ATO is the primary agency liable for enforcing federal tax laws. Federal taxes comprise income tax, capital gains tax, and the goods and services tax. State and territory taxes comprise stamp duty fee.

Retail funds are typically structured as unit trusts and, where possible, are usually operated as "flow-through" entities for income tax purposes. This means that investors in the fund, rather than the fund itself, are taxed on the fund's annual net taxable income.

Retail funds can sometimes be structured to qualify as managed investment trusts (MIT) for tax purposes to access tax concessions. Not all funds will qualify as MIT, so investors looking to invest in Australia should verify whether the relevant fund is a MIT.

Unit trusts are typically taxed on a flow-through basis, provided that the responsible company distributes all trust revenue for each tax year. This flow-through tax treatment is not possible if the RE carries on an active trading business, and the trust is categorized as trading trust as outlined in tax legislation. Trading trusts are taxed as enterprises and are subject to tax at the trading trust level.

Trusts whose activities constitute an "eligible investment business" cannot be categorized as trading trusts, they may be subject to tax on a flow-through basis, with investors paying the tax. Operations such as investing in land to generate rental revenue, as well as investing or trading in various debt and equity securities and derivatives, are typically considered eligible investment businesses.

Non-listed trusts counting fewer than 50 members are usually not considered public trusts and may be subject to tax on a flow-through basis, even though they involved in another than investment business.

Opening a mutual fund in Australia needs a grasp of the relevant legislative provisions. If you have any questions on this matter, you can consult our experts for additional information. We are ready to provide guidance and assistance in establishing a fund and obtaining a financial license in Australia.