Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management Property fund fee and fund structures Presented By: Brendan Ivers Partner PFA McMahon Clarke Roadshow 2013
Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management
Property fund fee and fund structures
Presented By:
Brendan Ivers
Partner
PFA McMahon Clarke Roadshow
2013
MCMAHON CLARKE Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management
Introduction
Fees in unlisted property funds.
Structures for unlisted property funds.
Issues with the custodial changes for
wholesale unlisted property fund managers.
MCMAHON CLARKE Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management
Fees in unlisted property funds - research
We have undertaken research on wholesale
and retail unlisted property funds.
Data has come out of disclosure documents
from 2010 onwards.
Wholesale unlisted property fund data comes
from our database of information
memorandums.
Retail unlisted property fund data comes from
product disclosure statements.
MCMAHON CLARKE Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management
Fees in unlisted property funds - trends
In general, ongoing management fees continue to
be relatively low.
Most retail funds are still charging acquisition fees
and disposal fees.
Most wholesale funds also still charging acquisition
fees but very few are charging disposal fees.
Overwhelmingly, performance fees (both wholesale
and retail) have a benchmark; usually IRR of
between 10% and 15%.
Some wholesale funds have wide variety of
“additional” fees.
MCMAHON CLARKE Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management
Management fee amounts – retail funds
Highest
ongoing
fee (p.a)
Lowest
ongoing fee
(p.a)
Average
ongoing fee
(p.a)
Median
ongoing fee
(p.a)
Retail
unlisted
direct
property
1.5%
0.6%
0.7%
0.6%
MCMAHON CLARKE Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management
Retail funds other common fees – trends
Entry fees
Still being charged, generally up to 3% or 4% and must be clipped from the application
amount and paid directly to advisers.
Need to be structured correctly under FOFA.
Exit fees
Nil
MCMAHON CLARKE Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management
Retail funds other common fees – trends
Acquisition fees
Still being charged by most fund managers.
Still most common to be a percentage of
purchase price of asset.
Sale fees
Still commonly charged.
Still most common to be a percentage of
gross sale price of asset.
MCMAHON CLARKE Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management
Retail funds other common fees – amounts
Highest Lowest Average Median
Acquisition
fees
5.125% 0% 2.5% 2%
Sale fees 2.5% 0% 1.3% 1.1%
MCMAHON CLARKE Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management
Wholesale funds fees – trends
In general, ongoing management fees similar
to retail fund levels.
Very few funds are charging disposal fees,
focus is on the performance fee.
Wider variety of “additional fees” charged in
wholesale funds and more often (e.g., debt
arrangement fees quite common and various
“AFSL” or “trustee” fees relatively common).
MCMAHON CLARKE Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management
Wholesale funds management fees – amounts
Highest
ongoing
fee (p.a)
Lowest
ongoing fee
(p.a)
Average
ongoing fee
(p.a)
Median
ongoing fee
(p.a)
Wholesale
unlisted
direct
property
1%
0.5%
0.71%
0.75%
MCMAHON CLARKE Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management
Wholesale funds other common fees –
amounts
Highest Lowest Average Median
Acquisition
fees
3% 0% 1.76% 1.5%
Sale fees 2% 0% 1.6% 1%
MCMAHON CLARKE Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management
Performance fees – trends
All funds reviewed (both wholesale and retail)
contained a performance fee.
Most common benchmark is an IRR of
between 10% and 15%. Amount of
benchmark will generally depend on the risk
of the fund.
Common for performance fees to be between
15% and 20% of outperformance.
MCMAHON CLARKE Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management
What do the researchers look for?
Most take a holistic approach and look at total
fees charged.
Performance fees must have a benchmark.
Don’t like more than 2% being taken upfront.
Manager’s and investors’ interests should be
aligned through the fee structure.
Generally don’t like “additional fees” like debt
arrangement fees.
MCMAHON CLARKE Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management
Single asset-fixed-term funds still structure of
choice.
Seeing some diversified funds in the retail
space.
Successful equity raising by hybrid fund
structures in the retail space recently.
Are we about to see the return of a modified
form of the open-ended diversified fund?
Fund structures
MCMAHON CLARKE Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management
Custody – financial requirements
NTA requirements for incidental custody
providers
NTA amount – greater of $150,000 or 10% of average
revenue in a financial year.
Average revenue is all revenue.
So, if the licensee generates $5 million in revenue, it
must have $500k in NTA.
NTA liquidity – at least 50% in cash or cash equivalents
and 100% in “liquid assets”.
12-month cash flow projections.
Increased audit requirements.
BUT – wholesale fund managers can avoid NTA
requirements by appointing an external custodian.
MCMAHON CLARKE Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management
Custody – financial requirements
Appointing an external custodian: issues to
consider
Stamp duty issues, considered in more detail
below.
Novation of finance facilities, speak to your bank
now.
Appoint the external custodian to hold all new
properties.
Be diligent about appointing an external
custodian, they are, from a practical perspective,
very difficult to replace.
Can the increased costs be recovered under your
fund’s constitution?
S e r i o u s a b o u t S u c c e s s ®
2013 PFA Roadshow Tax update
www.moorestephens.com.au
Commercial in Confidence
Our comments and information contained in this presentation are generic in nature and are not purported to represent advice that can be relied upon. You should seek your own advice for your own circumstances.
The author or any other persons involved in the preparation or distribution of this presentation expressly disclaim all and any contractual, tortious or other form of liability to any person in respect of this presentation and any consequences arising from its use by any person in reliance in whole or any part of the contents of this presentation.
The comments contains in the presentation shall not in any way constitute a recommendation as to whether you should invest in any product discussed in the presentation.
Disclaimer
Agenda
• Snapshot of current MIT regime
• Proposed new MIT tax system
– Changes to under/over attribution of net income announced on 5 August 2013
• Other issues surrounding MIT
– Taxable income exceeds cash distribution
– Foreign pension funds
• August Case – Capital v Revenue distinction
Snapshot of current MIT regime
• What is the MIT regime?
– Concessional withholding tax regime used primarily by Australian REITs and managed funds.
• MIT withholding rate
– Applies to MIT distributions to foreign resident investors that are fund payment amounts
– The rate (from 1 July 2012) depends on residence of the foreign resident investors:
– 15% for investors resident in EOI countries
– 10% for investors resident in EOI countries for fund payments made by a Clean Building MIT
– 30% in other cases
• Capital Account election
MIT Structure – proposed changes
• Will be subject to new simplified MIT regime from 1 July 2014
– Reasonable allocation of tax (clearly defined rights)
– Under / overs (including integrity rules)
– Other Integrity rules:
– Arms length rule
– Cost base adjustments
Under/over changes
Under distribution exceeds the de
minimus threshold
Over distribution exceeds the de
minimus threshold
Old proposal •amend and reissue distribution
statements; or
•Trustee pays tax at 46.5% on shortfall
•must amend and reissue statements
New proposal Unintentional under in excess of the
de minimis
•issue revised distribution or attribution
statements; or
•carry forward under amount into the
income year following identification –
under will be uplifted at GIC rate and
included in the earliest year in which MIT
has net income.
•Trustee may face administrative penalty:
•Under carelessness – up to 25%
of under
•Under recklessness – up to 50% of
under
Unintentional over in excess of the
de minimis
•issue revised distribution or attribution
statements; or
•carry forward over amount into the
income year following identification.
•Trustee may face administrative
penalty:
•Under carelessness – up to
greater of 20 penalty units or
10% of over
•Under recklessness – up to
greater of 40 penalty units or
20% of over
Examples – Unintentional under in
excess of the de minimis
• In 2013, an MIT has an ‘under’ amount of $100,000
• Assume that the $100,000 is in excess of 5% of net income for the 2013 and the the trustee did not cause the ‘under’ intentionally
• Option 1: issue revised distribution statements
• Option 2: carry forward the ‘under’ amount into 2014 income year, however this ‘under’ will be uplifted at the GIC rate (for example, GIC = 10%)
i.e. the ‘under’ amount of $110,000 ($100,000 x 110%) will be included in the earliest year in which MIT has net income.
• Trustee may face administrative penalty: • Under carelessness – up to 25% of under (i.e. 25% x 100,000 = $25,000)
• Under recklessness – up to 50% of under (i.e. 50% x 100,000 = $50,000)
Examples – unintentional over in excess
of the de minimis
• However, if in 2013, an MIT has an ‘over’ amount of $100,000
• Assume that the $100,000 is in excess of 5% of net income for the 2013 and the the trustee did not cause the ‘over’ intentionally
• Option 1: issue revised distribution statements
• Option 2: carry forward the ‘over’ amount into 2014 income year, unlike the treatment to the ‘under’ amount, this ‘over’ amount will not be uplifted
i.e. the ‘over’ amount of $100,000 will be subtracted in the 2014 income year
• Trustee may face administrative penalty:
• Under carelessness – up to greater of 20 penalty units (a penalty unit is currently $170 per unit) or 10% of over
• Under recklessness – up to greater of 40 penalty units or 20% of over
S e r i o u s a b o u t S u c c e s s ®
Other issues surrounding MIT
Taxable income exceeds distribution
• ATO view – where taxable income exceeds distribution
– Fund payment amount can not exceed distribution amount
– Excess taxable income maybe assessable to trustee at 45%
• Blackhole argument
– Fund payment amount can not exceed distribution amount
– Excess taxable income is not assessable to trustee at 45%
• PCA – where taxable income exceeds distribution
– All taxable income to be advised to investors as fund payment
• Assistant Treasurer advised that consultation would continue after the election
Foreign pension funds
• It is proposed to allow foreign pension funds access to the MIT withholding tax regime.
• Apply retrospectively from 1 July 2008.
• Development arises from ATO’s interpretative decision ATO ID 2012/71:
– deals with whether certain Foreign Superannuation Funds are eligible for the MIT concessional withholding tax rate under s.840-805.
– the ATO ID indicates that the concession does not apply to a foreign superannuation fund that holds an indirect interest in a MIT because it is a beneficiary in the capacity of a trustee of another trust and paragraph 840-805(4)(c) of the ITAA 1997 is therefore not satisfied.
August Case
Facts
• Toorak Trust acquired 6 properties (the Melba Shops) for $344K from 1997 to 2000 and spent $240K on building and refurbishing shops
• The properties were all let out
• Sold these 6 properties for $2.33m in 2003
• Gain of $1.766m.
Issue
• Was this on capital account and eligible for 50% CGT discount or on revenue account?
August Case
Findings
• No contemporaneous documentation supporting that the properties were acquired as a long term investment
• Held that the Melba properties were acquired by Toorak Trust as part of a profit-making scheme with the principal intention that they be developed, tenanted and sold for a profit.
• View mainly due to:
– Properties selected in consultation with a friend who was an experienced developer
– As soon as properties were upgraded and tenanted Mr August approached real estate agents to sell the properties
August Case
Learnings
• Ensure contemporaneous documentation (IM / PDS / Marketing materials etc.) support that the properties were acquired as a long term investment
• Focus on the strong income return
• Less risk on properties that are currently tenanted
• Reworking property and developing property greater risk. The greater the gap between:
– acquiring the property and starting any development the better
– Completing the development and starting to sell the property the better.
• MIT Capital account election (but not for trading stock)
Thin Capitalisation
• From 3:1 to 1.5:1 Debt to Equity (i.e. from 75% Debt to 60% Debt)
• From 1 July 2014
• Interest denied
• The de minimis threshold will increase from $250,000 to $2 million of debt deductions (i.e. interest).
• Options
– revalue
– worldwide gearing test or arm's length debt test
– recapitalise
Contact details
Presented in Sydney by: Martin Booth Partner Moore Stephens Sydney Pty Limited Level 15, 135 King Street Sydney NSW 2000 Phone: (02) 8236 7887 Email: [email protected]
Presented in Perth by: Richard Watkins Supervisor, Tax and Business Services Moore Stephens Perth Pty Ltd Level 3, 12 St Georges Tce Perth WA 6000 Phone: (08) 9225 5355 Email: [email protected]
Presented in Melbourne by: Stephen O’Flynn Director Moore Stephens Melbourne Pty Ltd Level 10, 530 Collins Street Melbourne VIC 3000 Phone: (03) 8635 1986 Email: [email protected]
Presented in Brisbane by: Abi Chellepan Senior Tax Manager Moore Stephens Melbourne Pty Ltd Level 10, 530 Collins Street Melbourne VIC 3000 Phone: (03) 8635 1905 Email: [email protected]
PFA
Roadshow
2013
Investment Managers and Superannuation, ASIC
Outline
• Major policy and guidance
developments
• Enforcement and surveillance
• Future focus
• Major law reform program
34
Major policy and guidance
New financial requirements for custodians
– RG166
– CO 13/760 & CO 13/761
– $10 million or 10% of avg revenue
– new requirements re cash flow and
liquidity
• ‘incidental providers’ also need NTA
although lesser amount
35
RG133
Managed investments and custody: Holding
scheme property and other assets
• CP 197 December 2012
• Updates to RG:
– Strengthening minimum standards of all
asset holders
– Strengthening content custody
agreements
– Permitting key assets to remain in RE
name where RE has engaged a
custodians so RE satisfy financial reqs
– Changes to use of omnibus accounts
36
RG134
Managed investments: constitutions
• June 2013
• Revised RG134 + 3 Class Orders
• ASIC’s views on the content
requirements of constitutions for
schemes and how ASIC will apply
these requirements in deciding
whether to register a scheme
37
Risk management practices: REs
• REP 298 on the adequacy of RE risk
management systems
• CP issued March 2013: good practice
guidance on risk management systems incl.
reviews of risk management systems,
resource adequacy, succession planning
and stress testing.
• Proposed RG based on many current
practices of REs
• Reflect international standards
38
More policy and guidance
• Liquid assets
• ‘Wholesale’/’Retail’ definition
• Financial reqs for REs – RG166
39
Surveillance and enforcement
• Proactive reviews
– Shorter PDS, advertising,
compliance plan audits, risk
profiled entities, A-REITs and
unlisted property schemes
• Reactive surveillance
– breach notifications, qualified
audit reports, complaints and
industry intelligence.
40
Surveillance and enforcement
Outcomes:
- Interim stop orders on PDS and
advertising
- Cancellation of AFS Licence
- Corps Act contraventions (breaches of
constitution, no prospectus, misleading
materials) resulting in injunctions,
declarations and Federal Court action
41
2013-14 Focus
• Review of sectoral risks and recent
legislative and guidance implementation
• Unlisted property schemes: Business models
and compliance with RG46
• A-REITs: Business models and emerging
risks
• Disclosure
– Advertising
– No tolerance of poor disclosure practices
• Post action review of entities
• Asian regions funds passport
42
Major law reform programs
• Stronger Super implementation
– Focus on disclosure
– ASIC guidance issued
• FoFA
– ASIC guidance issued
– Early days
• Facilitative approach to compliance
for the first 12 months 43
Questions?
44
Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management
Panel discussion
Corporate Funds Management Real Estate Agribusiness Litigation & Risk Management
Thank you
PFA McMahon Clarke Roadshow
2013