Property fund fee and fund structures...MCMAHON CLARKE Corporate Funds Management Real Estate...

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.


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.


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.


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%


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


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.


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%


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).


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%


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%


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.


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.


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


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.


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


Panel discussion


Thank you

PFA McMahon Clarke Roadshow

2013

Property fund fee and fund structures...MCMAHON CLARKE Corporate Funds Management Real Estate...

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