Client Alert

Who does this affect?

Responsible entities and life companies with legacy products

What do you need to do?

Consider whether the proposals are workable and whether to respond to the paper by 26 February 2010.

Authors
Jim Boynton  
Partner

Michael Hung  
Solicitor

---

Jim Boynton  
Partner
T +61 2 9296 2086

---

Michelle Levy  
Partner
T +61 2 9296 2437

---

Sydney
Jim Boynton  
John Edstein  
Michelle Levy  
Mark McFarlane  
Damien Richard  
Richard Snowden  

Melbourne
Andrew Clements  
John Malon  

Perth
 

Brisbane
Berkeley Cox  

Canberra
Stephen Jaggers  

---

The Government proposes a new regime to assist the rationalisation of legacy managed funds and life insurance products. The new regime includes a “no disadvantage” test, and provides for different approval processes for registered managed investment schemes and life insurance companies. Comments on the proposals paper are due by 26 February 2010.

Superannuation out

The proposed regime will not apply to superannuation products. There is already a workable rationalisation process for superannuation funds through the successor fund transfer process.

Legacy product test

The proposed regime will apply if the product has been closed to new investors for a period of at least two years. The product must also satisfy one of the following:

• the product has become uneconomic for investors

• the product has become out of date because of changes in the regulatory regime

• the costs of operating the product have become excessive, or

• the product rationalisation will result in the decommissioning of an underlying administration system or linked (interrelated) system.

No disadvantage test

Product providers must be able to demonstrate with a high level of certainty that there will be no detriment to any investor. It will be necessary to consider the total value of the rights and entitlements of each investor in the old product and whether they will suffer a diminution in value of those rights and entitlements in the new product. Contingent rights and entitlements must be considered.

Managed investment schemes approval process

To implement a rationalisation for a registered managed investment scheme, the responsible entity must develop a proposal complying with the above tests and commission an independent expert’s report opining on whether the necessary tests are met. The proposal must be lodged with ASIC for approval, prior to being sent to all scheme members.

For the proposal to proceed, any one of the following must be satisfied:

• no more than 5% of members in any class notify the responsible entity within 30 days that they do not agree to the proposal being implemented without approval of a court or meeting of members

• the majority by value of members in each class who voted on the proposal approve it, and at least 10% by value vote in each class, or

• the court approves.

Life insurance companies approval process

Similarly, to rationalise life insurance products, the life company must develop a proposal complying with the above tests and commission an independent expert’s report. The proposal must be lodged with APRA and circulated to policyholders. The life company could then:

• ask APRA to approve the scheme, if it believes that the proposal is straightforward, or

• otherwise, apply directly to the court for approval.

If APRA is asked to approve the scheme, APRA may:

• approve the proposal, where it agrees that applying the no disadvantage test is straightforward, or

• otherwise, reject the proposal, require it to be amended or refer it to the court.

If the proposal comes before the court (either directly or on referral from APRA), the court would need to assess the proposal against the no disadvantage test.

Tax relief

Tax relief from adverse consequences that might otherwise occur from the rationalisation will be available where the legacy product passes certain additional tests. These are that the product:

• has been closed to new investors for a period of five years

• is not an interest in a managed investment scheme that was closed to new members after it had raised an amount that was disclosed in any prospectus or PDS as the amount that was sought to be raised, and

• meets at least one of the criteria provided under the legacy product test.

Generally the relief is only available where the legacy product and replacement product have the same tax characteristics. The relief is as follows:

• life insurance: the transfers within the same life company should not give rise to CGT or revenue gains. Policy holders of exempt life insurance proceeds (after 10 years) would not have the period restart. A CGT rollover (and similar relief if on revenue account) will be given where assets are transferred between life companies as part of the rationalisation.

• managed investment schemes: CGT rollover (and similar relief if on revenue account) will be given where assets are transferred to other entities and members.

Next step

There has been no indication of an estimated start date for new regime. Interested parties must comment on the proposals paper by Friday, 26 February 2010.

For a copy of the paper, please click here.