AUSTRALIA Law and Practice Contributed by: Andrew Stone, Dhanushka Jayawardena, Andrew Choi and Chris Kinsella, Holding Redlich
Structuring Considerations It is not uncommon for fund managers to: • establish clear contractual boundaries limiting their role to advisory services; • ensure foreign trustees maintain ultimate control; and • document decision-making processes to demon - strate the fund’s foreign tax residence and opera - tional control. 3.6 Taxation of Carried Interest Carried interest presents complex taxation issues depending on the manager’s role and structure. For general partners actively involved in fund manage - ment, carried interest may be treated as revenue income subject to ordinary tax rates rather than capi - tal gains treatment. However, where managers can demonstrate genuine capital investment and passive holding characteristics, capital treatment may apply – potentially providing access to the 50% capital gains tax discount for individual taxpayers and eligi - ble trusts. 3.7 Outsourcing of Investment Functions/ Business Operations From a regulatory perspective, managers are per - mitted to outsource their investment functions and business operations. From a contractual perspective, managers would be well advised to consider whether outsourcing is permitted under the terms of the man - ager’s engagement. When outsourcing investment functions, the service provider will generally be required to comply with Aus - tralian financial services laws (among other laws) – including the obligation to hold an Australian Financial Services Licence – or to operate under an applicable exemption. In relation to outsourced business operations, manag - ers should consider that: • custodians will typically provide financial services and so will need to comply with Australian financial services laws;
• administrators will typically provide accounting or valuation services and will need to consider appli - cable professional services laws; and • managers who outsource any AML obligations, including KYC checks, will remain the reporting entity under the AML legislation and retain ultimate responsibility for AML compliance. 3.8 Local Substance Requirements If a manager does not hold an AFSL and is not incor - porated in Australia, there are no applicable local substance requirements. If a manager holds an AFSL, they must comply with the financial conditions of the licence. These include requirements relating to sol - vency, net assets and cash needs. If the manager is an Australian incorporated propri - etary limited company, then at least one director of such a company must live in Australia. If the manager is an Australian incorporated public company, then at least two directors of an Australian public company must normally live in Australia. All directors must apply for and obtain a director ID before their appointment. 3.9 Change of Control If there is a change in control of the holder of an AFSL, the licensee needs to notify ASIC of the change within ten business days after the change. Corporate re-structuring of fund managers and their parent companies may involve changes to staff. Con - sideration should be given to whether any staff mem - ber is a “responsible manager” for the purposes of the AFSL held by the fund manager or parent company. If a responsible manager will no longer be available to provide services to an entity that holds an AFSL, con - sideration should be given to appointing a replace - ment. ASIC must be notified of both the retirement and the appointment of any responsible manager. 3.10 AI and Use of Data Australia does not have legislation that specifically regulates AI. Nonetheless, AI is widely used for invest - ment purposes and for operational or compliance pur - poses. In relation to such usage, a significant number of Aus - tralian laws apply in relation to potentially harmful uses
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