Policy and Research Update | September 2020

Welcome to the Australian Investment Council’s third Policy and Research update for 2020.

The pace of regulatory change remains heightened with the governments’ response moving from survival to kick starting the economy and a number of regulators (re)commencing consultations on important issues for the private capital industry.

The Council has been busy with a wide range of advocacy, research and knowledge sharing projects. These include:

- meeting with government and opposition Ministers, and government departments to promote the industry’s Roadmap to Recovery: Creating a Stronger and More Dynamic Economy policy statement which was released in June. The Roadmap’s constructive focus has been well received and is timely given governments’ move towards an agenda of stimulating the economy. Key policy proposals from the Council’s Roadmap have been echoed in recent government policy announcements, such as the Senate Select Committee’s on Financial Technology and Regulatory Technology interim report and the recently announced whole-of-government Global Business and Talent Attraction Taskforce;

- Responding to the major reforms to the Foreign Investment Review Framework;

- Appearing at and making a submission to the Senate Committee inquiry into Australia’s trade and investment diversity; and

- Launching a Knowledge Series which has included sessions with the Lord Mayor of the City of London and, New Zealand Treasury and the Overseas Investment Office.

Submissions, hearings and government meetings

June

Tax Treatment of Employee Share Schemes

The Standing Committee on Tax and Revenue conducted an inquiry into Tax Treatment of Employee Share Schemes. The Council provided a submission on 10 June to the Standing Committee highlighting the importance of ESS to the industry and some technical concerns with the regime.

Australia’s Technology Investment Roadmap

The Department of Industry, Science, Energy and Resources released a Technology Investment Roadmap focused on low emissions technology. Working with a number of players in the clean energy space, the Council lodged a submission, on 21 June, focused on the ability of private capital to support Cleantech, the benefits of equity co-investment, the importance of R&D and developing Australia’s skills base.

July

Inquiry into diversifying Australia’s trade and investment profile

Joint Standing Committee on Trade and Investment Growth is undertaking an inquiry into diversifying Australia’s trade and investment profile. The focus of the Committee’s inquiry has been to understand whether there is a need for Australia to diversify its trade markets and foreign investment profile.

On 15 July, the Council attended the Joint Standing Committee on Trade and Investment Growth’s public hearing via teleconference. On 3 August, the Council also provided a written submission to the inquiry. The submission highlighted the importance for effective capital flows into Australia to support Australian businesses and Australian jobs. A number of recommendations were put forward including the establishment of a national co-investment program.

RG97: Disclosing Fees and Costs in PDSs and Periodic Statements

On 24 July, ASIC released minor amendments to the fees and cost disclosure regime for issuers of superannuation and managed investment products, RG97. The key changes included ASIC amending the transitional arrangements for product disclosure statements (PDSs) in response to COVID-19, such that:

- PDSs given on or after 30 September 2022 must comply with the new requirements;

- Issuers can choose to apply the new requirements from 30 September 2020; and

- Once an issuer has elected to apply the new requirements, all subsequent PDSs for that financial product must comply with the new requirements.

Further information is available on ASIC’s website.

August

Submission to Federal Budget

The Australian Investment Council lodged a comprehensive submission to the Federal Budget. The Council’s recommendations fit largely into three categories:

1) Introduce a new public and private sector co-investment fund to support Australian entrepreneurs and Australian fast-growth businesses;

2) Fill skills and talent gaps and build a pipeline of skills that will support Australia’s future growth industries; and

3) Fast-track outstanding legislation, implement previously recommended reforms and remove inconsistencies to improve the competitiveness of Australia’s investment regime.

AustCyber’s new Cyber Security Strategy

The Council continues to maintain a close relationship with AustCyber, which released a new Cyber Security Strategy on 6 August. An overview of the strategy is available on our website including a link to the Council’s December 2019 submission to AustCyber.

ASIC update on managed fund asset valuation

On 11 August, ASIC released an update regarding the valuation of assets held in managed funds. ASIC noted that “valuations of illiquid assets have been challenging as a result of increased economic and financial uncertainties due to the pandemic. In this context, it is more important than ever that valuations of managed fund assets are regular, robust and reasonable.”

Further information, including and FAQ on COVID-19 implications for financial reporting and auditing, is available on ASIC’s website.

Major reforms to the Foreign Investment Review Framework – Tranche 1

The Federal Treasury is undertaking a 'Major reforms to the Foreign Investment Review Framework'. The review is the most comprehensive reforms to Australia’s foreign investment review framework since the introduction of the Foreign Acquisitions and Takeovers Act 1975 (FATA). The reforms, which are due to come into effect on 1 January 2021, will update Australia’s foreign investment review framework to:

1) address national security risks;

2) strengthen compliance; and

3) streamline investment in non-sensitive businesses.

The draft amendments to the FATA will be released in two parts – the first, released in July, includes the definition of national security business. The Council, working with fund managers and leading industry experts, provided a submission to this first ‘tranche’ of proposed changes on 31 August.

The second tranche will include the remainder of the regulatory changes, including streamlining measures (including investor exemption certificates) and other technical amendments.

September

Senate Select Committee Inquiry on Financial Technology and Regulatory Technology Interim Report

The Senate Select Committee’s on Financial Technology and Regulatory Technology tabled an interim report on the findings and recommendations into its inquiry into the FinTech and RegTech sectors on 2 September.

Recommendations outlined in the Committee’s report provide clear direction on what has to be done to deliver the economic opportunity in these areas over the next few years. Some of the reforms identified in the report have been on the Council’s policy agenda for some time, and it’s encouraging to see the Committee driving for their implementation.

The Council made two submissions to the inquiry and attended a hearing.

Key recommendations in the report that the Council has advocated for include:

1. Implementing a Collective Investment Vehicles for Limited Partnerships and Corporates;

2. Widening access to the Early Stage Venture Capital Limited Partnerships and Venture Capital Limited Partnerships investment vehicles;

3. Providing clarity on the Research & Development Tax Incentive (RDTI) to ensure genuine software creation by Australian startups is reliably supported;

4. Implementing guidance on the RDTI in conjunction with the Australian Tax Office that includes limitations on the ability for payments to be clawed back retrospectively;

5. Considering incentives to encourage collaboration between large businesses and startups; and

6. Encouraging a culture for superannuation funds to invest more widely, including in Australian startups without undermining the sole purpose test.

Global Business and Talent Attraction Taskforce

A whole-of-government Global Business and Talent Attraction Taskforce was announced on 4 September by Minister Tudge and Minister Birmingham. The two-year initiative will “identify and attract exceptional talent and high-value businesses from around the globe to Australia” and initially focus on businesses operating in:

- Advanced Manufacturing;

- Financial Services (including Fintech); and

- Health.

The Council will continue to engage with Minister Tudge and Minister Birmingham’s offices on this initiative and will hold its first meeting with the Taskforce in the coming weeks.

Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019

The report by the Senate Economics Legislation Committee on the inquiry into the Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019 has been extended from 24 August 2020 to 12 October 2020.

The Council has been a leading advocate for the major R&D regime policy reform package to be paused indefinitely, given the prevailing economic climate, so more certainty for Australia’s innovation ecosystem.

ASIC Consultation Paper 328 – Initial public offers: Relief for voluntary escrow arrangements and pre-prospectus communications

ASIC recently released a response to submissions on Consultation Paper 328 – Initial public offers: Relief for voluntary escrow arrangements and pre-prospectus communications.

The relief and updated guidance follows ASIC’s public consultation in February 2020 under CP 328 Initial public offers: Relief for voluntary escrow arrangements and pre-prospectus communications (CP 328). CP 328 set out ASIC’s proposal to grant legislative relief for voluntary escrow arrangements and pre-prospectus communications to security holders and employees.

Alongside the relief, ASIC has updated its guidance in Regulatory Guide 5 Relevant Interests and Substantial Holding Notices in relation to voluntary escrow arrangements and Regulatory Guide 254 Offering securities under a disclosure document in relation to advertising and publicity for offers of securities that require a disclosure document.

Future events

Major reforms to the Foreign Investment Review Framework – Tranche 2

The second tranche of proposed changes to FATA are expected to be released later in September. The Council will again work with fund managers and leading industry experts to promote the interest and concerns of the private capital industry.

Protecting Critical Infrastructure and Systems of National Significance

The Department of Home Affairs’ consultation will impact how investments into ‘critical infrastructure’ are potentially monitored and responded to by government. The consultation also has bearing on the FATA reforms to due to a cross over of definitions in the Security of Critical Infrastructure Act 2018.

Division 6 – Negative control

While the ATO’s work on control for the purposes of Division 6C was not deprioritised as part of the ATO’s reprioritising in response to the COVID-19 pandemic, no material progress has been made. The Council continues to engage with the ATO and is expecting progress on this issue later this year.

Consultation on RDTI Guidance

The Department of Industry, Science, Energy & Resources has opened a consultation on draft guidance for the RDTI. The Department is seeking feedback on:

- Clarity and readability of the refreshed Guide;

- additional guidance that business may require to assist with assessment of eligibility; and

- how the guide will be used.

The Council will be making a submission on this consultation.

Research and knowledge sharing

June

Benchmark Report – Q1, 2020

In association with Cambridge Associates, the AIC released the Q1 2020 Australia Private Equity and Venture Capital index and benchmark statistics. The overview report is available to all members while access to the PE and VC specific benchmarks are restricted to members that contribute directly to the reports. If you currently do not have but would like access to these reports please contact Council’s research team.

Cambridge Associates has produced an insightful article on the Q1 2020 results, 'Australian Private Equity and Venture Capital: 'A Portfolio VaccineAmid Early Days of the Global Pandemic', which provides a snapshot of the finding as well as diving deeper into the implications for private capital and providing a comparison against other developed economies and relevant indices.

July

Political Insight Series: Scott Morrison & The Middle Power Consensus

Steve Lewis, Senior Adviser at Newgate Australia and former journalist with the Canberra Press Gallery, shared his insights into how Australia’s Prime Minister is forging closer ties with European leaders. He also looks into how the formalisation of a free trade agreement with the European Union will create opportunities for Australia in the years to come.

Private Capital CFO Series

In collaboration with the Australian Investment Council, EY conducted a private capital CFO Series webinar on valuations on 19 August.

EY’s Julie Wolstenholme and Jaya Kandasamy provided insight into a fair value approach in the current market and guidance from IPEV. The discussion included considerations of ramp up and recovery profiles, impacts on discount rates as well as market transaction appetite, and explored reporting and disclosures for meeting compliance standards.

Knowledge Series: Lord Mayor of London

Lord Mayor of the City of London, Alderman William Russell spoke with Australian Investment Council Chief Executive Yasser El-Ansary via video conference on 22 July in a one-hour webinar watched by members all over the country. They discussed the impact of COVID-19 on the UK economy, the importance of free trade agreements and the Sydney-London Fintech bridge.

August

Research Report: Managing the paradox of strict goals and agility: Why private capital owned companies have an advantage even in times of crisis

The Australian Investment Council has been working in collaboration with Massimo Garbuio, author and Associate Professor of entrepreneurship at the University of Sydney Business School, on a research project to understand the value of private sector directorships.

Preliminary findings of the research study were recently published on the Council’s website.

Knowledge Series: Investment into New Zealand: changes to the overseas investment regime

On 27 August, the Council in association with New Zealand Trade and Enterprise provided members with an opportunity to engage directly with the New Zealand Treasury and the Overseas Investment Office. The presentation provided attendees an opportunity to clarify and demystify the New Zealand Investment approval criteria and process.

A range of questions from attendees were answered by the presenters with 100% of respondents ‘agreeing’ or ‘strongly agreeing’ that they are “now better informed about how the latest changes to the New Zealand overseas investment laws impact international investors”. The recorded presentation is available to members via the member login at aic.co. Please contact [email protected] if you have any difficulties gaining access.

University of Sydney collaboration

The Council and the University of Sydney have initiated a project with a group of Master of Management students to explore the implications of enduring changes to consumer behaviour as a result of the COVID-19 pandemic. The projects report is due in October.

Future events

Benchmark Report – Q2, 2020

The Q1 2020 Cambridge Associates benchmark reports are expected to be released in October 2020.

Knowledge Series

The Australian Investment Council will provide a range of interesting and informative knowledge series event over the coming months. These are likely to include delving into issues such as cyber security, private capital market trends, subscription lines of credit and ESG. Keep an eye out for your invitation or contact [email protected].