After much anticipation, Australia's Federal Treasurer Scott Morrison handed down his first Federal Budget on May 3, 2016. The Budget unveiled two significant tax changes designed to attract capital from overseas investors.

New collective investment vehicles and Asia Region Funds Passport

The Federal Budget introduces two new collective investment vehicles (CIVs), a corporate CIV from July 1, 2017 and a limited partnership CIV from July 1, 2018 for which a new tax and regulatory framework will be required. Because these vehicles are internationally recognised and easy to use structures it is anticipated that they will make Australian domiciled investment vehicles a more attractive place for overseas investors to invest. In addition, these new investment structures can support the new Asia Region Funds Passport regime - an APEC initiative, the pilot program for which is scheduled to commence in 2017. These new CIV structures are more familiar to many non-resident investors than the unit trust structures that operate in Australia.

The Australian Federal Government has been reviewing the tax treatment of CIVs since May 2010, when the then Assistant Treasurer and the then Minister for Financial Services, Superannuation and Corporate Law announced that the Government would ask the Board of Taxation (Board) to review the tax treatment of CIVs, including whether a broader range of tax flow-through CIVs should be permitted.

The CIV changes in the Budget are based on the recommendations made by the Board of Taxation in the final report it released on June 4, 2015. It is anticipated that the new CIVs will be tax flow through vehicles that will operate in a similar way to Australian managed investment trusts. They will be required to meet similar eligibility criteria, such as being widely held and engaging in primarily passive investment.

These proposed new CIVs strengthen the international competitiveness of Australia's funds industry, and accordingly build on a key theme arising out of the final report of the Financial System Inquiry into Australia's banking and financial sector.

The Asia Region Funds Passport reached another important milestone when on April 28, 2016 Australia, Japan, South Korea and New Zealand signed the Memorandum of Cooperation (MOC) which completes international negotiation of the passport arrangements and is the culmination of over six years work. New Zealand, Australia, Japan, Korea, the Philippines, Singapore and Thailand have contributed expertise to developing the framework.

The MoC comes into effect on June 30, 2016 and any other eligible economy that signs the MoC before then will be an original participant in the passport. The MoC also ensures that any other eligible APEC economies are able to participate in the passport even after it comes into effect.

Participating economies have up to 18 months from June 30, 2016 to implement domestic arrangements. Activation of the passport will occur as soon as any two participating economies implement the arrangements under the MoC.

Asset backed financing – Islamic investment

The Federal Government in its Budget also pledged to "enhance access to asset backed financing" by removing key barriers to the use of asset backed financing arrangements imposed by Australia's current tax laws. While the announcement was not made with much fanfare, it may prove to be one of the most significant tax changes in the Budget. It is anticipated that the announcement may open the door to Islamic financing in Australia, thereby allowing Australian borrowers to access a new financial market to fund real estate and infrastructure projects.This tax measure will apply from July 1, 2018."