Can the Corporations Act apply to your management rights business?
By Frank Higginson13 Jul 2012
This article deals with the closest management rights ever comes to the Corporations Act.
It has been prompted by what has been a spate of matters we have been acting on where clients are not actually aware of their obligations in relation to certain components of the Corporations Act.
This topic can become relatively in depth.
The starting point is that the applicability of it to management rights businesses can be somewhat grey at times.
It probably does apply to you if:
- you are in a short term letting building (be that for corporate or holiday purposes) built around 1999 or after, or you have converted from permanent to short term letting after 1999; or
- you operate your letting pool under a pooling arrangement, where owners’ incomes are pooled and distributed other than by income earned by their unit, or there is a form of guaranteed income (like a leaseback).
It probably won’t apply to you if you are in a permanent complex.
How is this all relevant?
In 1998, the Federal Government introduced the Managed Investments Act (which is now part of the Corporations Act). In very simple terms, this Act was designed to regulate schemes where:
- people contributed money or monies worth;
- that contribution was pooled with other people’s contributions; and
- the people who made the contribution did not have day to day control over what was done with their contribution.
If you were operating a scheme of this nature, you had to comply with a whole range of requirements including the issue of a prospectus, having a third-party custodian for scheme assets, having compliance committees and so on.
A prime example is the managed fund you might have with a fund manager where you give them a $100,000 and they go and trade that in the share market and hopefully not turn it into $75,000. Noting that the ASX200 is in the same place it was more than 7 years ago, this (or worse) has unfortunately happened to most.
The Corporations Act does not really apply to property - hence why property spruikers can get away with making claims and providing forecasts that would largely be prohibited under the Corporations Act (property doubles every 7 years anyone?).
This was turned on its head for management rights when ASIC produced what was then a Policy Statement but is now Regulatory Guide 140, which provided their interpretation on how the Corporations Act can apply to things like management rights. For the bush lawyers amongst you, click here to read it.
In very simple terms, this said that:
- where people buy an investment unit; and
- that unit is put with others in a letting pool; and
- the people do not have day to day control over that unit,
then the promoter of the scheme (which is usually the operator of the management rights business) operates a Managed Investment Scheme.
In most instances compliance can be relatively painless provided you meet certain conditions and your letting appointments include certain obligations. Others may require an application to the ASIC for relief from compliance. This remains a bit of a sleeper for the management rights industry. When it arrived in late 2000, there was a lot of noise about it, but it died a relatively quick death in terms of profile.
That said, the obligations under it still remain, and when investment returns slow investors look at their options. These include the manner in which the investment is structured and delivered.
Be alert but not alarmed. If you are not sure where you stand we can help you.