Manged Investment Schemes

15 July 08

You may have heard the terms ‘MIA’ or ‘Managed Investments Scheme’ and wondered what it’s all about. If you operate a holiday letting or serviced apartment complex in any state read on. If your complex is solely permanent rentals, the MIA will not apply to you.

 

MIA’ is short for Managed Investments Act 1998, which is Commonwealth legislation that affects the whole of Australia. The MIA inserted the Managed Investments Schemes provisions (Chapter 5C) into the Corporations Act 2001 (‘Act’).


So what is a managed investment scheme?
A managed investments scheme (‘MIS’) has three features:
Managed: a manager has the day-to-day control over the scheme rather than the actual members of the scheme.
Investment: members contribute money or money’s worth as consideration to acquire rights to the benefits produced by the scheme.
Scheme: contributions are pooled or used in a common enterprise to produce financial benefits for the members.


How does this relate to Management Rights?
Managed: an on-site manager handles the lettings for all owners who elect to place their units in the letting pool (‘Letting Owners’).
Investment: Letting Owners contribute their unit for letting out by the on-site manager.
Scheme: the units of the Letting Owners are promoted and handled as a group by the on-site manager to generate returns for Letting Owners.

The Australian Securities and Investments Commission (‘ASIC’) is responsible for administering the Act. ASIC believes that short term letting operations will be a MIS where it is a serviced strata scheme, i.e. where there is reliance on:

  • use of other owners units in the letting pool; and
  • the operation of the serviced strata arrangement

to generate a return for owners.

Consequently, holiday letting and serviced apartments are, on face value caught by the MIS provisions of the Act.

 

Excluded from MIS provisions
Permanent rentals are not considered to be a MIS and accordingly are not required to comply with the MIS provisions of the Act.

Also where there are 20 units or less in a short term (holiday/serviced apartment) letting pool, the on-site manager is not required to comply with the MIS provisions of the Act.

There are also certain Class Order exemptions that apply to Management Rights schemes.


What does this mean?
Where there are 21 units or more in a short term letting pool (or the on-site manager is a promoter of such schemes), the on-site manager must comply with the following requirements unless exempted from doing so:

  • register the scheme: this involves appointing a responsible entity (a public company with a licence to operate a MIS), preparing a constitution and compliance plan, appointing an auditor of the compliance plan and lodging copies of such documentation with ASIC;
  • obtain an Australian financial services licence; and
  • provide owners with a prospectus.

The agreement between the owner on the on-site manager (Appointment to Let Agreement or similar) is voidable at the option of the owner if the MIS is unregistered, but under the Act is required to be registered.

ASIC has recognised that this is quite onerous for on-site managers so have created further exemptions specifically for Management Rights schemes.

 

Exemptions

Currently the most common class order exemption that applies to Management Rights schemes is CO 02/305, so we will focus on this exemption. The on-site manager must comply with all of the requirements of this class order to be exempted from the MIS provisions of the Act.


What are the requirements?

  • Product Disclosure Statement (‘PDS’): a statement complying with the Act must be provided to a person before they agree to place their unit in the on-site manager’s letting pool. The initial PDS should be prepared by your solicitor to ensure it complies with the Act in all respects. Thereafter you can produce the PDS yourself to provide to individual owners.
  • Residency permitted: each unit must be able to be lawfully used as a residence. If there are restrictions in place which mean that each unit cannot be used as a permanent residence (e.g. town planning restrictions, physical layout of the units), then you may apply to ASIC for specific relief from this requirement, provided you comply with all other requirements.
  • Withdrawal: either party may withdraw from the scheme on a maximum of ninety (90) days notice.
  • No joining fees: no payments are required to be made by the owner to participate in the scheme other than the cost to purchase the unit and a reasonable share of the on-site manager’s fees and expenses.
  • Voluntary: it must not be compulsory for owners to appoint the on-site manager to let their units.
  • Forced sale provisions: the agreement between the owner and the on-site manager must contain the ‘forced sale provisions’ which allow a majority of owners in the letting pool to force the on-site manager to sell the Management Rights to another unrelated party for market value.
  • Operator obligations: the on-site manager must:
    • hold monies in a trust account which is audited annually;
    • observe restrictions in relation to funds established for replacement, repair or refurbishment of furniture, fittings and equipment (‘FFE’) for the unit (e.g. payments to the FFE fund must be deducted from rental income and not be more than 3% of the gross rent for the period, the balance of the FFE fund for each unit must not exceed $5,000 at any time);
    • hold the relevant licence to conduct lettings;
    • not engage in misleading and deceiving conduct;
    • observe restrictions in relation to advertising.

 

As you can see, this is quite a technical area and you should obtain specialist legal advice before purchasing Management Rights to ensure the scheme you are purchasing complies with the Act.

  

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