Australia has made a number of changes to the way foreigners who invest in its mutual funds are taxed in a bid to make the sector more attractive to international investors and has mooted several more in order to boost the industry.
The changes, which include a reduction to 15% from 30% in the amount of withholding tax levied on distributions to non-residents from Australia-managed funds that took effect on 1 July, are part of an effort to help position Australia as a “regional hub”, according to Adelaide Boon, investment director – financial services at the Australian Trade Commission in London.
The withholding tax rate on non-resident distributions will fall still further in July 2010, to 7.5%, bringing Australia in line with, if not below, many other countries in the region.
Other recently-implemented changes include tweaks to capital gains tax rates affecting non-resident investors.
Global Player?
The efforts come as Sydney – Australia’s answer to New York or London – sits in 16th place on the most recent Global Financial Centres Index, unveiled in March after having fallen six places in the ranking. The GFC Index is assembled twice a year by the Z/Yen Group on behalf of the City of London Corp.
Melbourne, Australia’s No. 2 financial centre, languishes in 28th place on the index, down one place.
According to Australian government figures, Australia’s financial sector employs more than 400,000, of which around 242,000 are employed in Sydney and Melbourne, compared with 209,000 in Hong Kong (fourth place on the GFC Index) and 157,000 in Singapore (in third place).
‘Simplification’
In addition to benefitting from a reduced rate of tax on their Australia-sourced gains, foreigners who invest in Australian funds also will no longer be required to file a tax return, the Australian High Commission’s Boon noted.
“This means that it is not just a change of tax rates, but a simplification of the process,” she said.
Among some of the measures that have been proposed by Australia’s government but not yet enacted are plans to alter the regulations affecting foreign investment funds in a way that would make it easier for offshore fund managers to offer their products to Australian investors.
There is also ongoing public debate about whether the percentage of employees’ salaries that Australian companies are obliged to pay into a so-called superannuation fund, for the employee’s eventual use when he or she retires, should be raised to 12% or 15% from its current 9%.
It is this compulsory defined contribution pension scheme that has helped Australia’s funds industry to become the world’s fourth largest in terms of funds under management, even though the country’s population is below 22 million, or 1/14th that of the US. If the rate were raised, the Australian funds industry would benefit.
‘More cuts needed’
Australian funds industry experts said they welcome the changes to the country’s tax code that have been made, but argue that that deeper cuts would be needed if the country is to compete with regional rivals like Hong Kong and Singapore, which even after next July’s reduction in the withholding tax rate for non-residents will continue to enjoy other comparative tax advantages as well as a number of geographical and cultural attractions for Asian investors.
In particular, funds industry experts cite Australia’s 30% corporate tax rate, which they would like to see slashed to 10% for funds houses if they are to compete with lower-tax jurisdictions.
At the same time, they note, Aussie fund managers increasingly find themselves having to vie for Asian investor attention and money against the European Ucits juggernaut.
“Even if Australia were to solve the tax issues, you’d still have the issue that Asian investors are not familiar with Australian domiciled funds, and they are familiar with Ucits funds,” said Andrew Baker, managing partner of Sydney-based financial products development house Tria Investment Partners.
Nevertheless, Baker added: “If some of these [proposed additional] tax reforms go through, it will have the effect of unleashing the Australian funds management industry still further.”
He also noted that there were advantages for financial services companies to site in Australia, including its low cost base, large and well-educated workforce and agreeable lifestyle.
Economic recovery
News of the changes to Australia’s tax framework has been coming to the attention of foreign investors as economists and Australian government officials have been predicting that the country’s already-relatively sheltered economy may recover sooner than originally forecast, boosted by rising consumer and business confidence.
GDP grew by 0.4% in the first quarter of 2009, up from a decline of 0.6% in Q4 of 2008.
