Positioning Australia as an international financial services hub
While highly regarded for its robust funds management industry, Australia must review its tax regime and cut red tape if it wants to attract global fund managers and regional investors.
The Asia Region Funds Passport aims to reduce barriers to trade in funds management services in the region, with Australia well placed to benefit. However, the scheme has so far failed to reach its potential and the Financial Services Council believes it knows why.
Australia’s well-established financial services sector is widely considered one of the best in the world. But there are several stumbling blocks to becoming a regional or international hub able to attract significant investors and skilled employees to Australia.
Proposed reforms include removing excessive taxes that penalise investors in financial services and prioritising the development of investment vehicles that are familiar to investors in Asia.
The Financial Services Council (FSC) also recommends global fund managers be able to request an exemption certificate that removes the need for them to apply individually for investment in hundreds of Australian companies. This would recognise that fund managers are portfolio investors and do not seek to control the day-to-day management of the company.
“Government rules are holding us back,” says Sally Loane, CEO of the FSC. “Morningstar found that Australia has a tax and regulatory regime for managed funds that is inferior to 20 other markets including the UK, much of Europe, Hong Kong, Singapore, Thailand, Taiwan and Korea.
“Reductions in Australian taxes and red tape would make our market much more attractive to overseas investors and improve our global standing.”
She added that the tax regime detracted from Australia’s many advantages: a high-quality education and training sector, the rule of law, political stability, and a robust funds management industry servicing Australia’s superannuation industry.
Much of the FSC’s work in this area builds on the recommendations of the 2009 report, Australia as a Financial Centre: building on our strengths, often called the Johnson Report, after the then-Australian Financial Centre Forum chair Mark Johnson.
On 28 April 2016, representatives from Australia, Japan, South Korea and New Zealand signed the Asia Region Funds Passport’s (ARFPs) Memorandum of Cooperation, which Thailand later joined, and Singapore is still considering. Generally, funds are manufactured, distributed and administered within each relevant jurisdiction, with no transferability across borders – something the ARFP hopes to address by creating one Passport economy for investors in these countries.
In its submission to Parliamentary Inquiry into Diversifying Australia’s Trade and Investment Profile in August 2020, the FSC noted several reasons for the limited take-up of the Passport. At the time of writing, there don’t seem to be any Australian managed funds in the Passport, and very limited funds from any other Passport country.
The FSC says there are several potential reasons for the Passport failing to take off, including:
- A lack of clarity about tax treatment of investors from Passport countries investing into funds domiciled in other Passport countries.
- Complex tax rules in some member countries, particularly Australia.
- Significant limitations on the assets that can be held in Passport funds. Expanding the range of products which may be distributed through the Passport would make it an effective alternative to other passport products distributed throughout Asia.
- Difficulties with how to distribute funds to retail clients in a different Passport country – for example, financial advisers may be unaware of funds domiciled in other countries or reluctant to advise them to clients.
“The success of the Passport requires Australia to lead in facilitating better understanding of the cross-border flows between Passport participants, particularly in relation to their tax treatment,” says Loane.
“While the FSC understands there is a need to review foreign investment for national security reasons, we recommend a reduction in unnecessary red tape that hinders investment into Australia, particularly by managed funds which pose no security risk.”