Josh Frydenberg to boost funds management exports

The funds management industry has welcomed a commitment from Assistant Treasurer Josh Frydenberg to make tax and corporate law changes that will boost the export of asset management services to Asia.

Complex and uncompetitive legal and tax settings in Australia have acted as a handbrake on the export of financial services to the region by making Australian fund managers relatively unattractive to foreign investors, according to a report by corporate adviser Mark Johnson in 2009 which provided a road map for reform.

It is very apparent now we have to look for more export industries and funds management is something where Australia is in a pole position to export and it’s time has come.

Sally Loane, Financial Services Council
But the government has been spinning its wheels on implementing the Johnson report for the past six years, as countries such as Hong Kong, ¬Singapore, Luxembourg and Ireland have attracted fund managers who are now servicing the swelling Asian middle class’s growing demand for wealth products.

Foreign investment in Australian fund managers comprises just 3.4 per cent of funds under management in Australia, according to the Financial Services Council, compared with more than 60 per cent in Hong Kong and 80 per cent in Singapore.

In a speech to a FSC breakfast in Sydney on Wednesday, Mr Frydenberg said the government wants this to change and will push through Mr Johnston’s reforms, including establishing an “investment manager regime” (IMR) to ensure foreigners using Australian fund managers to invest money outside Australia will not be taxed in Australia, and creating alternative corporate structures, known as “collective investment vehicles” (CIV), which will be understood by Asian investors largely unfamiliar with the unit trust structures operated in Australia.

Allowing CIVs “means making the necessary tax and regulatory changes that will make the financial services industry more globally competitive and increase export of Australian financial services”, Mr Frydenberg said. He added he would like to see both the IMR and CIV regimes introduced this year.

Good timing
FSC chief executive Sally Loane said Mr Frydenberg’s comments “show [the Johnson reforms] are very important to the government, and particularly so in the environment we are in with mining and the iron ore price. It is very apparent now we have to look for more export industries and funds management is something where Australia is in a pole position to export and it’s time has come. That was brought out by the minister today.”

The government is also introducing a new taxation regime for managed investment trusts, modernising the offshore banking unit regime and pushing the Asia Region Funds Passport, which will allow the cross-border marketing and sale of managed funds across participating economies. Mr Frydenberg said he hoped to lead a delegation into the region later in year to garner support for the passport.

The low levels of exports of fund management services to Asia has been a missed opportunity for Australia’s big four banks, given their extensive wealth operations. Andrew Bragg, the director of policy at the FSC, said the wealth divisions of the big banks, large wealth managers including Perpetual, AMP and a host of boutique fund managers will introduce the CIV structures once amendments were made to the Corporations Act, putting them in a better position to sell to the Asian middle class which is set to grow by 3 billion people by 2030.

“Our laws have retarded our global competitiveness in this area,” he said. The opportunity for Australian managers is large, given Asia has 60 per cent of the world’s population but only 12 per cent of total funds under management, according to the FSC.

The FSC is also calling for interest withholding tax, levied on interest income earned by foreign investors in Australia, to be reduced to 5 per cent from its current level of 15 per cent, noting Singapore has no such tax. Mr Johnston also identified relatively high interest withholding tax as compromising Australia’s international competitiveness.

Mr Frydenberg said he would soon release a Board of Taxation paper, delivered to the previous government in 2011, which examined the CIV regime. This would allow the industry to respond to it in their submissions to the government’s tax discussion paper.

Call for new commissioner
In its submission to Treasury on the financial system inquiry, the FSC called for a new commissioner of the Australian Securities and Investments Commission to be appointed to focus on trade opportunities in financial services. The submission points to the recent free trade agreements with Japan and Korea and calls for ASIC to implement mutual recognition agreements with domestic regulators in both countries to allow companies to take full advantage of the FTA provisions.

Mr Frydenberg said there was “a real opportunity for Australia to leverage our domestic success to tap into the growing demand for financial services from the burgeoning Asian middle class. We must continue to pursue the domestic reform agenda.”