The major obstacle to Australia becoming a regional centre for funds management has been removed by the Senate’s passage of the New International Tax Arrangements (Managed Funds & Other Measures) Bill.
That is the view of the Investment and Financial Services Association (IFSA) Tax Working Group, which after ten years trying has finally convinced the Government to remove capital gains withholding tax from income repatriated to offshore investors in Australian unit trusts.
Previously, a foreign investor in an Australian-domiciled unit trust paid capital gains tax on any profits realised from ‘Australian’ assets in the portfolio. These profits might have been from the sale of Australian shares, a successful currency hedging program using derivatives, or even interest paid on surplus cash the portfolio had sitting in an Australian bank account.
If the investor was large enough to have a discrete mandate with an Australian manager, however, no capital gains tax was payable.
This discrepancy was enough to turn off almost all potential foreign investors in Australian managed funds, robbing the local industry of scale, according to IFSA Tax Working Group member Michael Brown.
“In the context of a global share portfolio run from Australia, just paying tax on local share gains wouldn’t have been that bad, but by the time you paid it on the currency derivatives there was no incentive to invest,” Brown said.
Now that the new Bill has waived the capital gains liability for foreign investors, IFSA estimates an extra $15 billion a year could flow into global and Asia-Pacific share products run from Australia.
Brown expected Asian institutions and high net worth individuals to lead the charge, followed by the Europeans.
“The American market is probably too competitive already, there’s not as much reason for them to look to Australia for these services.”
The next goal for the Tax Working Group is convincing Treasury to create a separate set of rules governing pooled unit trusts for investors.
“At the moment we still fall under the general trust rules which cover family trusts and estate planning, so managed funds keep getting caught up in all these measures which are really aimed at individuals avoiding tax,” Brown said.
