Australia | Nov 15 2012
-Foreign fund flows up strongly since tax changes
-Asia-Pacific accounts for majority of MIT flow
-Pension and sovereign funds now a big proportion
-Govt should implement more reform
By Eva Brocklehurst
The flow of funds into Australia via managed investment trusts (MITs) has risen strongly since taxation changes were implemented by the Australian government. This has prompted calls for the government to stiffen its resolve and implement the rest of the findings of the Johnson Report, handed down in 2010 as part of a federal commitment to secure Australia as a financial services centre. A two-year study, subsequently undertaken by the Financial Services Council and The Trust Company, called Australian Investment Managers Cross-Border Flows Report (FSC report), has now been released and highlights how successful the implementation of the taxation changes was for increasing overseas sourced funds.
A key tenet of the Johnson Report was the reduction of withholding taxes. The withholding tax rate on certain distributions of income to non-residents by Australian managed funds was reduced to 7.5% by July 2010, making it one of the lowest rates in the world. The FSC report finds the flow of funds into Australia through managed investment trusts increased significantly (54%), from $21.89 billion at 1 January 2010 to $33.60 billion at 31 December 2011. The report concludes that Australia has arguably the most efficient and competitive financial sector in the Asia-Pacific region but there is more than can be done to maximise the benefits. The report also found that Asia-Pacific was by far the biggest contributor of foreign flows into Australian managed funds.
Asia-Pacific provides 68% of fund sourcing and, in Australian dollar terms, had the largest increase over the study period – up $4.7 billion (33%). Europe was the second largest contributor accounting for 13.2% of total fund flows, followed by the UK at 9.1%. In terms of asset classes, Australian property, Australian fixed interest and Australian shares were the top three for flow increases, with respective funds growth of 47.9%, 44.2% and 24.7%. The study found overseas fund managers were the most prevalent investor type at 55% of assets in the sample, followed by overseas pension funds at 18%. Investment by overseas sovereign funds almost trebled over the two years – to $1.092 billion.
The authors of the FSC report believe that the proportion of funds sourced from overseas, especially Asia-Pacific, has the potential to increase exponentially if the right policy settings are in place. They have called on the government to expedite implementation of key recommendations of the Johnson Report. At the time, the government supported nearly all of the 19 recommendations, including the introduction of an investment manager regime and the development of what was called an Asia Region Funds Passport (ARFP).
The FSC report shows that, while fund managers represent the single largest type of foreign investor in Australian MITs, the pension and sovereign funds together contribute a considerable proportion of foreign fund flows. The authors believe it is essential that Australia develops policies to grow the existing (and increasing) level of interest from these investor types and this would be served by the implementation of a full investment manager regime that covers pension and sovereign wealth fund investors. Moreover, the authors say, given Asia-Pacific is the major contributors of foreign fund flows into Australian MITs, the need for an ARFP is self evident. An ARFP would streamline the ability of Australian-based fund managers to export their services and at the same make it easier for Asian investors to access Australian based funds managers.
Other recommendations of the Johnson Report called for collective investment vehicles and removal of state taxes and levies on insurance. The FSC report authors believe that increasing the breadth of allowable collective investment vehicles, with an appropriate governance framework, would allow Australian investment managers to take advantage of the interest shown by investors who are unfamiliar with current schemes or would prefer to invest in a different type of legal entity.
As for removal of state taxes and levies on insurance, given these jurisdictions are crying poor right now, this has probably been placed in the too-hard basket for now.
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