Australia needs to change its regulatory and tax policy settings, or else continue to face significantly lower funds under management (FUM) sourced from overseas, compared to its international peers.
A report prepared by KPMG for the Financial Services Council (FSC) mentioned that Australia has $4.31 trillion (US$2.7 trillion) in FUM, up 13 percent from $3.81 trillion in June 2020.
While 6.5 percent of overall FUM in Australia is sourced from overseas, this is far lower compared to 78 percent in Singapore, 90 percent in Ireland, and 95 percent in Luxembourg.
“Australia has a globally sophisticated funds management industry, with low fees by global standards, but is missing out on the opportunity to manage offshore due to regulatory and tax policy settings that fall short of international peer comparisons,” FSC chief executive Blake Briggs said.
“The significant foreign capital managed in other financial centres is not an accident. This has been achieved through a deliberate focus by these jurisdictions on regulatory and tax reform that support the global attractiveness and competitiveness of their funds management sectors.”
The report cited that Australia’s tax and regulatory reforms in FUM have tended to be tactical and responsive, instead of being holistic and modernising. It added that the way Australian policy settings have developed over time led to complexity with foreign investors required to comprehend multiple sets of rules.
The report also noted that Australia’s headline rates of withholding tax on domestically sourced income and the use of multiple tax rates for different types of income created an impression that tax will be higher and more complex than FUM in other jurisdictions.
“Addressing structural system inefficiencies by providing product rationalism to enable legacy products to be transferred into modern investment vehicles and providing clear tax settings with greater certainty for foreign investors will increase the attractiveness and competitiveness of Australia’s fund management industry,” Mr. Briggs said.
“In the context of a domestic economy facing a broad-based slowdown, the FSC encourages the government to harness this potential driver of economic growth and employment.”
Among the recommendations KPMG has made to address the inefficiencies are to introduce a regime to speed up the transition of existing investment funds into the Corporate Collective Investment Vehicle (CCIV) structure on a tax-neutral basis and to simplify the tax rules for CCIVs to eliminate unnecessary barriers for its adoption.
KPMG also recommended the government to review existing tax rules that apply to foreign partnerships or hybrid entities to align with tax regimes in competing jurisdictions, introduce product modernisation reforms to ease the transfer of facilitators from a legacy financial product into another product, and to replace withholding tax rates for FUM with a single low rate of 5 percent applying to all payments made by globally-focused funds, particularly passport funds.
In addition, KPMG said that the government must consider working with other passport jurisdictions to relax the restrictive rules on the types of financial arrangements applicable to passport funds and to simplify and harmomise the disclosure requirements for passport funds.
“An efficient and competitive Australian funds management industry delivers value to the Australian economy in the form of taxes and employment and enables Australians to create wealth and save for environment,” KMPG Asset and Wealth Management Partner Cecilia Storniolo.
KPMG also recommended to create legislation that will allow fund managers to more effectively price climate risk in their investment portfolios, consider legislating the Foreign Financial Services Provider regime for FFSPs dealing with wholesale clients and professional investors to support competition and investors’ choice, and to continue to assess the Your Future, Your Super performance test for unintended consequences.
