Feature: Asian funds passport in stark focus

17-Dec-2013

By Zoe Fielding

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Early in 2014, public consultation will begin to determine what model should be adopted to implement an Asia Region Funds Passport (ARFP).

The passport would remove legislative barriers that prevent Australian fund managers from offering their products to investors in other countries in the Asia-Pacific region. So far, South Korea, Singapore and New Zealand have signed up to participate in the passport’s pilot program with Australia.

The passport’s implementation is a key step towards establishing Australia as a financial service hub for the region, an ambition industry and government have held for the sector for several years.

The financial services industry already contributes a huge amount to the local economy. It adds about 10.5 per cent to gross domestic product and employs around 420,000 people, but to date the sector has largely been focused on the domestic market.

Recent growth in wealth around Asia has made it impossible to ignore the potential benefits for Australian financial institutions in tapping into global markets.

Three billion people in Asia will join the middle class by 2030, according to Deloitte research.

Those people will have higher disposable incomes and a need to save and manage their money. Deloitte estimates that by 2050, Asia will account for more than half the world’s financial assets.

“If we can get a slice of that massive pie, we will do very well,” Deloitte national industry leader for wealth management Neil Brown says.

Australia has several advantages that can be exploited to improve its position in the region, such as having English as the main language, a strong regulatory system and less sovereign risk than some of its neighbours, Brown says.

While Australia’s financial services industry is robust, there’s a lot of ground to catch up compared with other economies in the region when it comes to being recognised as a global financial hub.

Hong Kong is ranked the world’s third most important financial centre behind London and New York, according to Z/Yen Group’s Global Financial Centres Index, a respected measure of the relative competitiveness of 80 international finance centres.

Singapore is ranked fourth and Tokyo is placed fifth. Australia’s cities are further down the list, with Sydney ranked fifteenth and Melbourne thirty-third.

Minter Ellison partner Stuart Johnson says it is difficult to say whether Australia will ever become the region’s top financial centre, given the continued growth of the sectors in Singapore and Hong Kong.

“But that doesn’t mean it’s not worthwhile having our products being made available in other jurisdictions and products from elsewhere being made available in ours,” Johnson adds.
 
“I think it’s a valuable initiative that should be pursued.”

Some Australian institutions, such as AMP, Colonial First State and ANZ, have successfully moved into Asia.

In some cases, tax and legislative barriers have forced Australian companies moving offshore to use workarounds, such as investment vehicles not specifically designed for Australian products and forming partnerships with foreign companies.

“I believe we have a highly sophisticated financial services offering in Australia and if the regulatory and tax barriers were addressed, then there would be a willingness of managers to look to take their product offerings offshore,” Johnson says.

Industry and government have acknowledged more work is needed for Australia to boost its competitiveness. In September 2008, the federal government established the Australian Financial Centre Forum to report on measures required to push Australia towards achieving that goal.

The Australian Financial Centre Forum issued its final report, “Australia as a Financial Centre: Building on our Strengths” – nicknamed the Johnson report after the forum’s head, former Macquarie Bank deputy chair Mark Johnson – in early 2010.

The establishment of an ARFP was one of 19 recommendations for change to Australia’s taxation and regulatory systems that the report identified as ways to help improve the country’s position.

Australia, South Korea, Singapore and New Zealand signed a statement of intent to participate in the passport’s pilot program at the Asia-Pacific Economic Cooperation Finance Ministers’ meeting in Bali in September.

Financial Services Council chief executive John Brogden says the Philippines and Thailand have expressed interest in joining the program, and Australia is keen for Japan and Taiwan to come on board, too.

The FSC plans to take a leading role in the consultation for the pilot.

“At the end of 2014, the model will be adjusted according to the industry feedback. In 2015, participating countries will implement legislation, regulation and systems to prepare for the ARFP pilot program,” Brogden says.

Establishing the ARFP will be a significant task.

Trust Company general manager of corporate services Andrew Cannane says the passport is modelled along similar lines to Europe’s Undertakings for Collective Investment in Transferable Securities (UCITS), which are managed funds regulated by the European Union, rather than by individual governments within that region.

“In the European equivalent [UCITS], they have a common currency, a European Union. We are trying to create something within different countries’ legal structures. It’s ambitious. It’s going to take time,” Cannane says.

Progress has been made on other initiatives recommended by the Johnson report. In 2010, changes were made to the taxation of managed investment trusts (MIT) operated by Australian fund managers to clarify the tax liabilities of foreign investors in the vehicles.

The recently released “2013 Australian Investment Managers Cross-Border Flows Report”, prepared by Trust Company and the FSC, shows that since the MIT regime was introduced, investment flows into Australia have increased by 78 per cent to $36.2 billion from $20.3 billion.

“At the same time, there’s still much to do,” Cannane says.

More work is needed on the details of the MIT regime. The FSC argues the MIT withholding tax rate that applies on fund payments should be cut from 15 per cent to 10 per cent to align the MIT tax rate with the rate that applies to interest earnings. It says such a move would ensure Australia remains an attractive destination for foreign capital to be invested.

Work has also begun on the investment manager regime (IMR), another of the initiatives recommended in the Johnson report, although policy settings for the regime need to be completed. The IMR exempts foreign managed funds from tax on gains realised in selling foreign non-portfolio investments and certain Australian financial arrangements for non-residents.

The Johnson report also recommended that Australia should look at allowing a broader range of fund structures for investment through collective investment vehicles other than investment trusts.

Cannane suggests modifying the taxation of partnerships and corporate structures to allow those vehicles to be more tax-effectively used for investment.

“The issue is in Australia that a partnership is taxed as if it’s a company and a corporate structure is as well. When you automatically apply a 30 per cent tax, it’s not competitive,” he says.

Allowing additional types of collective investment vehicles, such as corporate or partnership structures, with an equivalent level of governance and the same taxation treatment as MITs could further increase fund inflows for Australian managers, Brogden says.

He believes the completion of all Johnson review recommendations should be a priority for the coming year.

“Completion of the managed investment trust regime, recognition of collective investment vehicles other than trusts and implementation of the Asia Region Funds Passport are critical,” Brogden says.

“If these are implemented as intended, Australia will be able to more effectively export financial services and become an appealing option as a financial services centre.”

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