Funds Managed Tax and Positioning for Prosperity

Perspectives

Funds Managing Tax

Positioning for prosperity? Catching the next wave

Two trillion dollars, a sophisticated finance sector and Asian growth: that’s the short version of why Australia has a shot at being a global competitor in the business of managing people’s money and becoming a more significant global financial centre.

Positioning for prosperity? Catching the next wave

Five super-growth sectors worth an extra $250 billion to the national economy over the next 20 years hold the key to Australia’s future prosperity, based on our Deloitte report, Positioning for Prosperity? Catching the next wave (the Report).  This is the third edition of Deloitte’s Building the Lucky Country series.

Promisingly, one of the super-growth sectors identified in the Report is Australia’s wealth-management sector, which is forecast to grow off the back of significant expansion and investment from Asia.

This issue of Funds Managing Tax gives a snapshot of suggested tax reforms seen as key to facilitating the continued growth in Australia’s wealth-management industry.

Our competitive advantage

According to the Report, more than three billion people in Asia are forecast to become middle class by 2030, while by 2050 the region is expected to be home to more than half of the world’s financial assets.

Australia already has circa $2.1 trillion of funds under management (FUM) which when coupled with the anticipated growth of wealth in Asia shows that there is a real opportunity for the wealth management sector to capitalise on the emergence of sophisticated Asian investors.

"What opportunities could the next wave of growth in wealth management present to your business?"

The next wave ... through the right tax and regulatory reforms

The Investment Manager Regime (IMR) reform that has been implemented to date has been a welcome step forward. However, the IMR reform is only one aspect of a reform package that is ‘collectively’ required to ensure Australia’s funds management industry succeeds in the Asian century.  

Further reforms are required in regard to Managed Investment Trusts (MITs), Collective Investment Vehicles (CIV) and the Asian funds passport to make our funds managers and responsible entities more attractive to offshore investors.

A new Australian tax regime for Collective Investment Vehicles is a must

It is hoped that a new CIV regime will be a key catalyst in driving the competitiveness of our funds management industry in the Asian century.  

From a national policy perspective, the design of a new Australian tax regime for CIV is key to enhancing our status as a leading funds management hub of Asia.  

A well-designed and robust tax regime would play a key part in influencing fund investment decisions in the national and global market.   

In designing a new tax regime for CIV for the Australian funds management industry, the framework needs to be attractive to offshore investors and comparable to leading international jurisdictions  to ensure Australia becomes the funds management hub of Asia.  

To achieve this, it is hoped that a CIV regime will reflect some of the following key policy considerations:
  • The CIV regime should replicate the same outcomes as if the investors had directly acquired the underlying investments, subject to specific required exceptions to make this workable (such as retaining an ‘outside’ cost base of CIV interests/investments)
  • Provide flexibility for Australia to offer funds  management vehicles that are widely  used and accepted and well understood in other locations in Asia and the world
  • The CIV regime should provide certainty of tax treatment (e.g. guaranteed ‘fixed trust’ status) and remove various incongruous tax outcomes. One example is that many funds that hedge against foreign currencies due to holding foreign shares have foreign exchange gains and losses from their hedge activities treated on revenue account, which are not aligned with the capital account tax treatment on the underlying shares.
  • As a result of this tax mismatch, which is also unattractive to non-resident investors, Australian managed funds are precluded from establishing multi-currency classes of units. This is only one example where currently the Australian funds industry is being left behind in terms of competitiveness and product offerings.
  • Transitional relief into the CIV regime should be available, so that there will be no disadvantage from electing into the proposed MIT regime in the interim, if a superior CIV regime is developed.

Asia region funds management passport

A key driver of potential growth in Australia’s wealth management industry is the Asia region funds passport, the pilot of which is due to commence in January 2016. This should create increased capital flows and liquidity within the region that will benefit our funds management industry.

Broadly, the Asian funds passport is focused on a common regulatory structure among likeminded countries in Asia that allows for cross-border issuing of funds across participating countries. The current pilot program agreement was signed by Australia, South Korea, New Zealand and Singapore in September 2013, and is due to commence in January 2016.

One only has to look at the benefits the European wealth management industry has obtained under the UCITS regime, which operates to allow funds to be freely marketed across the European Union, provided the funds meet the European UCITs requirements (which seek to provide greater transparency, liquidity and risk management for investors) to see the potential benefits for Australia of such a development.  

An Asian funds passport would create a number of benefits, such as growth of skills and employment, wider investment choice, and product offerings providing higher returns for domestic and regional investors, as well as greater economies of scale resulting in cost savings.  

Such benefits all contribute to promoting the development of domestic and regional markets in Asia and, as a direct corollary, fuelling the growth and eminence of the Australian wealth management industry.

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