The Australian funds management industry is a $2.4 trillion sector and represents a huge export opportunity for Australian fund managers into Asia. However, Australian fund managers have not been able to materially increase foreign investors participation rate in local managed funds; foreign investors make only 3.7% of the investment pool in local managed funds, which is substantially lower compared to other comparable jurisdictions (for instance Hong Kong). There are various impediments for Australian fund managers to transport their wares offshore. These impediments are being gradually addressed and one should see an improved opportunity for Australian fund managers to grow overseas.
As a starter, Australia is one of the main proponents to the Asia Region Funds Passport initiative, which, once implemented in 2016, will remove red tape for cross border offering of managed funds and resultantly reduce regulatory & compliance costs for fund managers. So far, New Zealand, Japan, South Korea, Philippines and Thailand are the other jurisdictions that have signed the statement of understanding (“SoU”) at the recent APEC Finance Ministers’ Meeting in Cebu. Singapore has withheld from signing the SoU citing non-commitment from the working group in addressing tax uncertainties to make the initiative more feasible.
Secondly, the last instalment of the Investment Manager Regime (“IMR”) has now been enacted. The IMR is designed to increase foreign capital flows into or through Australia with the possibility for Australian fund managers to increase their participation in international investment mandates by removing tax impediments to investing in or through Australia. In a nutshell, the changes will allow eligible investments (excluding Australian real property and non-portfolio Australian investments) made by foreign investors, namely where they engage an independent Australian fund manager to manage their investment or where they are a widely held foreign fund investing directly into Australia, do not trigger Australian income tax consequences. The IMR is an important piece of the puzzle for making Australian fund managers more competitive on the international fund management circuit (and more importantly in Asia); the likely benefits will take some time to crystallise but removal of tax impediments will no doubt allow Australian fund managers to become more marketable in Asia. In addition, the proposed new tax system for managed investment trusts (“MITs”) will modernise the tax rules for eligible MITs and increase certainty for both MITs and their investors. The new rules will enhance the international competitiveness of Australian managed funds and promote the greater export of Australia’s funds management expertise.
Separately, there is a push to expand the flow through collective investment vehicles (CIVs) that can be used in Australia. This is being further considered as part of the Tax White Paper released by the Australian Government. Currently, CIVs are generally structured as unit trusts in Australia, which is of limited appeal to foreign investors given they are not familiar with that kind of structure. The push for a broader range of CIVs will assist the export of financial services, by allowing Australian funds managers to offer products that are familiar to foreign investors.
Whilst the Australian fund management industry is recognised globally for its expertise, there are more that can be done locally from a regulatory perspective to ensure that Australian fund managers get a level playing field when competing overseas. The potential for the Australian fund management industry to contribute to our export should not be underestimated and the Australian government should give as much priority as it can to design and implement the necessary changes to further promote the Australian fund management overseas.