The last year has been an exciting time as the Government and industry have taken important steps towards developing Australia as a leading financial services hub in the Asia-Pacific region.
What have we seen in the last 12 months?
In May 2010, the Government announced that it supported nearly all of the 19 recommendations of the Johnson Report – Australia as a financial centre: Building on our strengths – released in January 2010.
One of the key recommendations of the Johnson Report was the removal of uncertain and distortionary taxes impacting on Australia’s funds management industry. We have
seen a significant amount of work undertaken around this recommendation. In particular:
- the foreign investment fund rules were repealed on 1 July 2010
- a regime was introduced to provide certainty around the capital gains tax treatment of distributions from eligible Australian managed investment trusts
- the Government announced it will take immediate action to address the uncertainty for many foreign funds investing in Australia caused by the US Accounting Standard ‘Fin 48’ issue1
- the Government announced changes to the income tax treatment of the investment income of foreign funds using Australian based fund managers2, and
- the Board of Taxation has sought industry comments on the introduction of an investment manager regime and on providing a broader range of tax flow-through collective investment vehicles3.
While there is still a lot of work to be done, we believe these initiatives will greatly enhance the attractiveness of Australia’s financial services industry and in particular the ability of Australian fund managers to attract offshore capital to manage.
US managers’ perceptions
To achieve our goal of becoming a financial services hub, Australia needs to be attractive for offshore managers looking to establish an Asia-Pacific operation. With this in mind, Henry Davis York conducted a survey to ascertain whether there had been any change in the perception of US funds managers of the Australian funds management market over the last 12 months. In particular, we sought US managers’ views on Australia’s comparative strengths and weaknesses as a hub for Asia-Pacific funds management operations. This was a follow up to a survey conducted by Henry Davis York in October 2009 and we were interested to ascertain whether offshore managers considered Australia to be progressing towards becoming a financial services hub in the Asia-Pacific region4.
The vast majority of respondents (88%) continue to see growth opportunities for offshore managers in the Australian funds management market. This is not a surprising result given the key attractions for setting up a funds management business in Australia continue to be the size of Australia’s investment pool and Australia’s compulsory superannuation contribution system.
It was no surprise that Australia’s tax system and rates were considered to be a key barrier for US fund managers setting up in Australia but as discussed above, progress is being made on this front. Some of the key tax announcements and proposals listed above were announced after the date of this survey so we are optimistic that this will be seen as less of a barrier over time.
69% of respondents confirmed that Australia having an investment manager regime will positively influence their decision to base their Asia Pacific funds management business in Australia. The remaining 31% of respondents were unsure and presumably waiting to see how Australia’s investment manager regime compares with those of other jurisdictions in the region.
It was also interesting that US fund managers are not yet sold on the idea of an ‘Asia Region Funds Passport’ similar to UCITs in Europe with less than half of respondents of the view that it would positively influence their decision to establish an Asia-Pacific funds management business in Australia. Perhaps this response is more indicative that this recommendation is likely to take longer to implement.
Have we missed the opportunity?
Just over half of the respondents to the survey answered positively that they would consider Australia as a serious option as the base for their Asia-Pacific operations. What is also reassuring is that another third of the respondents are undecided. So while 9% said they wouldn’t consider Australia as a serious
option, Australia is still a contender with most respondents.
We have an opportunity now to capitalise on the key attractions of the Australian financial services industry and realise the benefits identified in the Johnson Report. However, the Government needs to continue to prioritise implementing the Johnson Report’s recommendations to ensure this opportunity is not lost. Following the Global Financial Crisis, many US fund managers are currently looking to other regions to drive the growth for their businesses. The decision whether to use Australia as a base for establishing operations in the Asia-Pacific region is generally a one-off decision. The longer it takes to implement the Johnson Report’s recommendations, the more managers will be lost to other Asia-Pacific jurisdictions.
1 Media Release of 17/12/2010 by Assistant Treasurer Minister For Financial Services and Superannuation.
2 Media Release of 17/12/2010 and 19/01/2011 by Assistant Treasurer Minister For Financial Services and Superannuation.
3 Board of Taxation Discussion Paper on Funds Management Vehicles and Investment Manager Regime issued 23 December 2010.
4 Henry Davis York Foreign Fund Manager Survey, 19 November 2009 available at www.hdy.com.au