A competitive tax regime for Australian investment funds

The Australian Government’s recent response to the report on Australia as a Financial Centre prepared by the Australian Financial Centre Forum chaired by Mark Johnson includes some encouraging news for Australia’s managed funds industry seeking to attract further investments from offshore funds.

Consistent with the report’s recommendations, the Government is exploring the development of an investment manager tax regime (IMTR) and reviewing the tax treatment of collective investment vehicles (CIV).

The Johnson report noted that somewhere between 3.5% to 11% of total funds under management in Australia are sourced from offshore. This compares unfavourably with some of Australia’s regional competitors such as Hong Kong and Singapore.

Many international funds managers have indicated that the uncertain tax treatment of offshore funds managed in Australia is one of the main reasons they do not use Australia as a regional funds management base.

While the Government has accepted Johnson’s recommendation to develop an investment manager tax regime to provide greater certainty about the tax position of offshore funds that use Australian managers to invest in offshore assets, it is also seeking to include offshore funds investing indirectly in Australian assets in the proposal. The Government has appointed the Board of Taxation to be responsible for developing the comprehensive IMTR which will cover a range of other activities in the financial services sector beyond funds management.

An IMTR will be based on the principles that income from offshore investments of offshore funds managed by Australian intermediaries should be exempt from Australian tax, and that offshore funds investing in Australian assets through Australian intermediaries should be taxed on the same basis as if the offshore funds invested directly.

The Johnson report also identified the lack of a suitable flow-through CIV under Australian tax law as a significant issue for offshore venture capital and private equity funds wishing to invest in Australia. This issue has recently attracted considerable criticism in the context of the initial public offering of the Myer business by the Texas Pacific Group, an offshore private equity investor.

The Government will also explore the tax treatment of offshore funds investing in CIVs in Australia. The predominant form of CIV in Australia is a unit trust which does not permit the flow through of certain tax attributes. The Board of Taxation will undertake the review and will explore allowing flow through treatment for a broader range of CIVs including non trust CIVs such as companies.