Australian fund-passport proposal is a "long-term" plan

Australia is scaling up its efforts to engage with the wider business and financial community in Asia. Free-trade agreement talks with China are reportedly expected to resume on February 24, and changes to tax and financial rules are under consideration by the government.

The country's asset-management industry is hoping that plans set out in the Johnson Report last month will succeed in helping Australia export more financial services and attract more investment inflows. A delegation of Australian firms visited Hong Kong with these goals in mind just last month.

The new report contains several recommendations by the Australian Financial Centre Forum (AFCF), including: introducing an 'investment-manager regime' (IMR) to provide clarity on what tax foreign investors are liable to pay when using Australian financial intermediaries; creating a broader range of tax flow-through fund-management vehicles; and establishing an Asian fund-passport regime, rather like Europe's Ucits scheme, to allow the easier sale of Australian funds in Asian countries and of Asian funds domestically.

Australia has a $1.2 trillion fund-management sector, of which only $40 billion (less than 0.4%) or so is sourced from overseas. That is "a remarkably small amount, given our skills and expertise in this sector", says Geoff Weir, Sydney-based director of the secretariat at the AFCF, which was set up by the government in 2008 to help position Australia as a leading financial services centre in the Asia-Pacific region.

"Our penetration of the global pool of pension, mutual and sovereign funds is so small as to be negligible," adds Weir. "Even raising it to say 1% would represent a major increase in funds under management out of Australia."

So why aren't domestic firms managing more funds sourced from offshore? Tax uncertainty is one major issue, he says, while another is having investment vehicles that are compatible with those widely used and understood elsewhere in the region.

Unit trusts are common in Australia, but these vehicles are not widely used or familiar in many other countries in the region. Hence, says Weir, the country needs a broader range of fund-management vehicles taxed on a look-through basis that can be used to sell product in the region.

However, any developments along these lines won't happen overnight.

The Australian government has indicated it is likely to respond to the Johnson Report over the next few months, says Weir. "The fact that [the government has] been happy to release it in advance of making responses is, we hope, a good sign," he adds. "Certainly the response to the report to date has been very positive."

However, the government also has the "very wide-ranging" Henry tax review to take into account, the outcome of which will have significance for the Johnson recommendations, notes Weir. The review was completed at the end of last year, but the results have not yet been published.  

There are two recommendations in the Johnson Report -- one relating to withholding tax on offshore borrowing by banks and non-bank financial intermediaries and another on state tax on insurance -- which would have a significant revenue cost. Hence, says Weir, they are only likely to be considered in the context of the wider-ranging tax-reform proposals under the Henry review.

With regard to the IMR recommendations, the AFCF sets out broad parameters for such a regime in the Johnson Report. If the government accepts the recommendation, says Weir, the detail will be worked out through the normal consultation processes with industry stakeholders.

"As for the fund-passport proposal, this is a very long-term, ambitious plan," he says. "It could take 10 years to implement." The first phase involves building up a network of bilateral mutual-recognition treaties in the region, whereby funds run out of one country can be marketed more readily in the other and vice versa.

Australia already has such an agreement with Hong Kong, as well as one with Singapore, but the latter agreement only allows Singaporean funds to be sold in Australia, not the other way around. Weir says discussions are taking place between the relevant regulatory bodies about turning the Singapore agreement into a mutual-recognition treaty, but he is unsure of a likely time scale for this.

The second phase of developing a fund-passport regime would involve developing the framework of mutual-recognition treaties into an "Asia region funds passport", he says. The aim is that a fund manager in any of the jurisdictions covered can sell products in any of the other countries and, as far as possible, only have to comply with home-jurisdiction regulations.

A common regulatory framework would be developed for all funds sold across borders within the Asian passport group of countries; the framework would be very similar to Europe's Ucits framework. "Ucits-compliant funds are selling like hotcakes in Asia," says Weir. "One reason for that is that Ucits regulatory requirements resonate with quite a number of regulatory systems in the region."

Of course, for such a passport scheme to develop requires the support of other countries, he notes. "We believe the proposal would be mutually beneficial, but other countries must see it the same way for it to get off the ground," adds Weir.

"It also realistically requires some convergence in regulatory systems over time," he adds. "We can only really negotiate a mutual-recognition treaty if there are some similarities between the regulatory systems, or it's not going to work."