Accessing Asian funds management opportunities via Australia

WHO SHOULD READ THIS

• Fund managers (international and Australian), compliance professionals, custodians and trustees.

THINGS YOU NEED TO KNOW

• Asian Region Funds Passport, is due to commence in 2017, providing streamlined access for fund managers across Asia.
• The Australian Government plans to legislate two new collective investment vehicles which are recognisable to, and user-friendly for, overseas investors.

WHAT YOU NEED TO DO

• Consider Australia as the jurisdiction from which to deliver your (or your clients’) funds management capability across Asia.

International funds management capabilities

The Australian funds management industry is going global. At least that is the promise of the Australian Government with the announcement of the creation of two new collective investment vehicles (CIVs). By creating vehicles which are acceptable to overseas, especially Asian, investors, the Australian government hopes to create opportunities across Asia for fund managers, including international fund managers, based in Australia.

A particular driving force for these vehicles has been the Asian Region Funds Passport, which is due to commence in 2017. The Passport is designed to break down regulatory barriers to fund managers operating across the Asian region. The initial signatories are Japan, Korea, Thailand, Australia and New Zealand, with further countries able to join in the future

Financial services in Australia

With A$2.6 trillion under management, the financial services industry is Australia’s largest industry, and one of the largest pools of contestable funds in the world. Its growth is in part due to Australia’s mandated retirement savings scheme (known as superannuation, or ‘super’).

While many international observers might recognise Australia as a strong exporter of resources and agricultural produce, education and tourism, the Australian financial services industry is heavily underweight in terms of its export potential.

Part of the blame for this is that Australian regulation has tended to blaze its own trail and often not followed international norms and standards. The landmark ‘Murray Report’ into the Australian financial system recently recommended Australian ‘policy makers should avoid adopting unique Australian regulatory approaches that are inconsistent with international practice’.

End of the road for the traditional unit trust?

One concrete recommendation was the creation of investment vehicles which are recognisable to international investors. The government has obliged and it is planned that an Australian corporate CIV will be introduced on or after 1 July 2017, followed by a limited partnership CIV in 2018.

The unit trust has been the dominant passive investment vehicle in Australia for many years, for two main reasons. Firstly, they are generally flow through vehicles for tax purposes, which means that investors with different tax profiles (for instance, companies, pension funds, individuals) can invest together, but will be taxed according to their respective tax status. Secondly, they are generally not subject to any rules on the types of investments they can make, or the size of those investments (to retain the flow through status there are some rules, such as the investments must be passive, and there must be a suitable spread of investors). It is proposed that the new CIVs will also have these characteristics.

While the unit trust can be extremely flexible, it can also be complex.

If the new CIVs prove to be simpler and more attractive vehicles for investors and fund managers alike, the unit trust may find it has stiff competition going forward. However, given the vast number of legacy products, and the fact most Australian investors have a good understanding of the unit trust, the unit trust still has a major role to play in the Australian funds management environment.

Proposed changes to the withholding tax regime for CIVs

To complement the proposed new CIV structures, and the Australian Government’s broader drive to increase Australia’s competitiveness in the finance sector, a number of proposals have been put to consultation by the Australian Treasury department to reform Australia’s withholding tax (WHT) regime.

Very briefly, Australia currently levies a withholding tax on certain payments from Australian entities to non-residents. The rates of withholding tax differ depending on the character of the payment, the residency of the recipient, and characteristics of the Australian entity. It can be a complex system to apply in practice, which is commonly believed to put off international investors.

One of the proposed reforms to the WHT regime is to reduce all withholding taxes to 5% for payments from CIVs (both Autralia’s traditional unit trust structures and the new CIVs discussed above). The Treasury is considering limiting the 5% WHT rate to Asia Region Passport Funds, but it remains possible that the proposed, much simpler, WHT regime will apply to all Australian CIVs (although, possibly at a higher rate, such as 10%). While there may be a cost to revenue, it is hoped that the reduced WHT will increase Australian competitiveness in the international financial markets.

This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.