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Cross-border flows up but tax policy keeping wind from the mainsails

Two things are clear from the latest Australian Investment Managers Cross-Border Flows report:

  • demand for Australian investment products and expertise from overseas is up again; and
  • removing the last of the taxation barriers could transform the growth ebb into a groundswell.

First published jointly by Perpetual and the Financial Services Council (FSC) in 2010, the report was conceived to measure the impact of the Managed Investment Trust (MIT) regime which increased the competitiveness of Australian fund managers overseas. Since then, there has been an impressive 17.8% compound annual growth in the funds managed by local managers sourced offshore.

Despite this positive headline number, the pool of funds still only represents 3.4% of the total $2.7 trillion managed in Australia.
Compared with other financial centres both in our region and around the world, we are punching below our weight in the management of overseas sourced money.

Mark Johnson recognised this in his 2009 report, ‘Australia as a Financial Centre, Building on our Strengths’ – known as the Johnson Report – in which he made a number of recommendations to government to help grow the share of funds we derive from outside Australia.

The rationale was simple: Australia has investment managers who are highly skilled in managing large pools of money as a result of their more than two decades experience in stewarding our world class superannuation system; if we can remove the structural barriers facing off-shore investors wanting to access this local expertise then the country will be far better for it.

That view is shared by many operating in the local funds management industry including Perpetual general manager of managed fund services, Andrew Cannane; Colonial First State Global Asset Management head of product for Asia Pacific investment product solutions, Amna Khan; and Nikko Asset Management managing director Sam Hallinan. The trio joined FSC CEO Sally Loane on a panel at the launch of the report.

“I see no reason why we won’t get more mandates from overseas to manage both domestic and foreign equities as well as investment in other asset classes,” Mr Cannane told the attendant media and industry stakeholders.

This year’s Cross-Border Flows report shows yet again that Asia Pacific is the standout contributor to Australia’s offshore sourced funds under management with 62% ($28.4 billion) coming from within the region.
Japan alone accounts for 25% of all funds and 40% of those sourced from within the region (totalling $11.4 billion).

China and South Korea each contributed just over 5% of all funds ($2.5 billion and $2.2 billion respectively).

From outside the region, the United States contributed 6% ($2.8 billion) and the Middle East ($2.6 billion).

The institutional market is the largest user of Australian managers, with other fund managers accounting for 48% of investment money ($22 billion). Pension funds were the next largest source at 16% ($7.4 billion).

According to the survey, 31% of the total offshore sourced FUM is invested in Australian property with 22% invested in Australian fixed interest and cash and 10% in Australian shares.

Reinforcing the view that overseas investors value highly the investment skill of Australian fund managers, almost 40% of the funds mandated to our local experts is actually invested into overseas asset classes.
Also aiding the flow of funds from offshore, according to Mr Hallinan, is a structural trend in Australia that is seeing local managers, amid pressure on fees, look to grow their businesses offshore. Equally, he said, overseas managers are looking at the growth potential offered by the Australian super system and are entering this market through acquisition. This of course happened to Mr Hallinan’s old firm, Tyndall Investment, when it was bought by Nikko AM in 2010. The impact of this two-way interest is a boost to Australia’s bottom line.

“If you become more global you orientate your thinking outside of Australian and as a result you start realising that there’s great business to be done,” Mr Hallinan said.

Increased funds under management from global partners mean more economic activity, more investment in Australian companies and infrastructure, higher GDP and increased tax revenue for the public purse. It also means more jobs in investment management, legal, accounting, registry, custody and other related areas.

Seven years on from the Johnson Report, we are closer to removing the barriers.

Alongside the enhanced MIT withholding tax regime, the government has committed to introducing a new Corporate Collective Investment Vehicle by 1 July 2017 and the Asia Region Funds Passport is expected to commence by the end of 2017.

Mr Cannane said though the industry is often quick to criticise government policy, the new MIT regime in particular had had a material impact in moving the dial.

“If there are more vehicles and fewer barriers, that is a good thing,” he said.

However, all on the panel emphasised that there is still more to do.
“A lot of good work has been done already but we need a level playing field for clients,” Ms Khan said, adding that the big challenge for any Treasury department is giving up tax in one area to create growth in another. But, she argued, the results are plain to see.

“I think the government would be pleasantly surprised by the number of investment roles created by the new MIT regime,” Ms Khan said.
Recent free trade deals with Japan, Korea and China have promising financial services chapters but these must be backed up with regulator to regulator agreements. Crucially they must be accompanied by a competitive and simple non-resident withholding tax system.

In assessing the progress in attracting investment from overseas Ms Loane summed it up best: “There is no time to waste. We must ensure Australia’s taxation approach no longer hinders the country’s prospects as a financial centre within the region.

“We are one metre from the try line. The government must keep pushing to get the ball over the line.”

By Mark Smith, Media Manager, FSC

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