Australian Practitioners Urge Zero Withholding for Pooled Funds

Practitioners in the managed funds industry are calling for a zero-rate for withholding tax in Australia amid the government’s proposals for new tax concessions to boost it, saying the proposed measures don’t go far enough.

The government released a consultation paper Nov. 3 on non-resident withholding taxes for pooled funds—or collective investment vehicles—and managed investment trusts, to canvass views on proposals for a flat withholding tax for non-resident investors.

Australia already has the world’s third largest pool of funds under management. Its funds management services industry have grown steadily, with revenue estimated to have increased at an annualized rate of 5 percent over five years through to 2015-16 to reach 7.8 billion Australian dollars ($5.95 billion). Currently, less than 4 percent of funds are managed on behalf of foreign investors.

Boosting foreign investment is an important issue for the country, which has built a huge local funds management industry on the back of domestic pension fund contributions but with only minimal involvement from non-resident investors.

The new proposals could result in foreign investors in widely-held funds from at least some countries paying withholding tax at a flat, low rate compared to a murky array of rates ranging from 10 to 30 percent that can currently apply.

But Andrew Clements, Melbourne-based tax partner with law firm King & Wood Mallesons, told Bloomberg BNA Nov. 9 that foreign investors would still consider Australian funds less attractive than their global peers if they had to pay a 5 percent withholding tax.

Five percent would “still be higher than the rate they would regard as being competitive,” he said.

The government should instead consider dropping the rate to zero, he told Bloomberg BNA by phone.

The loss in tax revenue would be minor compared to the economic benefits of boosting levels of non-resident participation in Australian funds, Clements said.

“The real target in respect of this is not the withholding taxes that we generate,” he said. “The goal is to expand the scope of our Australian financial services industry.”

Proposals

Announcing the consultation Nov. 3, the minister for Revenue and Financial Services, Kelly O’Dwyer, said the industry “has indicated concern that the current withholding tax regime will inhibit the sector’s international competitiveness and reduce the effectiveness of these measures.”

In its consultation, the Treasury said that as taxes on income from inbound investment can affect the domestic cost of capital, it is generally considered appropriate to tax “passive” investment income—such as interest and dividends—more lightly than “active” business income, such as returns from running a business or immobile income, such as income or gains from real property. Passive investments are generally more internationally mobile.

“Australia’s international competitiveness relates to the effective tax rate paid by the non resident investor, which will depend on the amount of Australian tax paid, and which may be sensitive to whether additional tax is paid in the non resident investor’s home country on the investment income, less any foreign tax credits,” the Treasury states.

Australian tax reductions may therefore not necessarily increase an investor’s rate of return, if it is fully or partially offset by higher tax liabilities in the investor’s home country.

“It may lead to a partial or full transfer of revenue from the Australian government to the foreign government in question through a reduced foreign tax credit for Australian taxes paid in that other jurisdiction. This will also depend on the tax status of the recipient,” the Treasury stated in its consultation.

Under one proposal, a five percent non-resident withholding tax rate would apply to non-resident investors in Australia only if they are participating in the Asia Region Funds Passport initiative—a project of the Asia-Pacific Economic Cooperation forum that will provide a multilaterally-agreed framework for the cross-border marketing of managed funds across participating economies in the region. Australia became one of the first regional economies to formally signal it would participate by signing a memorandum of cooperation in June, along with Japan, Korea, New Zealand and Thailand.

Another proposal in the consultation paper, a standard rate non-resident withholding tax rate of five percent would apply to all Australian CIVs and MITs, whether or not they are involved in the ARFP.

The third option would be to make no changes at this stage until the impact of other tax changes that apply to inbound investment can be better judged.

5 Percent ‘Too High.’

Ken Woo, Sydney-based tax partner at PricewaterhouseCoopers who leads the asset management division, told Bloomberg BNA Nov. 9 that the paper “asks the right questions” about strategies to make Australian funds globally competitive.

But he, too, said the 5 percent rate could still be too high, and considers that the merits of a withholding tax rate of zero for non-resident investors should be examined.

Woo added that events could well overtake the government’s attempts to make the sector more globally competitive.

“Australia is known for making progressive announcements that can take quite a long time to implement,” he said.

Woo isn’t just referring to locking in a decision on the withholding tax rate that will apply to foreign investors—the government still has to launch its regulatory framework for CIVs, which are a well-known investment product overseas but not locally.

The regulatory framework will be phased in between July 2017 and July 2018.

Woo said the Australian funds industry won’t just wait around until it is in place and the withholding tax rate is sorted.

Instead, they will increasingly establish funds offshore so that they can offer an investment product to foreign investors that involves no zero Australian withholding tax, he said.

Growth Opportunity

The Australian Treasury’s paper notes that demand for funds management services in the Asia-Pacific region is expected to grow strongly over the coming decades.

“By 2030, the Asia Pacific region’s middle class is expected to grow to around 3.2 billion people,” the paper says. “This is anticipated to lead to increased demand for funds management services as income and wealth grows.’