Australia sets out tax treatment for foreign investors

The Australian government has published the latest draft of legislation intended to offer clarity over foreign investors' taxation exemptions. The move is expected to boost growth in the local fund management industry.
Australia sets out tax treatment for foreign investors

Australia’s bid to become a major financial centre will get a boost from changes set to liberalise tax rules for non-resident investors, say industry players.

By providing favourable access for foreign investors, the reforms could accelerate the growth of Australia’s local funds industry, a manager said. It is expected that managers of smaller funds will benefit more from the reform than larger fund management groups.

And a hedge fund industry body said the “changes could help to transform the hedge fund sector in the country”.

The Australian government on Thursday released the draft legislation aimed at making it easier for foreign investors to allocate to Australia-domiciled funds.

The proposed rules set out the circumstances in which non-residents investing in Australian financial instruments will not be subject to income tax or capital gains tax in the country on portfolio investments.

The tax reform has been on the agenda for several years and is now in its fourth draft.

Richard Brandweiner, CIO at retirement fund First State Super, said that the draft provided “some certainty on tax treatment” for foreign investors.

Brandweiner said the amendments were a positive step and should benefit the 750,000 members of the fund he manages by potentially spurring economic growth. First State Super has an AUM worth A$49 billion ($38 billion).

“Deregulation which encourages a greater flow of funds internationally is positive,” he said, adding that the move could boost Australia’s GDP growth rate by enhancing competitiveness.

Brandweiner added that by opening up more suitable access for foreign investors, the reform might raise the growth of Australia’s local fund management industry and, in so doing, promote local investment vehicles such as hedge funds.

The proposals implement part of the reforms known as the Investment Manager Regime (IMR) which is a legislative framework covering non-resident investors.

The first two legs of IMR, introducing exemptions for foreign funds investing in passive investments and those engaging Australia-based intermediaries to manage foreign investments, were enacted in 2012.  

The latest draft addresses concerns raised in relation to indirect investment, where a foreign investor engages a local manager in Australia. Concerns over direct investment, where a foreign investor invests directly without engaging a local manager, remain.

The latest draft only applies to foreign funds investing in Australia which are ‘widely held’ – where no member holds a greater than 20% interest in the fund or at least five members hold a 50% share in the vehicle. One source said that there are “practical issues in establishing this, particularly in an open-ended fund”.

The Alternative Investment Management Association's Australia chairman Paul Chadwick said "the government has proposed an either/or aspect to the widely held test, which does suggest it will be more friendly, but it's not ideal for smaller, growing funds".

Chadwick added that the implications for master/feeder structures - which are typically treated as a single entity - are ‘problematical’.

Still, despite lingering concerns, the process of finalising an IMR appears to be drawing to a close after four years of consultation.

Setting up an IMR was among the policy initiatives recommended in a 2009 report (known as the Johnson Report) on Australia’s position as a financial centre.  Other recommendations included a regional funds passport initiative, streamlining the vetting process for new offshore banking units, a broader range of tax flow-through collective investment vehicles and easing restrictions on venture capital limited partnership vehicles.

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