Managers of listed property trusts (LPTs) will benefit most from scheduled reductions in the withholding tax rate on investment distributions to foreign investors announced by the Federal Government last month.
But for the broader funds management industry to be truly competitive on a global scale, the withholding tax rate should be cut to zero, according to Mike Crivelli, executive chair of Perennial Investment Partners.
As a result of the changes, the tax on the Australian-sourced rental incomes managed through domestic LPTs would be lowered from its current rate of 30 per cent to a final 7.5 per cent rate in the next three financial years. Jeremy Duffield, managing director of Vanguard Investments in Australia, said the LPT sector would benefit most since the tax changes “apply to Australian-sourced income, particularly rental income and taxable Australian-sourced capital gains”.
The final 7.5 per cent withholding tax rate won’t apply to the interest earned from investments and paid unfranked dividends – these income streams will still be subject to withholding tax rates of between 10 and 30 per cent, Adele Watson, taxation partner with Deloitte, said.
According to Crivelli, the reduction would not be a turning point for the export of Australian funds management products globally. “Why has Australia dragged its feet in comparison to countries that are serious about this, like Ireland and Luxembourg? “To do what they’re doing, you need to tell Treasury to take a cold bath.” He said Australia should follow the example of Ireland, where investment incomes earned by non-resident investors are not subject to any withholding tax.
Perennial has taken advantage of this law to set up an office in Dublin and, through a business structure specific to the European Union (an Undertaking for the Collective Investment of Transferable Securities), which enables firms to manage and distribute unit trusts throughout the region, has also established a French base. And it is licensed to sell products in the US.
To compete seriously with these domiciles, the Australian regulatory approach to foreign withholding tax required an overhaul, Crivelli said. The recent changes could also create a bias toward LPTs, and other investment structures that hold properties, in favour of fixed-income products, Watson said.
Duffield said the tax rate reduction would make Australian funds managers more competitive in Asia – Japan’s comparative rate stands at 7 per cent and Singapore’s at 10 per cent – but did not expect sudden demand from offshore investors for Australian products. “We need to get the story out there,” he said.