The Second Johnson Report – Progress Stalls

The Second Johnson Report – Progress Stalls

Natalie Raju, Partner, Corporate Tax discusses the Second Johnson Report released this week and its progress for financial services.

Partner, Tax

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It's hard to believe that it has been almost 7 years since the original Johnson report was released, putting forward a number of recommendations to remove barriers to exporting financial services and to establish Australia as a Financial Services Centre. Whilst that phrase has become almost cliché, what progress have we really made in terms of legislative reform to implement some of these measures?

According to the Second Johnson Report released this week, not enough.

The second report provides a snapshot on the progress of each of the 10 key recommendations, and the report card is not great. Since the original report, only the Investment Manager Regime has been legislated. All other measures remain in progress or have been parked.

Based on a survey of fund managers which fed into the second report, it is evident that export barriers have indeed increased over this period. What is perhaps more telling is how many of these barriers relate to our current tax policy settings:

  • Withholding tax – both the rate and complexity (in that order) are significant impediments to foreign investment in Australian managed funds; 
  • FX volatility – the tax mismatch between the timing and character of foreign exchange (FX) gains and losses versus the portfolio of assets which they hedge is a long standing issue for our managed funds, causing volatility in distributions outside of the control of the fund manager. The taxation of financial arrangements (TOFA) reforms announced in the 2016/17 Federal Budget around Portfolio Hedging are intended to address this issue, but these changes will apply from 1 January 2018, which is still a long way off. 
  • Multi-classing – the inability for managed funds to offer classes of units which are segregated for tax purposes (i.e. hedged v unhedged and multiple currency) adds a level of complexity and cost for foreign investors. Fortunately, the recent introduction of the Attribution Managed Investment Trust (AMIT) regime should go some way to resolving this issue.

From next year, we will see the commencement of the Asia Region Funds Passport, which will create a single market for the distribution of fund products. The success of this regime is critical to the future growth of our Australian funds management industry. If we do not address some of the tax policy settings, then Australia simply cannot compete, and the regime which is intended to bolster our managed funds industry may well have the reverse effect.

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