Government Responds to Australia as a Financial Services Centre Report

Recommendation 3.1: Investment Manager Regime

The Forum recommends the introduction of an Investment Manager Regime (IMR), based on the following principles:

• The IMR would have wide application, to both retail and wholesale funds and to other areas of financial services beyond funds management, but would be confined to entities operating within the financial sector.
• For non resident investors using an independent resident investment adviser, fund manager, broker, exchange or agent:
  • investments in all foreign assets would be exempt from any tax liabilities in Australia;
  • investments in Australian assets would for tax purposes be treated the same as if the investments were made directly by the non resident without the use of any Australian intermediary.
• For non resident investors using a dependent intermediary acting at arms length:
  • investments in all foreign assets would be exempt from any tax liabilities in Australia;
  • investments in Australian assets would be treated as they are currently, subject to an agreed de minimis exemption to cater for global investment strategies that may include a nominal portion of Australian assets. Any Australian assets under this de minimis exemption would for tax purposes be treated the same as if the investments were made directly by the non resident without the use of any Australian intermediary.

The location of central management and control in Australia of entities that are part of the regime will not of itself give rise to Australian tax residency of those entities.

Support in principle.

The Government is responding to this recommendation through a two stage process.

As the first stage, the Government has as part of the 2010-11 Budget measures commenced a consultation process with the release of a discussion paper on the taxation of conduit income of managed funds.

As the second stage, other issues raised by Recommendation 3.1 will be considered by the Board of Taxation as part of its broader review of the tax treatment of collective investment vehicles (see response to Recommendation 3.3).

Recommendation 3.2: Offshore Banking Units

To give full effect to the Government's policy intentions for OBUs, the Forum recommends that:

• The Government, in its response to the Forum's Report, include a statement of support for, and commitment to, the OBU regime. Such a statement could also refer to arrangements to ensure the ongoing competiveness of OBUs.
• The tax uncertainty about 'choice' be removed, if necessary by legislation.
• Division 9A of the Income Tax Assessment Act 1936, which details the list of eligible OBU activities, be updated and regularly reviewed. The Forum's preferred option is for much of the detail in this Division to be replaced with Regulations. Regulations would contain an updated list of eligible OBU activities, developed with advice from the Treasury and the ATO, and following consultation with industry. These Regulations would be updated periodically on advice from the proposed Financial Centre Task Force, which would also make periodic recommendations on any other changes to the OBU regime necessary to ensure that it remained internationally competitive.
• A streamlined process for vetting new OBU applications be put in place:
  • with a requirement that an application be approved or denied within six months of its receipt, subject to all the appropriate application material being lodged;
  • with revised administrative changes for the 'other company' category. The Forum proposes that the guidelines 4(q), 4 (r) and 4(s) in the Income Tax Assessment (Determination of Offshore Banking Activities) Guidelines 1999 be satisfied by an external auditor (or equivalent) verification; and
  • that these new arrangements be reviewed by Treasury 18 months after their adoption to ensure they are working effectively.

Support in principle.

The Government will commence a consultation process, which will begin with the release of a discussion paper covering options for:

• streamlining the Offshore Banking Unit (OBU) application process
• addressing the issue relating to tax uncertainty about 'choice'; and
• ensuring the timely and efficient update and review of 'eligible OBU activities'.

Recommendation 3.3: Funds management vehicles

The Forum recommends that the Treasurer request the Board of Taxation to review the scope for providing a broader range of tax flow through collective investment vehicles.

The Forum recommends that, as part of this review, restrictions on the Venture Capital Limited Partnership vehicle be examined to see if they are all necessary and consistent with the Government's objective of developing Australia as a leading financial centre.

Support.

The Government will ask the Board of Taxation to:

• Review the tax treatment of collective investment vehicles, having regard to the MIT tax framework and including whether a broader range of tax flow-through vehicles should be permitted.
• As part of the review, examine the treatment of Venture Capital Limited Partnership vehicles.

Detailed Terms of Reference of the review, including the dates for reporting to Government, will be released in the near future.

Recommendation 3.4: Withholding tax on interest paid on foreign raised funding by Australian banks; on interest paid to foreign banks by Australian branches; and on financial institutions' related party borrowing

• Remove withholding tax on interest paid on foreign raised funding by Australian banks, including offshore deposits and deposits in Australia by non residents.
• Remove withholding tax on interest paid to foreign banks by their Australian branches.
• Remove withholding tax on financial institutions' related party borrowing.

On 11 May 2010, the Government announced that it will phase down the interest withholding tax (IWT) paid by financial institutions in Australia on certain offshore borrowings from 2013-14.

• The IWT rate applying to borrowings by a foreign bank branch from its overseas head office will be reduced from 5 per cent to 2.5 per cent (in 2013-14) to zero (in 2014-15).
• The IWT rate applying to other offshore borrowings by financial institutions will be reduced to 7.5 per cent (in 2013-14), to 5 per cent (in 2014‑2015), with an aspirational rate of zero.

Recommendation 3.5: LIBOR cap on deductibility of interest paid on branch parent funding

Remove the London Inter Bank Offer Rate (LIBOR) cap on deductibility of interest paid on branch parent funding.

The Government will ask Treasury to review the LIBOR cap.

The Government will respond to this recommendation when this review has been completed.

Recommendation 3.6: Islamic finance products

The Forum recommends that the Treasurer refer to the Board of Taxation the question of whether any amendments to existing Commonwealth taxation provisions are necessary in order to ensure that Islamic finance products have parity of treatment with conventional products, having regard to their economic substance.

Support (announced on 26 April 2010)

The Government has announced that it will refer to the Board of Taxation for review the question of whether any amendments to existing Commonwealth taxation provisions are necessary in order to ensure that Islamic finance products have parity of treatment with conventional products, having regard to their economic substance.

Detailed Terms of Reference of the review, including the dates for reporting to Government, will be released in the near future (see joint Media Release by the Assistant Treasurer and the Minister for Financial Services, Superannuation and Corporate Law of 26 April 2010).

Recommendation 3.7: Remove state taxes and levies on insurance

The Forum recommends that all state taxes and levies on the insurance sector be removed.

Support in principle.

The Government agrees that these are inefficient taxes but notes that this is a state government responsibility. The Government encourages the States to consider this recommendation.

Recommendation 3.8: Monitoring and advising on financial services tax issues

The Forum recommends that, as part of its six monthly reports to the Government on progress towards positioning Australia as a leading financial centre, the Financial Centre Task Force:

• monitors progress on implementation of those tax recommendations in this Report that are accepted by the Government, and reports on any significant concerns from the financial sector as to the details of their implementation;
• monitors any relevant changes in taxation legislation or in tax administration in overseas financial centres, with a view to identifying any measures which it considers worthy of closer examination for possible adoption in Australia; and
• makes recommendations in other areas where it sees a case for a review of existing tax legislation that may significantly conflict with the Government's objective of developing Australia as a financial centre.

Support in principle

Refer to response to Recommendations 6.1, 6.2 and 6.3.

Recommendation 4.1: Avoiding unnecessary regulation

The Forum recommends that any significant regulatory proposals applying to the financial services sector be fully tested and evaluated, in particular and wherever possible by way of detailed industry consultation, to ensure that they are necessary, effective and impose as small a compliance burden on industry as possible.

Support.

The Government's better regulation policy recognises the importance of conducting rigorous regulatory analysis of any significant proposals to ensure that new regulation is necessary, effective and efficient.

The Office of Best Practice Regulation provides clear guidance on how agencies are to apply the Government's consultation principles as part of designing and implementing better regulation. It highlights the need to consult widely, including consultation with industry stakeholders at all stages of the regulatory cycle.

Recently, the Government agreed to a suite of measures to strengthen the Regulatory Impact Assessment and Regulatory Impact Statement (RIS) process. One of these is the requirement on agencies to develop and publish guidelines on how they will facilitate more effective consultation with the community on regulatory issues.

Annual reviews on regulatory burdens on business are undertaken by the Productivity Commission. The Government's response to the latest review was announced by the Minister for Finance and Deregulation on 22 December 2009.

Recommendation 4.2: Periodic reviews of the regulatory rules and framework

The Forum recommends that there be periodic reviews of the regulatory rules and framework applying to the financial sector, focused on:

• ensuring that excessive and unnecessary regulatory rules and requirements do not build up over time; and that
• Australia's regulatory rules and framework remain best practice in the face of changing circumstances, products and market practices.

While the timing and terms of reference for such reviews would be a matter for the government of the day, the Forum suggests that the first review not be conducted until it is clear that conditions in financial markets have returned to normal and international regulatory reactions to the crisis are more settled.

Support.

The Government has been undertaking initiatives to review the regulatory framework of the financial sector and will continue to commission further review activity as the need arises.

In addition, wider government review measures to remove unnecessary regulation also apply to financial sector regulation. All regulations that are not subject to statutory review or to the sunset provisions of the Legislative Instruments Act 2003 will be subject to review five years after their introduction. The first tranche of five-yearly reviews is set to commence in 2012.

Recommendation 4.3: The Asia Region Funds Passport

The Forum recommends that the Asia Region Funds Passport be developed as set out in Appendix 8 of its report. Broadly, this would involve a two stage process:

Stage one: ASIC negotiates bilateral mutual recognition agreements with key jurisdictions in the region. In doing this, the Forum recommends that ASIC attempt to ensure that investment restrictions allow a relatively broad range of funds to be offered across borders, and that licensing requirements are as streamlined as possible.

Stage two: once bilateral agreements are in place, regional governments and agencies work together in the appropriate forums to develop these into a multilateral Passport regime. This would involve:

• developing a commonly agreed set of licensing arrangements, investment restrictions and, where possible, offer conditions that would allow complying funds registered in one Passport country to be offered in each of the other passport countries; and
• putting in place mechanisms for the continued administration of the Passport regime at national and regional levels.

Support.

A Working Party will be established under the Financial Centre Task Force comprising representatives from IFSA, AFMA, and the financial sector regulators, including ASIC, to progress the Asia Region Funds Passport.

ASIC is already undertaking bilateral mutual recognition negotiations in relation to funds management and has mutual recognition arrangements in place with New Zealand, Hong Kong and the United States.

ASIC will continue to monitor the work of, and make submissions to, the Committee of European Securities Regulators as regards their development of possible criteria and procedures that could be taken into account for mutual recognition between third countries and the EU.

Recommendation 4.4: Regulatory online gateway

The Forum recommends that:

• Austrade develop, in close consultation with APRA, ASIC, the RBA, FIRB, the ACCC, AUSTRAC and the relevant state agencies, an online gateway for potential overseas investors;
• Austrade administer and continually update the website, and provide the initial point of contact for offshore inquiries; and

Domestic investors would also have access to the proposed gateway.

APRA, ASIC, the RBA, FIRB, the ACCC, AUSTRAC and the relevant state agencies be encouraged to put in place formal arrangements for a central contact person charged with facilitating offshore enquiries relating to their organisation.

Support.

The Government will establish a working group of Commonwealth agencies with an interest in this matter to develop an online gateway for potential domestic and international investors. The working group will consult with relevant state agencies and other stakeholders in developing the gateway.

Recommendation 4.5: Increased competition on exchange traded markets

The Forum encourages the early consideration of licences for new trading platforms and exchanges, with a view to introducing competition as soon as possible once the recently announced financial market regulatory changes are in place.

Support. (already underway)

To achieve a globally competitive environment, three initiatives are being pursued:

• transfer of  market supervision to ASIC. Legislation to effect this was passed in March 2010 and is due to commence in the third quarter 2010.
• the introduction of market competition as announced by the Minister for Financial Services, Superannuation and Corporate Law on 31 March 2010 (see Media Release No 032).; and
• consideration of enhancements to the market licensing regime to ensure that Australia maintains a world-class regulatory system that facilitates market efficiency and innovation and accommodates new developments.

Recommendation 4.6: Reduce regulatory requirements on corporate debt issuance to retail investors

The Forum recommends that the regulatory requirements for listed companies that issue high quality corporate debt to retail investors be reduced.

• An exemption to existing requirements would apply for those issuers:
• with listed Australian dollar debt securities that also have listed shares and hence are already required to provide continuous disclosure and comply with the market operator's listing rules; and
• with investment grade securities that have a reasonably simple structure (that is, fixed or floating rate securities paying a margin relative to the bank bill swap rate; and with no credit exposure to entities other than the issuer or, if applicable, the guarantor).
• Such issuers would no longer be required to issue a detailed prospectus. Rather, a shorter prospectus could be issued, cross referencing all relevant documents already lodged with ASIC or the market operator.
• Those companies with a program of issues over time could use a base prospectus with a supplementary prospectus for each new issue.

Subject to satisfying the relevant criteria, these simplified procedures would also be available for Commonwealth and State government (or government guaranteed) bodies; OECD government (or government guaranteed) bodies; supranational entities; and offshore corporates listed on a recognised offshore stock exchange.

Support in principle.

On 11 May 2010 ASIC released a class order relief allowing listed entities which meet ASIC's criteria to issue bonds to retail investors using a simplified process.

ASIC's relief is subject to the following conditions:

• the companies are listed and have a good continuous disclosure history – e.g. they have not been suspended for more than five days over a period of 12 months;
• the bonds offered are simple, so-called 'vanilla' bonds offered to retail and wholesale investors at the same price; and
• the size of the bond offer is at least $50 million.

The change will take effect from the day after the Order is listed on the Federal Register of Legal Instruments. The date of effect is expected to be 12 May 2010.

Recommendation 4.7: Standardise non prudential regulation of the insurance sector

The Forum recommends that state regulations relating to the insurance sector be standardised, wherever possible.

Support in principle.

The Government agrees that harmonisation of regulation amongst the States is desirable although it is noted that this affects certain products that comprise only a small portion of the total insurance market. Progressing this recommendation is, however, primarily a state responsibility.

Recommendation 4.8: Removal of regulatory barriers to Islamic finance

The Forum recommends the removal of any regulatory barriers to the development of Islamic financial products in Australia, guided by the principle that there should be a 'level playing field' for such products.

Support in principle.

Austrade issued a publication on Islamic Finance in January 2010 designed to raise public awareness of Islamic finance in Australia and to promote opportunities for Islamic finance.

The Government has established an Interdepartmental Committee for examining barriers to Islamic finance. The IDC will be guided by the principle that there should be no obstacles, but no special treatment, for Islamic finance products. The IDC will provide advice on any regulatory barriers identified to the Minister for Financial Services, Superannuation and Corporate Law.

Recommendation 6.1: Declaration of intent

The Forum recommends that the Australian Government make a declaration of its intent to maintain and improve the openness, competitiveness and regional engagement of Australia's financial sector, including within the broader context of greater regional integration and cooperation.

Support in principle recommendations 3.8, 6.1, 6.2, and 6.3.

The Government has asked Mark Johnson to chair a Financial Centre Task Force (the Taskforce) of senior financial sector representatives to continue its work in promoting Australia as a financial centre for the region and facilitate industry input into the design of a range of proposals including the Asia Region Funds Passport, the Investment Manager Regime, and funds management vehicles.

The Task force will comprise Mr Mark Johnson AO, Chair, Mr Paul Binsted, Ms Jo Anne Bloch, Mr Alf Capito, Mr Phil Chronican, Mr Jeremy Duffield, Mr Craig Dunn and Mr Paul Schroder.

The role of the Taskforce will cover three areas:

• Regional engagement and enhancing Australia's presence in Asia;
• Engagement with domestic industry on an informal basis; and
• Facilitation of industry input into the design of several of the key outputs that flow from the recommendations of the Johnson Report.

The Taskforce will be supported by a dedicated Secretariat.

Recommendation 6.2: Financial services missions

The Forum recommends greater Ministerial and agency involvement in tailored financial services missions to selected economies in the region, focused on:

• promoting the recent and prospective policy changes in Australia designed to increase financial sector engagement in the region;
• encouraging two way investment in financial services with a view to expanding economic linkages and opportunities;
• promoting the capacity building initiatives that Australia is engaged in within the region;
• deepening understanding of Australia's regulatory and prudential policies and strengths; and
• at an appropriate time, promoting mutual recognition and the concept of a regional funds management 'passport'.

Refer to Recommendation 3.8.

Recommendation 6.3: Financial Centre Task Force

The Forum recommends the establishment of a Financial Centre Task Force along the following lines:

Chair: Three year appointment.

Committee: Five to seven members including a financial services taxation expert and CEOs or their delegates from commercial banking; investment banking; funds management; and insurance.

Consultative Group: A wide range of industry group representatives; financial market practitioners; official sector contacts; academics; and retired experts.

Dedicated Secretariat: Director; Project Officer.

Terms of Reference:

• To act as a conduit for dialogue and feedback between the financial services sector on the one hand, and Treasury and the Government on the other, on all policy issues of relevance to the Government's objective of developing Australia as a leading financial services centre.
• To monitor progress on implementation of those recommendations in this Report that are accepted by the Government, by providing industry input on design prior to legislation being finalised and, following legislative enactment, feedback on any concerns regarding their implementation and administration.
• To report every six months to the Government on progress towards developing Australia as a leading financial centre. These reports will cover, inter alia:
  • progress in implementing all those recommendations in the Forum's Report that are accepted by the Government;
  • issues relating to the regional promotion of Australia as a financial centre, including private sector involvement in the proposed financial services missions and in capacity building initiatives in the region;
  • changes in taxation legislation, tax administration or regulatory arrangements in overseas financial centres that it considers may be worth closer examination for possible adoption in Australia; and
  • more generally, recommendations in any areas where it sees a case for a review of existing tax legislation, tax administration, regulatory arrangements or other policy related issues pertaining to the financial sector.

The Committee may appoint working groups from its consultative group to prepare material for the Committee's consideration.

The Minister for Financial Services, Superannuation and Corporate Law may refer matters to the Task Force for its consideration.

The Secretariat will report to the Executive Director, Markets Group, Treasury. Sunset Clause: The role and usefulness of the Financial Centre Task Force will be reviewed by the Government after three years to determine whether it should be continued, restructured or abolished.

The Government has asked Mark Johnson to chair a Financial Centre Task Force (the Taskforce) of senior financial sector representatives to continue its work in promoting Australia as a financial centre for the region and facilitate industry input into the design of a range of proposals including the Asia Region Funds Passport, the Investment Manager Regime, and funds management vehicles.

The Task force will comprise Mr Mark Johnson AO, Chair, Mr Paul Binsted, Ms Jo Anne Bloch, Mr Alf Capito, Mr Phil Chronican, Mr Jeremy Duffield, Mr Craig Dunn and Mr Paul Schroder.

The role of the Taskforce will cover three areas:

• Regional engagement and enhancing Australia's presence in Asia;
• Engagement with domestic industry on an informal basis; and
• Facilitation of industry input into the design of several of the key outputs that flow from the recommendations of the Johnson Report.

The Taskforce will be supported by a dedicated Secretariat.