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Budget 2008: Establishing Australia as a regional financial hub.



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13 May 2008 NO.43

JOINT PRESS RELEASE WITH THE HON CHRIS BOWEN MP ASSISTANT TREASURER

MINISTER FOR COMPETITION POLICY AND CONSUMER AFFAIRS

Establishing Australia as a Regional Financial Hub

As part of its commitment to establish Australia as a regional financial hub, the Rudd Government has acted to dramatically improve the competitiveness of the Australian managed funds industry.

The Government has tonight announced it will substantially reduce the level of withholding tax from a non-final rate of 30 per cent to a final rate of 7.5 per cent on certain distributions from Australian managed investment trusts (MITs) to foreign resident investors. These arrangements will make Australia's withholding tax rate one of the most competitive in the world, and provide a significant boost to Australia's ability to compete globally. The arrangements will ensure Australian property trusts (which will be primarily affected by the new arrangements) are well placed to attract future foreign investment now and into the future. This will provide a major boost to Australia's goal of becoming a financial hub in the Asia-Pacific region and goes beyond the commitment made during the election.

Australia is internationally recognised as one of the major markets for managed funds. The Australian funds management industry manages more than $1.4 trillion in assets. The industry is expected to continue its strong growth, with assets under management estimated to exceed $2.5 trillion by 2015. The Australian property trust sector is a key part of the industry.

In spite of Australia's strong regulatory regime and reputation for funds management, less than three per cent of industry fees are derived from exports - that is, from foreign residents investing in Australian managed funds. Industry has advised this is in part due to the existing non-final withholding tax rate, predominantly applying to rental income and capital gains from taxable Australian property, which is higher, on average, than the withholding rates imposed by other countries.

In order to enhance the industry's export ability, the Government will introduce a new withholding tax regime, with effect from the first income year after the date of Royal Assent of the enabling legislation.

The new withholding tax regime will apply to fund payments that are distributions of Australian source net income (other than dividends, interest and royalties) of Australian MITs to foreign residents. It will cover distributions made directly from MITs to foreign residents as well as distributions made through other intermediaries (including custodians). Distributions of dividends, interest and royalties will continue to be covered by the existing final withholding tax arrangements.

However, to support the integrity of the arrangements and in keeping with the Government's commitment to minimise international tax evasion and avoidance, the nature of the new withholding tax regime will vary depending on whether the foreign investor is resident in a jurisdiction with which Australia has effective exchange of information (EOI) arrangements on tax matters.

Residents of such jurisdictions will be subject to:

• a 22.5 per cent non-final withholding tax for fund payments of the first income year after the enabling legislation receives Royal Assent;

• a 15 per cent final withholding tax for fund payments of the second income year; and • a 7.5 per cent final withholding tax for fund payments of the third and later income years.

For the first income year, as an interim measure, investors resident in EOI jurisdictions will be eligible to claim a deduction for expenses relating to fund payments. The net amount will be subject to tax at a new rate of 22.5 per cent.

The list of jurisdictions with which Australia has effective EOI will be specified in regulations.

Residents of other jurisdictions will be subject to a 30 per cent final withholding tax, with effect for fund payments of the first income year in which the enabling legislation receives Royal Assent.

Contacts:

Matthew Coghlan (Treasurer) - 0415 098 050 James Cullen (Minister Bowen) - 0409 719 879