Super market waits for boost from Rudd

Australia's new prime minister, Kevin Rudd, is backing the country's bid to become an Asian funds hub. Richard Newell explains how tax reforms can make that bid more competitive

As Australia enters what is expected to be its 17th year of uninterrupted economic expansion, in the financial sector all eyes are on the new Prime Minister, Kevin Rudd and his governing Labor Party. Rudd was a harsh critic of the Howard Government's over-reliance on Australia's position as a commodity-rich economy. He favours a more proactive stance on promoting Australia as a powerful and sophisticated financial services centre.

There is considerable resource being put behind Australia's bid to become an Asian funds hub (see IPA June 2007 p4) at a state and federal level. The Victorian government has been particularly active in its marketing for the past two or three years. Leo de Bever, CIO of Victorian Funds Management, comments: "In future, Australia, Canada and other resource economies will have to make money in large part through our intellectual capital, not from what we get out of the ground."

As important as the resources and tourism industries are, the new government is committed to taking Australia to the world, or at least to Asia. To ensure Australia becomes "more than Japan's beach and China's quarry", Rudd has pledged to lead a Funds Management Asia Export Taskforce.

Tax reform is also a major plank of the new government's strategy. As part of its election manifesto, Labor pledged to institute a flat and final 15% withholding tax rate for distributions from Australian managed funds for non resident investors. The new finance ministry is committed to improving the international competitiveness of Australia's tax regime, particularly as it relates to investment funds.

Assistant Treasurer Chris Bowen says: "This doesn't just apply to rates, but also to unnecessary complexity and the administrative burden that goes with our tax system. Australia needs to have a simple, transparent and internationally competitive system of taxation. As part of the first reference a Rudd Labor government will send to the Board of Taxation, we will be asking them to examine the opportunity of a managed investments tax regime in Australia, including the potential for a specific tax regime for REITs."

IFSA's CEO Richard Gilbert: "Exports of financial services, cross border trade, Australian source rules and withholding tax are certainly issues we are keen to progress. On the domestic front, taxation of managed funds and property trusts and State stamp duty on life insurance are significant issues for the industry. We also look forward to the release of the Board of Tax's report in relation to its review of the foreign investment funds rules (FIF), and the new government's response."

Funds industry growth

The consolidated assets of Australia's investment funds grew by more than 22% to A$1.3 trillion (US$1.1 trillion) during 2006-07, adding A$242 billion to the previous year's figure. This large and rapidly growing pool of assets, predominantly driven by the government-mandated retirement income scheme and the favourable tax treatment of superannuation, is the major focus of Australia's financial products industry. The institutions to benefit most from this growth are superannuation funds and public unit trusts, which grew by 28% and 18% respectively over the year to the end of June. The investment management industry now represents almost 130% of Australia's nominal GDP, more than double the level of 15 years ago.

 

rom July 2007, people over 60 years of age became able to withdraw funds from their superannuation accounts tax free. Contribution caps were also introduced making 30 June the last day on which individuals could make contributions of up to A$1 million. According to figures from the Association of Superannuation Funds of Australia (ASFA), 6,000 people contributed A$1 million or more to their superannuation funds in the June quarter. The A$35 billion of contributions comprised of three key sources: A$15 billion was generated by Australia's compulsory employer contribution scheme; A$10 billion flowed from regular after-tax contributions by individuals and A$10 billion resulted from extra, one-off contributions.

The Superannuation Guarantee (SG) system has to be one of the most successful policy initiatives of the last 15 years. Compulsory minimum contributions of 9% of annual earnings has created a vast and highly sophisticated pension fund market. Super did not figure significantly in the Labor Party's election campaign, but according to ASFA, the Association of Superannuation Funds of Australia, there are a number of relevant issues the new government will likely progress in its first term. A major initiative will be the First Home Savers Account (FHSA), a new tax-preferred vehicle that sits outside of super allocations (with a contribution cap of A$50,000) but which super funds will be able to offer. Investment choice would apply in a manner similar to super. Individuals would ordinarily be able to withdraw the balance tax-free after a minimum of four years.

Adequacy of retirement income is an issue in the ALP's policy agenda. Kevin Rudd has indicated a desire to boost overall contributions to 15%. ASFA says this could be achieved through a combination of contributions from employers, employees and the government, though the government has categorically stated that the 9% employer contribution will not be raised.

Other changes linked to superannuation include the establishment of a national clearing house for employer SG contributions. Use of the clearing would be voluntary and the Government will contract a private sector provider of the service. Such a move would create economies of scale and promote e-commerce in the super industry.

Research house Dexx&R has projected that Australia's investment fund asset pool will grow at an average annual rate of 11% over the next 10 years. Its Market Projections Report estimates that Australia's total superannuation market could surpass the A$3 trillion point by the end of 2016.

The report predicts that industry (professional trade-linked) funds and employer superannuation would record the strongest growth levels. By 2016, industry funds are projected to increase to A$686 bn while the employer super sector is projected to reach A$386bn. The report also cautions that growth in the superannuation sector may be tempered at the end of the 10 year period, owing to Australia's ageing population.