Australia's fund management credentials are renowned. The nation has a wealth of funds management expertise gained from managing $1 trillion in superannuation savings.

The industry has innovative investment products, respected prudential regulation and a sophisticated investment community. It also has the benefit of being in the same time zone as Asia.

"Australian funds under management are roughly the same as funds under management for the rest of Asia combined minus Japan . this is in large part a direct product of the Keating superannuation revolution here in Australia some 15 years ago. The result is that we have a funds management industry with a critical mass, history and depth that as of today few countries can match," then opposition leader Kevin Rudd told the Investment and Financial Services Association (IFSA) conference last year.

Funds under management smashed $1 trillion in 2006. With double-digit growth likely to continue, funds under management could reach $2.8-3 trillion by 2015.

Lateral Economics estimates funds management may account for 40 per cent of the contribution the finance and insurance industry as a whole makes to the Australian economy, putting its gross domestic product at around 3.4 per cent of the value added in the economy.

"Australian fund managers increasingly handle the Australian portfolio investments of foreigners, a responsibility commonly assigned to local affiliates of international investment houses. But missing thus far in the industry's development is a strong record of Australian fund managers exporting their services to the world: that is, being directly responsible for handling the domestic and overseas funds management requirement of foreigners," "Other people's money I: A snapshot of Australia's funds management industry and its export potential, a two-part study by Lateral Economics for IFSA, says.

Australia's finance and insurance industry exports, of which funds management is a component, are very modest at 2.9 per cent of Australian production, according to input-output tables compiled by the Australian Bureau of Statistics.

The industry's export performance ranks 27th of the 35 industries that comprise the Australian economy, according to the research.

"Lifting finance and insurance exports as a share of Australian production from 2.9 per cent to 5 per cent would involve an eventual $3.7 billion stimulus to the Australian economy in today's prices, while lifting the share to 10 per cent would translate into a $13 billion boost. These are big effects," the report says.

While 27 per cent of Australian assets are placed offshore, only 1 per cent of assets under Australian funds management are derived from offshore.

Sticky fingers
Europe's successful financial entrepots, Ireland and Luxembourg, have assertively targeted and lured global financial services exporters using low rates of corporate taxation, transparent tax regimes and using investment vehicles that promote tax transparency, according to Lateral Economics.

Changes to the tax and regulatory treatment of Australian-domiciled funds have removed some of the problems or unintended tax burdens on Australian-domiciled funds.

The Federal Government is in the process of halving the withholding tax rate for distributions from Australian managed funds for non-resident investors from 30 per cent to 15 per cent.

This will make Australia competitive with other countries. Japan's withholding tax rate is 7 per cent, Singapore's is 10 per cent and the Netherlands' is 15 per cent.

Lateral Economics quotes one foreign-owned fund manager that manages Asian offices from Australian headquarters as saying: "We don't mind paying Australian tax. We don't mind tax breaks on or profits in Australia. We'll pay the going corporate rate. What we can't live with is the Australian government taking a cut of our investors' money on the way through to them. Foreigners won't invest with us and we can't build serious capacity to export funds management from Australia if there's even a hint of sticky fingers. If we can't get certainty, we'll just do it from Dublin."

ALP Senator Ursula Stephens told IFSA last year: "Labor's objective is to turn Australia into a funds management hub for Asia, building on the existing strengths of our funds management industry. That is why Labor in government will halve the withholding tax on distributions from Australian managed funds to non-residents from 30 per cent to 15 per cent."

Australia's 30 per cent withholding tax currently generates $30 million a year.

Bowen makes hub a top priority
The importance of lifting the regulatory burden and improving the taxation regime to launch Australia as a funds management hub for Asia has been a perennial debate.

Labor already began to deliver on its fervent promises to the funds management sector while in opposition.

The party recognises the importance of removing handbrakes to allow increased exports of Australian funds management expertise to diversify the nation's export base away from volatile economic sectors, including agriculture and mining.

"When the world commodity market turns down, as it eventually and inevitable must, the Australian people will be asking us: 'what did the Australian Government do in the time of plenty to future-proof us, to ensure we are well placed in this downturn, whether it comes in five, 10 or 20 years' time?'" then opposition assistant treasurer Chris Bowen told the IFSA conference last year.

Now in government, Assistant Treasurer Bowen explained to Investor Weekly his progress in giving the industry a competitive level playing field and removing obstacles imposed by government.

Industry bodies have championed the progress.

"The Labor Party took to the election undertaking that it would have us involved in its incursions into the Asian region in order to allow our trade to extend. I'm very pleased to say that already I can see results. The Government has things planned and we are on its agenda. That's a very positive thing," IFSA chief executive Richard Gilbert says.

Bowen will create a competitive tax regime by taking a two-stage approach. Firstly, fixing the more inefficient aspects of Division 6C of the managed investment tax law in the short term and then replacing it with a specifically-designed managed investments tax regime in the longer term.

"[The financial services industry] should know how important this is to the Government. This is a top order priority promise mentioned in several key speeches. It's an area that we regard as being very important in preparing Australia for the commodity downturn when it happens," he says.

Treasury has got to work on introducing a broader tax reference on the managed investment tax regime.

"I've issued, as I said I would, the initial consultation paper on Division 6C. Submissions to that close today and the Treasurer will be working through those with me in coming weeks and we're hopeful of getting those implemented very quickly as an interim step," Bowen says.

"Of course, we're also progressing to reduce the withholding tax rate. They're the big three items that need addressing and it's a constant dialogue with industry about what can and should be done."

When pressed, he says he wants to reduce the withholding tax rate soon, but it will be a matter of months, not weeks.

"It's complex and it needs to be done right. That's why we have a two-stage process - to fix the real iniquitous provisions of Division 6C, the really obvious troublesome ones and in the longer run develop the managed investments tax regime. That will report to me next year," he says.

Bowen has called for the institutional industry to provide feedback.

"This isn't a sermon on the mount from me, it's a partnership with the industry and I need to know what the bottlenecks are, what the problems are, whether it's skills, tax, or anything else they need to be telling me about it," he says.

Flight to quality
IFSA has argued strenuously for the withholding tax laws to be revised for more than two years.

"We are delighted that Labor has moved on this proposal. We're comfortable with the time frame they have; you can't bring these things in overnight because systems have to be changed and detail has to be hammered out of the tax office and administration model," Gilbert says.

"We think that 15 per cent is a good number. It makes us look competitive and we have to be mindful of the portability of this with tight budgets. It's a tight budget and we've got to be mindful of it. We've been very comforted by the references to this by the Minister and also by the Prime Minister in the lead-up to the election."

In previous campaigns IFSA has called for the withholding tax to be slashed to 12.5 per cent, but Gilbert says 15 per cent would be adequate.

"Our members tell us they can compete at 15 per cent. This is not a race to the bottom; this is a flight to quality. We want thousands of our listed property trusts to be competitive, not to the point of being the cheapest tax rate in the world, but competitive. We believe the inherent quality in them will be sufficient to draw the funds," he says.

Issues on the IFSA agenda, in addition to managed investment tax reform, include lobbying for bilateral trade agreements and fixing up the aggregation rules.

An impetus for change
In the second half of its report for IFSA, Lateral Economics draws parallels with today's funds management export problems and Australia's missed opportunity as a competitive manufacturing hub. In the 1960s, Japan, Korea and Taiwan became manufacturing centres while Australia missed the boat because of government policy on trade protection.

"If Australia is to succeed in becoming an exporter of funds management services, tax and regulation must be more responsive to opportunities and developments as they emerge," the Lateral Economics research says.

"Our report describes this as a 'co-evolutionary' regulatory regime in which regulators and industry work together on the common goal of improving regulatory and tax competitiveness and optimising tax transparency whilst upholding the broad prudential, consumer protection and anti-tax avoidance goals of regulation."

Access Economics used its in-house general equilibrium model to illustrate the potential benefits to the overall economy of an increase in finance sector exports.

A 10 per cent increase over the period from 2007 to 2010 would have the following effects:

. Value added by the finance sector would be $1.4 billion higher than business as usual levels by 2010,
. Exports by the sector would be $3.3 billion higher by 2010,
. GDP would be 0.3 per cent or $1.9 billion above business as usual levels by 2010, and
. An additional 25,000 jobs, including 3500 in the finance sector.