Current tax withholding settings severely limit the attractiveness of Australian managed funds for foreign investors, according to a new report commissioned by the Financial Services Council (FSC).
The FSC has released a new report titled Australia as a Financial Centre: Seven Years On, authored by Mark Johnson and billed as a follow-up to Mr Johnson's 2009 government-commissioned report, Australia as a Financial Centre (the 'Johnson Report').
Mr Johnson's original report made 10 recommendations to encourage the development of Australia as a financial centre, most notably the development of an Asia Region Funds Passport (ARFP); the creation of collective investment vehicles; and the introduction of an investment manager exemption.
Of the 10 recommendations, since 2009 only the introduction of the investment manager exemption has been legislated (in 2015), Mr Johnson said in his new report.
The 2016 federal budget made a commitment to introduce two collective investment vehicles, he said, while the development of an ARFP is also underway but has yet to be finalised.
One key measure from the 2009 report that has yet to be implemented is the removal of withholding tax for foreign-raised managed funds and foreign banks, Mr Johnson said.
"Fund managers identified Australia’s overall withholding tax regime as a significant impediment to attracting funds from foreign investors, beyond those specific instances identified in the  Johnson Report," he said.
"These high and complex tax rates limit the attractiveness of Australian funds for foreigners and will limit any benefits Australia might derive from the ARFP.
"The current state of Australia’s withholding tax rates will not be marketable in the competitive environment that the ARFP seeks to create," Mr Johnson said.
Mr Johnson said tax is a "major issue" in foreign investors' minds, according to the fund managers he spoke to.
"Australia is perceived to have an inefficient and complex tax regime. Perceptions are sometimes worse than the reality, but concerns about the taxation of Australian-based funds are nonetheless a deterrent for Asian investors engaging Australian managers," he said.
"For instance, one fund manager said that while tax leakages are less than they were five years ago, many Asian investors believe they are still significant. These impediments make it much harder for fund managers to compete with vehicles for a tax neutral jurisdiction."
One fund manager told Mr Johnson: "You are on the back foot immediately, when you start to compete with those."