The Senate Economics Committee has rejected calls to slash withholding tax for foreign investors, despite new statistics that point to sluggish exports.
After intense debate on Friday, the committee recommended a 30 per cent reciprocal withholding tax rate on foreign investments in domestic property trusts remain in place as part of a sweeping review of tax law.
The rate is twice that argued by industry groups and opposing senators.
Labor and the Democrats said the Government senators had gone for a fall-back position that will be very slow to implement and would act as a disincentive for foreign investment.
“It is not a practical solution in a fast-moving capital market,” they said in a minority report.
The Investment and Financial Services Association (IFSA) has attempted to bolster its case for lowering tax by releasing statistics yesterday that show the weak performance of Australia’s financial services exports.
A Lateral Economics report said the stellar domestic growth of the industry was dragged down by a ‘very modest’ export record of 2.9 per cent of GDP.
“Financial services currently ranks 27th of the 35 industries for export performance,” IFSA chief executive Richard Gilbert said. “Compared with similar industries overseas, our record is weak.”
The research found that 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 domestic economy.
“Australian fund managers increasingly handle the Australian portfolio investments of non-residents, but missing so far in the development of our industry is the widespread management of global funds,” Gilbert said.
The focus of activity for Australian managed investment trusts is now overseas and returns from investments overseas flowing through these trusts to foreign investors are not subject to the withholding tax.
The committee heard that it would cost $100 million in revenue to cut the withholding tax rate to 15 per cent – a figure that Gilbert said was more likely to be no more than $30 million.
The committee said the 30 per cent rate is unlikely to have the effects on market competitiveness that some have predicted.
