The Financial Services Council (FSC) has called on the government to overturn its decision to increase the final withholding tax for investors in management investment trusts (MIT), claiming the rise places Australia's investment community at a significant disadvantage to its international peers.
FSC director of policy Martin Codina told Monday's House of Representatives standing committee on economics that increasing the MIT tax from 7.5 per cent to 15 per cent from 1 July 2012 was not the answer.
"Fundamentally, the FSC requests that the committee recommend that this measure not proceed," Codina said.
The measure would be "counterproductive and result in considerable damage to our reputation", he said.
He also called on the committee to recommend a more "comprehensive analysis" of the impact the increase would have prior to the bill being voted on in parliament.
"We note that this change was first announced in the [2012] budget and that there was, therefore, no prior consultation or opportunity for the industry or foreign investors to contribute to policy design or the assumptions which underpin the revenue forecasts in the budget," he said.
"We believe that had we been consulted a different approach would have been adopted, one that did not give rise to obvious arbitrage opportunities and one which would not put at risk Australian investments in countries, which will now be penalised with a higher rate of tax in Australia."
He said as a minimum, the FSC requested the committee recommend that foreign investors be able to access a lower rate, below the proposed 15 per cent, where Australian superannuation funds were the beneficiaries of a lower tax rate in the investor's home country.
Foreign investors had invested in good faith and had chosen to invest in Australia on the basis that the rate was being lowered to 7.5 per cent, he said.
"I accept the point that there may not have been in the purest sense grandfathering on the way down, but they got the signal that this rate is going to [7.5] per cent so, if anything, it allowed them to bring forward investments rather than wait until the rate hit [7.5] per cent," he said.
"Our very strong proposition would be by not providing grandfathering now - admittedly you are providing a small window - you are providing a large incentive for people to try and get out now before the rate doubles to 15 per cent.
"If they get out now, they can access the [7.5] per cent rate. We do not think that that is a good thing, particularly given the state of the industry and the market at present."
When questioned by members of the committee about the concerns foreign investors might have, he said investor concerns centred on whether the tax rate would actually change.
He said investors also wanted more background as to why that change was taking place, including whether the domestic industry was consulted and whether this was something they had missed.
Investors also wanted to know whether the change was part of a broader measure, he added.
"They were surprised that it went back to 15 per cent. They wanted to know whether they have missed something and whether this was now reversing in full - whilst it was 15 per cent under this budget, the next budget might say it is back at 30 per cent. So there are those three components," he said.
The committee met on Monday to review Tax Laws Amendment (2012 Measures No 2) Bill 2012, Income Tax (Managed Investment Trust Withholding Tax) Amendment Bill 2012, Pay As You Go Withholding Non-compliance Tax Bill 2012 and Passenger Movement Charge Amendment Bill 2012.
Last month, Labor announced it would increase the final withholding tax for investors in MITs from 7.5 per cent to 15 per cent from 1 July 2012.
The increase was a reversal of the government's plan to progressively lower the tax from 30 per cent to 7.5 per cent.
