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Other people’s money

By Nicholas Gruen - posted Thursday, 12 July 2007

With compulsory super filling its coffers, Australia’s funds management industry has become the fourth largest in the world. Already managing a trillion dollars in assets and growing fast, it’s sophisticated, capable and cost competitive.

Yet less than 3 per cent of its revenue comes from exports - that is, foreigners paying us to manage their money.

It’s hard to think of a parallel in finance elsewhere, but there’s certainly a parallel in our own past. In the 1960s we had capable and competitive manufacturing industry also assisted by government policy.


But while manufacturers and policy makers in Japan, Korea and Taiwan turned their eyes towards world markets, their Australian counterparts remained complacent.

It took us till the late 80s to reduce protection and start learning to export.

In funds management the policy issues are quite different. We have no protection to dismantle. But the basic story is similar. We think of exports as a nice bit of icing on the cake but we’ve not focused on them like others.

Exporting isn’t easy.

A global fund is domiciled in one country, holds assets in other countries, and may have investors from several other countries as well. Throw in the network of bilateral tax treaties and the complexities are enormous.

Given this complexity, global funds management should really be thought of as a co-product between funds management firms and their regulators (including taxation authorities).


Of course tax authorities and regulators must continue delivering on their central mission - vouchsafing market integrity and tackling tax evasion and avoidance. But the regulators of the most successful financial exporters manage to do this while still paying assiduous attention to the needs of their global fund managers.

If this sounds like a rationalisation for tax avoidance - it’s not. You see, just as we exempt exports from GST (like other countries) so there is a general understanding that global funds should be “tax transparent”.

Thus, while a manager should of course pay company tax on their profits on managing a global fund, the investments in the fund should not themselves be directly taxed. After all, they may already have borne company tax at source and will bear income tax in the investors’ home countries. Taxing the investments in the fund as opposed to the profits on managing the fund simply sends them elsewhere.

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First published in the Australian Financial Review on July 5, 2007. It is an abridged version of Other People’s Money a Lateral Economics report commissioned by the Investment and Financial Services Association (IFSA) released on the same day.

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About the Author

Dr Nicholas Gruen is CEO of Lateral Economics and Chairman of Peach Refund Mortgage Broker. He is working on a book entitled Reimagining Economic Reform.

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