Other people’s money

Like other countries Australia recognises these basic arguments. So we’ve spent the last few years trying to extricate investments in Australian domiciled global funds from inadvertent taxation. But it’s slow going. The devil’s in the detail, with difficult tradeoffs sometimes necessary between tax neutrality for global funds and preventing avoidance elsewhere in the tax system.

Meanwhile we’re up against countries like Luxembourg and Ireland whose regulators have specialised in the game for decades. They’re small countries hosting huge global funds. So if there’s a tension between their financial exporters’ needs and domestic considerations, guess whose interests win out?

Starting with virtually no funds management sectors of their own, Luxembourg and Ireland offered generous tax breaks to attract global funds. This gave them the incentive and also the information necessary to build tax and regulatory regimes that were highly responsive to those funds’ needs.

Thus when a special holding company structure within Luxembourg was struck down for breaching the EU constitution, a new regime was re-introduced just four months later.

Ireland worked with global funds to produce an innovative regime which is more tax transparent than companies and trusts for pooling super funds - so called Common Contractual Funds (CCFs). Some firms tell us that with a similar regime we’d manage billions more in pension assets right now. But it’s a chicken and egg problem. Our industry is chock full of global funds, but they’re busy managing Australia’s money. The complex regulatory problems faced by global funds are solved first and faster in Ireland and other financial entrepôts.

We’re still beavering away on tax transparency. But changes must run the gauntlet of lengthy reviews. That’s understandable. Still, delay and uncertainty is often a show stopper.

When setting up a global fund firms get advice on details - say, whether a particular transaction crystallises a capital gain. In Australia they’re often told “probably not”. Meanwhile Ireland’s regulators answer “no”, with precedents to back them up. Where do you think the fund ends up domiciled?

Still, at a time of labour shortage more jobs in finance will mostly mean fewer jobs elsewhere. What’s so special about finance jobs? How about the fact that finance employees get paid nearly twice as much as the Australian average - and still far more controlling for higher skill levels.

That helps explain why, from about the time Luxembourg and Ireland become financial centres, their economic trajectories headed sharply north. Ireland went from being the poor man of Western Europe to being Europe’s second wealthiest economy. The wealthiest? Luxembourg by a country mile.