Australia to SWFs: 'Come on In'

(April 25, 2011) — In an effort to bring Australia closer in line with international practice, the government may consider tax breaks on sovereign wealth funds that have passive investments in Australian assets.

As sovereign wealth funds rise in financial clout — with an estimated worth of $4.2 trillion, or almost double that of private-equity assets — the tax breaks reflect a sense of competition that is brewing among countries to obtain a greater level of foreign investment. Already, France, Canada, Japan, and Belgium provide tax exemptions for certain foreign investments. The Japanese government, for example, has provided a tax exemption for interest accrued on some assets held by sovereign wealth funds in order to attract more investment from abroad in the wake of credit turmoil.

Apart from allowing tax breaks, lowering compliance costs for investors by allowing them to assess their tax liabilities will make Australia an attractive destination for more sovereign investment in the future, Assistant Treasurer Bill Shorten noted in a statement. “By exempting those investments that are generally of a passive nature from income tax, which is standard practice around much of the world, as well as reducing compliance costs and increasing certainty, we position Australia as an attractive destination for more sovereign investment in the future,” he said.

Shorten continued: “By codifying the current tax treatment of sovereign investment, which has developed historically, we can make sure sovereign immunity law is consistent with the Government’s policy to tax inbound capital in a way that does not deter foreign investment.”

According to the Wall Street Journal, the proposal comes weeks ahead of a May 10 budget, which the government has warned will show weaker revenues as a result of a higher exchange rate that has lowered corporate tax.