New withholding tax for fund managers is inconsistent

The Government's decision to increase the final withholding tax on managed investment trusts (MITs) from 7.5 per cent to 15 per cent could very well "handicap" Australia's competitiveness in the funds management sector.

That's according Zenith Investment Partners director David Wright, who said the increase is inconsistent with the Government's recent calls to make Australia an international hub for financial services.

The 15 per cent tax - which comes into effect from 1 July - applies to distributions from MITs to residents of countries with whom Australia has a tax information exchange agreement.

"Foreign investors could well turn to alternative or similar investment options within the Asian region where the tax is lower," Wright said.

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"You take away the competitive advantage of Australia's financial services industry with moves like this."

Over the long term, the attractiveness of Australia's resources products could be impacted as investors turn to growing Asian markets like Singapore and Hong Kong, Wright said.

The Opposition spokesman on financial services, Senator Mathias Cormann said the Coalition will oppose the "ad hoc and counter-productive tax grab" when it comes to a vote in Parliament.

"Labor's zig-zag approach to withholding tax on MITs has yet again increased Australia's sovereign risk profile," he said.

"Our focus should be on encouraging more investment through internationally competitive taxation arrangements so we can grow our economy more strongly."

The Government said the decision to up the rate "would place Australia on a similar level with like countries within the Organisation for Economic Cooperation and Development (OECD)" including the United Kingdom, the United States, and Germany."

In its most recent Federal Budget review, the Government estimated the current measure to withhold 15 per cent tax on foreign distributions will raise an additional $260 million over the forward estimates period.