The government commissioned the report in September 2008 as part of its stated commitment to secure Australia's future as a leading financial services hub. The report concludes that Australia has arguably the most efficient and competitive financial sector in the rapidly growing Asia-Pacific region, but that its engagement in cross-border activities is much less developed.

It therefore focuses on a number of areas in which policy changes could lead to a more competitive and internationally engaged Australian financial sector, where offshore participants would want to do business. For example, the forum believes that tax scope and uncertainty issues are limiting the growth of offshore funds under management in Australia and the attractiveness of Australia as a regional headquarters.

The forum recommends the introduction of an investment manager regime (IMR), based on principles that would have wide application, to both retail and wholesale funds and to other areas of financial services beyond funds management, but would be confined to entities operating within the financial sector.

Under the IMR regime, for non-resident investors using an independent resident investment advisor, fund manager, broker, exchange or agent, investments in all foreign assets would be exempt from any tax liabilities in Australia; and investments in Australian assets would for tax purposes be treated the same as if the investments were made directly by the non-resident without the use of any Australian intermediary.

In addition, the location of central management and control in Australia of entities that are part of the IMR regime would not, of itself, give rise to Australian tax residency of those entities.

The forum also points out that the offshore banking unit (OBU) regime is under-utilized. It asks the government to restate its commitment to OBUs, and make arrangements to ensure their ongoing competitiveness. Tax uncertainties should be removed, if necessary by legislation. The relevant section of the Income Tax Assessment Act which details the list of eligible OBU activities should be updated and regularly reviewed, with advice from the Australian Treasury, the Australian Taxation Office and the industry.

As the forum identified that the lack of an appropriate funds management vehicle is inhibiting the management of offshore funds out of Australia, it recommends that the Australian Treasurer request the Board of Taxation to review the scope for providing a broader range of tax flow-through collective investment vehicles.

It says that the imposition of withholding tax on offshore borrowings by banks and other financial institutions, as well as the London inter-bank offered rate (LIBOR) cap on the deductibility of interest paid on branch-parent funding, are impediments to Australia’s access to offshore savings pools at competitive rates. It therefore recommends their removal.

The forum also recognizes that the dearth of Islamic finance products in Australia is limiting its access to offshore savings pools. The recommendation is that the Board of Taxation is asked whether any amendments to existing Australian taxation provisions are necessary in order to ensure that Islamic finance products have parity of treatment with conventional products, having regard to their economic substance.

Finally, in order to provide future certainty of the sector’s international competitiveness, the forum recommends that a Financial Centre Task Force (which it wants the government to establish) should monitor any relevant changes in taxation legislation or administration in overseas financial centers, with a view to identifying any measures which it considers worthy of closer examination for possible adoption in Australia.

For its part, the government has professed that it has “already taken a range of actions in line with its policy of promoting Australia as a financial services center," and that it is “committed to ensuring that our financial sector is well-placed to make the most of those opportunities that will emerge as the economic recovery takes hold."

For example, as from July 1, 2009, the withholding tax rate on certain distributions of income to non-residents by Australian managed funds was reduced to 15%, and, from July 1 this year, the withholding tax rate on those distributions will be cut further to 7.5% - “one of the lowest rates in the world," the Assistant Treasurer, Nick Sherry said. "The government has also released for public consultation draft legislation that will repeal the foreign investment fund and deemed present entitlement rules."

The government is now to consider the final recommendations of the report, before responding later in 2010.