Invitation for Public Submissions Draft Complying Investment Options for the Significant Investor Visa (SIV) and Premium Investor Visa (PIV) programmes Please send your submission to Austrade by 5pm AEDT 3 March 2015 By email: investorvisas@austrade.gov.au Please limit your submission length to a total of five pages Name Kevin Lane Title COO Organisation Migration Institute of Austalia Type Professional Association Telephone number 02 9249 9000 Email address Website Kevin.lane@mia.org.au www.mia.org.au Austrade is seeking comments and suggestions on the draft complying investment options, and any supporting material or data to support your views. Input received will inform recommendations on the complying investment options for the SIV and the design of a new PIV. Comments and suggestions on the draft complying investment options for the SIV. For example, comments on what is proposed to be included or excluded, and whether the quantums and measures listed are appropriate. The Migration Institute of Australia (the Institute) is the peak professional body representing Registered Migration Agents in Australia. The majority of applications for Significant Investor Visas (SIV) are prepared and lodged on behalf of applicants by Registered Migration Agents. It can reasonably be expected that this will be true for the PIV when it is introduced. The Institute has surveyed those members who are very active in providing professional assistance in this area of migration and who lodge high numbers of SIV applications. These Institute members can provide feedback that is in touch with the needs, desires and attitudes of the SIV and PIV market. The Institute counts amongst its membership Registered Migration Agents from the large international accounting and migration organisations, including Ernst & Young, Deloittes, Price Waterhouse Coopers and Fragomen. This allows the Institute to provide feedback from the perspective of private and public
companies, their stakeholders and clients within this sector. A number of key guiding principles are listed for the SIV and PIV programme including making an Australian material difference, and quality and marketability. The Institute and migration profession seek further detail on how Australian material difference is defined and measured, and what major industries/ entities will benefit? In relation to the quality and marketability principle, Institute members ask if Austrade has given consideration to principles of portfolio construction such as asset class diversification, hedging or market risk, that would allow SIV investment strategies to be marketed as robust and risk aware? The Institute is concerned that the limitations around the range of component investments available to complying funds will be too narrow to include investment strategies (such as alternative equity strategies) that might form an important component of a high quality, risk-aware SIV investment strategy. Institute members are also concerned that changes to the SIV program, so early in the visa s lifecycle, will have an extremely negative effect on the marketability of the visa and reduce confidence in the programme for risk adverse potential applicants, especially given the Canadian experience. The SIV subclass was introduced just over two years ago and the first SIV was granted around 18 months ago. The programme has not been through a full four year cycle as yet (ie 188 temporary visa to 888 permanent visa), yet major changes to the programme are being considered. Comments and Suggestions on Box 1 Regulatory Requirements for the SIV and PIV. The Institute supports FIRB compliance for all investments and the use of unencumbered, lawfully obtained applicant funds for such investments. The Institute also supports the current ineligibility of direct investment in residential real estate and the limit on managed fund investment in this area. The proposal to include derivatives for risk management purposes only and to limit the combined cash and derivates to 20%, requires further explanation: How are derivatives defined? Would the definition of a derivative extend to hedging strategies which involve short-selling of securities via a prime broker (whereby physical securities are borrowed from the beneficial owner and sold on-market)? What is Austrade s view on investment strategies that place much stronger focus on managing market risk, either through hedging strategies or tactical cash allocations? Comments and Suggestions on Box 2 Mandatory Investment in Venture Capital Funds as part of the SIV. The Institute does not support the introduction of mandatory investment amounts in Venture Capital Funds (VCF). This product has already proved very unpopular with SIV investors. There has been almost no uptake of the Subclass 188 Venture Capital Stream visa. RMAs report risk averse clients do not want to invest in VCF and are suspicious about why they are being forced to invest in such products ( Is it because Australians consider them bad investments and don t invest in them? ). A mandatory investment amount should not be enforced. Chinese investors are familiar with VC investment, as there are many opportunities in that country to make such investments and it is a highly competitive investment landscape. For potential Chinese investors, the Australian VC landscape is tiny by comparison and not viewed as competitive. These informed investors are
more concerned for the safety of their investment, even at the expense of lower returns. If encouragement to invest in VCF is desired by Australian authorities, there should be incentives to do so, rather than mandatory requirements. These incentives could include lower total investment thresholds or tax incentives. The return on investment period for VCF is likely to be eight to ten years, which is at least double the visa cycle for SIV. This creates a mismatch between the visa and the investment requirements. This has the potential to complicate both the investment and the visa processes. Consideration should be given to the investment behaviour of applicants who have been forced to invest a specific percentage of their investment funds in VCF. Will these investors withdraw these funds as soon as they have gained permanent residency, four years after investment and halfway through the usual VC investment cycle, negatively impacting on the investment cycle in that sector? Comments and Suggestions on Box 3 Mandatory Investment in Small and Micro Capital Funds as part of the SIV. The Institute does not support the introduction of mandatory investment amounts in Small and Micro Capital Funds. As with VCF investment, investors should be provided with incentives to invest in these smaller and therefore higher risk products. The Institute supports the investor s right to change between complying investment funds during the qualifying period. A balance of maximised gains and minimised risks specific to an investor s risk appetite is an essential element of any investment strategy. Investors should not be forced to maintain particular investments over the qualifying period, if they deem other investment strategies to be superior. Comments and Suggestions on Box 4 Balancing Investment Items for the SIV. SIV investors can currently invest 100% of their funds in Government Bonds. Although the returns are lower, the security offered by this product is very attractive to certain types of investors. To suddenly remove this very secure investment option, could be regarded with suspicion by investors, especially so soon after the SIV was created. Insurance bonds are included in the proposal for complying investment and the features of those bonds are not much different to those of Government bonds. The investment of 50% of investor funds in the balanced investment options may not be sufficient, especially in poor economic conditions, to balance possible loss of returns on the investment of the other 50% in high risk VCF and SMC investment. Where this occurs it will negatively impact on investors perceptions on the safety and quality of these investment requirements. The ability to invest in Australian Government or State/Territory Government funds should be retained. Those funds still provide a material benefit to Australia through reinvestment by those Governments into infrastructure and other services. This move also takes away the fee free advantage, such investments offer and force investors into funds with potentially much higher fees and charges. It is difficult to understand why investors are to be forced to invest in high risk VCF and SMCF, while the ability for making complying investments into private Australian companies is to be removed. This investment is an important source of funds for Australian companies and at least comparable in SMCF. All other countries offering similar visa products in this market and permit investment in government bonds and other less risky investments
In respect of cash parameters, the proposals remove the flexibility of fund managers to hold higher levels of cash and affect the fund s ability to manage risk. During periods of prolonged market underperformance or uncertainty it may be in the fund s best interest to hold high levels of cash for long periods to manage risk. The Institute is concerned that to put these constraints on managed funds, when the rest of the market does not have them, is detrimental to the investor s interest. To not have these proposed restraints will not have serious adverse effects considering the weight of capital that flows in and out of markets. Comments and Suggestions on Box 5 Design of the PIV. The Institute believes the PIV subclass will be an attractive visa option for high net wealth investors looking to gain Australian permanent residency relatively quickly and with fewer barriers. Offering increased flexibility within the complying investment options is reasonable given the higher levels of business acumen such applicants could be presumed to possess. As levels of foreign investment increase in Australia, allowing the use of investments made in the two years prior to the PIV application would seem warranted. Allowing philanthropic donations, as specifically defined, would seem a constructive investment option and to provide the possibility of research advancement in areas where it may be difficult to gain other funding. Other comments or suggestions. The Institute would be interested to know Austrade s view on funds that employ gearing (financial or otherwise) as part of their investment mandate. Where a fund has the flexibility to deploy capital in excess of the net assets in complying securities, does Austrade view this as enhancing the material difference the SIV investment funds may make in Australia? Some Institute members have raised concerns on the use of Form 1413 by which fund managers declare that the fund meets the requirements for a complying investment. Overseas investors have limited knowledge of the Australian financial industry and must rely on unknown or unfamiliar fund managers to confirm the funds comply with the Migration Regulations. The visa holder has no control over whether the managed fund remains compliant. Given this uncertainty, potential investors may consider the proposals to restrict investments to managed funds unattractive. The proposed changes make the SIV even less competitive with comparable visas in other countries: Singapore - invest a minimum of $2.5 million SGD into approved fund that will invest the money into Singapore-based companies. Canada closed but was $800k CND investment threshold. UK investor visa - invest 2,000,000 or more in UK government bonds, share capital or loan capital in active and trading UK registered companies. Can apply to settle after 2 years if 10 million or 3 years if 5 million invested. Portugal - Invest in real estate with a minimum investment of 500.000 You can buy several properties and rent them OR cash Deposit or Financial Investment (Bonds or Stocks) with a minimum value of 1.000.000, or create a new company with at least 10 permanent employees based in Portugal. Conditions: Stay in Europe for a minimum period of 7 days per year. Apply Portuguese Citizenship at the end of 6 years. NZ - $10m for 3 years or $1.5 for 4 years- investment in: equity in NZ firms, public or private. An equity
investment can be active or passive and direct or via managed funds (only the proportion of the Fund that is invested in NZ is counted as acceptable); bonds, issued by the NZ Government, NZ local authorities or approved NZ banks, finance companies or firms; new residential property development that is not for the investor s personal use and designed to make a commercial return on the open market. The proposed changes impose a very limited range of investment options for SIV applicants. Institute members overwhelmingly agree these proposals will have a negative effect on potential applicant confidence and the quality and marketability of the SIV and PIV programmes.