Australia acts to reel in investors

Australia acts to reel in investors

SYDNEY (AFP): The Australian government is reportedly considering giving overseas investors a tax break in a bid to lure their business from its crisis-stricken Asian neighbors.

The Australian newspaper said yesterday that Treasurer Peter Costello could abolish the 9.8 percent interest withholding tax levied on overseas investors holding government bonds.

The move would make the purchase of government bonds by overseas fund managers more attractive and could see Australia benefiting from a massive cash injection, the paper said.

A Treasury department task force has been set up to find ways to attract more offshore investor funds, including removing the tax which claws back some of the interest earnings paid to foreign holders of government debt, it said.

The rush of funds drawn from investors who perceived Australia as an economic safe haven could help keep domestic interest rates down and drive up the Australian dollar.

JP Morgan Australia chief economist John Kyriakopolous said losing the tax would benefit the market by removing a irritant to investment in Commonwealth and state issued bonds.

"There is no doubt that some investors are concerned and more than anything else it is a nuisance to investment in Australian bonds," he said.

So far offshore investors have been able to offset the tax by a process called coupon washing, so "it may not lead to a big increase in net demand," he suggested.

Citibank senior economist Annette Beacher said the move tax would create a more level playing field for offshore investors in the Australian bond market.

"It will be fabulous for our bond market," she said.

"We are about the only country in the whole world that has a withholding tax, so that would be a good start."

Overseas central banks are already exempt from the tax, which is expected to raise A$610 million (US$451 million) in 1997-98, but successive governments had so far resisted calls for its total abolition.

The Australian said Costello was expected to announce the abolition of the tax before the end of the year.

The Treasurer's office was not immediately available for comment.