Catching the 888 wave!

The growth in Australia-Asia trade and investment over the past 10 years has been nothing short of phenomenal. Centered on the resources sector and funded mainly by Chinese State Owned Enterprises, Australia has emerged as China’s No. 1 destination for outbound investment and has attracted billions of dollars of foreign investment into our economy.

As technology evolves and societies change, we will transition to a new phase of investment with its roots in clean energy, real estate, agriculture and services. We are already seeing an increasing number of capital injections from private high net worth individuals and entrepreneurs looking to strategically diversify their wealth by investing in Australia.

The “Significant Investor Visa”, otherwise known as visa category 888, was launched on 24th November 2012. It invites wealthy foreign investors to apply for a four year residency visa in Australia (which can then be converted into citizenship) for individuals who invest over AUD 5million for a minimum of 4 years into three main categories: (1) Australian Government Debt (2) privately owned Australian companies, and (3) complying managed funds investing in Australian assets and overseen by the local regulator, ASIC. In addition, in order to be granted a permanent visa from a provisional Significant Investor Visa, each applicant must spend at least 40 days each year (or cumulatively) over four years.  There is expected to be strong demand for these visas, particularly from Asia, with at least 700 visas expected to be issued under the scheme each year – a combined annual investment of $3.5bn into Australia’s economy. 

The aim of the scheme is primarily to attract much needed capital plus entrepreneurial skills and experience into Australia. There are over 60,000 individuals in China with over AUD16 million in assets - if Australia were to issue visas to just 1% of these individuals, it would be a $30bn injection into the Australian economy, not allowing for the multiplier effect of their personal contribution to the economy, including housing, luxury goods, taxes, retail expenditure etc. With over one million millionaires in China, of which 85% send their children abroad to study, Australia’s education sector is well positioned to attract these high net worth individuals as long term investors into our economy.

Whilst there has been some controversy surrounding this new visa category (“Australia sells visas”) from an economic standpoint it must surely be viewed as a beneficial transaction for all involved. Last year, Asian nations purchased over two thirds of our exports, worth over $175 billion to the economy. As a net importer of capital, Australia will no doubt welcome these innovative and entrepreneurial individuals who are eager to invest in our economy, creating jobs, boosting local consumption and raising much needed Government revenue to pay for new infrastructure, education and healthcare services.

Of course, Australia is not the first to offer this type of visa category. The UK, Singapore, New Zealand and Canada all have similar visa categories aimed at attracting high net worth migrants. The UK, Singapore and NZ investment threshold are all below Australia’s, sitting at GBP1million, SD1million and NZD1.5million (with language requirements) respectively, so Australia needs to compete on an international and regional scale to be the destination of choice for wealthy Asian entrepreneurs and their families.

The 888 scheme will provide a huge opportunity for both the funds management and banking sectors. Applicants who are successfully granted a visa and choose to live in Australia will open bank accounts and transfer some or all of their wealth to Australia. Interestingly, Asian people generally prefer to keep their money on deposit in banks – a competitive opportunity for banks to appeal and market their retail banking and other divisions to Chinese investors. The 888 visa scheme will also see investments flow into our services sector and, in particular, the managed funds industry, with new migrants requiring investment, taxation and wealth management advice, an enormous opportunity for financial advisers who can tap into the Asian migration pool. To capitalise on these opportunities, financial advisers and bank executives must invest in developing their profile, creating new connections and tailoring their services to a bilingual, multi-cultural and relatively sophisticated group of high net worth Asian investors.

Currently, the investment limitations surrounding complying investments in managed funds are restrictive and detailed. They require managed funds to hold investments in one or more of:

  • infrastructure projects in Australia:
  • agribusiness in Australia;
  • cash held by Australia deposit taking institutions;
  • State or Territory Bonds;
  • bonds or equity issued by an Australian ASX listed company;
  • bonds or term deposits issued by Australian Financial Institutions;
  • real estate property in Australia; and
  • investment into ASIC regulated managed funds that invest in the mentioned list of assets.

The main problem is that the majority of Australian managed funds which already invest in these categories would not qualify as complying investments under the 888 scheme due to their exposure to a broader range of asset sectors or other instruments, like derivatives. As a result, assuming the requirements under the scheme are not extended, managed funds will need to be tailored to comply with the current 888 requirements.

Should the investor choose to invest directly into an Australian Private Company, it must satisfy several requirements, including that the company must not be established solely for the purpose of meeting the complying investment test. In addition, it must operate as a ‘qualifying business’, i.e. “one for which the prime motivation is to make a profit through providing goods and services and not for the purpose of speculative or passive investment” and for a minimum period of time. The investment must be an interest as a shareholder in the company that operates the business, including interests held directly through a partnership, trust or company. 

The complementary nature of the Australian economy to other Asian nations will open enormous opportunities in the agricultural, food, clean energy and services sectors. As the mining and resources industry slows and the Australian economy adjusts to a new equilibrium, the role of foreign investment will be crucial to the expansion and evolution of these fast growing industries, with the need to invest in innovation, technology and research. The Significant Investor Visa is just one mechanism to attract large foreign investments and successful entrepreneurs to our country, but it is the one that is most occupying the minds of all banking executives as we start the Year of the Snake.