by: Annabel Hepworth

AUSTRALIA’S Future Fund has revealed it has invested more than $20 billion through offshore tax shelters, including the Cayman Islands, warning of lower returns if it does not minimise its tax bill.

The $77bn fund for federal public-servant pensions has revealed that 14.4 per cent of its assets, worth about $11bn, are invested in subsidiaries based in the Cayman Islands (a tax haven in the Caribbean) and a further 1.3 per cent is in its subsidiaries in the British Virgin Islands and Jersey.

On top of this, the fund has tipped 12.6 per cent of assets, about $9.6bn, into private market vehicles based in these tax shelters and a small fraction is invested in a vehicle based in Luxembourg. But the fund has no controlling interest in those.

While the fund declared in 2009 that it had set up five subsidiaries in the Cayman Islands, and was open about its ambition to maximise after-tax returns, this is the first time the value of the funds stashed in tax shelters has been revealed.

The fund has staunchly defended the investment in the face of a push by the Greens to tell it where to direct its holdings and force it to dump its holdings in tobacco companies and nuclear weapons manufacturers.

The fund, which was set up in 2006 by Howard government treasurer Peter Costello to be independent of the government, has declared it invests in “various jurisdictions” for “a variety of commercial, legal and tax reasons”.

“Properly structuring its investments can be essential to maintaining the board’s rights and entitlements, including the benefit of sovereign immunity for tax purposes in certain jurisdictions,” the fund said in answers to questions from a Senate inquiry examining Greens legislation.

“Failure to manage these matters can have a material financial impact on performance and would be inconsistent with the mandated objective to maximise returns without excessive risk and fail to reflect the board’s obligation not to cause any diminution of the Australian government’s reputation in financial markets.”

The fund’s vehicles are audited by one of the big four accountancy firms. A Future Fund spokesman said yesterday that many private and public-sector investment institutions invested through vehicles in the Caymans and elsewhere “for well accepted legal, tax and commercial reasons”.

“Putting the right arrangements in place is important, given the size and diversity of the portfolio we operate, the opportunities to invest alongside other institutions and the need to protect the rights, entitlements and assets of the fund,” the spokesman said.

“We take a prudent approach to these arrangements and operate through highly respected investment managers. We only use structures and vehicles that are commonplace and well tested.

“We require full transparency and information exchange for tax purposes and we adopt the OECD principles on tax transparency as the required standard of disclosure. All subsidiaries are audited and reported in our annual report.”

The government has flagged that it does not support the Greens plan, with the Finance Department warning it would cut its returns and weigh down the budget.

Former Greens leader Bob Brown put forward a Senate motion in 2009 to “deplore” the use of overseas tax havens, but this was voted down by the major parties. At the time, then finance minister Lindsay Tanner said investing through asset managers in the Cayman Islands was common and often difficult to avoid.

The fund is also opposed to the Greens plan, and has warned it would have to “revisit” its risk and return target (4.5-5.5 per cent over inflation) if the plan were to pass. In its answers to the Senate inquiry, the fund says it does not invest in schemes that contravene the OECD guidelines on transparency and information exchange for tax purposes, and ensures due diligence is undertaken.

The answers reveal that at June 30, the fund held stakes in 15 tobacco manufacturers that it would be forced to divest if the Greens plan proceeded. These include a $55.4 million stake in British American Tobacco in Britain, $44.5m in Lorillard and a $44.9m investment in Philip Morris in the US.

The fund, which has averaged a yearly return of 4.9 per cent since it was set up, has been making 50.8 per cent returns on its holdings in Indonesia’s cigarette manufacturer Gudang Garam, according to the questions.

For more on this story go to:

http://www.theaustralian.com.au/business/financial-services/future-funds-20bn-haven/story-fn91wd6x-1226447087462