The 30 per cent withholding tax charged to foreign residents investing in Australian managed funds will be slashed to 7.5 per cent.

"The Government is committed to creating a financial services hub. To achieve this ambition we will be reducing the withholding tax to 7.5 per cent by 2010," Treasurer Wayne Swan said.

The financial services industry supported the announcement.

"The announcement goes beyond our expectations. It sends a very positive signal to the financial services sector and will enhance our industry in the Asia Pacific region. It will also encourage more young people to enter the industry," Investment and Financial Services Association (IFSA) chief executive Richard Gilbert said.

AMP Capital Investors managing director Stephen Dunne said the Government's plan to reduce the withholding tax would enhance the continued growth of the Australian funds management industry.

"Reducing the withholding tax for foreign residents will strengthen Australia's competitiveness as an international investment centre," Dunne said.

Centric Wealth head of technical research Anne-Marie Esler said: "We are happy that the withholding tax for non-resident investors is going to be reduced on a sliding scale over the next three years. It just may mean that some of our non-resident clients continue to hold some of their investments while they are working overseas for a period of time."

IFSA has been lobbying the Government to overhaul the withholding tax regime in order to make Australia's financial services internationally competitive with other countries.

Japan's withholding tax rate is 7 per cent, Singapore's is 10 per cent and the Netherlands' is 15 per cent.