By Matthew Cranston
Labor’s capital gains tax overhaul will hinder the business investment required to lift Australia’s lacklustre productivity, a former union chief has warned, urging the Albanese government to overhaul its controversial budget measure.
Michael Easson, former head of the NSW Council of Trade Unions and now chairman of EG funds management, raised his concerns as the Productivity Commission closed submissions into its inquiry into business dynamism, which critics have attacked for excluding key reform areas such as tax and industrial relations.
Senior figures including fund manager Geoff Wilson and Centre for Independent Studies economists said omitting such factors would place a “significant constraint on the usefulness” of the inquiry.
The clash underscores growing friction between the Albanese government and the business community over the economic roadmap for growth following Jim Chalmers’ contentious tax changes in the May budget which were made law last week.
Dr Easson and EG chief executive Adam Geha said that while Labor’s attempts at tax reform were commendable, there were “unintended and perverse consequences have not been adequately thought through by Treasury.”
“Good tax policy is in the details, and some of the proposed budget changes will produce consequences Treasury doesn’t appear to have intended,” Dr Easson and Mr Geha said. “The proposed ‘innovative company’ carve-outs are too narrow and too limited. If this issue is not adequately addressed, the reforms risk tilting ownership of Australia’s innovation economy offshore.”
The budget included the removal of the 50 per cent CGT discount, to be replaced by an inflation-indexation model, and the imposition of a minimum 30 per cent CGT rate. In their submission, the pair argue that the existing 50 per cent CGT discount should remain for all existing and new start-up investments.
They state in the submission that the effective rate on capital gains for start-up founders was likely to rise from about 23.5 per cent under the current CGT discount to about 47 per cent under the new model, arguing that indexation “affords almost no cover”. For the high-growth, shorter-hold exits that are typical of venture capital, the effective rate would rise from about 23.5 per cent to about 42 to 45 per cent.
Declaring the new tax regime would be dispiriting for Australian business owners, Dr Easson and Mr Geha also claimed the changes would lower Australia’s international competitiveness.
“Most start-ups founded after January 2020 are today still languishing on low valuations and negative returns,” they said. “The prospect of paying near 50 per cent tax on capital gains above current valuations would be highly dispiriting. This creates a perverse incentive structure: an Australian angel investor or founder is now taxed significantly more heavily on exactly the kind of high-risk, productive investment the government claims to want to encourage.”
In submissions to the Productivity Commission’s Reducing Barriers to Business Dynamism Public Inquiry, businesses and think tanks decried a decision not to include tax and industrial relations as potential barriers to business dynamism.
The submission also takes issue with Treasury modelling on Labor’s next tranche of tax legislation aimed at cracking down on trusts. “The Treasury fact sheet notes that of the approximately 80,000 companies receiving trust distributions in 2022–23, 83 per cent did not have evidence of business activity, suggesting they operate primarily for tax purposes,” the submission read.
“This flies in the face of common sense and lived experience. Almost all corporate beneficiaries become investment vehicles and derive taxable business income from these investment activities. Treasury has conveniently sought to characterise investment activity as something other than a ‘business activity’.”
In submissions to the Productivity Commission’s Reducing Barriers to Business Dynamism Public Inquiry, businesses and think tanks decried a decision not to include tax and industrial relations as potential barriers to business dynamism.
The Centre for Independent Studies, chaired by former Macquarie Bank chief executive Nicholas Moore, said in its submission that exclusion of such key factors would curb the recommendations to the Treasurer. “Matters related to tax, workplace relations and mergers frameworks are not intended to be the focus of this inquiry,” CIS economist Stephen Walters wrote in the 10-page submission. “This condition, however, is a significant constraint on the usefulness of this inquiry.
“Each of these issues potentially plays a significant role in determining business dynamism and, by extension, our productivity. Their absence from discussion is likely to impede commissioners from drawing the right conclusions and recommending the most corrective policy measures. In particular, the extensive changes to workplace relations legislation since 2022 have significantly reduced workplace flexibility and likely have been a significant drag on business dynamism. As an example, the reinstatement of multi-employer bargaining into the workplace-relations landscape, by definition, is a barrier to competition at the firm level, where most productivity gains are determined,” he said.
Wilson Asset Management also made a submission to the inquiry, noting that while much of the debate was dominated by regulation, one of the most important barriers was the cost of productive capital.
“The government’s capital gains tax reforms move in the wrong direction, materially increasing the cost of productive capital for almost every business outside the largest dividend -paying companies.
“Businesses cannot innovate without capital,” the firm’s chairman Geoff Wilson wrote. “Businesses cannot employ people without capital. Businesses cannot commercialise research without capital. Businesses cannot expand without capital. Capital markets therefore underpin every aspect of business dynamism.
“Australia needs more productive capital formation, not less: the country’s productivity slowdown is, in significant part, a capital problem, and the market that finances productive businesses is already shrinking and internationally contested. The government’s capital gains tax reforms move in the wrong direction, materially increasing the cost of productive capital for almost every business outside the largest dividend-paying companies.
“The Government says it wants higher productivity. You cannot make productive businesses harder to finance and expect productivity to rise.”
The federal government-funded Regional Development Australia committee for Goldfields Esperance also criticised the inquiry’s exclusion of the tax changes, claiming the reforms had consistently been brought up in consultations. “While the inquiry’s terms of reference state that the tax framework is not its focus, several respondents raised tax and broader cost settings as material to their willingness to invest and grow,” the RDA committee said. “These are recorded here as context for the commission’s consideration of the economic impacts of barriers on investment and expansion.”
Despite Dr Chalmers claiming in his May budget that its reforms would cut regulatory costs by $10.2bn every year, Australia’s high regulatory burden featured heavily in inquiry submissions.
The criticisms of Labor’s tax reforms come as Anthony Albanese backs workers taking a whole week off if the Socceroos win the World Cup.
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