By Matthew Cranston
The top 20 biggest companies will be the main beneficiaries of Labor’s new capital gains tax treatment, as investors shift out of high-growth stocks into high-yield ones, fund managers say.
Anthony Albanese is hoping to get legislation through parliament in the next sitting fortnight to bring in the biggest CGT and negative gearing changes in decades, despite promising not to introduce new taxes at the last election.
In an effort to garner support for the measures from the Greens and wider community, the Prime Minister agreed to changes on Thursday that would remove sweeping ministerial powers from the bill and increase the threshold exempting businesses from the new tax from an annual turnover of $2m to $10m.
But experts said the reforms, which would remove the 50 per cent discount on capital gains in favour of an inflation index model coupled with a minimum 30 per cent CGT, still contained serious risks to the economy.
A report by Wilson Asset Management revealed that, while company profits taxed and delivered as dividends come with franking credits for investors, retained profits that lift the share price and the capital gain do not come with tax credits.
Combined with the minimum 30 per cent CGT, this leaves the highest income earners with an effective 63 per cent tax rate on realised gains.
Fund managers including Paradice Investment Management’s David Paradice and Wilson’s chairman, Geoff Wilson, say this will push a huge number of investors into the big banks and high-yielding stocks and away from smaller high-growth companies that have bigger capital gains.
Mr Wilson, who stands to gain from the shift away from high growth because most of his funds are high yield, said the tax changes would flow to the big companies, not the smaller ones more likely to invest in capital.
Among the highest-yielding companies were gas companies such as Woodside and Santos.
“Effectively, all the money will go to oil and gas and the big banks and the real estate investment trusts – the top 10 companies,” Mr Wilson said.
“This is not a marginal reallocation. It is a structural reweighting of the entire market away from the part of it that generates productivity growth, new employment and innovation, and towards the part that is already large, mature and concentrated.”
The 10 largest companies account for close to a third of Australia’s $3.3 trillion sharemarket and have a high level of foreign ownership.
Mr Paradice, who manages the largest fund investing exclusively in small companies in Australia, said the tax changes would lead to a significant shift of capital to the big companies, which would make the cost of capital more expensive for smaller companies.
“We are now looking at putting together an income fund [as opposed to growth] to address this tax change, because people will just want income with the tax benefit,” Mr Paradice said.
“Why would they want growth and capital gain if they get a higher effective tax rate?”
“The tax changes mean people will get away from growth companies and that might mean less investment. If [those stocks] become cheap enough then you might start to see foreigner investors buy them.”
The Greens previously rejected proposed tax changes on the basis that the benefits would flow to the bigger companies.
Greens economic justice spokesman Nick McKim on Friday said the Greens were “continuing discussions with the government on its tax package”.
“We are yet to see Labor’s amendments, but we are continuing discussions and look forward to seeing them soon,” Senator McKim said.
On Friday, economists such as AMP’s Shane Oliver noted how even after the government’s tweaks to the tax package this week, the minimum 30 per cent CGT and the inflation indexation could shift the flow of money away from growth.
“The changes to CGT still apply in relation to share investing which by biasing sharemarket investors towards income could mean less capital available for growth stocks,” Dr Oliver said.
Mr Wilson on Friday said many people needed to understand the behavioural changes that would come from the tax proposals.
“Faced with these settings, capital will flow away from growth and towards franked income,” Mr Wilson said. “Investors will prefer large, mature companies that pay high, fully franked dividends and whose value grows only roughly in line with inflation, because real capital growth is now punished, while franked income is not.
“The 50 per cent discount exists in large part to compensate for two things at once: the inflation embedded in a nominal gain, and the fact that the gain has already borne company tax. Remove the discount, add a 30 per cent floor, and leave the company tax unrelieved, and you have built a machine for taxing the same profit twice.”
A report into this week’s Senate CGT inquiry released on Friday recommended that the impact of the tax changes on the economy, as modelled by Treaury, should be released to the public for proper scrutiny and that an independent review be required.
Recommendation nine by independent senator David Pocock said that “in the interests of transparency, the assumptions underpinning the Treasury modelling should be released in full and a statutory review clause (for example an independent review by July 1, 2029, as suggested by CPA Australia) should be included in the primary legislation”.
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